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MEMORANDUM OF DISCUSSION

A meeting of the Federal Open Market Committee was held
on Wednesday, March 7, 1973, at 12:30 p.m., at the call of
Chairman Burns.

This was a telephone conference meeting, and

each individual was in Washington, D.C., except as otherwise
indicated in parentheses in the following list of those
participating:
PARTICIPATING:

Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.

1/

Burns, Chairman
Hayes, Vice Chairman
Balles
Brimmer
Bucher
Daane
Mayo
Mitchell
Morris
Robertson

(New York)
(San Francisco)

(Chicago)
(Boston)

Holland, Secretary
Broida, Deputy Secretary
Altmann, Assistant Secretary
Hackley, General Counsel
Partee, Senior Economist
Axilrod, Economist (Domestic Finance)
Bryant, Associate Economist
Holmes, Manager,
(New York )
System Open Market Account
Mr. Coombs, Special Manager,
(New York )
System Open Market Account
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.

Mr. Reynolds, Associate Director,
Division of International Finance,
Board of Governors
1/ Entered the meeting at the point indicated.

3/7/73

Mr. Holland observed that Chairman Burns had been
unavoidably detained and that Vice Chairman Hayes would preside
until Chairman Burns arrived.
Mr. Hayes noted that, as the members had been informed,
Chairman Burns would be joining Secretary Shultz at a meeting on
current international monetary problems to be held in Paris on
Friday, and he had called today's meeting for the purpose of
consulting with the Committee prior to his departure for Paris.
Mr. Hayes asked whether Mr. Holland had anything to add with
respect to the background and purposes of the meeting.
Mr. Holland said it was not contemplated that any proposals
for action would be put to the Committee at this meeting; the pur
pose, as Mr. Hayes had suggested, was simply to provide an oppor
tunity for the Chairman to consult with the members--that is, to
exchange information and views, and to answer any questions they
might have.

It was perhaps unnecessary to stress the confiden

tiality of the matters to be discussed.

He might mention, however,

that because of the security problems associated with a telephone
conference meeting, some of the responses to questions might be
less full than they would be in the customary type of meeting.
Mr. Hayes then asked Mr. Coombs to provide the Committee
with some background information on conditions in the foreign
exchange market at present.

3/7/73

Mr. Coombs remarked that the second devaluation of the
dollar last month and the subsequent breakdown of the new parity

structure had had a shattering effect on confidence in the dollar
throughout the world. All of those holding, lending, or even
invoicing dollars had been taught a harsh lesson, and their main
concern now seemed to be to eliminate further risk on that score.
Moreover, the credibility of official statements had plunged to
a new low on both sides of the Atlantic.
Mr. Coombs observed that during the past week the Europeans
had made a major effort to put together some kind of joint float,
but that effort did not appear to have been successful, at least
so far.

The British and Italians wanted their currencies to

remain on an individual floating basis, and the French apparently
did not want to float at all.

He did not know the official U.S.

view on that matter.
All of the major central banks had withdrawn from the
foreign exchange market, Mr. Coombs continued, and exchange rates
were moving erratically in an atmosphere of extreme uncertainty.
Spot quotations were abnormally wide and only small commercial
orders were being handled in a routine fashion. Activity in the
forward market was down to minimum levels; premiums on one-month
forwards in a number of European currencies ranged between 10 and
15 per cent, with most quotations fairly nominal.

3/7/73

New and much more severe measures were being taken to
restrict foreign transfers of dollars into the Netherlands and
Belgium, Mr. Coombs said.

If exchange rates were permitted to

continue floating over coming weeks, it seemed to him all too
likely that there would be a proliferation of exchange controls,
probably directed in an increasingly discriminatory way against
the dollar.

When there had been similar breakdowns of the

international financial system in the past, such exchange
controls had invariably bred controls on trade as well.

In

general, he thought that the existing situation was serious if
not dangerous, and that if it were allowed to persist it would
probably become worse rather than better.
In response to a question by Mr. Hayes, Mr. Holland said
he could provide certain information regarding the Paris meeting
that Chairman Burns wanted to have transmitted to the Committee.
On the subject of government policies, it was not yet possible to
say what position would be taken by the United States; that
position was still being developed.

Nor was it possible to say

what the other countries represented at the meeting would urge
for themselves, on each other, or on the United States.

As

Mr. Coombs had noted, the Europeans had made the political
decision to try to work out a Common Market float but seemed not
to have succeeded.

Whether they would renew those efforts was

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3/7/73

a matter of conjecture; but in the unlikely event that they were
successful in launching and maintaining such a float, no Federal
Reserve action would be involved.
However, Mr. Holland said, one at least hypothetical possi
bility--and he would underscore the word "possibility"--might be
a decision during the Paris meeting to mount a firm multilateral
defense of some range of currency values.

As part of such a

multilateral program, Federal Reserve intervention in exchange
markets, using the proceeds of swap drawings, could emerge as
a constructive element.

The Chairman and the Special Manager had

been in consultation on that subject with Treasury officials and
with the members of the Subcommittee of the Open Market Committee.
If decisions as to the size and timing of swap line actions and
market intervention could practically be deferred until there was an
opportunity for full discussion by the Open Market Committee, that
would be done.

On the other hand, if prompt decisions on those

points proved necessary to the working out of a constructive
multilateral agreement, and if the Treasury--speaking, in effect,
with the President behind it--certified that such decisions by the
Federal Reserve were in the national interest of the United States,
the Chairman would expect to act and to instruct the Special Manager
accordingly.

The Chairman would, of course, take due account of the

guidelines and limits set by the Committee's foreign currency autho
rization and directive, and he might attach additional limiting
conditions that he deemed prudent.

3/7/73

Mr. Holland emphasized that such observations were
entirely in the nature of contingency planning for actions that
appeared at the present juncture to be no more than a possi
bility--and one for which the probability might be very low.

As

soon after the Paris meeting as time and circumstances permitted,
Committee members would be informed of developments at the meeting
and of any decisions that might have been reached there, and they
would be asked to consider any proposals to them that might emerge
and to cast any requisite votes.
Mr. Hayes asked whether the members had any questions or
comments at this point.
Mr. Mayo said there was some uncertainty as to whether
the latest speculation against the dollar was a consequence of
inappropriate exchange rates or whether it simply reflected
efforts by speculators to make a profit.

He asked Mr. Coombs

whether there was reason to believe that some further basic
realignment of the existing exchange rate structure was needed.
Mr. Coombs replied that the recently established parities
of European currencies against the dollar probably involved a
substantial undervaluation of the dollar.

As far as the yen was

concerned, he thought it would be misleading to say that any
particular rate was right or wrong; the problem there was a struc
tural one whi ch

was not amenable to changes in the yen exchange

-7-

3/7/73

On the general subject of speculation, he thought it was

rate.

understandable that market participants would now attempt to

protect themselves against a repetition of their recent experience.
Certainly, one large element in present speculative thinking was
the possibility of a joint float of European currencies against
the dollar.

Almost as big an element, however, was the possibility

that a rampart of exchange controls might be constructed around
the Common Market to keep dollars out.

Such controls would make

it extremely difficult for U.S. firms or others with real or
financial investments in Europe to finance their activities.
Mr. Robertson asked whether it was correct to describe
the present situation as one involving a "clean" float of all
major currencies.
Mr. Coombs said the answer was yes, if a "clean" float
was defined as the absence of official intervention in the market
for

a

currency.

He was not sure that that was an adequate

definition, however, since the objectives that governments might
seek through market intervention could be achieved with various
kinds of exchange controls.

In any case, what the exchange rates

emerging under the current float were supposed to represent was
not at all clear to him.

-8-

3/7/73

Mr. Robertson referred to Mr. Holland's comments about
the possibility that a multilateral agreement to engage in market
intervention might be reached in Paris, and he asked whether there
was anything to indicate that the central banks would be able to
"outspeculate the speculators" at this point.
Mr. Coombs replied that in his judgment the solution to
the problem of speculation lay in restoring confidence.

Admittedly,

that would not be easy.
Mr. Robertson asked whether confidence was more likely to
be restored by repeating an approach that had failed in the past
or, rather, by continuing the current float and letting the
speculators speculate against one another.
Mr. Coombs observed that there had been both successes
and failures in past efforts to stabilize exchange rates.

The

efforts had failed when they had not been backed up adequately;
they had succeeded when effective programs had been put together.
In reply to a further question by Mr. Robertson, Mr. Coombs
said that market intervention by central banks would be only a
part--and possibly a minor part--of the type of program he thought
would be required to stabilize exchange rates.

Intervention by itself

was likely to do no good whatsoever.

The recent episode involving

the German mark was a case in point.

There had been a great deal

of intervention--$6 billion by the German Federal Bank and

-9-

3/7/73

$300 million by the System--but in the absence of any official
statement about the objective for the mark-dollar parity the
market drew the conclusion that the United States did not
support the prevailing parity.
In response to a question by Mr. Mitchell about the
revaluation clause in the System's swap contracts, Mr. Coombs
noted that when the swap lines with the central banks of Germany
and Belgium had been reactivated last summer new language had
been negotiated under which the System was protected only if the
foreign creditor revalued "in isolation among the G-10 currencies."
Other Common Market central banks would no doubt insist on similar
language if it was proposed to reactivate the swap lines with them.
In his judgment, a revaluation by one or two major trading countries
in Europe would put pressure on others to follow a similar course
and would quickly become a joint revaluation.
Mr. Brimmer asked whether official intervention in defense
of current parities might not simply mean using public money to
provide a means for private holders of funds to move them out of
the United States.

In other words, he wondered whether the

structure of exchange rates established in mid-February was
consistent with the present program of U.S. capital controls.
Mr. Coombs replied that until confidence was restored
private holders would no doubt continue to move funds abroad to

-10-

3/7/73

the extent they could do so.

The main hope of a program--and he

would repeat that it was not profitable to think of intervention
except as part of a much larger program--was that it could change
psychology.

In his judgment capital controls would be an essential

element in whatever new system emerged; the only question was
whether they would be applied by the United States or by foreign
governments.
Chairman Burns entered the meeting at this point.
Mr. Daane observed that the question of the appropriateness
of the currency parities established in mid-February had been
touched on in the preceding discussion.

It was worth noting that

in his Congressional testimony this morning Chairman Burns had
said that those parities appeared to be basically sound, and that
the U.S. competitive position had improved substantially as a
result of the February changes together with the Smithsonian
realignment.

And while the Chairman had not implied that the

present parities would necessarily prove to be ideal for an
indefinite period, he had expressed confidence that progress
would be made in reducing the U.S. deficit later in 1973, and
more so in 1974.

On the matter of possible market intervention,

in testimony yesterday Under Secretary Volcker had said that the
United States would not try to maintain "an artifical value of
the dollar," but he had gone on to indicate that he did not
consider the new parities to be artificial.

-11-

3/7/73

Chairman Burns remarked that the question of market
intervention may or may not prove to be a serious possibility.
Since it may be raised in the Paris meeting, however, he had
considered it desirable to discuss it with the Committee today.
He would be grateful for any comments or advice the members had
to offer, and he would be happy to respond to any questions
they might have.
Mr. Mayo said he thought the best outcome of the Paris
meeting would be an agreement on some kind of joint float.

In

his judgment that outcome would be best calculated to restore
the sense of confidence that many observers had expected to
prevail following the recent exchange rate realignments.

He

hoped it would not prove necessary for the United States to pledge
that it would undertake intervention.

He was seriously concerned

about the risks that would be involved in a massive support pro
gram, in view of the magnitude of the potential speculative flows
and the problems of identifying the speculators and controlling
their operations.

It was possible, of course, that the very

announcement of a support program would make it unnecessary to
engage in more than minimal operations.

He did not see, however,

how one could be sure that that would be the result.
Mr. Hayes remarked that he differed with Mr. Mayo regarding
the desirability of a joint float.

In his judgment, the certain

3/7/73

-12-

consequence would be a proliferation of strong exchange controls
in the area of the float--that is, the Common Market--against
inflows of dollars.

In view of the huge stake this country had

in the form of private investments in all of the Common Market
countries, he would not look on that prospect with any great
optimism.

He believed that market intervention, in the context

of an appropriate program of supporting measures, could be very
useful in restoring confidence.
Mr. Balles asked whether Mr. Hayes would describe the
types of supporting measures he had in mind.
Mr. Hayes replied that while there were various possibilities,
he did not have a specific program to suggest.

Perhaps Chairman Burns

would comment on the question.
The Chairman observed that it was difficult to advance any
concrete suggestions at this point because of the uncertainty about
the positions that would be taken by other governments at the Paris
meeting.

It was not even clear whether the Europeans would be united

or divided in their views.

He had the impression that the Europeans

were leaning toward a joint float, and if that impression was correct
any discussion of intervention was probably idle.

Should an inter

national agreement regarding intervention be considered in Paris, the
President obviously would be involved in the decision; once the U.S.
delegation reached some definite view, Secretary Shultz, as head of

-13-

3/7/73

the delegation, would consult with the President and get his
approval before acting.

In effect, the negotiations in Paris

would be similar to many other international negotiations on
economic and political issues in that it was impossible to say

in advance how they were likely to come out.
Mr. Morris asked whether the Europeans had developed the
operating techniques that would be required for maintaining a
joint float.
Chairman Burns said it was his impression that they had
been working on that problem but that it was still not clear that
they were in a position to overcome the difficulties.

He asked

Mr. Coombs whether his impression was correct.
Mr. Coombs responded affirmatively.

He noted that the

subject of a joint float had been discussed informally in Europe
on many occasions in the past year or so, and that there was
widespread understanding of the serious institutional and technical
difficulties involved.

It was his guess that the Europeans would

be unable to resolve those difficulties at this time.
Mr. Balles noted that as an alternative to a joint float
the individual European currencies might be permitted to float
separately.

He asked whether Mr. Coombs thought such a course

also would be undesirable.

-14-

3/7/73

In reply, Mr. Coombs noted that the major currencies had,
in fact, floated separately in the late summer and autumn of 1971.
During the period there had been a steady drift toward a break
down of the usual international financing arrangements, with
associated depressing effects on domestic economies.

When the

Smithsonian agreement brought that period to an end, the feeling
of relief--both in the exchange market and within individual
European governments--was enormous.

The experience in a new

period of separately floating exchange rates would probably be
similar to that of 1971.
In reply to a question by Mr. Mayo, Mr. Coombs said that
despite the opposition of the French to floating exchange rates,
they probably would go along if other major countries agreed to
float.
Mr. Mayo said he would repeat his view that a solution
involving floating currencies for the time being would be best.
He added that Mr. Balles' suggestion for separate floats of major

currencies was attractive to him.
Mr. Balles remarked that he was inclined to agree with
Mr. Robertson that it would be desirable to let the speculators
speculate against each other.

Accordingly, he would be inclined

to recommend measures that involved at least a temporary float as
a major element.

-15-

3/7/73

Mr. Daane observed that one could never be sure that a
"temporary" float would in fact terminate within a reasonably
short period.

In terms of the U.S. payments position, it was also

highly uncertain that floating exchange rates of others would move
in a desirable direction or that induced changes in their rates
would have a desirable impact.
Mr. Mayo noted that there was another possible disadvantage
to separately floating rates--namely, that if speculators had venal
motives they could attack individual currencies in turn.

In the

absence of official support for the currencies, the resulting prob
lems could be serious.
Mr. Daane went on to say that in recent history no major
country had maintained a clean float.

Under a system of separately

floating currencies there obviously would be a risk of competitive
interventions against one another and against the dollar.
Chairman Burns remarked that under current circumstances
concepts of "clean" and "dirty" floats tended to become confusing.
If all currencies were permitted to float cleanly, in the sense
that central banks made no attempt to influence rates of exchange,
the large volume of dollars that had moved into foreign central
banks would never return.

Dirty floats would be necessary if a

return flow of dollars was to be facilitated.
Mr. Coombs said it might be useful to define floats as
clean or dirty depending on whether they were helpful or not.

-16-

3/7/73

The United States was hardly likely to object if a European
country supplied dollars to the market to prevent its rate of
exchange against the dollar from depreciating below some floor
level.

On the definition he proposed, such operations would

not render a float "dirty".
Mr. Brimmer asked about the scale of operations that might
be contemplated if an agreement on market intervention was reached
at the Paris meeting.
In reply, the Chairman said that if it was decided to
intervene--and he did not know whether such a decision was likely,
all things considered--it would make no sense to operate on a
token scale.

The realistic choice, in his judgment, was between

standing ready to intervene on a scale sufficiently large to
leave no doubt that the objectives would be accomplished or not
entering the market at all.
Mr. Hayes said he recognized that the probabilities were
not high that the System would be called upon to engage in any
intervention operations at this time.

He would reiterate his

view, however, that if such operations were undertaken it was
essential that they be part of a broader package aimed at
restoring general confidence in the dollar.
Mr. Balles said he did not know whether the discussion
at the Paris meeting would cover possible longer-run measures.
If it did, he would recommend that consideration be given to a

3/7/73

further widening of the bands around central values--perhaps by
a percentage point on either side--and also to sliding pegs.

And

he would recommend strongly against any further moves to monetize
gold; if anything, the movement should be in the other direction.
Mr. Hayes indicated that he did not agree with Mr. Balles'
suggestions either for wider bands or for a sliding peg.

With respect

to the former, he thought the bands incorporated in the Smithsonian
agreement were certainly wide enough and possibly too wide.

He was

not sure that the wider bands adopted then had served their intended
purpose; in general, that experiment had not been particularly
successful.
Mr. Mayo expressed the view that wider bands might still
prove useful if they were combined with sliding pegs, so that the
bands themselves could show some movement.
Mr. Daane noted that Mr. Balles' comment raised the general
question

of international monetary reform.

In that connection it

was worth noting that Chairman Burns, in his testimony this morning
as well as on several other occasions during the past week, had

expressed the view that the restoration of confidence required
an intensification of the current efforts to reform international
monetary and trading relationships.

In response to Chairman Burns' request for any further comments
or advice, Mr. Balles said he thought the Chairman should be armed
with maximum flexibility at the meeting.

3/7/73

-18-

Chairman Burns then said he regretted that the pressure
of time had necessitated a meeting of this kind, in which some
members participated by telephone; the discussion no doubt would
have been fuller and more satisfactory if all of the members
could have been present in Washington.

He was happy, however,

to have had the opportunity to consult with the members today and
he was grateful for their counsel.
Thereupon the meeting adjourned.

Secretary

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