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For release: THURSDAY
February 16, 1967
7:30 m C,S.T.


Remarks by
Andrew F , Brimmer
Board of Governors of the
Federal Reserve System
at the
30th Chicago World Trade Conference
Sponsored by
Chicago Association of Commerce and Industry
International Trade Club of Chicago
Chicago, Illinois
February 16, 1967

International Capital Markets and the
Financing of U.S Foreign Trade and Investment

Almost exactly two years ago today, the President appealed to the
American banking and business communities to help reduce the persistent deficit
in the Nation's

balance of payments. The response was immediate, and the

effect on our international payments position was striking.

But in achieving

these results, striking changes were also brought about in the conduct of
business abroad and in the structure and functioning of international capital

Moreover, these transformations were hastened and re-inforced by the

policy of monetary restraint (also partly aimed at strengthening our balance
of payments) pursued during most of last year.
To a considerable extent, the broad contours of this story are generally

Yet, some aspects are less familiar while still others are again the

subject of debate among those primarily responsible for the shaping and conduct
of national economic policy.

Thus, it appears both timely and appropriate to

review a number of vital current issues relating to international finance and
our balance of payments.

First, I shall focus on the revival of a genuine international
capital market outside New York. Despite the exigencies which
stimulated this revival, this new market may prove far more
viable and long-lasting than is generally appreciated.
Secondly, I shall look at developments in the short-term
Euro-dollar market. Here also efforts to adjust to temporary
pressures (especially the efforts of U.S. banks with branches
abroad) may have aided the emergence of a more efficient market
mechanism. At the same time, however, bank participation in
this market has complicated the tasks of domestic monetary
Thirdly, the drive of U.S. corporations to expand their direct
investments abroad, while minimizing the impact on the balance
of payments, has generated the most dramatic changes in the
international capital market. In fact, the very success of

their efforts has attracted both praise and condemnation. Yet
a strong case can be made for even greater — rather than less ~
reliance by U.S. companies on foreign sources to finance direct
investment. This is particularly true with respect to equity
Finally, I shall summarize the latest information on the extension
of foreign loans by U.S. banks. Trends in export financing and
the status of the banks under the Voluntary Foreign Credit
Restraint program may be of special interest.
Expansion of the International Capital Market
Since 1962, the volume of internationally-issued securities in nonU.S. markets has increased nearly four-fold.

And, what is even more dramatic,

dollar-denominated issues (which were virtually non-existent a few years ago)
have become the most dominant market instrument.

Foreign long-term bonds

issued in major European markets amounted to the equivalent of $291 million
in 1962, virtually all of which was denominated in a single national currency
and floated in a particular national market. By 1964, the total volume of
of which $514 million were
offerings had risen to $913 mi11ion/denominated in currencies other than that
of the country where issued.

Of this amount, $490 million (or 95 per cent)

were dollar-denominated. Total flotations reached $1.2 billion in 1965, with
$625 million denominated in U.S. dollars.
shrank somextfhat to roughly $1.0 billion.

Last year, issues in all currencies
However, dollar bonds climbed

further to more than $800 million, accounting for a substantially larger
proportion of the total market than in the previous year.

This rapid expansion in the volume of dollar-bond flotations has led
to significant changes in the marketing mechanism itself.

In the early 1960's,

investment bankers in Europe (particularly in Belgium and Luxembourg)
began to form multinational syndicates to market long-term bonds for nonresident borrowers in the key financial centers of Europe.

However, the first

dollar-denominated issues were through syndicates managed or co-managed by
a few American investment banking firms. But the growing volume of issues
drex^ into the market not only more money but more men as well. Thus, during
the first ten months of last year, 58 firms served as managers or co-managers
of these dollar issues;
and the rest European.

only 19 firms (or one-third) were North American
Moreover, x^hile American firms still account for

the largest volume of dollar bonds underwritten, European firms are acquiring
a rising share of the market. For instance, in the first ten months of 1966,
one U.S. firm(/with a volume of $261 million) held the lead position and
accounted for about 30 per cent of the total. Second place x*as held by a
British firm with 20 per cent, and an Italian firm x^as in third place with
17 per cent.

An American underwriter with 16 per cent barely edged out a

German firm for fourth place.
The rush of both American and European investment bankers to this
market is not hard to understand in view of the profit opportunities available.
Data relating to the cost of securities sold abroad by companies participating
in the voluntary program administered by the Department of Commerce
a fairly good estimate of the profitability of the business.


In general,

issue costs (the difference between issue price and proceeds received by the
borrower) seem to be about 2h per cent of the amount of the bond issue.


division between underwriting and selling costs cannot be determined readily.

However, data from industry sources suggest that selling costs may be slightly
more than 1% per cent and the underwriter's share slightly less than 1% per

In contrast, corporate flotations in this country normally entail

underwriting and selling costs of only 1 per cent of the total issue


compared with the 2k per cent on international dollar bonds.
Impact of the Interest Equalization Tax
Although the principal focus in this discussion is on the influence
of U.S. corporations and banks on the international bond and Euro-dollar
markets, \*e should remember that the application of the Interest Equalization
Tax (IET) to securities of most developed countries sold in the U.S. since
mid-1963 had already given these markets a strong push in the direction they
have taken in the last two years.

For example, in 1962, countries which

were later affected by the IET sold slightly more than $350 million of new
issues to U.S. investors, and during the first half of 1963, roughly the
same amount was sold here. In the second half of 1963, however, issues sold
by lET-affected countries dropped to less than $200 million (which included
some issues not subject to the tax at the start of the period).
As the tax increased the cost of borrowing in the United States,
foreigners turned to the European market for accommodation. For example, in
the last quarter of 1963, foreign securities floated by European underwriters
jumped to the equivalent of $234 million;

these issues had averaged only

$93 million in each of the three previous quarters.

Dollar-denominated bonds

represented a substantial proportion of this increased volume «


to $490 million in 1964, and the uptrend continued into 1965 -- well before
U.S. companies began to sell securities under the stimulus of the voluntary

As far as access to the U.S. capital market is concerned, the IET has
worked well. For example, in the

years during which the IET has been in

force, new issues sold in the United States by European countries, Australia,
New Zealand, South Africa, and Japan have averaged slightly more than $100
million per year;

this compares with an annual average of more than $450

million in the 2\ years just prior to mid-1963.
U.S. residents

In reality, the average

volume of securities sold to / since the tax became effective is even smaller
than the above statistics suggest; this is particularly true if one does not
count the Japanese issues floated in 1965 under a special exemption of up to
$100 million (not all of which was used) granted for Japanese government
and government-guaranteed long-term borrox^ings.
Currently, the Administration has asked Congress to extend the IET
until July 31, 1969 -- rather than allowing it to terminate at the end of
July this year.

It was also requested that the tax be established on a

flexible basis with authority vested in the President to vary the/rate between
0 and 2 per cent.

IJe in the Federal Reserve strongly support this proposal.

The tax, even at its present level of 1 per cent, provides a degree of
protection from too-ready access to our capital market by developed countries.
Thus, it permits us greater scope to conduct monetary policy in a way best
suited to meet the needs of the domestic economy x^hile minimizing potential
conflicts with the balance of payments -- which is also one of the Federal
Reserve's major responsibilities.
This year, such a conflict may be far more probable than it was a
year ago.

As domestic economic pressures —

including pressures on prices --

began to ease late last year, the Federal Reserve shifted from a policy of
substantial restraint to a policy of somewhat easier credit conditions.


results of this shift are clearly evident in the sharp decline in a variety
of interest rates and the greater availability of credit at most types of
financial institutions. However, if our interest rates decline compared with
interest rates abroad, the widening differential may well induce an increasing
number of foreigners —

even those subject to the IET —

to seek funds here.

Thus, it is wise not only to extend the tax but -- equally important -- to
provide flexibility in setting the rate to apply at any particular time to
meet changing conditions in our domestic capital market.
Impact of Borrowing by U.S. Corporations
As mentioned above, U.S. corporations have been the pace-setters in
the international capital market during the last two years.

It will be re-

called that, when the voluntary program to improve the U.S. balance of payments
was launched in February,1965, companies were asked by the Secretary of Commerce
to postpone marginal projects and to obtain abroad the maximum amount of funds
required to finance direct investment.

In response to that request, companies

participating in the program administered by the Department of Commerce began
to issue securities abroad during the Spring of 1965.

By the end of January

this year, they had raised over $1.0 billion through 43 issues offered publicly

The greatest share of this borrowing (35 issues amounting to $865

million) has been through U.S. financing subsidiaries (mainly incorporated in
Delax/are), and the remainder has been through foreign (principally Luxembourg)
financing subsidiaries.
Initially, borrowing companies relied on straight bond issues with
maturities of 15 to 20 years. The yields required to market these averaged
about 5.75 per cent well into the Fall of 1965.

However, as the volume of

issues mounted, companies began to search for ways to reduce this relatively
high cost of borrowing abroad.

The first remedy was the offer by financing

subsidiaries of debentures convertible into stock of the parent U.S. corporation.
This potential opportunity to acquire "blue chip


equities in U.S. firms proved

particularly attractive. The first convertible debentures were offered in
October, 1965, at a yield of 4.50 per cent —

while companies x*ith equally

strong credit ratings had to pay 6 per cent or slightly more on straight bonds.
Soon thereafter, bonds with the convertible option became the dominant form
of borrowing, and the trend continued until the period of market congestion
in the Spring of last year.

In fact, through the end of 1966, funds raised

through convertible issues ($425 million) were nearly twice as large as the

($231 million) raised through sales of straight bonds by U.S.-incorpo-

rated companies.
Yet, as the growing volume of borrowing exerted increasing pressure on
the market in the Spring of 1966, even the convertible feature became lessand-less able to move long-term bonds except at substantially higher yields.
For example, by last April, straight bonds with a 10-year maturity were being
issued at 6.25 per cent and 20-year convertibles at 5.00 per cent. To attract
a wider market, companies began to offer 5-year notes, but yields even on
these shorter issues continued to advance —

reaching 6.38 per cent in May.

Yields on convertible issues also continued to rise and reached 5.25 per cent
in the same month.
This congestion in the market not only resulted in a considerable climb
in yields and modifications in the mode of borrowing — it also generated a
among foreign underwriters
sharp debate/over the need for some form of regulation. It was felt in some
quarters that borrowers (such as national governments) who could not resort to
convertible and other features were being forced (unfairly) out of the market

by U.S. corporations.

Some European underwriters —

unaccustomed to the

vigorous competition which U.S. investment bankers brought to the market
began to call for a voluntary spacing of new issues.


IJhile a number of schemes

were suggested, no real effort at regulation was undertaken —


primarily because no obvious basis exists, or can be readily foreseen, for
control of the international capital market.
Perhaps another reason why most of the criticism subsided is that U.S.
companies themselves began to back ax*ay from the market in t h e face of sharply
rising rates. While U.S.-based and foreign subsidiaries floated a total of
$281 million of securities abroad in the second quarter of last year, the
volume amounted to only $35 million in the third quarter and to $101 million
in the fourth.

Part of this drop probably can be traced to the lessened

attractiveness of convertible debentures as prices of U.S. stocks declined
steadily through the rest of 1966.
But since the turn of the year, interest rates abroad have declined
considerably, and stock prices in the U.S. have recovered much of the lost

In this improved environment, U.S. borrowers seem to be returning

to the international capital market. In January, three issues, totaling
$65 million, were offered for sale. Straight bonds, convertible debentures,
and 5-year notes x*ere equally represented.

If the volume of borrowing

continues to expand (as well it may in view of the continuing high level of
direct investment abroad projected by U.S. companies), we may again hear
criticism and a demand for regulation of the market.
But, xyhatever the course of events xvhich may lie ahead, I am personally
convinced that U.S. companxes should continue to look to the international

capital market for a sizable share of the funds required to finance their
projects abroad. Not only will this lessen the burden on our balance of
payments, but it will also help to hasten the development of a genuine
international capital market.
Innovation in the Euro-Dollar Market
Just as the advent of the IET and the U.S. voluntary balance of payments
program gave an extra stimulus to the Euro-bond market, these same factors
accelerated the process of innovation in the market for short-term Eurodollars.

However, in the context of our balance of payments and monetary

management in this country, one development outweighs all others -- that is,
the sharply increased role played by U.S, commercial banks. But before
examining their behavior more closely, we might reflect for a moment on the
overall workings of this part of the international capital market.
The exact dimension -- or even a definition —
market is impossible to determine.
of the borrowing and lending —
in other countries.

of the Euro-dollar

However, for practical purposes, it consists

normally at short-term -- of dollars at banks

Just a few years ago, Euro-dollar deposits were of only

minor importance. But the Bank for International Settlements in Basle,
Switzerland, recently estimated the volume outstanding at more than $12 billion.
While trading in these deposits is rather widespread, London apparently
accounts for about one-half of the total.
As mentioned above, the Euro-dollar market had already experienced
noticeable growth prior to mid-1963.

Since then (and apart from the IET

and the U.S. voluntary balance of payments program), new techniques have continued
to appear. For example, even earlier, Italian monetary authorities had entered

into a series of special arrangements with Italian commercial banks through
which the latter were able to hold sizable dollar deposits.
to work in the Euro-dollar market —

These they put

thus greatly expanding the supply.

Moreover, the growing financial requirements of foreign affiliates of U.S.
corporations have induced many banks with Euro-dollar deposits to extend
longer-term loans as well as short-term credits. This experience may lead to
a major change in the ability of the market to meet foreign credit needs
The appearance of the negotiable, dollar-denominated CD was another
innovation which occurred last year. So far, the CD has not become an
important factor in the market. Yet, in a period of declining interest rates,
it may well become quite popular as a means of arbitraging among various
short-term yields.

It will be recalled that this is exactly what happened

in the United States in the early 1960 s.
IJhile these institutional changes may have a lasting impact on the
functioning of the market in the long-run, the most immediate significance
must be attached to the part played by foreign branches of U.S. banks in
mobilizing Euro-dollar funds for use in this country.

About a dozen or so

large U.S. banks maintain a netx^ork of branches abroad, and this is essentially
their story.
During 1966, these foreign branches increased their claims on their
head offices by $2% billion. This inflow was obtained explicitly by the head
offices as a means of easing the pressures on reserves resulting from a
policy of domestic monetary restraint. The rise in branch claims represented
virtually all of the expansion in their dollar assets last year.

In contrast,

during 1965, the gain in assets of the branches had consisted mainly of

increased claims on commercial banks abroad and an expansion of loans to other
foreigners -- including foreign subsidiaries of U.S. corporations. There
was essentially no change in branch claims on head offices in the United States.
Most of the $2>i billion rise in branch claims on head offices last
year x*as financed through the branches
Euro-dollar deposits.


bidding for relatively short-term

As a result, the amount outstanding at the end o£

last June was already roughly $800 million above the level at the close of

But the truly spectacular rise occurred in the last half of 1966,

the peak of about $4*3 billion outstanding being reached in mid-December.
Reflecting this bidding for funds, yields on 3-month Euro-dollar
deposits rose from less than 5h per cent at the end of 1965 to about 6 per cent
at the end of last June. A further sharp rise occurred during the Summer and
Fall, and a peak of 7 per cent was reached in October.

Yields then declined

slightly and stabilized around 6 3/4 per cent through November.


then, they have fallen sharply to 5% .per:.*cant•
The sources of the Euro-dollar deposits acquired by the foreign
branches cannot be identified readily.
good part

However, there is no doubt that a

represented funds shifted out of sterling because of the un-

certainties facing that currency around mid-year.

Shifts probably also

occurred out of some continental currencies during the Summer and Fall.
Moreover, some of the proceeds from Euro-bond issues sold by U.S. firms
and not needed itemed lately for direct investment were placed in Euro-dollars.
On the basis of very fragmentary data publicly available, an attempt
has been made to identify the main sources of the rise in the branches
claims on their head offices.


But in interpreting these figures, their

tentative nature must be kept fully in mind.

During the first nine months

of 1966, U.S. liabilities to commercial banks abroad (including foreign
branches of domestic banks) rose by $1.9 billion.

Of this amount, almost

$500 million came through an increase in Euro-dollar deposits in London
owned by U.S. residents (particularly non-financial corporations).


also appears that perhaps $200 million of the gain can be traced directly to
switches out of sterling by London banks at the cost of a reduction in British
perhaps $600 million to net purchases of dollars by the commercial banks
reserves*', and/; - in seven continental We stern European countries. The
remainder came from other sources*
Thus, on the whole, it is evident that, through bidding aggressively
in the Euro-dollar market, the foreign branches of U.S. banks kept a sizable
volume of dollars from accumulating in central banks — which may have been
the inflow of these funds
inclined to convert them into gold. Moreover,/
also contributed to
a substantial reduction in our balance of payments deficit calculated on
the basis of official reserve transactions.
On the other hand, these inflows also allowed a handful

©f large

money market banks to obtain considerable relief from the policy of
monetary restraint.

Member banks of the Federal Reserve System are not

required to hold reserves against amounts due to branches abroad.

So --

despite the high costs of these funds -- banks here readily turned to the
Euro-dollar market as an alternative to bidding for Federal funds in the
domestic market. This became especially the case as the 5% per cent ceiling
on the rates payable on CD's made them less-and-less competitive while
other market yields rose to historic levels. In one sense, then, the
activities of the banks in the Euro-dollar market complicated the management
of domestic credit policy.

..^Because of

this outside source of funds,

greatep e£fort:*haa to.absorb reserves through open market,

. Of course, this situation was known and fully
However, in view of the temporary aid to our balance of

payments derived therefrom, it seemed preferable to allow the inflow to
Since the turn of the year, a sizable reduction has occurred in the
liabilities of U.S. banks to their foreign branches. As of February 1, the
amount outstanding was about $3% billion.

This x/ould represent a repayment

of about half of the increase between last Spring and the December, 1966,

To some extent, this reflow may enlarge the volume of funds available

in the Euro-dollar market —

and thus permit U.S. firms, among others, to

make a lesser demand on domestic sources to meet their requirements abroad.
But there is also the danger that a sizable share of the reflow may end up
in some foreign central banks that are not anxious to hold dollars.
In fact, the appearance of this reflow has led a number of observers
to suggest recently that it may be necessary to prevent any substantial
reduction in domestic short-term interest rates —
would worsen our balance of payments.

because such a decline

Below I. shall comment furthec^on this

Financing U.S. Direct Investment Abroad
As already indicated, the search for a larger volume of funds abroad
to finance direct investment projects has cast American firms in the role
of leading innovators in the international capital market.
in this effort cannot be disputed.

Their success

However, the basic factor giving rise

to the search in the first place still remains -- that is, the high rate
of growth of U.S. business abroad which, in turn, exerts inevitable pressure
on the companies to transfer funds from this country.
During 1966, U.S. direct investment may have been in the neighborhood
of $2 3/4 billion, after allowing for the use of funds obtained abroad by
parent companies.

This would be a substantial reduction from the $3.3 billion

registered in 1965.

Last year, U.S. corporations borrowed abroad about

$600 million to finance direct investment, compared with around $200 million
of such borrowing in 1965.

Since these borrowings were undertaken explicitly

within the guidelines of the voluntary program, they are counted
as"an offset to the outflow .from the United States
when the funds are actually used for direct investment.

In 1966, between

$350 - $400 million of the proceeds may have been employed for this purpose
(against roughly $60 million in 1965).

As indicated above, the rest was

added to the companies?; bank deposits and other short-term assets abroad.
Income from direct investment apparently rose more slowly in 1966
than it did in the previous year, and the advance was substantially beloxj
the long-run trend.

During the first three quarters, the inflow was at a

seasonally adjusted annual rate of $4.1 billion, a gain of less than $200
million from the figure for the full year 1965.

The slower advance in income

last year reflected a number of factors, including the reduced pace of
industrial activity in several foreign countries, higher tax payments by oil
producing companies, and the absence of special dividend receipts recorded
in the 1965 figures.

On the other hand, the excess of direct investment

income over direct investment outflow seems to have improved considerably.
In 1965, the surplus amounted to only $590 taillion, compared with $1.3 billion
in 1964. But in the first three quarters of 1966, it was at a seasonally
adjusted annual rate of $940 million. Y e t , when the current surplus is
measured against the performance of 1964 and earlier years, one can see
readily why there is so much concern about the direct investment outflow
in relation to the balance of payments*
In raising external funds abroad, foreign affiliates of U.S. companies
have depended almost entirely on various kinds of debt —
of equities•

rather than on sales

In 1965, loans from foreign banks and other financial institutions

rose by $600 million to $1,3 billion —
term and long -term debt.

divided almost equally between short-

This amount represented nearly two-fifths of total

funds raised abroad compared with only one-quarter in 1964.

Increases in

other types of liabilities accounted for nearly half of the foreign sources.
In contrast, issues of equity securities abroad provided only $273
million for the foreign affiliates in 1965, or 7 per cent of their foreign


Such sales amounted to $436 million in 1964 and to $334 million

in 1963.
This modest reliance on equity financing is one of the principal
points of criticism of U.S. companies in many of the countries in which
their affiliates are located. As is generally known, most U.S. firms maintain
in their own hands both the ownership and control of their foreign operations.
Just how closely these are held can be inferred from

Commerce Department

In 1957 (the date of the last census of U.S. business abroad),

three-quarters of the value of direct investment assets were held by firms
in which U.S. ownership represented 95 per cent or more of the total, and
one-fifth was held by firms in which U.S. ownership was between 50 and
95 per cent.

While foreign participation in these enterprises has undoubtedly

increased in the last decade, the gain apparently has been rather small.
This is implied by the Commerce Department figures which indicate that in
1965 only 6 per cent of the undistributed earnings of U.S. subsidiaries abroad
were assigned to foreign owners.
Here, then, is an area in which U.S. corporations could strengthen
their foreign sources of funds —

and their positions in the host countries


while simultaneously reducing the impact of the direct investment outflow on
our balance of payments.

It will be recalled that, under the Commerce

Department's guidelines, companies in the voluntary program were urged to
sell equities in their foreign subsidiaries where this seemed appropriate.
So far, this appeal has been received with little warmth.

Where a response

has been forthcoming, most companies have stressed the management complications
which might result from a wider sharing of ownership (and presumably control).

Nevertheless, while I obviously do not wish to comment explicitly on
how the companies should conduct their business, in my personal opinion a
greater reliance by U.S. firms on sales of equities in their foreign subsidiaries is a course well worth pursuing.
In the meantime, if the affiliates


needs for funds in 1966 expanded

as much as they did in 1965, they would have found it necessary to make further
heavy calls on foreign sources or on U.S f -source funds.

However, the trend

of direct investment in the first three quarters of last year and the volume
of borrowing abroad suggest a substantially reduced reliance on the transfer
of resources from this country in 1966.

As far as the current year is

concerned, some easing may occur with respect to the affiliates
for funds and in their claims on foreign financial markets —
the outflow from the U.S. for direct investment.


total demand

as well as in

It now appears that plant

and equipment outlays abroad by the affiliates will not rise appreciably over
the level attained in 1966, and —

because of the slower pace of industrial

activity in several foreign countries —
to working capital.

they may require only modest additions

Thus, the need of U.S. corporations to meet direct

investment requirements should pose less of a burden on the balance of payments
this year.


Bank Lending Abroad and the Financing of U.S. Exports
As announced a few days ago, U.S. commercial banks made a substantial
reduction in their holdings of foreign loans and investments last year, when
assets covered by the voluntary foreign credit restraint program declined
by approximately $160 million. In 1965, they had risen by about the same
On December 31, 1966, these banks had a net leeway of $864 million
for further expansion of credit within the target ceiling applicable in 1967.
They were/only> $144 million below the interim ceiling applicable through
March 31, 1967.
It will be recalled that, under the guidelines for the 1967 voluntaiy
balance of payments program, the Federal Reserve again asked commercial
banks to keep their foreign claims within 109 per cent of the amount outstanding
as of October 1, 1966.
at the end of 1964. This gave them a leeway of $1.2 billion-/. However, they
were also asked to use no more than 20 per cent of the leeway each quarter
and no more than 10 per cent (or $120 million) for nonexpert credits to
developed countries.
In adopting these guidelines, we wanted to provide a stimulus to export
credits beyond that afforded by the request in 1965 and 1966 that banks give
an "absolute priority


to such credits.

On the other hand, we felt that complete

exemption of export credits from the program might well amount to the virtual
ab&ance of any ceiling whatsoever.

But after the program was announced, a tiumber of bdnks suggested that it
would be difficult -- if not impossible —

to meet the reporting requirements.

Th£y held that it would be particularly difficult and costly to segregate
nonexpert from export credits. Therefore, they reported that it was not
feasible to comply with the request to impose a quantitative limit on nonexport
credits to developed countries.

Some banks also said that the limitation in

the guidelines would make it difficult for them to meet large anticipated credit
demands from Japanese banks in 1967, and, further, that it would be hard to
refuse such demands if they materialized —

given the fact that large deposit

balances are maintained by the prospective borrowers.
The Federal Reserve gave careful consideration to the banks



But, on balance, we have not felt it necessary to make any formal modification
in the guidelines. On the contrary, banks have been requested explicitly to
adhere as closely as possible to the original request.

However, we did try to

ameliorate the problems encountered by banks in reporting on their foreign
lending activities.

We are now asking only that they report their total

credits, distinguishing simply between those to developed countries and those
to less developed areas,, Loans to Japan are still subject to the special

However,banks can use run-offs of European loans to meet expanded

credit demands from Japan -- should these materialize —

and the guideline

encourages them to do so.
This change should in no way adversely affect the achievement of the
objective of a greater stimulus for exports anticipated when the guidelines
for 1967 were developed. Moreover, since we have never had any evidence that

any significant amount of export credits was being turned down because of
the program, I do not believe export financing will be hampered because of
the modification in reporting requirements.
Concluding Remarks
In closing these comments, I want to turn again briefly to the
question of whether short-term interest rates in the United States must
remain relatively high in order to prevent an excessive outflox* of shortterm funds. Some observers have held that, to avoid such an adverse impact
on the balance of payments, the Federal Reserve System should adopt a new
version of the so-called "Operation Twist


policy launched in 1961 and

followed during at least part of the next two years. That policy was aimed
at producing a sizable decline in long-term interest rates while preventing
a sharp reduction in short-term yields.

The further twin objectives were

to stimulate domestic real investment and faster economic growth while
simultaneously checking the short-term capital outflow.
As indicated above, I do not believe that the adoption. o£
an updated version of "Operation Twist" is called for at this time. In the
first place, there is no evidence so far of any marked tendency for private
short-term balances to move abroad in search of higher earnings. In fact,
the only noticeable movement to date has involved the reflows associated
with the repayment of funds which U.S. banks obtained from their branches
abroad during the period of greatest credit stringency last year.

As I

stressed above, we have been fully aware all along that this reflow was
almost certain to occur if we found it necessary to ease the availability

of credit for domestic reasons. In my opinion, it would be a mistake to keep
short-term interest rates in this country unduly high «

in a vain attempt

to keep banks from reducing the high-cost balances obtained in the Eurodollar market last year in order to escape some of the pressures of domestic
monetary restraint.

Moreover, in the early I960 s many corporate treasurers in this country
were just discovering the profit opportunities afforded by short-term investments in London and other foreign financial centers. To exploit these, they
transferred sizable amounts of short-term funds abroad. In the present
environment, there is little danger of a recurrence of this practice.


under the voluntary program administered by the Department of Commerce,
companiee have repatriated such holdings and have refrained from re-building

They also seem fully prepared to continue their cooperation in this

regard during the life of the program.
In emphasizing the lack of any need for a new version of "Operation

Twist ' —

at least under present circumstances -- I am by no means suggesting

that currently prevailing interest rates (short-term or long-term) are inappropriate and should be reduced further.

I am personally confident that the

Federal Reserve System will pursue whatever monetary policy appears to be
required in view of the actual future trend of economic developments, whether
these relate to the domestic economy or the balance of payments. Rather, my
purpose is to urge strongly that we do not conclude from the reflow of previous
U*S # bank borrowings from the Euro-dollar market that we need to be diverted
into following a policy which would offer no clear advantage to the balance
of payments and which might be definitely ill-suited to our domestic requirements.