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REPORTBYTHEu.s~

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LMfifJ087

I Accounting Office
Government Procedures For Buying
Some Foreign Currencies

Each year the U.S. Government purchases
about $5.5 billion worth of foreign currencies
to meet its operating expenses in other
GAO found that with few excountries.
ceptions currencies were being obtained at
competitive exchange rates.

ID-7:9-17
AUGUST $3.3979

UNITED STATESGENERAL’ACCOUNTING
OFFICE
WASHINGTON,

INTERNATIONAL

D.C.

20548

DIVISION

B-146749

The Honorable
The Secretary
Dear Mr.

G. William
Miller
of the Treasury

Secretary:

This report
discusses
arrangements
acquires
some foreign
currencies
in other countries.
States

by which the United
needed for operations

Comments from your Department,
the Board of Governors
of the E'ederal Reserve System, the Federal
Reserve Bank of
were considered
in the
New York, and the State Department
report and are included
as appendixes
I through
IV.
Our recommendations
to you can be found dn pages 8 and
236 of the Legislative
ReorganizaAs you know, section
tion Act of 1970 requir.es
the head of a Federal
Agency to
submit a written
statement
on actions
taken on our recommendations
to the House Committee on Government
Operations
and the
Senate Committee on Governmental
Affairs
not later
than 60
days after
the date of the report
and to the Rouse and Senate
Committees
on Appropriations
with the agency's
first
request
for appropriations
made more than 60 days after
the date of
We would appreciate
receiving
copies
of these
the report.
statements.
10.

We are sending copies of this
report
to the Chairman
of the Board of Governors
of the Federal
Reserve System;
President,
Federal
Reserve Bank of Mew York; Secretaries
of
and cognizant
congressional
committees.
Defense. and State)

”P

:
i

.K. Fasick
Director

REPORT BY THE U.S.
GENERAL ACCOUNTING OFFICE

GOVERNMENT PROCEDURES
FOR BUYING SOME FOREIGN
CURRENCIES

DIGEST
Each year the U.S. Government
buys about
$5.5 billion
worth of foreign
currencies
for operating
expenses in other countries
which must be paid in local
currencies
and
for nonappropriated
fund activities,
such
as the post exchange system.
To determine
whether
favorable
rates were being obtained,
GAO reviewed
Government
procedures
for purchasing
foreign
currencies
through
the West
German Central
Bank, the Dai-Ichi
Kangyo
Bank in Tokyo, the State Department
finance
centers
in Paris and Bangkok,
and the
Federal
Reserve Bank of New York.
With few
exceptions,
currencies
were being obtained
at competitive
exchange rates
and existing
arrangements
were effective.
It is probable
that the State Department
could obtain
somewhat more favorable
rates
for Japanese yen if its requirements
were
purchased
under the same arrangements
as
those prevailing
for Defense Department
foreign
operations.
Although
GAO did not comprehensively
review
the purchase
of currencies
with official
fixed
rates of exchange in relation
to the
dollar,
some instances
were noted where the
State Department
was buying such currencies
at rates less favorable
than the official
rate.
At GAO's suggestion,
arrangements
were made
for State to buy Korean won at the official
exchange rate and a review will
be made of
arrangements
for buying other currencies
with fixed
exchange rates
to ascertain
that
the U.S. Government
receives
the most
advantageous
rates available.

Tear Sheet.
Upon removal.
cover date should be noted

the report
hereon.

ID-79-17

COORDINATION OF FOREIGN
CURRENCY PURCHASES WITH
MONETARY INTERVENTION OPERATIONS
GAO questioned
whether
the U.S. Government
could acquire
the foreign
currency
needed
to meet operating
expenses in other countries
at more favorable
rates of exchange
and whether
foreign
exchange intervention
operations
could be better
coordinated
if
selected
currency
needs (e.g. German marks
and Japanese yen) were obtained
through
the Federal
Reserve Bank of New York.
From the standpoint
of obtaining
foreign
currencies
at competitive
rates and
servicing
Defense needs, there seemed to
be no particular
advantage
in doing this.
Information
available
to GAO concerning
Treasury
and Federal
Reserve foreign
exchange operations
to counter
periodic
disorderly
monetary
market conditions,
such as speculative
pressures,
appeared
to support
the desirability
of coordinating
the large annual Defense purchases
($2.6 billion
in marks and $1.0 billion
in yen) with foreign
exchange intervention
operations.
For other than such selected
currencies,
it did not seem advantageous,
for monetary
intervention
purposes,
to
have Government agencies
obtain
their
foreign
currency
needs through
the Federal
Reserve Bank.
GAO proposed
that Treasury
and the Federal
Reserve use the Federal
Reserve Bank of
New York to coordinate
Government
foreign
currency
purchases,
especially
German marks
and Japanese yen, with monetary
intervention
operations.
Since GAO neither
has nor seeks
authority
to review U.S. international
monetary policies
and interventions,
it recognized
that the merits
of this proposal
would need
to be assessed by the responsible
agencies.
In commenting
on GAO's proposal,
the Board
and the Bank both said that,
although
they
have the capabilities
to do so, there appeared to be no special
benefit
in coordinating
ii

foreign
currency
purchases
with intervention
transactions
and they would assume the funcTreasury
tion only if requested
to do so.
concurred
with this view, and GAO has, therewithdrawn
its proposal.
fore,

iii

Contents
Page
i

DIGEST
CHAPTER
1

U.S. GOVERNMENT PROCEDURES FOR
PURCHASING FOREIGN CURRENCIES
Types of transactions
German marks
Defense
State
Agency comments
Japanese yen
Defense
State
Agency comments
Recommendation
Canadian dollars
Controlled
currencies
Korean won
Defense
State
Other controlled
currencies
Recommendation
Agency comments

COORDINATION OF FOREIGN CURRENCY
PURCHASES WITH MONETARY
INTERVENTION OPERATIONS
Intervention
operations
Advantages
and disadvantages
of coordination
GAO proposal
and
agency comments
SCOPE OF REVIEW

APPENDIX
I

Letter
&ted
June 6, 1979, from
tile President,
Federal
Reserve
Bank of 11ew York

1
1
2
2
3
3
4
4
6
8
8
8
9
9
9
9
10
10
10

12
12
13

Page
APPENDIX
II

III

Letter
dated June 13, 1979, from
the Chairman,
Board of Governors
of the Federal
Reserve System

Letter
dated June 22, 1979, from
the Under Secretary
of the
Treasury
for Monetary
Affairs

Letter
dated
the Deputy
for Budget
of State

July 10, 1979, from
Assistant
Secretary
and Finance,
Department

CHAPTER 1
U.S.

GOVERNMENT PROCEDURES

FOR PURCHASING FOREIGN CURRENCIES
The United
States buys foreign
currencies
for operating
expenses
in other countries
which must be paid in local
currencies,
including
salaries
of foreign
nationals,
contracsupplies
and equipment,
and travel.
tual
services,
rents,
These expenses are financed
from appropriated
funds and
account
for about half of the $5.5 billion
worth of foreign
The remainder
of the foreign
currency
purchased
each year.
currency
purchased
is used for such nonappropriated
fund
activities
as the post exchange system and for sales to U.S.
military,
civilian,
and contractor
personnel
in exchange
for dollars.
Department
of the Treasury
guidance
to the Departments
of Defense and State for purchasing
foreign
currencies
requires
that they avoid speculation
through
obtaining
foreign
currencies
only when payments are due.
We made this review to determine
whether
the Government
obtained
favorable
rates
in purchasing
foreign
currencies.
with few exceptions,
the U.S. Government
was
We found that,
We believe,
buying foreign
currencies
at competitive
rates.
that savings
would result
if all Government
requirehowever,
ments for Japanese yen were obtained
under the arrangements
Also, prothat provide
the most beneficial
exchange rates.
cedures
should be reviewed
for insuring
that foreign
currencies with official
fixed
conversion
rates
in relation
to
dollars
are purchased
at rates no less favorable
than official
rates.
TYPES OF TRANSACTIONS
In a foreign
exchange transaction,
each party
promises
to pay a certain
amount of currency
to the other on an agreed
is called
a "spot"
The most common type of transaction
date.
transaction,
whereby the agreed payment date (or “value
date"
as it is known) customarily
is 2 business
days following
the transaction.
This allows
time for the parties
to send
instructions
to debit
and credit
bank accounts
at different
locations.
Banks often
trade for "next day" value,
whereby
payment is made one business
day after
the transaction.
Banks also can trade for "cash",
whereby payment is made on
the same day.

Another
type of transaction
is the "forward"
transaction,
under which the value date can be a few days, months,
or even years in rare cases. The exchange rate is fixed
at
the time of the transaction,
but no money changes hands
until
the value date.
Usually
the exchange rate for a forward transaction
will
differ
from that for a spot transaction.
The method of settlement
for dollars
in a foreign
exchange transaction
usually
differs
from settlement
for
foreign
currency.
Settlement
in foreign
currency
is made in
"immediately
available
funds;"
that is, the recipient
can
use the funds on the value date of the transaction.
Settlement in dollars
is made in clearinghouse
funds,
which are
not available
for use until
the first
business
day after
the
value date.
By custom, exchange rates are quoted in clearinghouse
funds.
If the seller
of dollars
settles
in immediately
available
funds,
it receives
a slightly
better
rate
to compensate
for the loss of one day's
funds.
GERMAN MARKS
In fiscal
year 1978, marks valued at $2.6 billion
were
purchased,
all except $46 million
of it for the Defense
Department.
The $46 million
was purchased
by the State
Department
for civilian
agency needs.
Defense
Since the flexible
exchange rate system was initiated
in 1973, Defense has purchased
marks valued at $11.5 billion
from the West German Central
Bank (Bundesbank).
The Army and the Air Force buy all their
marks from the
Bundesbank through
the American
Express Company in Frankfurt
at the 1 p.m. fixing
rate set by the major commercial
West
German banks and the Bundesbank.
The Army and the Air Force
have until
11 a.m. each day to buy at the fixing
rate for
the previous
day. Settlement
is made in immediately
available
funds,
and Defense gets use of the marks and the Bundesbank
gets use of the dollars
on the day of the purchase.
Defense arrangements
for purchasing
marks date back to
a January
1952 agreement
between Headquarters,
U.S. Army,
Europe,
and the Bundesbank's
predecessor.
A July 1961 agreement replaced
the 1952 agreement.
The July 1961 agreement
was amended in May 1971 and April
1972. Also,
an April
1978
letter
from the Bundesbank to the Army refers
to a March
1973 agreement,
apparently
verbal
between Bundesbank
and
2

to use the last
Army officials,
quoted on the Frankfurt
currency
mark conversions.

known official
exchange for

The 1961 agreement provides
that either
cel the agreement
by giving
90 days notice.
ments do not change this provision.

fixing
making

rate
dollar/

party may canThe later
agree-

State
The State Department's
Regional
Finance
Data Processing Center in Paris purchases
marks from the Bundesbank
through
the American
Express Company at the fixing
rate
or from commercial
banks at a rate obtained
by canvassing
European foreign
exchange markets.
The Paris Finance Center buys foreign
currencies
for
civilian
agencies
in 90 countries
throughout
Europe, Africa,
and the Near East; it also buys the Air Force's
requirements for pound sterling.
From November 1976 to October
1977, the Center bought $553 million
worth of foreign
currencies,
$462 million
of which was in floating
currencies.
is purchased
Currency
through
spot transactions,
with value
dates of 2 business
days following
the transactions,
and
settlement
is in clearinghouse
funds.
During October
1977 through
March 1978 and August
through November 1978, the Finance Center made 98 purchases
of marks totaling
$43.6 million.
In 30 cases, or 31 pera better
rate on the open market,
cent, lJ it obtained
saving $64,276.
AGENCY COMMENTS
We discussed
the Defense Department's
arrangements
for purchasing
marks with Defense and Treasury
personnel.
We noted that the existing
ag reement does not seem to require
Defense to buy all of its marks from the Bundesbank and asked
whether
it would be appropriate
to buy marks in the open
market when better
rates were available.
U.S. Army staff
in
Europe said that,
regardless
of the written
agreements,
there
is a gentlemen's
agreement
that Defense will
buy all of its
marks from the Bundesbank.
They said that the gentlemen's

L/If
the Finance Center settled
in immediately
available
funds,
we estimated
that it would have obtained
better
rates
in 36 cases, or 37 percent
of the time.
3

agreement
was made at the time of the first
written
agreement
in 1952 and has been verbally
passed on among Army officials
in Europe.
Treasury
officials
said that the present
system has provided competitive
rates over the years and Defense purchases
have not disrupted
the market because the dollars
are resold
in the market gradually
by the Bundesbank.
It was Treasury's
view that
it could be unfair
to expect the Bundesbank to hold
an exchange rate for such large military
purchases
for a 22hour period
while
Defense sought more favorable
rates.

Defense staff-level
personnel
said that the present
arrangement
assures
the availability
of marks when and where
needed.
According
to an official
of the Federal
Reserve Bank,
the Federal
Reserve Bank could also make suitable
however,
delivery
arrangements,
as follows.
*'Purchases
and sales of foreign
exchange would
be executed
upon receipt
of properly
authenticated
The instructions
should indicate
the
instructions.
currency
involved,
the delivery
date for the foreign
currency,
the amount to be purchased,
or sold,
the
institution
to which the foreign
currency
should
be paid and for whose account.
Orders received
by
8:00 a.m. in New York can normally
be excuted
for
delivery
on that day.
Any instructions
received
later
will
need to have a value date (delivery
date)
of at least
the following
day.
Following
execution
of any order,
we will
notify
the customer
by telephone, or by wire,
and subsequently
by mail,
of
the rate at which the order was executed,
the
foreign
currency,
the value date,
and the U.S.
dollar
equivalent
of the transaction."
JAPANESE YEN
In calendar
year 1978, the U.S. Government
yen at a cost of $989 million,
$969 million
for
needs and $20 million
for civilian
agencies.

purchased
military

Defense
The Defense Department,
under a contract
negotiated
by
the Treasury
Department,
currently
purchases
all of its
requirements
for yen from the Dai-Ichi
Kangyo Bank in Tokyo.
The major commercial
Japanese banks and the Bank of Japan

set a fixing
rate at 10 a.m. each business
day.
Yen are
purchased
at the fixing
rate plus a 16 sen premium.
For
if the fixing
rate for the day of purchase
is
example,
yen to
190.80
yen to $1, Defense buys at the rate of 190.96
The
order
is
placed
in
the
morning,
before
the
fixing
$1.
rate is set, for "next day" value;
that is settlement
is
made on the first
business
day following
the transaction.
Defense and the Dai-Ichi
Kangyo Bank both receive
immediately available
funds.
Yen are purchased
almost every business
day.
Through September
1977,
the United
States purchased
yen for military
needs from the Bank of Japan.
This arrangement was terminated
because the Japanese Central
Bank was
adding the dollars
to its reserves
instead
of reselling
the
dollars
in the market.
The U.S. demand for yen was not,
therefore,
permitted
to have an effect
on the market.
At
the suggestion
and agreement
of the Japanese authorities,
the United
States
then instituted
yen purchases
in the
market.
Effective
October
1, 1977, the Treasury
Department,
in coordination
with Defense,
agreed to purchase
military
requirements
for yen from the Bankers Trust Company, New
Bankers Trust agreed to sell yen to the United
York.
States at 2 sen above the 10 a.m. fixing
rate through
Treasury
awarded the contract
to Bankers
February
19, 1978.
Trust after
considering
competitive
proposals
solicited
from
13 American
Banks.
Since February
20, 1978,
Treasury
has awarded two contracts
to the Dai-Ichi
Kangyo Bank at 16 sen above the
rate.
The first
contract
was awarded after
10 a.m. fixing
receiving
proposals
submitted
by 11 American
and 8 Japanese
banks.
The second contract
runs through
September
30, 1979,
and was awarded after
reviewing
proposals
from 8 American
and 8 Japanese banks.
Before the first
contract
was awarded to the Dai-Ichi
Kangyo Bank, Treasury,
Defense,
and State considered
alternative
ways to buy yen for military
needs at favorable
exchange rates,
including:
1.

Having State's
Regional
Finance
Center in
Bangkok canvass worldwide
markets
for favorable exchange rates.

Having Defense canvass the Tokyo
favorable
exchange rates.

market

for

Buying yen under contract
soliciting
proposals
from
can banks.

from one bank after
Japanese and Ameri-

Treasury
and State personnel
concluded
that the Bangkok
Finance
Center did not have the communications
capability
to canvass
foreign
exchange markets
for the best rates.
The Finance Center had recently
installed
a telex machine
to obtain
to solicit
quotes but, due to the time required
the agencies
questioned
whether
a bank
quotes by telex,
would hold its quote while other banks were contacted.
It was concluded
that improved telephone
communications
were needed to obtain
favorable
rates.
Defense staff
in Japan said that in order to canvass
two additional
employees
the Tokyo market for exchange rates,
would be required
and that it would take at least
6 months
Treasury
said that canvassing
to train
these employees.
the market could be simplified
through
giving
a finance
officer
a list
of banks to telephone
for quotes and placing
a Defense-wide
order with the bank offering
the best rate;
bilingual
personnel
would be needed to call
the banks.
After
considering
the first
two alternatives,
Treasury
and Defense decided
on the third
alternative.
Competitive
proposals
were solicited
from Japanese and American banks
and the Dai-Ichi
Kangyo Bank was awarded the contract.
State
through
its Bangkok Regional
The State Department,
Finance
Center,
purchases
yen after
a limited
canvassing
the foreign
exchange market in Tokyo.

The Finance Center was established
in 1973 to provide
and accounting
services
for U.S. Governpayroll,
disbursing,
ment agencies
in South Asia and East Asia and the Pacific
State selected
Bangkok as the site
for the Center
areas.
because a Navy computer
at that location
became available
to assist
in operations.
From January
1 to October
6, 1978,
the Center purchased
$42.2 million
worth of foreign
currencies,
$33.6 million
of which was in floating
currencies.
Purchases
are made through
spot transactions
with value
dates one business
day after
the transaction,
and settlement is in immediately
available
funds.
In 1977,
responsibility

the Bangkok
for civilian

Regional
agency

Finance Center assumed
disbursing
operations

in Japan and started
purchasing
yen for these
Prior
to 1977, yen had been purchased
through
Disbursing
Office
in Manila.

agencies.
the Regional

An official
in the Bangkok Finance Center told us that
the communications
system in Thailand
would have to be
improved before
foreign
exchange markets
could be adequately
canvassed
for favorable
rates;
there are not enough telephone
iines
and it takes as long as one hour to place an outgoing
international
call.
In buying yen, the Finance Center uses a telex machine
to solicit
quotes from commercial
banks in Tokyo; only two
banks are contacted
because it takes about 15 minutes
to
obtain
each quote.
Officials
said that it would be unrealistic
to contact
more than two banks because in a volatile
market a bank will
not hold its quote very long;
sometimes
the first
bank will
not hold its quote until
the Center
obtains
a second quote.
Officials
said that one employee now handles
foreign
currency
purchases
and that a second employee and a second
telex
machine would improve the Center's
capability
for canvassing
foreign
exchange markets.
From January
1 to October
6, 1978, the Finance Center
made 15 purchases
of yen costing
$16.2 million.
We compared
the rates
for these purchases
with rates available
to Defense
under contracts
with Bankers Trust Company and the Dai-Ichi
Kangyo Bank.
For 8 of the 15 purchases,
the Defense contract
rates were better
than the rates obtained
by the Bangkok
Finance Center.
The Center incurred
overall
costs of $6,606
more than the 15 purchases
would have cost under the current
Defense arrangement.
As shown in chapter
2, the exchange rates obtained
under
the current
Defense arrangements
were competitive
for a
selected
period
of time with exchange rates
that might have
been obtained
by the Federal
Reserve Bank of New York.
Considering
the Bangkok Finance Center's
limited
communications
capability
at the time of our review,
we concluded
that somewhat more favorable
rates
for yen probably
would be obtained
by State under whatever
arrangement
prevails
for obtaining
yen for Defense operations.
We proposed
that Treasury,
in cooperation
with State,
arrange
to buy yen for State needs in the same manner as
Defense buys its requirements.

AGENCY COMMENTS
Treasury
stated
that the communications
capability
of
Bangkok Regional
Finance Center had improved
since the
time
of our review.
A new trunkline
has expanded the Center's
telex
capabilities,
and it now takes only 3 to 4
minutes
to obtain
a quote over the telex
lines
in Bangkok.
the

State said that it was coordinating
with Treasury
to
decide
the most suitable
methods for purchasing
yen to
meet U.S. Government
operating
needs.
(See app. IV.)
State said that the contract
with the Dai-Ichi
Kangyo Bank
probably
would be renewed at the beginning
of fiscal
year
1980 and provide
for acquisition
of all U.S. Government yen
needs unless
there was a more favorable
offer
from a competitive
banking
institution.

RECOMMENDATION
We recommend that the Secretary
of the Treasury,
in
cooperation
with the Secretaries
of State and Defense,
obtain
all requirements
for yen through
the method that
provides
the more beneficial
exchange rates.
\

CANADIAN DOLLARS
In fiscal
year 1977, the U.S. Government purchased
$164 million
worth of Canadian dollars
for military
needs
through
the Federal
Reserve Bank of New York.
The Bank
made these purchases
on the basis of instructions
from the
Treasury
Department,
which generally
asked the Bank to enter
into a forward
transaction.
Settlement
is in immediately
available
funds.
The Federal
Reserve Bank has direct
telephone
lines
to
30 commercial
banks operating
in the North American
foreign
exchange markets
and keeps up to date on exchange rates
for
the Canadian dollar
and other major currencies
by contacting
these banks periodically
during
the day.
It also uses
Reuters market information
service
to monitor
exchange rate
movements.
Reuters provides
current
information
on a video
screen about exchange rates quoted by various
banks.
The Federal
Reserve Bank said tha~ttthe
quotes obtained
traders
at several
points
during
the day merely
indicate market levels
at the moment they are collected
and constantly
fluctuate.
In practice,
according
to the Bank,

its

when a trader
is seeking
a price
monitors
the rate fluctuations
quote when suggested
by market
mines whether
or not to accept
experience
and judgement
of the
the amount of the transaction,
his evaluation
of other market

for Canadian currency,
he
and obtains
more than one
A trader
deterconditions.
a rate on the basis of his
current
trend in the price,
the depth of the market,
and
conditions.

CONTROLLED CURRENCIES
We did not comprehensively
rencies
with official
fixed
rates
we noted
to the dollar;
however,
the State Department
was buying
at rates less favorable
than the
Korean

review purchases
of curof exchange in relation
some instances
in which
these nonflexible
currencies
official
rates.

won

In fiscal
year
$248.8 million
worth
tary needs and $1.4
purchases
were made
ments by the Korean

purchased
1977, the U.S. Government
for miliof Korean won, $247.4 million
These
million
for civilian
purposes.
only after
won available
from debt payGovernment was depleted.

Defense
Since 1973, Defense has purchased
won from the privately
owned Cho Heung Bank at the rate of 484 to the dollar.
This
is the official
exchange rate fixed
by the Korean Central
Bank.
Defense selected
Cho Heung as its supplier
because it
has the capability
to deliver
won to the various
finance
offices
in Korea through
its branch system.
U.S. banks do
not have branches
throughout
Korea, and delivery
costs for
American banks would be expensive.
State
The Bangkok Finance Center
civilian
purposes
primarily
from
tory in Korea, because Citibank
From January
to
available
rate.
ranged from 481.45 to 483 won to

purchases
the won needed for
Citibank,
the U.S. deposiroutinely
offers
the best
July 1978, the exchange rate
the dollar.

Although
purchases
of won for civilian
agency needs are
not nearly
as substantial
as those for military
needs, there
would still
be some savings
if the Bangkok Finance Center
could make the civilian
purchases
at the same rate available
for military
purchases.
9

In October
1978, we asked officials
in the Bangkok
Finance
Center whether
arrangements
could be made to buy won
for civilian
purposes
at the more favorable
exchange rate
available
to the military,
and they agreed to inquire
about
the matter.
In February
1979, Treasury
officials
advised
us that such arrangements
had been completed
and a civilian
purchase
had been made in December 1978 at the rate of 484
won to the dollar.
Other

controlled

currencies

State,
through
its Paris and Bangkok Finance Centers,
purchases
other controlled
currencies
from banks in the
the foreign
countries
which also act as depositories
for
The banks advise the Centers of the
the U.S. Government.
exchange rate and the foreign
currency
amounts credited
to
the U.S. account.
The Centers'
records
do not show whether
the exchange rates at which U.S. accounts
were credited
are
the official
rates established
by the governments
of the
countries
involved.
According
to financial
statistics
issued by the Interwas not credited
national
Monetary
Fund, the U.S. account
at the official
rate for one purchase
of a controlled
curOn December 4, 1978, the Paris
Finance Center purrency.
chased $100,000 worth of Yemen rials
at the rate of 4.535
rials
to the dollar
from the Yemen Bank for Reconstruction
and Development.
International
Monetary
Fund statistics
showed that the exchange rate set by the Central
Bank of
Had the
Yemen for that date was 4.562 rials
to the dollar.
purchase
been made at the official
rate,
the Center would
have saved $603.
This amount could represent
payment of a
service
charge to the seller
bank, which might have been
avoided by direct
purchase
from the Yemen Central
Bank.
RECOMMENDATION
We recommend that the Secretary
of the Treasury,
in
cooperation
with the Secretary
of State,
review
arrangements for insuring
that foreign
currencies
with official
fixed
conversion
rates
in relation
to the dollar
be purchased at rates no less favorable
than official
rates or
determine
reasons why this may not be done.
AGENCY COMMENTS
Treasury
agreed with our recommendation.
It said that,
although
all currencies
cannot be obtained
at the official
rates
since many are adjusted
for bank conversion
fees, a
10

review will be made to ascertain
that the U.S. Government
is buying these currencies
at the most advantageous rates
available.
State said that it will cooperate with Treasury in
this review.
It said that commercial sales of controlled
currencies
are usually carried out through the commercial
banking system in the countries
involved and that insofar
as the rates reflect
bank charges they will not be the
same as the official
fixed rates.

CHAPTER 2
COORDINATION OF FOREIGN CURRENCY
PURCHASES WITH MONETARY INTERVENTION OPERATIONS
could acquire
We questioned
whether
the U.S. Government
the foreign
currency
needed to meet operating
expenses
in
other
countries
at more favorable
rates of exchange and
whether
foreign
currency
intervention
operations
could be
better
coordinated
if selected
currency
needs (e.g. German
marks and Japanese yen) were obtained
through
the Federal
Reserve Bank of New York.
INTERVENTION

OPERATIONS

The long-term
value of the dollar
in relation
to foreign
currencies
depends on such economic factors
as inflation
and
productivity
rates,
balance of trade;
energy policy,
budget
and other monetary
and fiscal
policies.
deficit,
However,
the Federal
Reserve Bank of New York, acting
under coordinated
instructions
from the Department
of Treasury
and
the Federal
Reserve Board, ccndacts
intervem+inn
.* ---.I operations
to counter
disorderly
monetary
market conditions
under the
flexible
rate system.
If the Bank wants to stop the dollar
from declining
in value,
it intervenes
by selling
another
currency,
such as German marks,
in exchange for dollars
to
increase
the demand for dollars
and stabilize
or improve
its value.
If the Bank wants to prevent
a rapid
increase
in the dollar's
value,
it intervenes
by selling
dollars
in exchange for a foreign
currency.
The Bank uses various
intervention
techniques
depending
upon market conditions
and tactical
objectives.
On November 1, 1978, the United
States announced a new
program to counter
the rapid,
disruptive
decline
in the
dollar
which was not justified
by underlying
economic factors.
This program increased
the amount of foreign
currency
available
for U.S. intervention,
including
$29.8 billion
in
short-term
reciprocal
credit
lines
(swap network)
between
foreign
central
banks and the Federal
Reserve Bank of New
York.
The swaps consist
of simultaneous
spot and forward
currency
transactions
between these monetary
authorities
at the same rate of exchange.
Under this arrangement,
the
Federal
Reserve Bank buys a foreign
currency
against
dollars,
with a commitment
to reverse
the transaction
at or
before
a fixed date,
usually
3 months hence, at the same
rate of exchange.
Also $10 billion
equivalent
would be
obtained
from issuing
foreign
currency
denominated
securities,
$3 billion
from drawing
on the U.S. reserve
position
12

with the International
Monetary
Fund, and $2 billion
equivalent from sales of special
drawing
rights
to mobilize'additional
balances
of German marks, Japanese yenr and Swiss
francs.
Other resources
of the Exchange Stabilization
Fund are also available
for monetary
intervention
purposes.
The Federal
Reserve Bank said that from August 1978
sales of foreign
to January
1979, the U.S. intervention
currencies
totaled
$9.3 billion.
In German marks, sales
over this
6-months amounted to $8.1 billion,
of which
$4.9 billion
was for the Federal
Reserve and $3.2 billion
for the Treasury.In Swiss francs,
the Federal
Reserve
sold a total
of $1.0 billion.
Sales of Japanese yen totaled
$207 million,
of which $161 million
was for the Federal
Reserve and $46 million
for the Treasury.
ADVANTAGES AND DISADVANTAGES
OF COORDINATION
An official
of the Federal
Reserve Bank of New York
provided
us with information
suggesting
that,
on balance,
it may be advantageous
to U.S. interests
for the Bank to
purchase
selected
foreign
currencies
for Government operating
needs.
The official's
main reservations
concerned
delivery
of funds if other than major currencies
were
involved.
view

Factors
include:

favoring

the

arrangement

in the

official's

The Bank's professional
staff
has an
intimate
knowledge
of the workings
of
the currency
markets
and the technical
details
of foreign
exchange trading;
it is in constant
contact
with the
market,
following
rate movements on
a minute-to-minute
basis.

The Bank deals actively
in the market;
in addition
to official
intervention
activities,
it deals as agent for official
foreign
accounts
and in 1978 dealt
in about 50 different
currencies
spot
and in a variety
of forward
maturities.

The Bank has direct
telephone
lines
to 30
commercial
banks
operating
in the North
American
foreign
exchange markets;
the
prestige
of dealing
with the U.S. Central
Bank
and the large volume of business
it generates
13

prompts these banks to bid aggressively
its business
and results
in obtaining
best prices
available
in the market.

for
the

The Bank has daily
telephone
contact
with
major European central
banks and maintains
cable communications
with most others;
at
times,
these relationships
enable the Bank
to purchase
or sell
substantial
amounts of
currency
at market rates directly
from
another
central
bank, thus avoiding
chasing
the rate while executing
the transaction
in the market.

Since the Federal
Reserve Bank is the
operating
arm of the U.S. Government
in
the exchange market,
it can ensure that
purchases
of currencies
to satisfy
government needs do not work counter
to U.S.
exchange rate policy
or to official
market intervention
activities.

The Bank's purchases
are settled
exclusively
in immediately
available
funds,
which results
in it receiving
a discount
on currency
purchases
since the market
rates are based on clearinghouse
funds;
the Bank passes on the full
value of the
discount
on immediately
available
funds
to its customers.

Military
personnel
in Japan were concerned
that the
Federal
Reserve Bank might give priority
to intervention
objectives
and the agencies
would not get the best prices
available
in the market for currency
purchases
for operating
needs.
A Bank official
said that,
although
the Bank may
decide
not to buy the currency
needed for Government
operations
in the market,
it could provide
such currencies
from
resources
available
for intervention
and that the exchange
rates provided
to Government agencies
would always be equivalent
to current
market rates at time of receipt
of the
order.
Officials
of a commercial
bank said that purchases
of
foreign
currency
for Government operating
needs would complement
the Federal
Reserve Bank's intervention
activities
and that foreign
exchange traders'
uncertainty
as to why the
Bank was in the market would be an advantage
to the United
States.
A Treasury
official
who did not agree with the
14

above reasoning
said that the Federal
Reserve Bank's assumption of responsibilities
for purchasing
the currencies
needed for Government
expenditures
might interfere
with the
Bank's responsibilities
for intervention
operations
to counter
disorderly
market conditions
and might lead to undesirable
confusion
in the market.
We compared rates obtained
by Defense for marks and yen
under existing
arrangements
with rates available
to the
Federal
Reserve Bank in the New York market from July 1978
through
February
1979.
The results
for this
8 months showed
New York rates
to be competitive
with rates obtained
under
existing
arrangements.
Rates in New York were slightly
more
favorable
for marks and slightly
less favorable
for yen.
Defense usually
purchases
marks from the West German
Central
Bank every business
day at the fixing
rate determined
in Frankfurt
each afternoon
at 1 p.m.
Because of the 6-hour
time difference
between Germany and New York, the New York
foreign
exchange market is not open at that time (7 a.m. in
New York).
We therefore
compared fixing
rates with 9 a.m.
opening
rates
for that day in New York and 4 p.m. New York
closing
rates
for the previous
day from July 1978 through
February
1979. The results
are shown below.
Rate

Ncrmberof days (note a)

New York closing
Frankfurt fixing
New York opening

161
169
162

Average daily exchange rate
(marks to the dollar)
1.9205
1.9194
1.9192

a/Total days for each rate are not the same because the New York market
- is closed on certain holidays not observed in Germany.
If the New York rates are increased to reflect the discount obtained by the Federal Reserve E3ankfor settling
in inmediately available
funds instead of clearinghouse funds, the average daily New York closing
rate is 1.9212 marks to $1 and the average daily opening rate is 1.9199
marks to $1. Thus, both New York rates, as adjusted, are scmewhat
better than the fixing rate.
Defense purchases yen from the Dai-Ichi Kangyo Bank almost daily
at 16 sen above the fixing rate determined in Tokyo each morning at
10 a.m. (9 p.m. e.s.t. the previous day in New York).
Since the
New York market is not open at that time, we compared the New York
rates before and after the fixing with the purchase rate.
We used the
New York closing rate for the day before the fixing
and the New York
opening rate for the day of the fixing.

The comparisons, as set forth below, show that fram July 1978 to
February 1979, both New York rates were somewhat less favorable than
rates obtained from Dai-Ichi Kangyo.
Rate

Number of days (note a)

New York closing
Dai-Ichi Kangyo
New York opening

Average daily exchange rate
(yen to the dollar)
b193.17
193.49
b193.19

150
157
151

-a/Total days for each rate are not the same because the New York market
is closed on certain holidays not observed in Japan.
b/Reflects
adjustment for settlement by Federal Reserve Bank in imnediately available funds instead of clearinghouse funds.
From the standlpint of buying foreign currencies at competitive
rates and servicing Defense needs, there seems to be no particular
advantage in using the Federal Reserve Bank to buy such currencies
as German marks and Japanese yen. However, the information available
to us concerning Treasury and Federal Reserve foreign exchange operations to counter such periodic disorderly monetary market conditions
as speculative pressures appeared to support the desirability
for
coordinating
the large annual Defense purchases (about $2.6 billion
in marks and $1.0 billion
in yen) with foreign exchange intervention
operations.
Other than for selected currencies, such as marks and yen, it
did not seem advantageous for monetary intervention
purposes to have
Government agencies buy their foreign currency through the Federal
Reserve Bank.

We proposed that
with the Chairman of
Federal Reserve Bank
currencies,
especially
Government operating

the Secretary of the Treasury, in cooperation
the Federal Reserve Board, arrange to have the
of New York manage the acquisition
of foreign
German marks and Japanese yen, to meet U.S.
needs in other countries.

As we neither have nor seek access to review U.S. international
monetary policies and interventions , we recognized that the merits
of this proposal would need to be assessed by the responsible agencies.
In cmenting
on our proposal (see apps. I and II), the Board
and the Bank both said that, although they have the capabilities
to
do so, there appeared to be no special benefit in coordinating
foreign

currency
purchases
with intervention
transactions
and they
would assume the function
only if requested
to do so.
Treasury
concurred
with this view (see app. III),
and we
withdrawn
this proposal.
have, therefore,
Treasury
and Defense expressed
some concerns
as to
whether
the Federal
Reserve Bank of New York could at a competitive
cost provide
the comparable
services
available
under cuyvnnt
&Lb‘
arrangeme nts for purchasing
German marks
and Japanese yen.
We understand
that the agencies
did not
talk with Bank officials
to determine
the validity
of their
concerns.
The resolution
of such technical
issues would
not seem important
in view of the consensus
that there
was no special
benefit
in coordinating
Government
foreign
currency
purchases
with intervention
transactions.

CHAPTER 3
SCOPE OF REVIEW
We examined Government procedures
for purchasing
foreign
currencies
through
the West German Central
Bank, Dai-Ichi
Kangyo Bank in Tokyo, State Department
finance
centers
in
Paris and Bangkok,
and Federal
Reserve Bank of New York.
We reviewed
Defense and State procedures
for buying Korean
won, a nonflexible
currency,
and obtained
limited
information about State's
arrangements
for purchasing
other such
currencies.
Also,
we reviewed
public
information
about
Treasury
and Federal
Reserve foreign
exchange intervention
operations
and other
information
provided
by the Federal
Reserve Bank of New York.
We may not review specific
Treasury
and Federal
Reserve foreign
exchange intervention
transactions.
We interviewed
officials
of the (1) Departments
of
and Treasury
and of the Federal
Reserve
Defense,
State,
Bank of New York in Washington,
D.C., and New York City,
(2) military
commands and banking
facilities
in Frankfurt,
Heidelberg,
and Ramstein,
West Germany and in Toyko, Japan,
and (3) State Department
regional
finance
centers
in Paris
and Bangkok.
We interviewed
commercial
banking officials
in New York, Frankfurt,
Paris,
Tokyo, and Bangkok.
Our work
overseas
was performed
during
October
to December 1978 and
in Washington
from September 1978 to June 1979.

APPENDIX I

APPENDIX I
FEDERAL

RESERVE
NEW
AREA

PAUL

YPRK,
CODE

BANK
N.Y.
212

OF NEW

YORK

10045
791-6173

A VOLCKER
PRESIDENT

June 6, 1979

Mr. Allen R. Voss, Director
United States General
Accounting Office
441 G Street N.W.
Washington, D.C. 20548
Dear Mr. Voss:
Thank you for the opportunity
to review and comment on
the General Accounting Office's
draft report entitled
"Changes
Needed in Government Procedures for Buying Some Foreign Currencies."
Your report recommends that the acquisition
of German
marks and Japanese yen needed for the U. S. Government's overseas
operations
be managed by the Federal Reserve Bank of New York in
order to coordinate
this activity
with the intervention
operations
undertaken to implement U. S. economic and financial
policies.
From a technical
point of view, the purchase of these currencies
by the Federal Reserve's trading desk for the Department of
Defense appears feasible,
although as the report seems to suggest,
no clear price advantage should be anticipated.
It should also
be noted that reporting
of Defense Department activities
to the
In addition,
the
monetary authorities
could be instituted.
Federal Reserve has daily telephone conversations
with the German
Central Bank from whom Defense purchases their marks.
New York,
activities,
activities

From the standpoint
of the Federal Reserve Bank of
we perceive no clear advantage in conducting these
but we would technically
be prepared to conduct such
should the appropriate
authorities
so wish.
Sincerely yours,
?
/.
c; :i.;+; t C&L
// Ir:c4.i
Paul A. Volcker

APPENDIX

BOARD

GOVERNOR5

OFTHE
.

.
.

*
.

FEDERAL

RESERVE
WASHINGTON,

DC.

SYSTEM
20551

WILLlAM

MILLER

CHAIRMAN

June

Mr. Allen R. Voss,
Director
General
Government
Division
United States General
Accounting
441 G Street,
NW
20548
Washington,
D. C.
Dear

Mr.

13,

1979

Office

Voss:

Thank you for the opportunity
to review
and comment
on the
General
Accounting
Office’s
draft report
entitled
“Changes
Needed
in Government
Procedures
for Buying Some Foreign
Currencies.
”
We have studied your report
and your recommendation
that
the Federal
Reserve
Bank of New York act as agent for the Government in purchasing
German
marks
and Japanese
yen.
There appears
to be no special benefit
to the Federal
Reserve
in folding foreign
currency
purchasing
in with intervention
transactions.
It should be understood
that the Governmentrs
currency
requirements
could not normally
be met from the small balances
maintained
by the
Federal
Reserve.
However,
we see no technical
obstacles
to having
the Trading
Desk act as purchasing
agent for the Government.
In this
case,
some special
arrangement
would be necessary
in order to keep
the accounting
of currency
purchases
separate
from the accounting
for intervention
operations.
With these minor
reservations,
the
Federal
Reserve
is willing
to provide
currency
purchasing
services
if desired
by the departments
concerned.
Sincerely,
#

’

APPENDIX

III

THE

UNDER SECRETARY
FOR MONETARY
WASHINGTON.

III

OF THE TREASURY
AFFAIRS
D.C.

20220

JUN 221979
Dear

Mr.

Fasick:

I am pleased
to provide
Treasury
Department
comments on
the draft
report,
"Changes Needed in Government
Procedures
for
I wish to commend the GAO
Buying Some Foreign
Currencies".
for its extensive
study of this
important
and complex subject.
The draft
report
states
that
"there
is not a focal
point
for the acquisition
of U.S. Government
foreign
currency
requirements to meet operating
expenses
in other
countries,"
in that
there
is no single
purchasing
agent for all acquisitions
of
foreign
exchange
by the U.S. for its operating
needs.
However,
the Department
of the Treasury
exercises
the overall
responsireporting
and administration
bility
for accounting,
valuation,
foreign
currencies
acquired
to meet U.S. government
requirements.

The draft
report
recognizes
the complexities
of buying
foreign
currency
in 118 countries,
and accurately
describes
the arrangements
that were used to purchase
the equivalent
of
approximately
$5.5 billion
in foreign
exchange
during
FY 1978 to
meet U.S. Government
expenditures.
To obtain
the best available
in dealing
with a
exchange
rates
and meet other
U.S. objectives
wide variety
of foreign
currency
markets,
different
arrangements
I am pleased
and procedures
have been developed
and adapted.
to note the findings
in the report
that,
through
the use of the
various
current
procedures
and arrangements,
foreign
currencies
are being obtained
at competitive
rates.
While the draft
GAO report
recognizes
that
existing
arrangements
are cost-efficient
in obtaining
foreign
currencies
operations,
it nonetheless
needed by the U.S. for its overseas
recommends
that
those arrangements
as they apply to deutschemarks
and yen be dismantled
and that
the Federal
Reserve
Bank of
New York (FRBNY) act as the sole U.S. agent for all purchases
of these currencies.
This recommendation
is supported
by the
“the information
available
as to Treasury
and
statement
that
Federal
Reserve
foreign
exchange
operations
to counter
periodic
disorderly
monetary
market
conditions
such as speculative
pressures
supports
the desirability
for coordinating
the large
annual defense
purchases
($2.6 billion
in marks and $1.0 billion
in yen) with
foreign
exchange
intervention
operations".
main

The Treasury
reasons.

does

not

support

this

recommendation,

for

three

APPENDIX

III

APPENDIX

III

the average
daily
volume of U.S. Government
foreign
First,
currency
purchases
is extremely
small in comparison
with turnover in the markets
concerned,
and any effects
of such purchases
can be taken fully
into account
under existing
arrangements
by the U.S. and foreign
central
banks, with which the U.S.
coordinates
closely,
in deciding
upon intervention
operations.
Centralization
of all U.S. government
purchases
in the FRBNY
would make no practical
contribution
to the conduct
of U.S.
exchange
market
operations.
it is implicit
in the recommendation
that
the
Second,
objective
of minimizing
the cost of foreign
currency
purchases
would at times be subordinated
to intervention
objectives,
possibly
raising
the cost of foreign
currencies
needed for
defense
and other
U.S. Government
expenditures
as compared
It is, moreover,
with
the costs
under existing
arrangements.
uncertain
whether
the FRBNY would be in a position
to supply
needed currencies
from its own resources,
as suggested
in the
draft
report,
and thus whether
there
would be any savings
in
transactions
costs
from this
source.
Third,
although
the draft
report
acknowledges
that
there
is no particular
cost advantage
in using the FRBNY as purchasing
agent,
it fails
to recognize
that
there
could be substantial
disadvantages.
Let me explain.
Approximately
one-half
of total
U.S. Government
needs for
foreign
currencies
is met through
purchases
of deutschemarks
directly
from the Bundesbank.
Under the current
arrangements,
the previous
day's mid-day
(1:OO p.m.)
Frankfurt
"fixing
rate"
remains
available
to the U.S. Forces until
11:OO a.m, on the
date of acquisition.
This provides
a degree of choice
in the
rate applied
to the transactions
which is highly
desirable
in
terms of minimizing
costs.
The total
amount of deutschemarks
required
is consolidated
daily
by the American
Express
Company,
at the Military
Banking
Facility
Headquarters
in Frankfurt,
which
receives
information
from approximately
82 locations
throughout
Under current
cash management practices,
the finance
Germany.
officers
in Germany determine
their
disbursing
needs on the total
checks issued
each day.
Twelve deutschemark
checking
accounts
are maintained
by Army and Air Force disbursing
officers
throughout
Germany,
all of which are funded on a zero balance
basis,
the disbursing
officers
purchase
only the deutschemarks
I.e.,
required
to cover checks issued
during
any given day,
Maintaining
the accounts
on a zero balance
basis
saves the U.S. Government
and having
the capability
to purchase
marks
interest
expense,
from the Bundesbank
for immediate
disbursing
needs permits
maximum flexibility
in funding
local
currency
checking
accounts.

APPENDIX III

If arrangements were made to manage the purchase of marks
through the Federal Reserve Bank of New York, or any other
the procedures
to acquire the currency
facility
in this country,
Under the current
system,
would become more complex and costly.
disbursing
officers
are notified
of the exchange rate throughout
Germany to be used to pay vouchers on the day of purchase.
Because of the time difference
between Frankfurt
and New York,
currently
six hours, the purchase procedures would be extended
one full day if they were to be handled through New York.
Any
delay caused by telecommunications
would have an adverse impact
on the Treasury cash management program of maintaining
zero
The military
disbursing
balance checking accounts in Germany.
officers
would have to anticipate
disbursement
requirements
for holidays,
both in Germany and the United States,
and make
Thus,
necessary purchase arrangements
3 to 4 days in advance.
without
offering
an advantage of obtaining
more favorable
the GAO proposal would require
the maintenance
exchange rates,
of substantially
increased
bank balances as well as increase
the administrative
costs.
The problems in funding Japanese yen operating
accounts
from New York would be similar
to those in Germany. The time
difference
between Tokyo and New York is currently
13 hours,
thus complicating
even further
the procedures
that would need
to be utilized
by the U.S. Forces in communicating
and
ii-lso, it is questionable
confirming
daily purchases of yen.
whether yen-denominated
bank balances could continue
to be
funded on a zero balance basis.
A brief comment is warranted regarding
the State Department's
The Regional Finance Center
procedure for purchases of yen.
in Bangkok, operated by the Department of State, is currently
throughout
used to provide U.S. Government currency requirements
Originally,
one of the options was to use the
the Far East.
Finance Center to purchase the Japanese yen requirements
for
that the Center did
the military;
however, it was determined
Subsequent to the
not have the communications
capability.
survey conducted by the GAO staff,
however,
the capability
of
A new telex trunk line
the Finance Center has been improved.
has expanded the telex capabilities
of the Bangkok Processing
It now takes only 3 - 4 minutes to obtain and service
Center.
a quote over the telex lines in Bangkok. The Treasury as well
as the Center is constantly
reviewing
its purchase procedures
to insure that the U.S. Government is receiving
the most
beneficial
exchange rates available.

APPENDIX

III

APPENDIX

III

On an additional
technical
point
raised
in the draft
report,
concerning
the acquisition
of certain
other
currencies,
Treasury
concurs
in the view that
foreign
currencies
with official
fixed
conversion
rates
in relation
to the dollar
should be obtained
at
rates
no less favorable
than the official
rates.
However,
not
all currencies
can be obtained
at the published
official
rates,
since many are adjusted
for bank conversion
fees.
In addition,
the U.S. Disbursing
Officer
in Paris has advised
that rates
quoted
for these currencies
are sometimes
estimated
to allow
for
bank charges;
for example,
it usually
takes a week or longer
to
confirm
the actual
rate for purchasing
Yemeni rials.
A further
review
of all arrangements
for obtaining
currencies
with
fixed
exchange
rates
will
be conducted
to ascertain
that
the U.S.
Government
is obtaining
the most advantageous
rates
available.
In sum, the Treasury
is keeping
under continuous
review
the U.S. Government
arrangements
for acquisition
of foreign
currencies
for U.S. Government
expenditures
in order
to assure
the most cost-efficient
means of obtaining
those currencies.
In our view,
it would serve no useful
purpose
at present
- and
could,
for the reasons
outlined
above , prove costly
to government
- to centralize
all U.S. purchases
of deutschemarks
programs
and yen in the FRBNY.
Sincerely

Anthony

Mr. J. K. Fasick
Director
International
Division
U.S. General
Accounting
Office
Washington,
D. C.
20548

yours,

M. Solomon

APPENDIX IV

DEPARTMENT
Washington.

OF
D.C.

STATE

20520

July
Mr. J. Kenneth Fasick
Director
International
Division
U.S. General Accounting
prlashington,
D.C.

10, 1979

Office

Dear Mr. Fasick:
I am replying
to your letter
May 15, 1979, which
"Changes Needed
forwarded
copies of the draft
report:
in Government Procedures
for Buying Some Foreign Currencies".
We appreciate
having had the opportunity
to review
and comment on the draft
report.
If I may be of further
assistance,
I trust
you will
let me know.
Sincerely,

Deputy Assistant
Secretary
for Budget and Finance
Enclosure:
As stated

APPENDIX

A/BF/FC
RESPONSE TO GAO DRAFT REPORT,
ENTITLED "CHANGES NEEDED IN
GOVERNMENT PROCEDURES FOR
BUYING SOME FOREIGN CURRENCIES

We have reviewed
your draft
report
"Changes
in Government
Procedures
for Buying
Some Foreign
We appreciate
the fine
efforts
required
to bring
information
and data in this
complicated
subject

Needed
Currencies".
together
area.

We consider
that
the major
thrust
of the report
is
directed
to the Department
of the Treasury
since
that
Department
by statute
and Executive
Order
is charged
with
the primary
responsibility
for administration
of the
acquisition,
custody,
deposit,
sale,
and reporting
of
foreign
currencies
by Executive
departments
and agencies.
The Department
of State,
both in Washington
and its
overseas offices,
coordinates
with
the Treasury
Department
in the administration
of foreign
currencies
generated
by.U.S.
programs
abroad
or acquired
by purchase
with
U.S. dollars.
The objectives
of the report
were
(1) to assess
whether
it would be advantageous
to the United
States
to coordinate
foreign
currency
purchases
with
monetary
intervention
operations
and (2) to determine
whether
the
Government
obtained
favorable
rates
in purchasing
currencies
needed for its
operations
abroad.
COORDINATION
OF GOVERNMENTAL FOREIGN CURRENCY
PURCHASES WITH MONETARY INTERVENTION
OPERATIONS
Since
the Department
of State
is not responsible
for intervention
activities,
we are not in a position
to comment comprehensively
on your recommendation
that
the Secretary
of the Treasury
and the Federal
Reserve
Board arrange
for the Federal
Reserve
Bank of New York
to manage the acquisition
of foreign
currencies
to meet
U.S. Government
operating
needs.
Your report
mentions
that
selected
currencies
were being
obtained
at competitive
rates
under present
procedures.
For example,
on page 13
the report
indicates
that
the Paris
Finance
Center
is
able to compare
the Bundesbank
daily
fixing
rate
with
rates
on other
European
markets
and select
the most favorable.
We believe
that
maximum cash management
benefits
might
be more difficult
to achieve
if transactions
were handled
in New York,
especially
if acquisitions
for operating
needs were subordinated
to intervention
decisions.

APPENDIX IV

ARRANGEMENTS TO OBTAIN U.S. YEN REQUIREMENTS
UNDER DEFENSE DEPARTMENT PROCUREMENT
The Department
of State is coordinating
constantly
with the Treasury
Department
in developing
procedures
that will
result
in the most favorable
purchase
arrangements for Japanese yen to meet U.S. Government
expenditures.
We are finalizing
our decisions
on the most suitable
methods.
It is likely
that the contract
with the Dai-Ichi
Kangyo Bank Tokyo to meet Defense needs will
be renewed
at the beginning
of the fiscal
year.
We expect
that
provisions
for acquisition
of all U.S. Government
yen
needs will
be included
unless
there is a more favorable
offer
from a competitive
banking
institution.
ARRANGEbIENTS TO INSURE CURRENCIES ARE
PROCURED AT OFFICIALLY CONTROLLED RATES
Treasury
and State Department
regulations
require
that currencies
needed for operations
be purchased
at
the most favorable
rate legally
available
for the purpose
of the procurement.
We will
coordinate
with the Treasury
Department
in reviewing
procedures
followed
for procurement
of currencies
in countries
with official
fixed
rates.
With regard
to the use of International
Monetary
Fund statistics
on official
rates,
central
banks are
generally
concerned
with monetary
policy
including
the
fixing
of exchange rates
for transactions
between central
Sale of currencies
banks and domestic
banking
institutions.
for commercial
or private
use is usually
carried
out
by the commercial
banking
system.
Rates available
in the
marketplace
may be more indicative
of the actual
costs
of acquiring
currencies
that the official
central
bank
We are
rates,
insomuch as they reflect
bank charges.
making inquiries
on the reasons
for the exchange rate
difference
cited
in the report.

SUMMARY
The Department
will
continue
to cooperate
and
coordinate
with the Treasury
Department
in constantly
striving
to improve procedures
for the acquisition
of
We expect
foreign
currencies
for operating
requirements.

APPENDIX IV

this
to be a continuing
challenge
in a world of floating
exchange rates
and wide-spread
monetary
instability.

Deputy Assistant
Secretary
for Budget and Finance

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