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Statement by-

Arthur F. Burns

Chairman, Board of Governors of the Federal Reserve System

before the

Subcommittee on International Finance

of the

Committee on Banking and Currency

House of Representatives

March 7, 1973

The Board of Governors of the Federal Reserve System
supports prompt enactment of H. R. 4536, the bill to amend the
Par Value Modification Act of 1972.
The bill proposes a new par value for the dollar in the
International Monetary Fund.

This proposed change will have

several financial and accounting consequences.

The value of the

Treasury's reserve assets will be written up by 11. 1 per cent, or
about $1.4 billion.

The dollar value o f our subscriptions and

contributions to several international financial institutions will
need to be increased.

In addition, there will be an increase in

the dollar value of certain Treasury and Federal Reserve
liabilities connected with operations in foreign currencies.


net result of these financial and accounting adjustments will be to
leave budgetary expenditures and the overall dollar assets and
liabilities of the U. S. Government little changed.
The Federal Reserve System will be affected by these
financial and accounting adjustments in two ways.

First, the

Treasury will be able to issue new gold certificates to the
Federal Reserve Banks in an amount equal to the increase in
the book value of the Treasury gold stock.

To the extent that

the Treasury does so, its cash balance will rise.

A subsequent

return of the Treasury cash balance to previous levels would, of
itself, result in an equivalent increase in bank reserves; but such
an increase can be readily offset — in whole or in part —by Federal
Reserve open market operations.
The other effect on the transactions and accounts of the
Federal Reserve will occur in connection with settlement of
commitments under the reciprocal currency arrangements with
foreign central banks.

Use of a "swap" arrangement by the Federal

Reserve entails an obligation to deliver a specified amount of foreign
currency at a future date.

Similar commitments have been under-

taken by the Treasury on its debt securities denominated in foreign
As of February 12, 1973, the Federal Reserve had
outstanding swap drawings of $1. 66 billion, almost all of which
were originally undertaken prior to August 15, 1971. Inasmuch as
the dollar prices of the affected currencies--Swiss francs,
Belgian francs, and German marks—were further increased as
a result of the currency realignment of February 12, there will
be an additional cost to the Federal Reserve in liquidating these

The cost attributable to the February 12 realignment

is presently estimated at nearly $200 million.

The total cost

attributable to both the Smithsonian realignment and this
February's realignment is presently estimated at less than
$400 million.
The purpose of the swap transactions carried out prior
to August 15, 1971, was to defer or reduce declines in reserve
assets that would otherwise have occurred.

The losses that are

incurred at the time these swaps are settled reduce the earnings
which the Federal Reserve System turns over to the Treasury.
But against these losses the Treasury has a roughly offsetting
profit on the gold and other reserve assets that it still holds
because foreign central banks were willing to accept Federal
Reserve swap drawings instead of demanding reserve assets
from the Treasury.
The fundamental cause of the exchange market crisis
that preceded the February 12th decision to propose a change in
the par value of the dollar was the large and persistent deficit
in the U. S. balance of payments and, as its counterpart,
persistent surpluses of foreign countries.

Our deficit of about

10 to 11 billion dollars on official reserve transactions in 1972
was less than the huge $30 billion deficit of 1971, but it was still
enormous by any historical standard.

As a consequence, the


liabilities of the United States to foreign monetary authorities
rose to $61 billion by the end of last year.
Against this background, it was not surprising that
exchange markets were sensitive to current

economic develop-

Publication of our November and December trade figures,

which indicated that the trade deficit during 1972 would reach
nearly $7 billion, had an unsettling effect on financial opinion.
Recent sharp increases in wholesale prices coincided with doubts
voiced in the public press about the effectiveness of Phase III.
Financial sentiment may also have been adversely affected by the
continuance of a large Federal budget deficit at a time of rapid
economic expansion.
In late January, confidence in the stability of exchange
markets deteriorated when the Italian Government adopted a twotier market and the Swiss authorities decided to let their currency

Excitement mounted rapidly in exchange markets,

particularly in the case of the German mark.

When large-scale

speculation failed to diminish, the President decided on February 6
to take the lead in trying to find a resolution of the crisis by promptly
exploring alternative courses of action with other countries.


Monday, February 12, Secretary Shultz announced that an agreement
had been reached.


As you know, the President has proposed a devaluation
of the dollar by 10 per cent — that is to say, the value of the dollar
in terms of gold or SDR would decline by 10 per cent.


differently, our official price of gold would rise by 11. 1 per cent
or from $38. 00 to $42. 22 per ounce, and the price of SDR would
likewise rise by 11.1 per cent or from $1. 09 to $1. 21.

The bill

you are now considering will give formal effect to the devaluation.
It should be noted that the newly proposed official price of gold,
like the old official price, is an accounting measure and must
not be confused with the market price of gold.
The immediate response of foreign governments to the
proposed devaluation of the dollar was generally in accord with
our expectations.

A large number of countries left unchanged the

value of their currency in terms of gold and SDR, thereby allowing
their currency to appreciate against the dollar by the full amount
of the dollar devaluation.

Many other countries devalued part or

all of the way with the dollar, but in most cases these actions
appear to be consistent with their balance-of-payments situations.
In view of the need to correct the existing pattern of payments
imbalances, it was particularly encouraging that the Japanese yen
appreciated not only against the dollar, but also by a significant
amount against other major currencies.


In the week immediately following February 12, the mood
in exchange markets was relatively calm.

However, uneasiness

soon returned to the markets and large speculative movements of
capital again took place last week.

On Thursday, March 1, the

German central bank was forced to purchase over $2-1/2 billion
in support of its new exchange rate; other European central banks
also intervened in substantial amounts.

In the face of this

speculative onslaught, most exchange markets in Europe and
Japan were closed down on Friday.
The Finance Ministers of the European Economic Community
met to discuss this situation last Sunday.

At that time they decided to

leave foreign exchange markets closed this entire week, while
further deliberations by finance ministers and central bankers
were going forward.

As you probably know, meetings have

been scheduled on Friday of this week in Paris.


Government of the United States will be represented at these
meetings, and I feel sure that a determined effort will be made on
all sides to achieve a constructive resolution of the crisis.
In view of current uncertainties, the immediate objective
shared by all countries is to restore confidence and order in
financial markets.

Speedy passage of H. R. 4536 will remove one source of

The Treasury, acting in the President's behalf,

undertook a commitment in the negotiations leading to the
February 12 realignment.

Adoption of the bill that you are now

considering will contribute to the restoration of confidence.
The United States can also help to restore confidence in
international financial order by making sure that our policies,
taken as a whole, are realistically adjusted to our needs.


primary task of economic policy this year is to steer our expanding
economy onto a no.ninflatio.nary course,

This goal is essential

for domestic reasons, and it is no less vital for our international

Unless our recent success in reducing the rate of

inflation is extended, the improvement in the balance of payments
which will result from the devaluation, of the dollar may gradually
be eroded away.

A determined effort, to increase productivity and

curb inflation will also play an important role in eliminating the
instabilities currently plaguing exchange markets.
At the same time, the restoration of confidence requires
that we intensify our efforts to reform international monetary and
trading relationships.

The behavior of exchange markets since

rnid- January has poignantly demonstrated once again the urgent


need for reaching early agreement on the framework of a new
international monetary system.

It would be easy to dawdle away

one, two, or more years on discussions of how to improve the
monetary system.

But the world cannot afford such a luxury.

Whatever the difficulties, ways to resolve them must be found-and quickly.

The essential thing is to move at a much faster

pace toward rebuilding the monetary system so that it will not be
prone to recurring crises.
When exchange markets gyrate, as they have been doing
in recent days, it is easy to lose sight of underlying developments.
The currency parities that resulted from the February 12 agreement
appear to be basically sound.

When these exchange-rate changes

are taken together with the Smithsonian realignment, it is clear
that the U. S. competitive position has improved substantially.
Thus, although the deficit in our trade and payments will remain
large during an initial period of a few months, we can confidently
expect progress in reducing the deficit later this year, and more
so in 1974.

The two realignments together have placed us firmly

on the road back towards equilibrium in our balance of payments.