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BOARD OF GOVERNORS
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25. D. C.
March 21, 1966.
CONFIDENTIAL (FR)
TO:
Federal Open Market Committee
FROM:
Mr. Holland
As you will recall, Mr. Young reported at the meeting of the
Committee held on March 1, 1966 that a staff memorandum on System foreign
currency operations was being prepared in response to the Committee's
request of last November.
A copy of the memorandum, entitled "Federal
Reserve Operations in Foreign Exchange 1962-65", is attached.
Mr. Charles C. Baker, Jr. of the Board's staff carried main responsibility
for drafting.
To allow more time for study, the Committee may prefer not to
discuss the substance of the attached memorandum at tomorrow's meeting,
but to defer consideration of the attachment (and of the related
memorandum from the Secretariat, dated February 18, 1966, proposing a
reorganization of the instruments governing foreign currency operations)
until a later meeting.
Robert C. Holland, Secretary
Federal Open Market Committee
Attachment
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CONFIDENTIAL (FR)
r
Federal Reserve Operations in Foreign Exchange
1962-1965
In the spring of 1961, after nearly thirty years of
inactivity in the foreign exchange market, the Federal Reserve
began consideration of renewed foreign currency operations.
A
variety of factors were responsible for this reconsideration; but
foremost among them was concern about the position of the dollar in
world markets, the result of persistent deficits in the U. S.
balance of payments and drains on the U.S. gold stock.
In February 1962, the Open Market Committee authorized
the New York Federal Reserve Bank to undertake open market opera-
tions in foreign currencies for System account.
These operations
were, and still are, considered to be exploratory and experimental
in nature.
This paper examines the aims and experience of the
System's operations in foreign currencies over the last four years
and attempts to lay the groundwork for assisting in a re-evaluation
1/
of those activities.1/
Aims and Purposes
Since 1962, the broad underlying purposes of the System's
operations in foreign exchange have been the defense of the value
of the dollar in exchange markets, especially in the face of
1/ A historical review of System activities may be found in
Appendix A; statistical tables supplementing both the text of
the paper and Appendix A may be found in Appendix B.
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speculative pressures, and the temporary restraint of drains on the
U.S. gold stock.
In initial discussions, the role contemplated for
the Federal Reserve's operations had been a relatively more active
one; but later, in the draft of the proposed Authorizationfor
Open Market Operations in Foreign Currencies, dated October 17, 1961,
and then in the version of February 13, 1962, the operations were
all described in terms indicating that they should be undertaken
only in reaction to market forces.
Short-run purposes.
Within the underlying aims of the
System's foreign exchange operations, it is useful for discussion
to distinguish four short-run purposes:
(1)
Offsetting of disequilibrating, short-term
flows of private funds;
(2)
Moderating fluctuations in exchange rates
within the limits established by the I.M.F.
Agreement;
(3)
Countering disorderly conditions in the
foreign exchange market; and
(4)
Averting or postponing purchases of U.S.
gold by foreign central banks.
(1)
private funds.
Offsetting of disequilibrating, short-term flows of
In an exchange market environment in which par values
rarely change and in which movements of spot quotations around those
par values are constrained within narrow limits, the risks of loss
to holders of foreign currencies (or to foreign holders of dollars)
through sizeable exchange rate fluctuations are largely removed,
thus raising the possibility of large private flows of funds in
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response to relatively small variations in interest incentives or
in response to speculative opinions about exchange rate parities.
Attainment of fundamental goals of balance-of-payments policy may
thus be hampered by such private short-term capital movements, unless
official actions can counteract such flows by influencing spot or
forward rates or both so as to avert or stop disequilibrating private
flows of funds or to stimulate equilibrating flows.
For example, in times of grave political or economic
uncertainties a decline in the dollar exchange rate might, for
reasons of market psychology, stimulate a private outflow of domestic
of foreign funds.
Should the outflow lead to a further decline in
the exchange rate or to foreign official conversions of dollars into
gold, a further outflow could occur and a vicious spiral be generated.
Under such circumstances, spot market intervention could be employed
to temper or prevent the decline in the exchange rate.
On the other
hand, if the dollar spot rate were about to appreciate toward its
ceiling, spot market intervention might be directed toward slowing
that appreciation in order to encourage a greater volume of dollar
purchases by foreigners.
Disequilibrating movements of private funds might also be
influenced through forward exchange market operations.
may be considered:
Two cases
If confidence in the currency is unimpaired,
movements of funds in response to covered rate differentials could be
influenced by official intervention to move the forward rate one way
or the other.
If, on the other hand, confidence in the currency has
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-4been impaired,
official support of the forward rate may encourage
those who would like to buy foreign exchange forward to do so,
instead of moving funds out of the domestic currency immediately.
In the British experience in 1964-1965, a policy of this latter kind
proved effective in limiting reserve drains, although one final
result may have been to stretch the selling pressure on the exchange
rate out over a longer period.
There are difficulties in the actual execution of any such
actions.
These include not only problems of deciding on the scope,
size, and timing of such operations, but most importantly, those
of deciding whether the observed flows are indeed disequilibrating
so that official intervention is warranted.
Too ready official
action runs the risk that optimal international allocation of funds
will be hampered, and could result at the extreme, in a system
of continual exchange market manipulation.
That is, it might be
better to take market expectations as given, to permit the
resulting exchange rate movements and flows of private funds, and
to prevent the developments from having a cumulative effect by other
means:
for instance, use of the "swap arrangements" with foreign
central banks might keep dollars sold by private foreigners in the
hands of foreign central banks, with the result that the private
flows would not serve to reduce U.S. reserves.
(2)
Moderating fluctuations in exchange rates within the
limits established by the I.M.F. Agreement.
In most instances the
System's operations are not designed to "take a stand" at a particular
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exchange rate within the limits of fluctuations established by the
I.M.F. Agreement; however, they do aim at moderating the severity
of rate movements within those limits.
Proponents of such intervention argue that any resulting
moderation of rate movements will be salutary, first, because the
mere threat of such intervention lessens undesirable speculation
and thereby reduces needs for actual official intervention; and
second, because more moderate movements in rates, through their
effects on market psychology, may lessen sizeable conversions of
dollar assets into gold or foreign currencies, as well as movements
out of weaker foreign currencies.
Both effects would be beneficial
to the dollar's position not only directly but also indirectly, by
generally promoting market confidence in the preservation of
existing par values.
The most general case against official intervention to
effect moderation in rate movements argues that any official intervention in the market will produce distortions and will obscure the
working of the natural and fundamental forces that make for the
market's efficient operation.
This general problem has been
recognized by the System, and in order to deal with it, the
Committee has deliberately instructed the Management in the Guidelines to "purchase and sell authorized currencies at prevailing
market rates without trying to establish rates that appear to be
out of line with underlying market forces."
(Underscoring added)
Further, in respect to transactions in spot exchange, the Guidelines
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instruct that, "The guiding principle for transactions in spot
exchange shall be that, in general, market movements in exchange
rates, within the limits established in the International Monetary
Fund Agreement or by central bank practices, index affirmatively
the interaction of underlying economic forces and thus serve as
efficient guides to current financial decisions, private and
public."
In addition to this broad, general opposition to official
intervention, another argument against short-term exchange market
intervention for the purpose of moderating exchange rate fluctuation
doubts the usefulness of such intervention within the exchange rate
limits on the grounds that, while some effect on rates may be
achieved in situations of modest imbalance of market forces, support
under crisis conditions may stimulate further outflows as the market
would consider such support as evidence that the officials consider
the situation to be serious.
In the case of forward market inter-
vention, the further point is often made that however useful such
intervention may be in the first instance, if the crisis is prolonged, the reserve drains avoided by the initial actions may
still have to be met later if speculators do not reverse their
positions.
(3)
Countering disorderly conditions in the foreign
exchange market.
Disorderly conditions in the exchange market
arise when there is no two-way market; that is, when no market
demand for a currency exists at prices within existing margins.
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Official intervention in such a market is mandatory for the
authorities responsible for currencies other than the dollar
(Art. IV, Sec. 4(b) of the Fund Agreement), and is generally
advisable for the United States in cases of disruptions in markets
for the dollar for obvious reasons of market psychology.
Possibly the most frequent example of such disorder is
the bear attack on a currency during a political crisis.
Such
large supplies of the currency could be put on the market at such
a time that all confidence in the stable value of the currency would
be lost; demand for the currency would dry up; and a meaningful
market would cease to exist.
At the sign of such a situation, one
counteracting official action might be to place a stop order in
the market to indicate the intention of the authorities to maintain
the value of the currency in the markets at levels existing before
the time of the crisis.
One alternative policy might be to place
the stop order only at the lower limit of the permissible rate
movement, thereby signifying official determination to maintain
the currency's market value within the permissible range of
variation while making no commitment about the appropriateness
of rates existing just before the crisis.
The System's operations have been at times, of course,
directly concerned with such "bear" attacks and with market
disorder affecting the dollar exchange rate.
But the System must
also be concerned with disorderly market conditions directed
against foreign currencies, for two reasons:
(a) such disorder
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may be transmitted to the markets for other currencies, including
the dollar, with adverse effects on overall market psychology and
general confidence in par values; and (b) since the dollar serves
as the intermediary ("vehicle") currency in international transactions of central banks, the dollar rate can come under pressure
whenever a foreign central bank finds itself obliged to sell large
amounts of dollars to counter disorder in the market for its
currency.
(4)
Averting or postponing purchases of U.S. gold by
foreign central banks.
Temporary needs for foreign currencies by
private foreign dollar holders may produce sizeable net sales of
dollars from time to time.
While those needs may be short-lived
and the flow of private funds may be quickly reversed, some of the
dollars are likely to find their way into foreign official reserves.
If the foreign central banks finds that this accrual of dollars
swells its dollar reserves beyond the level it desires to hold, it
will demand conversion of the excess into gold.
Given the fixed relationship between the U.S. dollar and
gold, a serious decline in the U.S. gold reserves--even a temporary
one--may produce speculative private or even official foreign
sales of dollars for other currencies.
Added to existing increased
offers of dollars in the market, such sales would lead to further
accumulation of dollars by foreign central banks, to additional
demands
for U.S.
gold,
and,
in
speculative sales of dollars.
a
self-feeding
spiral, to further
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Among the variety of official actions available to reduce
or postpone the demand for conversion of dollars into gold, two have
been important in Federal Reserve operations:
(a)
Market swaps of dollars against the foreign currency
have been made jointly by the U.S. authcrities and foreign central
banks.
In the resulting market operations, the foreign central
bank would sell spot dollars to the market and the U.S. authorities
would purchase the dollars forward in the market.
Private holders
would thus be able to acquire spot dollars at a favorable rate and,
at the same time, cover them forward, in this way eliminating the
exchange risk.
Moreover, the private holders are encouraged not
only to retain but perhaps to increase their dollar balances.
At
the same time, the level of the foreign central bank's dollar
reserves would be held down or reduced.
(b)
The System has drawn on its reciprocal currency
agreements with foreign central banks and used the foreign currency
proceeds of the drawing to purchase a portion of the foreign central
bank's outright dollar holdings, thereby substituting covered for
uncovered dollars in the foreign bank's reserves and effectively
removing the immediate need for purchases of U.S. gold.
This type
of operation has been by far the most important part of Federal
Reserve activities, as the description of operations in Appendix A
and the tables in Appendix B indicate.
In view of the effectiveness of these temporizing operations
in countering seasonal private flows of funds and their effects on
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foreign official reserves, the System has encouraged foreign central
banks to undertake similar operations and thus to assist in counteracting such flows.
Consequently, several foreign central banks have
undertaken actions to cover temporary increases in their dollar
reserves by making equivalent forward dollar sales to the market,
thereby balancing their position and removing the need for purchases
of U.S. gold.
Longer-run purposes.
Two primary longer-run purposes of
First
Federal Reserve exchange activities should be distinguished.
and most important, Federal Reserve exchange operations seek to
encourage foreign central banks to maintain or increase their
official dollar holdings over the long run as well as in periods of
temporary strain on the dollar.
In large part, all of the short-
run purposes discussed above are directed to this end.
The second major long-term aim of System foreign exchange
operations is to facilitate the growth in world liquidity.
Federal
Reserve activities seek to promote this growth in several ways:
(1)
By maintaining balances in other currencies
and encouraging other central banks to do
the same, thus encouraging private willingness to accept balances and payments in a
variety of currencies;
(2)
By promoting arrangements between central
banks that in effect provide reciprocal
credits; and
(3)
By cooperating with other central banks,
particularly during periods of crisis and
of speculative attacks on currencies, thus
demonstrating that virtually limitless
resources can be found for the defense of
a major currency in case of need.
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In addition to these overall longer-run aims in some
instances, System operations have had the effect--if not always the
purpose--of interim holdings actions in the exchange market, with
System commitments in due course being liquidated by means of longerterm Treasury operations, such as drawings on the I.M.F. or the
issue of non-marketable Treasury bonds ("Roosa-bonds") to foreign
monetary authorities.
System operations and international financial developments.
The System's operations in foreign exchange are designed to be part of
the larger framework of U.S. international financial policies.
By
influencing spot or forward exchange rates, they can modify
incentives for flows of private funds to and from the United States;
and thus, they may have an effect on the capital accounts of the
U.S.
balance of international payments.
Similarly, System operations can affect the balance of
payments of foreign countries, both indirectly through the impact
of changes in the U.S. payments balance and directly through support
of foreign currencies under speculative attack.
In this latter
respect, the System has frequently engaged in cooperative efforts
with foreign central banks to correct disequilibrium situations
abroad, especially by providing resources to foreign banks under
swap agreements or special arrangements, either alone or with other
institutions.
Outstanding in these latter arrangements is the part
played by the Federal Reserve in the special assistance packages
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for the Canadian dollar in 1962, for the Italian lira in 1964,
and for the pound sterling in the fall of 1965.
In each of these
instances, the System's central role in the assistance packages
demonstrated its willingness, not only to defend the exchange
value of the dollar, but, where feasible, to assist in defensive
actions for other major currencies.
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Evaluation of Federal Reserve Foreign Currency Operations.
In undertaking an evaluation of the System's foreign exchange operations and their aims and purposes, it must be realized
that any particular action may be designed to accomplish a variety
of ends.
Because of this complication and also because of the
complexity of political and economic factors affecting the market,
it is often difficult to reach an unqualified conclusion concerning
the effectiveness or lack of effectiveness of particular activities
in achieving their objectives.
Equally important, however, it must
be remembered that official intervention in the exchange market must
often be based on uncertain and incomplete information.
Therefore,
despite the seeming wisdom of their use at the time, some operations
may, in retrospect, appear to have met with less than complete effectiveness.
In other instances, even though the operations were
relatively effective, an ex post consideration of the situation
may raise the question of whether alternative actions might have
been preferable.
In the greater number of cases, however, it will
be seen that the choice of action has been confirmed by subsequent
developments.
The purpose of this evaluation, in part, is to point to
new directions which those activities may take in the future.
In
this regard the less completely effective operations of the past
are more interesting than those which have adequately fulfilled
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their objective.
Therefore, the discussion may, at times, seem
to stress the limitations and shortcomings of the System's actions
more than the accomplishments; this is not because the more effective operations have been any less important, but rather because
it is in the areas of less than complete accomplishment that the
greatest need for additional analysis and experience lies.
Needless to say, even the complete lack of effectiveness
of an operation does not indicate that the action should not have
been undertaken.
First, it would be impossible, and if possible
often inadvisable, to undertake an action only if attainment of
the objectives of the action were completely certain.
Second,
in many cases the cost of failure is virtually nil while the
gain from fulfillment may be substantial; in such cases, actions
should be undertaken even though the chance of attaining their
objectives would be rather slim.
An example of that kind was
the effort undertaken to bring the French franc down from its
ceiling (See page 21, below); this effort did not cost the System
anything, either in money or in prestige, and without the experiment it would have been impossible to find out whether the strong
market position of the French franc at that time was or was not
assailable.
It should be added in this connection that the whole
undertaking of foreign currency operations by the Federal Open
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- 15 Market Committee was recognized at the outset as having many
experimental aspects.
The program was initiated in the light of
the experience of the Treasury Stabilization Fund in such operations; and in view of the apparent successes of those actions-at least, from a short-run point of view--it was concluded by the
Open Market Committee that the new experimentation by the System
in such operations merited all of the risks to which the System
Open Market Account might be exposed.
In the last analysis, what
was at stake was the integrity of the dollar internationally; and
that being the case, the full faith and credit of the Federal Reserve as well as of the U.S. Government were necessarily involved.
System Operations.
Market operations by the System have comprised only a
small portion of its total operations in foreign currencies compared with swap and inter-official transactions (See Tables 5 and
6, Appendix B).
In fact, most of the market operations involving
the dollar over the last four years have been conducted, not by
the Federal Reserve directly, but by foreign central banks.
This
is not, however, to criticize System operations or to say that
those market operations which did occur were any the less important, but it is rather a recognition of a fact learned from experience; namely, that the U.S. problem of market intervention contrasts
sharply with that of other convertible currency countries and often
requires use of different techniques for dealing with that problem.
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The Articles of Agreement of the International Monetary
Fund established par values for the currencies of member countries
in terms of the U.S. dollar, as well as of gold, and limited fluctuation in the spot exchange rates of a convertible currency to within
one per cent of that par value (Art. IV., Sec. 1 and 3).
This
obligation made official intervention at the exchange rate limits
necessary, except for the United States, which instead chose to
maintain the par value of the dollar by freely buying and selling
gold for the settlement of international transactions (Art. IV.,
Sec. 4).
Under this system, intervention by foreign authorities
in their own markets has typically taken the form of purchases and
sales of U.S. dollars.
Official intervention by U.S. authorities
in the market for dollars, however, has been more or less precluded
by the dollar's position under the present system as the major re-
serve and vehicle currency, since such intervention, except on an
unrealistically broad scale, could create a broad range of arbitrage
incentives.
These could be effectively offset only by simultaneous
across-the-board intervention in at least all major currencies.
Under the prevailing conditions of persisting deficits in the U.S.
balance of payments intervention by U.S. authorities accordingly
has had generally to be limited to situations of direct bear attacks
on the dollar and market disorder.
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In addition to these general considerations, the continuing U.S. balance-of-payments deficit and the relative payments
strength of a number of other major convertible currency countries
has meant that since 1958 many foreign exchange rates have tended
to be strong against the dollar and that foreign intervention in
the exchange markets has resulted in sizeable net foreign official
dollar purchases.
These dollars have, in turn, formed the basis
for continuing large demands for dollar conversions at the expense
of U.S. gold reserves.
In this context, it is not surprising that swap and interofficial transactions have accounted for the largest portion of the
Federal Reserve's foreign exchange activities.
While providing
balances for those market actions which were undertaken by the
System--in line with the original conception of the purpose of the
swap arrangements--swap drawings were soon found to be an especially
useful expedient influencing the timing of, and thus for delaying, foreign official dollar conversions.
Indeed, in a few
cases, use of the drawings served to forestall such conversions
altogether.
Equally important, the swap arrangements have also provided
the System with a huge credit base from which exchange market intervention may be conducted if necessary.
This presence of the System
as a potential force in the market has no doubt conditioned operations
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in dollar exchange by foreign central banks and influenced them to
operate within limits of reasonableness, considering both their own
foreign exchange market problem and that of the dollar.
Perhaps in
evidence of this, foreign authorities have tended to keep an ever
closer watch on their own markets, preventing or countering such
disruptive conditions as have arisen and the effects of those conditions on the dollar/foreign currency spot and forward exchange
rates, allowing System activities to be mainly concerned with the
financing of these foreign official market operations through intercentral bank transactions.
It is clear from the foregoing that it is misleading to
classify market operations and swap and inter-official operations
by the System as entirely distinct and alternative activities,
It
is also misleading to contend that, because of their relative
volume, market operations have been any less important or interofficial operations any more important in the Federal Reserve's
activities.
Nonetheless, market activities have raised quite a
different set of questions and problems from swap and interofficial operations in the System's foreign exchange activities.
For this reason, the following discussion treats the two separately.
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Spot operations.
Operations in spot exchange can be
undertaken with the immediate intention of affecting the direction
in which the spot rate is moving, the speed at which the rate is
moving, and even the level of the spot rate in order to achieve
one or more underlying policy goals.
The clearest example of a need for spot market intervention by the System in the New York foreign exchange market came in
November 1963, at the time of President Kennedy's assassination.
At that time, there was a danger of direct heavy and disorderly
selling pressure on the dollar, and the System actively intervened
in the exchange markets to avoid the risk of a disorderly market
Immediate offerings of sizeable amounts of all major
situation.
currencies by the New York Bank at exchange rates existing immediately prior to the assassination absorbed the dollars that were
offered and demonstrated an official determination to prevent any
serious loss of market confidence in the exchange value of the
dollar rate,
These actions did serve to allay fears for the
dollar's position; and altogether, only slightly more than $26
million of foreign currencies were actually sold.
This experience
shows how a relatively small operation at a given time can contribute significantly to maintaining confidence in the dollar.
Several other spot market operations undertaken by the
System are of particular interest.
The first occurred during the
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Cuban crisis; the second two, in the summer and fall of 1963, when
on two occasions the System decided to test the market for the
dollar in Paris; the fourth, throughout 1963, when sizeable sales
of marks were made by the System in New York and in Europe; and
the latest in the fall of 1965, when the System placed bids for
sterling in the New York market in order to support and encourage
the appreciation of spot sterling.
(1) The news of a military buildup in Cuba and President
Kennedy's announcement on October 23 of a U.S. quarantine of that
country sparked a heavy flow of private flight capital to Switzerland,
the traditional safehaven for funds during periods of international
political tensions.
In an attempt to relieve some of the upward
pressure on the franc spot rate and to reduce the need for dollar
purchases by the Swiss authorities, the Federal Reserve quickly
entered the market and sold approximately $9 million equivalent of
Swiss francs in New York and Switzerland.
Despite these sales, the
Swiss authorities, acting on instructions from the New York Bank,
intervened in the market, purchasing dollars against francs.
Sub-
sequently, a Federal Reserve swap drawing from the BIS and operations by the Treasury in the forward market were necessary to reduce Swiss official uncovered dollar holdings and avoid a U.S. gold
sale to Switzerland.
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(2) and (3)
In the summer of 1963 an apparent inflow
of foreign investment funds into the French economy was adding to
an already sizeable French balance of payments surplus and thus
helping to keep the dollar rate persistently on the floor, with
a possible build-up of uncovered dollar exchange positions by
French traders.
In July the System decided to test the firmness
of this dollar quotation in the hope that, in the context of an
increase in the discount rate in the United States, limited
official intervention could spark some appreciation of the dollar
rate.
Consequently, the System drew $12.5 million of francs from
the swap line with the Bank of France and, through the Bank of
France, sold them in the Paris market.
Despite these sales, the
dollar rate showed no lasting signs of improvement, and the System
discontinued the operations.
Then, in October, the dollar moved
off the floor in the Paris market, and the System drew and sold
$9 million more of French francs in the hope of stimulating a
further appreciation of the dollar.
Again, however, the under-
lying strength of the franc prevailed in the market; the dollar
returned to the floor; and the System's activities were stopped.
The francs necessary for repayment of all of these swap drawings
were acquired in the Paris market by forward market purchases.
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(4)
The System's spot market activities in marks formed
the major part of its spot transactions during the four year
period.
Most of these transactions occurred during 1963 when
the combination of a favorable German balance of payments, tight
money market conditions in Germany, and window-dressing activities
by German commercial banks resulted in more or less continual
demands for marks in the year.
In response to these pressures,
the System made spot sales of marks in the New York market and
in the German market using the proceeds of swap drawings.
In
large part, the sales in the New York market were made after the
close of the European market for the day; the New York Bank was,
therefore, acting directly in support of the dollar rate in
terms of the mark.
The sales in the European markets, however,
were generally made by the German authorities and then "taken over"
entirely or in part by the System on the same day.
In a broad sense the aims of these System spot market
activities in marks were the general goals of moderating fluctuations in exchange rates despite a heavy private flow of funds into
the foreign currency and countering speculative forces directed
against the dollar, with the fundamental objective of preventing
or postponing sizable movements of U.S. gold in the expectation of
some reversal in market pressures and flows of funds.
In fact,
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exchange markets in 1963 did remain fairly orderly, although some
speculation on a revaluation of the mark was seen; and movements
in rates were relatively moderate.
Although certainly not
entirely the result of System operations, gold sales to Germany
were avoided entirely during the year.
And, although a portion of
the System's exchange commitments on the swap lines used to finance
market operations were eventually repaid out of the proceeds of
medium-term Treasury operations in marks, well over $100 million of
the mark commitments were repaid with the proceeds of dollar
purchases by German authorities--an indication of some reversal or
cessation of the dollar inflow to German reserves.
(5)
System purchases of sterling in the fall of 1965 came
at a time when selling pressure on sterling was clearly diminishing,
when it was known that the short position against sterling was
extremely large, and when there was a very good chance that spot
demand for sterling would induce a rush to cover open positions.
Under the circumstances and following extensive discussions between
Federal Reserve and Bank of England officials,
the Bank of England
requested the Federal Reserve and leading European central banks
to join in outright purchases of sterling up to agreed amounts for
which the Bank of England would in turn give an exchange guarantee.
As a participant in this pool, the System placed fairly substantial
bids for sterling in the New York market at continually increasing
prices in an attempt to encourage the appreciation of the spot
sterling quotation.
In view of these rising bids, the dollar market
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- 24 for sterling tended to move ahead of the System's quotations so that
actual purchases of sterling were limited.
Forward operations.
Only a few forward market operations
have been undertaken by the System.
Three types of such operations
may be distinguished:
(1)
Forward sales of foreign exchange in the market to
provide cover for foreign private holders or
purchasers of spot dollars;
(2)
Forward sales of foreign exchange in the market
to influence exchange rates and arbitrage flows; and
(3)
Takeovers of forward market sales of foreign
exchange from foreign authorities.
(1)
Forward sales of foreign currencies by the System in
the market for the purpose of providing foreign private dollar holders
with exchange cover.
These operations have taken the form of out-
right forward sales, alone and in concert with spot market purchases
of foreign currencies by foreign central banks, and of market swaps
wherein both spot purchases and forward sales of the foreign currency
are made by the System.
The effect desired in each case is the same:
to encourage foreign market participants to retain or increase their
spot dollar holdings by the provision of forward cover for those
holdings through System forward sales of the foreign currency
involved, with the final goal of offsetting or eliminating the
dollar inflow to the foreign central bank until--it is hoped--the
market pressures responsible for that inflow subside or are reversed,
The System's operations in forward guilders in late 1964
in response to flows of funds from sterling to the Netherlands, tight
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money market condition in the Netherlands, and to window-dressing
pressures; and in the first part of 1965 as money market tightness
continued in the Netherlands, are the clearest examples of these
actions.
In all, approximately $100 million equivalent of forward
guilder sales were made by the
System for the last quarter of 1964
through the second quarter of 1965 as part of a program conducted
jointly with the Netherlands Bank which undertook the spot market
portion of what were in effect market swaps.
During this same
period, the Stabilization Fund also undertook such sales amounting
to $98 million.
The operations were effective in holding down the gain
in official Dutch dollar holdings over the 8- to 9-month period;
nevertheless, as it turned out, the System exposed itself to
exchange risks (within the exchangespread) which persisted for a
number of months.
Granting that System foreign currency operations
must inherently contain some element of risk and that the Committee,
in undertaking such operations, fully recognized this risk element,
this extended exposed position raises two technical questions
relevant to System actions:
(a)
What is the limit for the term "temporary" in
reference to flows of private funds or increases
in foreign official dollar holdings? With regard
to swap drawings, the provision of the current
Guidelines requiring, as a rule, liquidation of
swap drawings within 12 months, may be interpreted as implying that "temporary" means any
action which may be reversed within a year. On
the other hand, the fact that individual swap
drawings have, as a rule, a maturity of only
3 months suggest a much more restrictive meaning of "temporary."
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(b)
When should actions be reassessed, even within
the limits of the meaning of "temporary," so
as to determine whether market conditions,
flows of private funds, or increases in
foreign official dollar holdings should
continue to be considered "temporary?"
(2)
Forward sales of foreign exchange in the market to
influence exchange rates and arbitrage flows.
In the summer of 1964,
the forward discount on sterling narrowed markedly, moving the
covered interest arbitrage calculations between New York and London
sharply in favor of U.K. investments and threatening to produce an
unwanted outflow of short-term funds from the United States.
In
order to counteract this situation and to provide support for spot
sterling, the System undertook market swaps in sterling, buying spot
sterling and selling it forward.
The result was a restoration of
the forward discount spread against sterling and a return of the
arbitrage incentive to New York's favor.
In their immediate objective, these operations proved
effective; however, the forward contracts matured at the time of
the market crisis in sterling.
The System therefore appeared to
be placed in the position of working at cross purposes with the
Bank of England.
(3)
Takeovers of forward market sales of foreign exchange
from foreign authorities.
In the fall of 1965, the System agreed
to "take over" $500 million of forward lire contracts with Italian
commercial banks from the Bank of Italy.
These contracts had
originally been made with Italian commercial banks by the Italian
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Exchange Office as part of dollar/lire swaps aimed at offsetting the
large spot dollar inflow experienced by the Bank of Italy.
Despite
the shifting forward of the dollar inflow, the Italian authorities
continued to be under domestic political pressure to purchase U.S.
gold to compensate for the expected uncovered, unguaranteed dollar
inflow.
Therefore, earlier in the year, the U.S. Treasury and, then,
in the fall, the System agreed to take over technical responsibility
for the contracts on the general grounds that the Bank of Italy had
been acting responsibly in terms of the functioning of the international payments system and had been striving to avoid undue drains
of gold from other monetary authorities, including those of the United
States.
The terms of the takeover, however, stated in a memorandum
of understanding with the New York representative of the Italian
Exchange Office (rather than in a cable exchange), were (1) that the
contracts would be reacquired by the Italian authorities at final
maturity and (2) that exchange-rate fluctuations within the limits
set by the Fund Agreement would be at the expense of the Bank of
Italy; the Bank of Italy would be guaranteed against loss only in
the case of a dollar devaluation vis a vis the lira.
Although the
provision of an exchange guarantee against a dollar devaluation
removed any rational basis for any Italian demands for gold
purchases, the Italian authorities requested that the nature of the
transaction not be publicly revealed and that the forward contracts
be entirely removed from the statistics of the Italian authorities.
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This transaction raises two difficult questions:
First, is it appropriate for the System to engage in a
transaction which enables another central bank to obscure its
published accounts even though the transaction will reduce or postpones demands on the U.S. gold stock?
Since the System is, in
accordance with the memorandum of understanding, under no obligation
ever to provide the Italian banks with lire--even in the case of a
devaluation of the dollar it would only need to make good the
difference in collars--it rightly excludes the obligation from the
System's published liabilities.
But since the Bank of Italy also
excludes its forward obligations from its published accounts, the
transaction--totalling $1.5 billion equivalent for the U.S. Treasury
and the System together, and one-third of that amount for the System
alone--does not appear anywhere as a conditional obligation of any
monetary authority although the accounts of the commercial banks in
question presumably include the corresponding forward cover.
This
discrepancy is bound some time to attract the attention of some
observer, with detrimental consequences for the credibility of System
data.
Second, it can be questioned whether the guarantee against
loss in the case of a dollar devaluation for so large a block of
Italian forward contracts does not establish an undesirable precedent?
Thisaspect of the Italian transaction would appear to be particularly
serious in view of its non-disclosure in the current financial reports
of the two banks.
Once the secret is revealed--as may easily happen,
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e.g.,
in the course of Congressional investigations--other central as
well as many commercial banks anywhere may well seek similar
guarantees.
No good reason could be given for a preferential treat-
ment of Italian holdings, since Italy is a considerable net debtor
in dollars (on longer-term account), and since only two years ago
Italy's international financial situation was reversed by a dollar
credit.
If under these conditions Italian official and private dollar
holders can successfully threaten to convert their dollar holdings
unless they are given an explicit guarantee against devaluation
losses, it is difficult to see why or how other foreign dollar holders
could be prevented from uttering similarly successful threats.
Swap operations.
As shown in Tables 1 and 2 in Appendix B,
System drawings and repayments on the reciprocal currency lines
totaled $2,353 million and $2,218 million, respectively; foreign
central bank drawings and repayments amounted to $3,735 million
and $3,080 million, of which the largest portion was accounted for
by British swap utilization in 1964 and 1965.
The System's reciprocal
currency agreements with other central banks have, therefore served as
the primary means for its foreign exchange activities.
The balances
obtained from these arrangements, however, were not primarily used in
direct market operations.
As shown in Tables 3A and 3B, Appendix B,
only a small portion of the proceeds from System drawings were
immediately employed in market operations.
Most of the remainder of
the proceeds were resold to the correspondent central bank in exchange
for uncovered dollar holdings of that bank.
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This experience illustrates the inference drawn above;
viz.,
that, because of the special nature of the U.S. exchange market
problem, most of the market operations involving the dollar over the
last four years have been conducted, not by the Federal Reserve
directly, but by foreign central banks.
The distribution of the sources for System repayments of
its swap drawings is also illustrative of this contrast between
the System's activities of those of the central banks of other
convertible currency countries.
A large portion of System swap
repayments were effected out of purchases from foreign central banks
when those banks found their dollar holdings decreasing, in most cases
because they, in turn, had had to supply dollars to their residents.
In many cases, the market forces that gave rise to the original drawings
by the System were reversed, and with the changes in the flows of
dollars and in exchange rate pressures the foreign central bank
found itself in need of dollars and the System was therefore able to
liquidate its swap commitments.
It is sometimes difficult to assess clearly the reasons
for individual System swap operations, especially in the cases in
which the initiative for the System's actions came from the other
party to the transaction rather than from the System itself.
In general, however, System swap activities with other central banks
were designed to achieve the following aims:
(1) Offsetting of seasonal or other temporary
accretions of dollar reserves to foreign
countries. The System's swap drawings and
sales of foreign currencies to foreign
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authorities at times of seasonal window-
dressing activities by foreign commercial
banks or of temporary money market tightness
in the foreign markets fall under this
category. Despite the expected temporary
and reversible nature of these flows, some
repayments of the drawings were nonetheless accomplished only from exceptional
sources or with the proceeds of thirdcurrency swaps, and in several cases gold
sales were needed to take up additional foreign
dollar accumulations. These experiences suggest
that, despite what was thought at the time of
their execution, the System's operations did not
always turn out to have been in response to
temporary flows of funds, and that, even when
the flows did prove temporary, the operations
were not always entirely effective in offsetting the accruals of dollars to foreign
official reserves.
(2) Encouraging foreign willingness to hold dollars.
In one sense, the swap operations could not have
failed in achieving this goal: they automatically
encouraged foreign official dollar holdings by
providing cover for those holdings and thus removing
any exchange risk to the foreign official holder.
In the more meaningful sense of encouraging foreign
official holding of uncovered dollars, the effectiveness of System swap operations is more difficult to
assess. Of the eleven countries with which the
System has concluded swap arrangements, five
(Belgium, France, Netherlands, Switzerland,
United Kingdom) only hold necessary working
balances in official dollar balances. Among the
others, Germany has cut its dollar holdings in
half since the end of 1961, and Austrial and Canada
have kept their dollar holdings at about their 1961
levels. Only Italy, Japan and Sweden have substantially
increased their official dollar holdings, and only
in the case of Italy has this behavior been clearly
attributable to the cover given by inter-official
transactions.
(3) Aiding in short- and long-run growth of international liquidity. The size and frequency of
both foreign and System use of the swap arrangements is ample proof of the usefulness of the
swap arrangements in providing a flexible source
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of liquid funds for financing official exchange
market activities. To the extent that official
utilization of these facilities has resulted in
more orderly exchange markets and greater world
confidence in existing par values, the swap
operations of the System and of foreign central
banks have also encouraged growth in private
lines of international credit and liquidity
in the face of occasional uncertainties.
Other inter-official operations.
The transactions between
the System and other central banks, many of which have involved the
sale of the proceeds of a swap drawing or the purchase of foreign
exchange from these banks for the repayment of swap commitments, are
summarized in Table 6, Appendix B. One transaction, however, does
merit special attention.
In the summer of 1965, the System decided to reduce its
balances of sterling.
In late 1964, these balances had risen to an
all-time high of $56 million equivalent, but by July of 1965 $14
million equivalent had been sold off.
Then in July, when the Bank of
England reserves were under heavy pressure as a result of renewed
sterling sales in the exchange markets another $14 million of these
balances were sold to the Bank of England.
two reasons for these sales:
There appear to have been
first, the Account Management felt the
need for more "elbow room" under the $150 million limit on the foreign
currency balances which could be held; and second, there was evidently
some concern by the Management, shared by other F.O.M.C. officials with
whom he consulted, that a sizable exchange loss might be incurred on
these balances in case of a new market crisis in sterling.
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This action, coming when it did, raises a question of policy:
While there is little doubt that the System's foreign currency operations are not designed to be a profit-making enterprise, it is not
reasonable to expect the System to strive to protect itself against
every risk of loss or to cut back that risk when a friendly correspondent
central bank finds itself under pressure and losing reserves.
To be
sure, the System should carefully weigh the alternatives of the
possible exchange losses on its balances and of the impact of a sale
of those balances on the foreign bank.
But, however the sales were
made and even if the other central bank concurred in them, they did
put added pressure on that Bank's reserve position at a time potentially
adverse to it.
Two other types of inter-official transactions are not
summarized in the tables in Appendix B:
(1) transactions with the
Stabilization Fund and (2) transactions on third-currency swaps.
(1)
On two occasions, in 1963 and 1965, the financing of
System swap repayments was accomplished through a medium-term borrowing
by the U.S. Treasury:
in the one case, an issue of a mark-denominated
bond and in the other, a drawing from the IMF.
At these times it
became clear that some System operations had involved attempting to
offset flows which had proved to be long rather than short-term;
and the longer-term facilities available to the Treasury were then
thought more appropriate for financing such flows.
Two other transactions between the System and the Treasury
are worth noting:
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- 34 The first was the simultaneous spot purchase of lire by
the System from the Italian authorities and the forward sales of
those lire to the Treasury in the winter of 1963-64.
These actions
not only provided the Italian authorities with funds necessary for
support of the lira rate, but also built up needed Treasury balances
in lire.
Second, in the summer of 1963, the Treasury arranged for a
sterling/Swiss franc swap with the Bank for International Settlements,
the proceeds of which were sold to the System; the System used these
proceeds, together with those of its own third-currency swap, for
repayment of bilateral commitments in Swiss francs.
(2)
Over the last four years, the System has arranged a
total of $90.5 million of third-currency swaps with the BIS.
The first
of them, in 1963, involved swapping $13 million equivalent of sterling
for Swiss francs; the francs were then used by the System for repayment of long outstanding drawings on its bilateral arrangements.
Successive drawings, repayments (including repayments financed by
additional third-currency swaps), and changes in the currencies involved
in the swaps were made frequently during 1964 and 1965.
At the end
of 1965, the System still had outstanding a $40 million third-currency
swap under which it is to deliver Swiss francs for German marks, and
by early March, 1966 this had been reduced to $10 million.
It is difficult to assess the usefulness of the System's
third-currency swaps.
It is argued that the necessity for such
operations arises from the limited willingness of foreign central
banks to accept other foreign currencies in repayment of swap transactions.
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- 35 When a commitment to a foreign central bank matures, a third-currency
swap is one way in which the System may acquire the needed currency
without resort to gold sales.
Opponents of third-currency swaps
point out, however, that:
(1)
they do not discharge a short position in a
currency, but only transfer the commitment to
another creditor;
(2)
they act, therefore, to extend the maturity of
the System's liability in a currency; and
(3)
they expose the System to an additional exchange
risk in that the System has a "long" position
with a fixed maturity--in contrast to "outright"
holdings of a foreign currency, which can be
liquidated at the System's pleasure.
Experience with third-currency swaps has so far been too
limited, however, to permit a firm evaluation of the relative weight
of these advantages and shortcomings.
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Conclusion.
The foregoing discussion has brought out several points
about the System's foreign currency operations over the last four
years:
First, in part because of the dollar's special place in the
present international financial system and in part because of the
continuing U.S. balance-of-payments deficits, the problems confronting
the U.S. authorities in the foreign exchange market contrast sharply
with those facing the authorities of other convertible currency
In consequence of this situation, direct market operations
countries.
by the System have been a relatively small part of its overall foreign
currency activities, while the swap arrangements and other inter-
official transactions have been more frequently employed.
Second, while most official market actions involving the
dollar have been conducted by foreign central banks. the System has
nevertheless undertaken significant market operations under special
circumstances, such as at the time of the Cuban crisis, of the
assassination of President Kennedy, and last fall, of the assistance
to sterling.
Third, the System's activities in foreign exchange, in use
of the swap arrangements, in other official transactions and in the
market directly, have not always shown unqualified effectiveness;
nevertheless, they have for the most achieved their objectives of
helping to moderate destabilizing fluctuations in exchange rates and
to reduce drains on U.S. gold reserves.
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- 37 Fourth, Federal Reserve operations have been of great
importance in furthering inter-central bank cooperation in foreign
exchange market actions.
It is difficult to measure the System's
exact contribution to such an intangible concept.
Nonetheless, the
increases in the size and number of the swap lines, the System's
encouragement of other bilateral arrangements, its role--often as the
initiating party--in a number of international financial assistance
packages, and the forceful example which these actions have provided
for other central banks, all stand in evidence of the System's
crucial contribution to cooperative inter-central bank action in the
foreign exchange market.
Fifth, since experience to date has been relatively short
and has been limited to a situation of balance of payments deficits,
there would seem to be a clear case for continuing the System's foreign
currency operations as an experimental undertaking.
A step that might
be appropriate now would be to streamline the Committee's authorization, guidelines, and directive by consolidating these three instruments into two, an authorization and directive.
A proposal to this
end has been submitted by the Committee's Secretariat.
Sixth, the Committee may wish to direct its staff to
give consideration in the months ahead to some such questions as
the following:
(1)
The relation between the System's swap network
and the proposed reform of the international
payments mechanism;
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(2)
The relative stress to be placed on market
operations and on inter-central bank arrangements;
(3)
Possible expansion of the swap network by
additions of other central banks or by
increases in the individual amounts;
(4)
The circumstances under which System drawings
and repayments under the swap arrangements
are desirable;
(5)
The possible development of additional
techniques to facilitate the use by the
System of foreign currencies for settlement
of obligations in other foreign currencies,
supplementing third-currency swaps;
(6)
The role of special transactions such as
the recent operations in sterling and the
provision of forward cover for Italian lire.
Finally, System foreign-exchange operations since their
resumption in 1962 have been conducted against the background of
a large deficit in the U.S. balance of payments.
A different set
of problems will be posed when that deficit is eliminated.
A full
study of the basic long-range problems of official foreign-exchange
operations should be undertaken, perhaps in one or two years, after
the completion of other comprehensive System studies now under way,
(e.g., the studies of the discount mechanism and of the Government
securities market) with the dual aim of reviewing past aims and
experience further and considering the role of operations under
changed international financial conditions.
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Appendix A:
Historical Survey of
System Foreign Exchange Operations
Background to System Operations.
The Federal Reserve undertook its first foreign exchange
operations in 1918.
In that year, under the direction of the Board's
Division of Foreign Exchange and the Board's Agents at the Federal
Reserve Banks, the Federal Reserve established balances with several
foreign central banks and intervened directly in the market for
foreign currencies for the purpose of administering exchange controls
set up under the Trading with the Enemy Act of 1917 and the Executive
Order of January 1918; dealing with sizable and apparently speculative movements of gold; and stabilizing the value of the dollar in the
exchange markets.
These operations were short-lived however; and
not until the mid-1920's did the Federal Reserve again begin acquiring
foreign currency denominated bills of exchange and balances with
foreign central banks.
Federal Reserve foreign exchange activities in the later
'20's were primarily for the purpose of providing stabilization
credits for a number of European central banks for the defense
of their currencies, and were largely conducted by the Federal
Reserve Bank of New York, with only cursory supervision by the
Board of Governors.
By the fall of 1931, System foreign assets had
reached a peak of nearly $170 million, of which just over $125 million
represented sterling assets.
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- A2 -
The Federal Reserve's stabilization activities for
currencies other than the dollar and especially the role of the
Federal Reserve Banks in initiating such activities brought vehement
criticism from Senator Glass on the grounds that such activities
were alien to the intent of the Federal Reserve Act.
The result of
that denunciation of the Federal Reserve's policies was the
enactment, in 1933, of Section 14(g) of the Federal Reserve Act,
stripping the individual Banks of the authority to conduct foreign
business without the "special supervision" and advance approval of
the Board of Governors.
With the Gold Reserve Act of 1934, the Federal Reserve's
authority to control gold movements to and from the United States,
as well as title to the gold held by the System, was transferred
to the Treasury.
Moreover, Section 10 of the Act placed in the
hands of the Treasury the responsibility for stabilizing the
value of the dollar through dealings in gold and foreign exchange
and established the Stabilization Fund for carrying out these
responsibilities.
Despite the broad authority granted to the Secretary of
the Treasury, Stabilization Fund activities in foreign exchange
were fairly small during the 1930's and 1940's.
In fact, as for-
eign countries established ever more rigid exchange controls in the
late 1930's, U.S. official intervention in the exchange markets
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became more and more a matter of only academic concern.
The onset
of World War II removed any remaining vestiges of convertibility
for most foreign currencies.
At the end of World War II there was very little need
for official U.S. operations in
the foreign exchange market, and
the Stabilization Fund was almost solely concerned with currency
stabilization agreements with Latin American countries.
The inactivity of U.S. authorities in foreign exchange
markets in the years immediately following the war stemmed from
three major and interrelated factors:
(1)
the strength of the U.S. payments position
and the large increase in its gold reserves;
(2)
the emergence of the dollar as the world's
major trading and reserve currency; and
(3)
the lack of convertibility of most nondollar currencies.
After the mid-1950's, however, the situation in the
world economy changed.
Discussions of a "dollar shortage" waned
and the recovery of the industrial economies of Europe made the
case for a continued passive
U.S. policy in foreign exchange
markets less certain.
Recovery of the industrial European economies, furthered
by the formation of the Common Market, increased world trade, and
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restoration of internal and external financial equilibrium in the
leading foreign countries relieved the pressure for U.S. goods and
services and for dollars to pay for such goods and services.
In
consequence, pressures for restoring the convertibility of other
currencies increased until, in 1958, most major countries
formally declared their currencies convertible under Art. VIII.
of the Fund Agreement, and under Article IV were obliged to intervene to limit fluctuations in the spot rates.
The reserve position
of the European countries has continued to improve over the past 15
years as a result of increasingly favorable trade balances, and
growing productive capacities and opportunities for investment,
which has induced large capital flows to Europe.
In late 1960 and early 1961, three factors provided the
final impetus for the active re-entry of the U.S. authorities into
the foreign exchange market.
(1)
As a result of continuing deficits in the U.S.
balance of payments and heavy U.S. gold sales, speculation developed in late 1960 that the incoming Kennedy Administration
would change the gold value of the dollar.
Thus, for the first
time since the 1930's, the position of the dollar as an unassailable store of value was seriously questioned.
Although the state-
ments of the President-elect dampened speculation, the underlying
situation producing the speculation was not corrected; and anxiety
about, and the threat of, renewed speculation against the dollar
remained.
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A5 -
(2)
There was increased concern in a number of quarters
that sterling might come under speculative selling pressure in
early 1961.
Since the dollar's position was also potentially
subject to speculative pressures, it was felt that the two major
trading and reserve currencies should negotiate some facility for
mutual credit and assistance which would make gold movement between
Britain and the United States unnecessary.
(3)
The rapid economic growth of Continental Europe,
together with speculation on a devaluation of the U.S. dollar,
produced heavy inflows of private funds, to Germany, the
Netherlands, and Switzerland.
In order to reduce the surplus on
both current and capital accounts, the Dutch guilder and the
German mark were revalued in March, 1961.
Contrary to intentions,
the effect on the exchange markets of the revaluations was to
induce even greater speculation about other, or further, changes
in exchange rates, with private outflows of funds becoming
particularly heavy from the United Kingdom.
Under these conditions,
spot and forward rates for many foreign currencies moved sharply
away from par values, tending to reinforce the speculative rumors
of further changes in par values and producing widespread market
disorder.
While the Stabilization Fund actively entered the market
to counter the immediate pressures on the mark, guilder, and Swiss
franc, it was apparent that these three major factors posed more
far-reaching questions about U.S.
exchange market policy and
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- A6 activities.
Consequently, the Federal Reserve began early in 1961
to consider reentry into the foreign exchange markets.
After nearly
a year of study, the Open Market Committee authorized in February,
1962, limited System operations in foreign exchange to be conducted on an experimental basis.
1/
System operations, 1962.
Background.
System operations in 1962 were conducted
in an atmosphere in which the U.S. payments deficit, while showing
some improvement in the first part of the year, continued and even
increased over the previous year.
In the United Kingdom, too,
the payments situation was of major concern, with emerging signs
pointing to a worsening of the situation, although actual events
in the year showed a slight improvement in the balance.
In
Continental Europe, the general tendency was toward reduced
surpluses, with France as the major exception to this performance.
In addition to the influences exerted by these payments
developments, the exchange markets were subjected in mid-summer
to considerable pressure from speculative attacks on the newly
established par value of the Canadian dollar, resulting in heavy
flows of funds to Europe, and to Switzerland in particular.
Earlier, widespread price declines in a number of stock markets
had unsettled investor confidence, and repatriations of funds
from those markets placed a number of currencies under pressure.
1/
Appendix B contains a series of tables presenting a
statistical summary of System operations since 1962 and supplementing the material in this Appendix.
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- A7 Two political developments in particular added to the
general speculative nervousness in the exchange markets:
the
Berlin crisis and the U.S.-Russian confrontation over Cuba.
Operations.
In response to these events and to the
resultant exchange market pressures, the System, together with
the Treasury and foreign central banks, undertook a variety of
operations.
The larger part of the System's limited spot market
operations was in Swiss francs, often in cooperation with the
Swiss National Bank, and was in response to the speculative
pressures arising from reactions to the stock market developments,
the Berlin crisis, speculation against the Canadian dollar, and the
Cuban situation.
In addition to these selling activities in the
spot market, market purchases of Swiss francs were made at times of
reduced pressure on the rate for use in repayment of swap commitments.
The System also engaged in a few spot operations in
marks and guilders.
In the first instance the mark transactions
were designed to counter speculative flows to and from Germany,
in reaction to the stock market declines and to the Berlin situation.
System purchases of guilders were made to acquire balances at times
of ease in the rate for repayment of swap drawings made in the
spring and early summer,
System operations in the spot market were quite limited.
In all, gross market transactions in marks totaled $20 million;
in guilders, $26 million; and in Swiss francs, about $9 million.
These operations formed only a small part of a more comprehensive
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program conducted by the System, the Treasury and foreign officials
to moderate or prevent outflows of U.S. gold.
The larger part of the
System's participation in the program was in its use of swap
arrangements.
During 1962, the System negotiated reciprocal currency
("swap") agreements with ten foreign central banks, including the
B.I.S.; three of these were increased in size from their original
amounts during the year.
For the most part, the swap arrangements
were initiated at the request of the Federal Reserve in reaction
to, or in anticipation of, heavy inflows of dollars to the foreign
central bank and the consequent threat of purchases of U.S. gold.
A notable exception was the arrangement with the Bank of Canada.
The role of the Federal Reserve as the initiating bank
in the swap network is not surprising.
The general weakness of
the dollar throughout the year made it necessary for the System
to acquire foreign balances for market actions and for covering
foreign official dollar accruals.
It was, therefore, usually
more in the interest of the System than of the foreign banks to
negotiate such arrangements.
On the other hand, when the Canadian
dollar came under attack, it was necessary for the Canadian
officials to secure resources to turn back the attack, and it was
they who initiated the swap arrangement with the Federal Reserve.
Utilization of the swap lines in 1962 was almost entirely
through System drawings, which amounted to $420.5 million, most of
which was repaid within six months of the original drawing.
A
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total of $130 million in Swiss franc drawings were made by the
System in the year, of which $110 million took place during the
summer months at a time of heavy speculative inflows to Switzerland.
Market purchases of francs in the late summer as pressure on the
rate eased permitted repayment of part of these drawings.
In the
fall, however, the Cuban crisis brought renewed stress on the
dollar's position and increased dollar accumulations by the Swiss
authorities.
A $30 million swap drawing by the System and Treasury
forward operations were used to reduce the pressure on the dollar
and to purchase uncovered dollar balances held by Swiss authorities.
In the early summer, swap drawings in guilders provided
cover for dollars held by the Dutch authorities; then, with an
easing in market pressures on the guilder in the late summer, the
System made spot purchases of guilders to repay these swap commitments.
At the end of the year, a precautionary drawing from the
Dutch swap line was made by the System in anticipation of possible
year-end pressures on the rate; however, the pressures did not
develop and the guilders were not needed.
In October, the System negotiated a swap agreement with
the Austrian authorities, and the total amount of the facility,
$50 million equivalent, was immediately drawn by the System with
the purpose of at least delaying an Austrian gold purchase.
A series
of drawings and repayments on the Belgian swap arrangement was
also made by the System during the year, reflecting the changing
pressures on the Belgian position.
In all slightly more than
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1/
$30 million in such drawings were made.
However, unlike the
Austrian transaction, the activities of the System on the Belgian
swap line were designed to finance what were considered temporary
swings in the Belgian payments situation without resort to frequent
gold sales and purchases between the two countries.
In the Austrian
case, the movement of funds was expected to be of more than a
temporary nature, and settlement of the System's swap commitment
was eventually made with the proceeds of a gold sale to that country.
Only a single foreign drawing on the swap lines was made
in 1962:
by Canada for $250 million.
Reversal of the speculative
pressure on the Canadian dollar and a return of more normal flows
of funds to Canada allowed the Canadian authorities to repay
their drawing before the end of the year.
System operations, 1963.
Background.
After having worsened markedly during 1962,
the U.S. balance of payments in 1963 first continued the deterioration of the previous year and then, after the announcement of
President Kennedy's balance-of-payments program in July, showed a
rather substantial turn-around in the latter half of the year.
Nevertheless, for the year as a whole, the U.S. position remained
one of continued deficit in its international accounts.
In Europe and elsewhere the picture of payments movements was rather mixed.
France continued to run a substantial
surplus but the British situation began to deteriorate; and the
1/ Activities in Belgian francs represented disbursements and
acquisitions under the fully drawn part of the swap.
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Italian surplus declined sharply under pressure of rising import
demands accompanying the steady rise in real incomes in Italy.
In large part in reflection of the Italian situation, Germany
saw the slight deficit of the previous year turn to a surplus of
major proportions.
Finally, despite a large and troublesome
deficit on current account, international tensions and mounting
capital flows from Italy produced an overall surplus for Switzerland throughout the year.
There were three economic events of more than routine
interest for the exchange markets:
(1)
the negotiation by the Soviet Union of grain
purchases valued at about $500 million from
Canada;
(2)
the announcement by the United States of the
proposed imposition of an Interest Equalization Tax, within the framework of
President Kennedy's balance-of-payments
program; and
(3)
the rejection of Britain's bid for membership
in the Common Market.
From the viewpoint of System exchange market transactions,
one political event was of overshadowing importance:
the assassi-
nation of President Kennedy in November.
Operations.
Spot market transactions by the System in
1963 expanded both in volume and in the number of currencies
involved; for the most part, they consisted of sales of foreign
currencies.
Such sales were, in almost every case, undertaken
as a part of a coordinated program of support for the dollar rate,
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involving the System, the Treasury, and foreign authorities,
and utilizing a variety of market and inter-central bank operations.
Occasional easing of the selling pressures on the dollar rate during
the year and the reversal of the strength in sterling in the spring
permitted limited purchases of foreign currencies by the System.
These were used largely to replenish balances and to acquire
currencies for repayment of outstanding commitments; however, the
purchases also served to support the sagging sterling quotations
as part of a cooperative policy with the Bank of England.
Spot sales of foreign currencies by the System during
the year totaled more than $175 million and were designed to serve
a variety of purposes:
(1)
to counter seasonal pressures; sales of marks
and Swiss francs at year-end are examples of
this type of action;
(2)
to counter pressures arising from foreign payments imbalances; the heavy sales of marks in
the first half of the year (totaling $99 million equivalent) in cooperation with spot and
forward operations of the Treasury and with
market activities of the Bundesbank serve as
the major examples of this type of action;
(3)
to meet temporary pressures arising from
differential money market conditions; part
of the summer sales and later purchases of
guilders may serve as examples;
(4)
to meet speculative pressures directed in
favor of a foreign rate; as in 1962, the
Swiss franc sales by the System were largely
designed to counter these pressures, and
in the fall of the year, rumors of a guilder
revaluation also made such sales advisable;
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(5)
to meet speculative pressures against the
dollar; the System's actions at the time of
the President's assassination may be cited
in this case;
(6)
to test the dollar's market rate by official
intervention; the sale of French francs in
Paris, designed to see if the dollar could
be pulled off the floor, was such an action.
The System-foreign central bank network of reciprocal
currency agreements was considerably expanded in 1963:
(1)
Two new agreements, with the Bank of Sweden
and the Bank of Japan, were negotiated.
(2)
The size of several agreements was increased;
the increase in the swap line with the Bank
of England from $50 million to $500 million
was the most outstanding of these increases.
(3) The maturities of several agreements was increased from the typical 3-month term to six
months in the case of the arrangement with
the Bank of Italy and twelve months for the
agreements with the Bank of England and the
Bank of Canada.
Some of these expansions in the bilateral swap network in
the year were again initiated by the Federal Reserve; the most
outstanding increase, however, that of the arrangement with the
Bank of England, was at the request of the British authorities.
The negotiation of the Japanese swap and the expansion in the
Italian arrangements also were at the initiative of those banks.
During the year the Committee explicitly put into the
Guidelines the requirement that outstanding swap drawings be
generally liquidated within twelve months, thereby underscoring the
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short-term nature of System operations.
In addition, authorization
was given to make simultaneous forward purchases and sales in one
foreign currency for another -- "third-currency" swaps -- for the
purpose of utilizing balances in one currency for acquiring needed
balances in another.
System drawings on the swap lines in 1963 were heavily
concentrated in marks, Swiss francs and guilders.
German mark
drawings in the first half of the year were largely used to provide
spot balances for the System's market activities.
Later in the
year, drawings served to purchase uncovered dollar holdings
accruing to the German authorities from the window-dressing
activities of German commercial banks.
Most swap commitments in
marks were repaid by the end of the year, utilizing market-acquired
balances, the proceeds of medium-term Treasury mark bonds issued to
Germany, and the proceeds of dollar purchases of the German Defense
Ministry.
During the first five months of the year the System repaid
its outstanding Swiss franc indebtedness on the swap lines, using
balances acquired in the New York market, from the Swiss National
Bank, and through a third-currency swap of sterling for Swiss
francs made with the B.I.S.
However, renewed speculative pressures
in the market and window-dressing activities by Swiss banks produced
a considerable appreciation in the franc rate and dollar accruals
to the Swiss authorities increased in the summer and fall months.
The System made sizable swap drawings from both the Swiss National
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Bank and the B.I.S. for direct purchase of uncovered dollars from
the Swiss authorities and for use in limited market operations.
Some repayments of these drawings were made in the fall, but
additional drawings were needed at the end of the year to offset
the effects of window-dressing by Swiss banks.
In 1963, there was a succession of System guilder
drawings and repayments in response (1) to varying degress of
tightness in the Dutch money market and the accompanying pressures
on the dollar/guilder rate and threat of dollar accruals to the
Dutch authorities, and (2) to pressures on the exchange rate arising
from speculation concerning revaluation of the guilder.
The proceeds
of the drawings were about evenly divided in their use between
market transactions conducted in concert with the Treasury and direct
transactions with the Dutch authorities.
In the summer, the System drew on the swap arrangement
with the Bank of France and used the proceeds for market operations
in Paris.
These activities were designed to test the market for
dollars in Paris in the context of the higher U.S. discount rate
to see if the dollar rate could be pulled off the floor by official
intervention.
However, the position of the franc in the market
proved too strong to be amenable to such actions; the dollar rate
returned to the floor; and the System's operations in francs were
suspended.
In October, a similar operation was again undertaken in
the Paris market.
Once more, the gains were short-lived, and the
operations were discontinued.
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Other System drawings on the swap lines were almost
entirely in support of market operations, many of which occurred
at the time of the President's assassination.
Foreign central bank drawings on the swap lines were
made (1) in the spring, by the Bank of England as sterling came
under pressure; and (2) late in the year, by the Bank of Italy,
as the deteriorating Italian payments balance put downward pressure
on the lira rate which the Italian authorities wished to maintain.
In both cases, the proceeds of the drawings were used to support
market activities by the foreign bank.
The funds for System repayment of swap liabilities came
from several sources:
(1)
from reversal of market forces which had led
to the original drawing, allowing market purchases or purchases from the other central
bank of the needed foreign currencies; the
System's repayment of obligations in sterling,
some Swiss franc commitments, and some guilder
commitments were accomplished in this manner;
(2)
from the proceeds of a Treasury foreign currencydenominated bond; repayment of mark obligations
was made in this way;
(3)
from funds received as part of a foreign debt
payment to the U.S.; some of the System's
guilder swap liabilities were repaid from such
a transaction;
(4)
from the proceeds of a "third currency" swap
drawing; liabilities in Swiss francs were met
by such a drawing.
In all, $460 million of System swap repayments were met
by the first of the above methods; whereas, $87 million were repaid
by use of one of the remaining "special" types of transactions.
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Two specially authorized transactions were made in 1963:
(1)
the forward purchase of French francs for the
purpose of covering swap drawings made for
System spot market intervention in Paris in
testing the dollar rate as described above;
(2)
the simultaneous System purchase of $50 million
of lire from the Bank of Italy and sale of
the lire to the Treasury for its use in reducing outstanding Treasury obligations in that
currency, thereby placing the System in the role
of intermediary between the Italian and U.S.
Treasury authorities aiding in the Italian
policy of bolstering their reserve position
and in the Treasury policy of reducing its
outstanding foreign commitments where feasible.
System operations in 1964.
Background.
After some improvement in the early
months of 1964, the U.S. balance of payments deteriorated
further from its 1963 position as a result of heavy capital outflows -- despite measures taken to restrain a portion of these
flows.
By the latter part of the year, the size of the U.S.
deficit, together with side effects arising from the sterling
crisis, caused serious concern about the dollar.
In Europe, the
payments surpluses of the preceding year continued, though with
some easing in
the German and Dutch positions.
was gradually eliminated with U.S.
The Italian deficit
financial assistance and the
institution of a program of general domestic and trade restraint;
by the end of the year Italy's balance of payments had returned
to substantial surplus.
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In addition to the increased U.S. balance-of-payments
deficit, a major, and perhaps the most important, development affecting the exchange market during the year was the burgeoning British
payments deficit, arising from both mounting trade and current
account deficits and from large long-term capital outflows.
The
result was a crisis of confidence and a bear attack of unparalleled
magnitude on the pound in exchange markets.
Operations.
Reflecting the growing recognition of the
special problems of the United States in exchange market operations,
market operations were less frequently employed by the System in 1964
than in other years relative to transactions conducted directly with
foreign central banks under the reciprocal currency arrangements.
On many occasions, the market transactions were part of market swap
activities, i.e., simultaneous market spot and forward currency
sales and purchases, conducted jointly with foreign authorities.
Outright sales of marks were made by the System in the
first months of the year and in June in support of the dollar rate
against speculation on a possible revaluation of the mark.
these sales totaled $20 million equivalent.
In all,
System sales early
in the year were also reinforced by cooperative actions of the
Treasury and the German Federal Bank in the spot market.
Market swap contracts in sterling ($55 million equivalent)
and in Canadian dollars ($2 million equivalent) were made by the
System in the spring and summer, selling spot dollars and purchasing
them forward with the dual aim of reducing the incentive for
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At
the end of the year, under a new Committee authorization and with
the cooperation of the Netherlands Bank and the Swiss National
Bank, the System undertook forward sales of guilders and Swiss
francs in the respective foreign markets for the purpose of
encouraging dollar retention or spot dollar purchases in a period
of foreign window-dressing and pressure on the dollar.
In 1964, System drawings on the swap lines with other
central banks decreased considerably from the 1963 level; however,
the swap lines themselves were expanded in both size and maturities
during the year, with increases of $250 million and $50 million in
the British and Belgian lines and extensions in the maturities of
five of the arrangements to twelve months.
System drawings
during the year totaled $475 million equivalent, in marks, guilders,
Belgian francs, and Swiss francs, the currencies in which most
drawings had been made in previous years.
While providing some
resources for market intervention, these drawings were almost
entirely used to purchase excessive outright dollar holdings of
foreign central banks, the result of speculative or other private
dollar sales during the year.
Repayment of System obligations on the swap arrangements
was accomplished through an even greater variety of transactions
than seen in other years, many of which were the result of changing
payments conditions and dollar needs in other countries.
In
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addition to repayments from balances acquired in market transactions
when reversals of flows of private funds occurred, repayments were made:
(1)
by using the proceeds of third-currency swaps
with the B.I.S., selling balances of one currency for needed balances of another, with
corresponding reciprocal forward repurchase
contracts;
(2)
by purchasing with dollars the foreign currency
proceeds of a foreign drawing from the IMF;
(3)
by purchasing the foreign currency proceeds of
a foreign bank's swap drawing from a third
foreign bank;
(4)
by purchasing the proceeds of a Treasury bond
denominated in a foreign currency; and
(5)
by using the proceeds of a gold sale.
Three foreign central banks made use of the swap arrangements with the System in 1964:
the Bank of Japan, in the summer
and fall; the Bank of Italy in the spring; and the Bank of England
in the summer, the fall, and into the following year.
The Japanese drawing on the swap line served primarily
to boost their reserve figures during the summer and early fall
months after the Bank of Japan had sustained reserve losses in
support of the yen.
These drawings were fully repaid soon after
the beginning of the fourth quarter.
Deepening Italian balance of payments difficulties placed
the lira under considerable selling pressure in the fall of 1963
and winter of 1964.
Swap drawings were made by the Italian
authorities as they incurred sizable reserve loses while engaging
in support of the rate above par.
The System provided further aid to
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the Italian authorities by purchasing lire in advance of U.S. needs
and selling the lire immediately to the Treasury.
After a brief
exchange crisis in early March, broken by the announcement of a
$1 billion assistance package for the Italian authorities and
their initiation of a number of measures to counter the deficit, the
outflow of funds from Italy slackened and the pressure on the rate
eased.
By the early summer, Italian commitments to the System had
been repaid and Italy had made substantial progress in correcting
its payments deficit.
The sterling crisis which began in earnest in the fall
of 1964 has been well described in many places, and a further recital
will not be attempted.
The British drew on the swap arrangement
with the System in 1964 and later in 1965 with two basic purposes
in mind:
(1) to replace reserves lost in spot or earlier forward
support of the pound in the world's exchange markets; and (2) to
window-dress reserves in the hope of effecting some restoration
of market confidence.
British drawings for these purposes
dominated the Federal Reserve's foreign accounts in both 1964 and
1965.
In 1964, gross drawings by the Bank of England totaled $1,370
million, of which all but $100 million were in the fourth quarter.
However, all but $230 of these drawings were repaid by the end of the
year.
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System operations in 1965.
Background.
After the sharp worsening of the U.S. payments
position in the last quarter of 1964, heavy capital outflows from
the U.S. developed in the early weeks of 1965 in anticipation of
some forms of controls.
A modest tightening of the interest
equalization tax and a program of voluntary restraints on capital
outflows were announced in February; and these measures produced
some improvement in the U.S. position and in world confidence in
the dollar.
Elsewhere, the United Kingdom continued to experience
difficulties; and sizable trade deficits and reserve losses, in
spite of proliferating government programs to counter them,
continued to undermine market confidence in sterling.
France re-
mained in surplus throughout most of the year, although some
indications of a slackening of the inlfow were seen in the fall;
Italy's surplus, which had developed toward the end of 1964 as
measures to correct the previous deficit took full hold, mounted
through the spring and summer; in contrast, Germany, the Netherlands and Switzerland were in better balance than in many earlier
years.
U.S. capital outflow restraint programs had a considerable
effect on the exchange markets in 1965 through their impact on shortterm interest rates, particularly in the Euro-dollar market, as
well as through their diversion of many financing needs from New
York to other markets.
The exchange and capital markets were also
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influenced by unusually large grain purchases of Communist countries
and by increasing tensions in Southeast Asia.
Finally, money and
credit markets both in the United States and abroad showed a general
tendency to tighten in the year; their different rhythms, however,
produced at times substantial but often quickly reversed, private
flows of funds between markets and fluctuations in exchange rates.
Operations.
At the end of 1964 the System had net
foreign exchange liabilities of almost $350 million, reflecting
liabilities assumed under reciprocal currency agreements, under
third-currency swaps and in uncovered forward transactions.
By the end of 1965, these net liabilities --
abstracting
from the technical forward transaction in Italian lire, described
below -- had been reduced to about $40 million.
Market operations by the System in 1965 were more extensive
than in 1964 and involved sterling, marks, Swiss francs and guilders.
For the most part they were concerned with:
(1)
spot purchases of exchange for meeting
maturing swap and forward commitments, and
(2)
forward sales of foreign exchange as part of
market swaps conducted jointly with the
Treasury and foreign central banks for the
purpose of encouraging spot dollar purchases
or retention by private foreigners.
These latter operations were undertaken in Swiss francs
($32 million equivalent) and in guilders ($100 million equivalent)
at the end of 1964 and early in 1965.
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System gross drawings on the swap lines increased over
1964 by about one-half, totaling $690 million equivalent; $150
million of such drawings were in Swiss francs, $350 million in lire.
Swiss franc drawings reflected the need to purchase,
early in the year, uncovered dollar holdings accumulated by the
Swiss authorities at the end of 1964 (1) as a result of Swiss
bank window-dressing operations and (2) as a result of the
dollar's role as a vehicle currency in the transfer of assets
to Switzerland at the height of the sterling crisis.
Later, tight
conditions in the Swiss money market and speculative flows arising
from general international tensions required additional System
drawings for the purchase of increased Swiss official dollar
holdings.
Drawings by the System during the year on the arrangement
with the Bank of Italy were used to purchase part of the heavy
dollar inflow experienced by the Italian authorities on the shift
from a large payments deficit to an even larger surplus.
In an
attempt to lessen the inflow of dollars to official holdings, with
corresponding pressures for gold purchases, the Italian authorities
engaged in dollar/lira swaps with the Italian banks.
However,
pressure on the Italian authorities to convert more dollars into
gold continued, and in the fall the System assumed responsibility
for $500 million of the lira forward contracts.
Earlier in the
year, the Treasury had assumed responsibility for approximately
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twice that amount.
A similar operation with the Italians had been
conducted by the Treasury at the time of the preceding Italian surplus.
As in earlier years, the System made considerable use
of the fully drawn portion of the swap facility with the Belgian
National Bank and also made $65 million of drawings under the standby swap arrangement.
However, unlike earlier years, the inflow of
dollars to the Belgian authorities was not quickly reversed and
repayment was slow.
The only foreign utilization of the swap lines in 1965
was by the Bank of England; and heavy dependence by the British
authorities on the swap arrangement with the System was a cornerstone
of their defense of the sterling parity.
In all, $1,765 million of
drawings and $1,490 million of repayments were made by the Bank
of England.
British transactions in other currencies allowed the
System to repay commitments in other currencies, as the System
acquired from the Bank of England some foreign-currency proceeds of
bilateral credits and of British drawings on the Fund.
At the close
of the year, $475 million in British drawings were outstanding, over
$200 million more than at the end of 1964.
System repayment of swap drawings was again effected in
a variety of ways.
(1) Balances acquired in market transactions played
an even smaller role in these repayments in
1965, amounting to only $7.3 million equivalent.
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(2) Obligations in Swiss francs were repaid
during the year with the proceeds of spot
market purchases, of dollar sales to the
Swiss authorities, of the conversion of
part of a British credit, and of a thirdcurrency swap.
(3) Guilder commitments of the System were,
in large part, eliminated in the course
of a reversal of market conditions when
a deficit appeared in the Dutch balance
of payments and guilders could be
purchased from the Dutch authorities.
Guilders totaling $45 million equivalent
from the British IMF drawing were also
used to repay some of these commitments.
(4) The System repaid part of its lire
commitments with lire received from the
Bank of England in conversion of the
British IMF drawing, and the rest in
the summer with the proceeds of the U.S.
drawing on the IMF. In this way, the
System's short-term intervention obligations were for the first time funded by
means of the medium-term facilities of
the IMF. Previously, medium-term funding
of System obligations had been achieved
on occasion through the issuance of
Treasury bonds denominated in foreign
currencies, the so-called "Roosa" bonds.
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Appendix B
Statistical Tables
of Federal Reserve Foreign
Exchange Operations
The Tables in this Appendix are designed to supplement
the main part of the paper and the historical survey given in
They were derived from the weekly reports of the
Appendix A.
Special Manager of the Federal Reserve's foreign exchange operations.
The Foreign Department of the Federal Reserve Bank of New
York was kind enough to check the data for accuracy.
Tables 4A and 4B, summarizing the utilization of swap
drawings, may contain some double counting because of the method
used in calculating the "Balances" item as a residual of reported
utilization of swap-derived foreign currencies subtracted from
total
drawings
for the given quarter.
Because System activities in
Belgian francs have largely
been in the form of disbursement and reconstitution of balances
held under the $50 million portion of the swap arrangement with
the Belgian National Bank which is
at all
times,
summarize
a separate table,
the
fully drawn by both parties
Table 7,
has been provided to
transactions in that currency.
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TABLE 1
System Drawings and Repayments
on Reciprocal Currency Agreements
1962 - 1965, quarterly
of dollars equivalent)
millions
(In
Pounds
Sterling
1962
Quarter
I
Quarter
II
Drawings
Repayments
Drawings
D.
Marks
Guilders
Swiss
Francs
Lire
Belgians
Francs
Can.
Dollars
--50.0
--
10.0
50.0
---
40.0
50.0
110.0
10. 0
---
10.5
10.5
--
10.0
20.0
15.0
50.0
20.0
5.0
50.0
30. 5
15.5
French
Francs
Yen
Austrian
Schillings Total
50.0
--
--
50.0
--
--
--
60.0
50.0
---
---
160.5
170.5
---
50.0
--
150.0
20.0
50.0
50.0
---
50.0
--
420.5
190.5
---
---
-50.0
30.0
163.9
---
---
---
205.0
100.5
12.5
--
---
---
102.5
163.6
Repayments
Quarter III
Quarter
IV
Drawings
Repayments
Drawings
Repayments
Year
Drawings
Repayments
50.0
50.0
---
60.0
50.0
130. 0
25.0
Drawings
Repayments
25.0
25.0
--
10.0
9.5
--
""'
1963
Quarter
Quarter
I
II
Drawings
--
5.0
150.0
50.0
Repayments
Quarter III
Quarter
IV
Year
95.5
Drawings
Repayments
113.0
40. 0
50.0
50. 0
----
10. 0
10.0
136. 0
113.0
60. 0
20.0
180. 0
Repayments
Drawings
Repayments
35.0
35.0
286.0
226.0
150.0
80.0
230. 0
115.0
Drawings
50.0
19.4
5.0
5.0
.6
15.0
20. 0
20.0
9.0
12.5
---
---
430.0
185.5
--
25.0
50.0
25.0
20. 0
20.0
21.5
12.5
---
-50.0
767.5
613.5
--
10.0
Authorized for public release by the FOMC Secretariat on 5/27/2020
-
B3 -
TABLE 1 (Cont.)
System Drawings and Repayments
on Reciprocal Currency Agreements
1962 - 1965, quarterly
(In millions of dollars equivalent)
1964
Quarter
I
Drawings
Repayments
Quarter
II
Belgianl/
Swiss
Pounds
D.
Sterling
Marks
Guilders
---
55.0
115.0
55.0
Lire
15.0
Can.
Dollars
Francs
Francs
9.0
15.0
Austrian
French
Yen
Schillings Total
--
---
55.0
209.0
---
25.0
255.0
Drawings
Repayments
--.
--
--
--
25.0
Quarter III
Drawings
Repayments
--
--
95.0
Quarter
Drawings
Repayments
--
50.0
Drawings
---
105,0
115.0
100. 0
80.0
125. 0
245.0
---
15.0
60.0
-50.0
150,0
20.0
100.0
--
55.0
10.0
---
---
---
320.0
140.0
50.0
-130.0
150.0
82.0
10.0
40.0
---
---
---
160.0
307.0
-52.0
100.0
168.0
75.0
80.0
---
---
---
200.0
300.0
10.0
30.0
---
---
---
10.0
103.0
350.0 150.0
250.0 160.0
-
--
--
690.0
-
--
--
850.0
IV
Year
Repayments
--
Francs
5.0
25.0
230.0
100.0
w--
--
37.5
--
--
--
132.0
---
107.5
100.0
---
---
---
262.5
100.0
---
145.0
115.0
475.0
9.0
-"
--
--
564.0
"
1965
Quarter
I
Drawings
Repayments
Quarter
II
Drawings
Repayments
---
5.0
--
Quarter III
Drawings
Repayments
Quarter
Drawings
Repayments
--
--
Drawings
Repayments
---
15.0
65.0
IV
Year
1/
25.0
25.0
-48.0
25.0
125.0
150.0
250.0
---
Represents disbursements and reconstitution of balances under the $50 million fully drawn portion of
the swap arrangement and drawings and repayments under the $50 million stand-by agreement.
Authorized for public release by the FOMC Secretariat on 5/27/2020
-
B4-
TABLE 2
Foreign Bank Drawings and Repayments on Reciprocal
Currency Agreements, 1962-65, quarterly
(In millions of dollars, equivalent)
Pounds
Sterling
1962 -
I
II
D.
Marks
Guilders
Swiss
Francs
Lire
Belgian
Francs
French
Francs
Austrian
Yen
Schillings
Total
--
250.0
--
250.0
Drawings
Repayments
250.0
Drawings
-- i
Repayments
III
Can.
Dollars
Drawings
Repayments
IV
Drawings
Repayments
250.0
""'
1963 -
I
II
III
Drawings
Repayments
IV
--
25.0
--
Drawings
Repayments
50.0
12.5
---
10.0
12.5
10.0
12.5
---
---
10.0
10.0
30.0
--
50.0
5.0
50.0
15.0
15.0
Repayments
Total Drawings
25.0
12.5
--
-
Drawings
Repayments
""
25.0
Drawings
Repayments
25.0
25.0
See following page for footnotes.
250.0
250.0
250.0
250.0
250.0
--
Total Drawings
Repayments
--
---
50.0
--
45.0
45.0
---
120.0
70.0
Authorized for public release by the FOMC Secretariat on 5/27/2020
-
B5 -
TABLE 2
Con't.
Foreign Bank Drawings and Repayments on Reciprocal
Currency Agreements, 1962-65, quarterly
(In millions of dollars, equivalent)
Pounds
Sterling
Strln
1964 -
D.
Marks
Mrk
Guilders
__
French
Francs
Yen
Drawings
Repayments
---
II
Drawings
Repayments
15.0
Drawings
Repayments
85.0
65.0
---
30.0
30.0
Drawings 1,270.0
Repayments 1,075.0
--
50.0
---
80.0
80.0
IV
Total Drawings
Repayments
--
100.0
--
150.0
--
1,370.0
1,140.0
--
100.0
150.0
""'
""
50.0
--
__
Austrian
Schillinzs
Total
--
100.0
--
65.0
--
150.0
--
115.0
--
95.0
--
1,270.0
1,125.0
--
1,550.0
1,370.0
""
I
Drawings
Repayments
605.0
485.0
II
Drawings
Repayments
610.0
570.0
---
610.0
570.0
Drawings
475.0
III
IV
605.0
485.0
Repayments
85.0
---
475.0
85.0
Drawings
Repayments
75.0
350. 0
---
75.0
350.0
1,765.0
1,490.0
---
1,765.0
1,490.0
Total Drawings
Repayments
1
_
Belgian 1/ Can.
Lire Francs __ Dollars
I
III
1965 -
Swiss
Francs
rac
_
1/ Represents disbursements and reconstitution of balances under the $50 million fu
portion of the
wap arrangement and drawings and repayments under the $50 million stand-by agreement. lly drawn
Authorized for public release by the FOMC Secretariat on 5/27/2020
- B6 Table 3 A.
Utilization of Swap Drawings
All currencies, 1962-65 quarterly
(In millions of dollars)
I
Market
OperationsI/
1962 -
Sales to
Foreign
Authorities
I
110.0
II
III
IV
170.5
140.0
-10.0
10.0
310.5
110.0
19.4
26.0
59.4
10.6
94.3
80.5
392.5
161.3
577.9
15.5
4.5
35.0
Year
1963 - I
84.7
17. 2
II
III
IV
Year
1964 -
2/3/
Balances-
I
II
III
IV
20.0
Year
-
4.5
130.5
237.5
2.0
25.0
428.0
27.0
12. 3
675.0
2. 7
193. 6
1991.4
III
IV
-
4.5
25.0
2. 7
II
Total
28.3
305.0
160.0
200.0
10.0
1965 - I
Year
4.8
-21.9
--
--
168.0
Includes only operations in the New York market.
Residual item of total drawings in quarter.
Balances acquired in one quarter may be used in succeeding quarters for
one of the other purposes.
Authorized for public release by the FOMC Secretariat on 5/27/2020
- B7 Table 3 B.
Utilization of System Swap Drawings
Total, 1962-65, by currencies
(In millions of dollars)
f
-I
Market
Operations1962-1965
Pounds Sterling
Sales to
Foreign
Authorities
8.0
5.6
D. Marke
132.4
270. 9
Guilders
50.9
268.9
Swiss Francs
635.0
Lire
400.0
Belgian Francs
325.5
2.3
Canadian Dollars
14.0
21.5
French Francs
2/
Balances
71.4
2. 7
15.2
25.0
3.7
50.0
Yen
Austrian Schillings
50.0
Total
-
193. 6
-----
---
-
1991.4
---
-
Includes only operations in the New York market.
Residual item from total drawings.
168.0
-
Authorized for public release by the FOMC Secretariat on 5/27/2020
- B8 Table 4 A.
Source of System Swap Repayments 1 /
All currencies, 1962-65, quarterly
(In millions of dollars, equivalent)
Market
Purchasea2_
Purchased from
Central Banks
Balances-
Treasury
Other
Total
1962 - I
85.8
170.5
20.0
84.7
20.0
Year
1963 -
I
8.4
II
III
IV
3.3
Year
1964 - I
II
III
IV
Year
1965 - I
II
III
IV
Year
Total
105.8
84. 7
126.4
56.0
29.1
4.2
24.0
50.0
/
190.5
13.0
163.9
100.5
163.6
13.0
113.6
164.1
8.4
24. 7
460.1
41. 7
74.0
13.0
613.5
2.0
172.5
63.5
-20.6
22.0
-69.5
55.1
100.0
209.0
255.0
2.0
14.1
4. 7
1.2
75.0
25.0
311.0
26.4
110.0
210.6
52.0
102.0
20.0
474.6
46. 7
1351.5
185.5
--
--.
--
--
100.0
155.1
564.0
140.0
203.0
20.0
81.6
45.0
203.0
146.6
850.0
346.5
314.7
2218.0
69.5
-4.1
10.1
.2
5.8
158.6
I/ Excludes third-currency swaps totalling $90.5 million equivalent.
3/
--
Includes only operations
in the New York market.
May include balances originally acquired from one of the sources.
--
307.0
300.0
103.0
Authorized for public release by the FOMC Secretariat on 5/27/2020
- B9 Table 4 B
Source of System Swap Repayments-1/
Total, 1962-65, by currencies
(In millions of dollars)
Purchased from
Market
Purchases2Central Banks
Balances/Treasury
Other
Total
1962-65
--
50.0
35.0
406.0
--
20.0
335.0
13.6
--
D. Marks
15.0
303.3
2.7
Guilders
--
299.4
.2
18.1
360.5
5.2
93.5
173.0
635.0
Swiss Francs
71.4
--
Pounds Sterling
85.0
Lire
--
50.0
.4
163.0
86.6
300.0
Belgian Francs
--
250.5
25.0
40.0
--
315.5
--
16.3
3.7
--
--
20.0
French Francs
--
21.5
50.0
--
--
71.5
Yen
--
--
--
-
Austrian Schillings
--
50.0
-
-
--
50.0
158.6
34645
314.7
Can.
Total
I/
2/
3/
Dollars
46.7
1,351.5
Excludes third-currency swaps totalling $90.5 million equivalent.
Ingludes only operations in the New York market.
May include balances originally acquired from one of the sources.
2,218.0
Authorized for public release by the FOMC Secretariat on 5/27/2020
Table 5
1/
System Foreign Exchange Transactions in Market Operations-
Total period, 1962-65, by currencies
(In millions of dollars, equivalent)
Spot Operations 2/
Gross
Sales
Forward Operations
Gross
Purchases
Total
17.1
156.8
173.9
63.6
--
63.6
D. Marks
161.8
37.2
199.0
---
--
---
Guilders
51.6
99.9
151.5
99.9
--
99.9
5.8
50.5
56.3
32.5
--
32.5
---
---
---
--
500.0
----
---
---
1962-65
Pounds Sterling
Swiss Francs
Lire
Belgian Francs
Can. Dollars
2.3
1.9
Sales Purchases Total
500.0
---
4.2
1.9
--
--
---
1.9
French Francs
---
---
---
--
-
Yen
---
---
---
---
--
---
Austrian Schillings
---
---
---
---
--
---
--
697.9
Total
238.6
346.3
584,9
697.9
1/ Spot operations do not include deliveries or receipts under earlier
forward contracts.
2/
Includes only operations in the New York market.
Authorized for public release by the FOMC Secretariat on 5/27/2020
-
Bl1 -
Table 6.
Inter-Official Transactions between the System and Foreign Authorities
other than on reciprocal currency lines, by currencies for 1962-651
(In millions of dollars)
!
Forward Transactions
Spot Transactions
Gross Total
Purchases
Sales
Gross Total
Purchases
Sales
8.4
20.9
29.3
--
8.7
8.7
Marks
372.3
270.9
643.2
--
--
--
Guilders
347.2
293.9
641.1
--
--
Swiss Francs
375.4
643.0
1,018.4
Lire
269.6
400.0
669.6
--
--
--
Belgian Francs
280.6
326.6
607.2
--
--
--
16.3
14.0
30.3
--
--
--
French Francs
--
21.5
21.5
Yen
--
--
--
50.0
50.0
100.0
1,719.8 2,040.8
3,760.6
1962-65
Pounds Sterling
D.
Can. Dollars
Austrian Schillings
Total
1/
--
----
--
21.5
--
--
--
--
--
--
21.5
21.5
8.7
Excludes $90.5 equivalent in third-currency swap transactions.
30.2
Authorized for public release by the FOMC Secretariat on 5/27/2020
-
B12
Table 7
System Transactions in Belgian Francs
Annually, by type of transaction, 1962-65
(In millions of dollars)
1965
1962
1963
1964
Drawings on Swap line ]
30.5
25.0
145.0
150.0
Repayments on Swap line?/
15.5
25.0
115.0
160.0
Sales of Belgian Francs:
--
--
--
30.5
25.0
145.0
To U.S. Authorities
--
--
0.5
To Other
--
--
--
-
--
--
--
--
15.5
25.0
90.0
From U.S. Authorities
--
--
--
From Other
--
--
To Market
To Belgian Authorities
--
150.0
--
Purchases of Belgian Francs:
From Market
From Belgian Authorities
1/
2/
25.0
120.0
40.0
--
Represents both disbursements of swap balances under $50 million equivalent
portion of the swap agreement which remains fully drawn at all times and
drawings under the $50 million equivalent stand-by arrangement.
Represents both reconstitution of balances under the $50 million equivalent
portion of the swap agreement that is fully drawn at all times and repayments
of drawings on the $50 million equivalent stand-by portion of the swap
agreement.
@FedFRASER