Full text of Statements and Speeches of J. Charles Partee : Statement before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives

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For Release on Delivery
Expected at 9:30 a.m., E.S.T.
March 10, 1983

Statement by
J. Charles Partee
Member, Board of Governors of the Federal Reserve System
before the
Subcommittee on Domestic Monetary Policy
of the
Committee on Banking, Finance and Urban Affairs
U.S. House of Representatives
March 10, 1983

I am pleased to appear today to testify about the Federal Reserve's
operations under section 105(b) of the Monetary Control Act of 1980. This
amendment of section 14 of the Federal Reserve Act authorizes the Federal
Reserve to invest its holdings of foreign currencies arising from foreignexchange operations in interest-bearing obligations of foreign governments.
Such investment authority was needed in order to enable the Federal Reserve
to earn interest on its holdings of foreign currencies acquired through
exchange-market intervention at rates of return comparable to those
prevailing in the market.

Before passage of the Act, our ability to earn

market-related rates had been restricted by limitations cm the avail
ability of suitable investment outlets in foreign countries. We estimate
that the annual rate of earnings on our current holdings of foreign currencies
is about $32 million greater than it would have been without the expanded
investment authority.

Since the Federal Reserve turns over essentially all

of its net earnings to the Treasury, the authority contained in the Act is of
conmensúrate value to the taxpayer. The only use we have made of the invest
ment authority has been to invest foreign-currency holdings arising from our
foreign-exchange operations, and we believe that is the only use compatible
with the purpose and legislative history of the provision.
Section 105(b) also expanded the list of assets that may be used as
collateral for Federal Reserve notes to include all the assets that may be
purchased by the Federal Reserve under section 14 of the Federal Reserve Act.
Therefore, both the new foreign-currency investments and the foreign
currencies held under our former section 14 authority becane eligible for use
as collateral for Federal Reserve notes.

- 2 -

By way of background to a more detailed description of the Federal
Reserve's use of its authority under section 105(b), I should note that sig
nificant Federal Reserve holdings of foreign currencies are relatively recent
in origin. They arose as a result of active intervention in foreign-exchange
markets by the Treasury and Federal Reserve during the period between November
1978 and April 1981.

Federal Reserve holdings on January 31, 1983 of $5.3

billion equivalent in foreign assets were chiefly the result of our own inter
vention activities and of our warehousing for the U.S. Treasury of $1.1 billion
equivalent of foreign currencies.

(Warehousing is a procedure whereby the

Federal Reserve buys the currencies spot from the Treasury and simultaneously
resells them forward to the Treasury at the same exchange rate.) Accumulated
interest earnings on the assets are also included in the total.
As Federal Reserve holdings of foreign currencies — primarily German
marks, Swiss francs, and Japanese yen — increased, the limited investment
opportunities available to us under the Federal Reserve Act constrained our
ability to invest our holdings at market-related rates of return. As a
practical matter, the only available outlets were deposits or forward trans
actions with foreign central banks and the Bank for International Settlements,
since the Federal Reserve Act did not explicitly authorize purchase of govern
ment debt instrunents.

For their part, the foreign central banks were in some

cases legally prohibited from paying interest on deposits. Other facilities
they could offer us did not always yield returns equal to those on highquality, liquid instruments in the market.
Section 105(b)(2) of the Monetary Control Act of 1980 amended the
Federal Reserve Act to provide that the Federal Reserve may buy and sell
obligations of, or fully guaranteed as to principal and interest by, a foreign

- 3 -

government or agency thereof. Hie sole purpose of including this provision
in the Act was to overcame the barriers I have just noted, thereby enhancing
the Federal Reserve's ability to earn a carpetitive return on its assets
arising out of foreign-currency operations. Ihe legislative history of the
Act is very clear on this point.

In testimony before the Senate Banking

Committee on September 26, 1979, Chairman Volcker stated that the purpose of
the provision was to enable the Federal Reserve to invest its holdings of
non-interest earning foreign currencies in interest bearing obligations.

March 27, 1980, during the Senate's consideration of the Monetary Control
Act, Senator Proxmire indicated that the purpose of the authority to purchase
obligations of foreign governments is "to provide a vehicle whereby such
foreign currency holdings could be invested in obligations of foreign
governments and thereby earn interest. Ihis authority would be used only to
purchase such obligations with foreign currencies balances acquired by the
Federal Reserve in the normal course of business." Copies of these
statements are attached as Annex I for your information.
Further restrictions on the use of the new investment authority
were imposed by the Federal Open Market Comnittee, which authorizes Federal
Reserve open market operations. At its annual review of continuing authori
zations and directives on March 31, 1981, the POMC amended its authorization
for foreign-currency operations to provide that investments of foreign
currency balances "shall be in liquid form and generally have no more than 12
months remaining to maturity." As indicated by the record of FOMC policy
actions, this limitation applies to all Federal Reserve investments of
foreign-currency holdings, including specifically those made under section
105(b)(2).

(Copies of POMC foreign-currency authorizations and directives

4 -

for 1980/ 1981, and 1982, and an excerpt from the March 1981 record of POMC
policy actions, all of which are published in the Board's Annual Report, are
attached as Annex II.)
As noted in the authorizations, the POMC has limited the Federal
Reserve's authority to buy, sell, and hold foreign currencies by specifying
14 currencies.

Since the investment authority under section 105(b)(2)

applies only to foreign currencies acquired in the course of normal foreignexchange operations, this limitation also specifies the countries whose
obligations we are empowered to acquire under that section. 'Hie list of
eligible currencies has always comprised only currencies of those countries
with whose central banks the Federal Reserve has reciprocal-currency or
"swap" arrangements. No country has been added to that list since 1967.
In light of the clear legislative history of section 105(b)(2),
including Chairman Volcker's 1979 testimony on behalf of the Board, the
further restrictions imposed by the FOMC, and the limited list of currencies
that have traditionally been eligible for Federal Reserve purchase and sale,
I believe that there are anple safeguards to prevent section 105(b)(2) from
being used by the Federal Reserve as a basis for assisting foreign govern
ments in financial difficulties.
The Federal Reserve first invested in debt obligations of a foreign
government in October 1980. Renewals of maturing investments and additional
purchases have been made at various times since then.

The only holdings of

currencies we have invested in this way are German marks, Swiss francs, and
Japanese yen — a small subset of the eligible list of currencies — all
representing amounts obtained through exchange-market operations.

- 5 -

A summary of our transactions in foreign debt obligations between
October 1980 and January of this year is attached as Annex III. Our invest
ments of foreign currencies in obligations of foreign governments have
generally been made with the understanding between the Federal Reserve and
foreign authorities that the details of our transactions will not be made
public.

In view of these undertandings, the table provides data on the

average size of our transactions in all currencies during three-month
intervals since October 1980 and the average period securities purchased were
held in our portfolio.
As indicated in the table, Federal Reserve investments made under
the authority of section 105(b)(2) and still outstanding totalled $1.4
billion equivalent on January 31. They are in short-term obligations of or
guaranteed by the governments of Germany, Japan, and Switzerland, denominated
in the currencies of those countries. Most of the rest of the $5.3 billion
equivalent of Federal Reserve holdings are also German marks, Swiss francs,
and Japanese yen, and they are held at the central banks that issue those
currencies and the BIS in investments that yield a market-related rate of
return.

In addition, the Federal Reserve holds Mexican pesos acquired in

connection with the Bank of Mexico's drawing on the $325 million swap
arrangement with the Federal Reserve that was put in place in August 1982 in
parallel with facilities provided by the U.S. Treasury and the Bank for
International Settlements. The peso holdings are invested in an interestbearing account at the Bank of Mexico. When the swap drawing is unwound, the
pesos will be exchanged with the Mexican central bank for dollars at the same
rate of exchange at which they were acquired. This traditional procedure
under the swap arrangements was also followed as the Bank of Mexico repaid

- 6 -

in full the $700 million swap drawing provided directly by the Federal
Reserve last August.
Turning to the use of Federal Reserve investments in foreign assets
as collateral for Federal Reserve notes, this matter is mainly technical
in nature, and details of our procedures are provided in the attached note.
Under section 16 of the Federal Reserve Act, each Reserve Bank is obligated
to designate as collateral a portion of its assets equal in value to the
notes it individually has issued.

Since the notes themselves (also under

section 16) are first and paramount liens on all the assets of the Reserve
Bank, not just the designated collateral, and are moreover obligations of the
United States, the collateral designated in no way limits the security of
noteholders.

Eligible collateral specified in the Federal Reserve Act before

passage of the Monetary Control Act of 1980 consisted of gold certificates,
Special Drawing Rights certificates, U.S. government and agency obligations,
and small amounts of certain other Federal Reserve assets. While the System
as a whole has always had sufficient eligible collateral for the aggregate of
all Reserve Banks' notes in circulation, the distribution of the collateral
among the Reserve Banks is not necessarily in proportion to their note
liabilities. The Reserve Banks issue notes to meet the demand for currency
in their region, while their holdings of U.S. government securities depend on
an allocation of System holdings and flows of funds between Federal Reserve
districts.
It was foreseen that the Monetary Control Act would lower reserve
requirements on depository institutions' liabilities, and the Federal Reserve
would have to sell U.S. government securities in order to eliminate the
excess liquidity that would otherwise be provided to the financial system.

- 7 -

Therefore, it seemed to us entirely possible that some Reserve Banks might
occasionally experience a shortage of assets eligible as collateral for their
note issues. To prevent this development, section 105(b)(1) was added to the
Monetary Control Act.

Besides eliminating the Reserve Banks' previous obli

gation to designate collateral for notes still in their own vaults, this
section enlarged the list of eligible collateral to encompass all foreigncurrency investments — both those the Federal Reserve was newly authorized
to purchase under section 105(b)(2) and those it could purchase under
previous authority.
As indicated on the table attached as Annex IV, four Reserve Banks
have used foreign-currency assets as collateral on various occasions. No
specific instruments are earmarked in connection with such designation of
collateral:

the amounts used represented undivided portions of each Bank's

participation in the System's foreign-currency account. At most, $515
million equivalent of our investments were used at any one time; generally
the amounts were much smaller. New procedures are now under study for
collateralization of Federal Reserve note liabilities. These procedures, if
they can be implemented, would reduce sharply, if not eliminate, any fore
seeable need to use foreign-currency assets as collateral for issuance of
Federal Reserve notes.

Technical Note on Collateralization
of Federal Reserve Notes
Section 16 of the Federal Reserve Act (as amended) requires that
Federal Reserve notes issued into circulation by Reserve Banks be fully
collateralized.

A Reserve Bank's notes held in its own vaults do not require

collateral. Assets eligible for use as collateral are specified by section
16 as follows:

notes, drafts, bills of exchange, or acceptances acquired

under the provisions of section 13 of the Federal Reserve Act, or bills of
exchange endorsed by a member bank of any Federal Reserve district and
purchased under the provisions of section 14 of the Act, or bankers'
acceptances purchased under the provisions of section 14, or gold
certificates, or Special Drawing Right certificates, or any obligations which
are direct obligations of, or fully guaranteed as to principal and interest
by, the United States, or any agency thereof, or assets that Federal Reserve
banks may purchase or hold under section 14 of the Act.
Each day, an employee at the Board of Governors in Washington
representing the Federal Reserve Agent at each Reserve Bank, insures that
sufficient collater2 is designated to meet each Reserve Bank's note lia
d
bilities.

Eligible assets are used in the following order:

all gold and

Special Drawing Rights certificates and, to the extent available, sufficient
U.S. government and agency securities to meet full collateral requirements.
Only if a Reserve Bank requires additional collateral are foreign-currency
assets used. At Annex IV is a list of dates on vrfuch foreign currencies were
used in order to collateralize fully note liabilities at individual Reserve
Banks.

- 2 -

fti a Systemwide basis, sufficient collateral is available without
use of foreign-currency assets. However, using only gold and SDR certifi
cates and their government and agency securities, individual Reserve Banks
may experience a shortfall if seasonal increases in their notes outstanding
{for example, at Christmas or during vacation periods) happen to coincide
Kith reductions in holdings of government securities resulting from the con
duct of monetary policy.

In December 1982, for example, it was necessary to

use foreign-currency investments to collateralize sane Banks' note liabilities
27 times, even though Systemwide excess collateral, excluding foreigncurrency investments, averaged approximately $14 billion on a daily basis.
Section 16 of the Federal Reserve Act further stipulates that, in
addition to the eligible assets designated as collateral for note liabilities
on a daily basis, Federal Reserve notes issued to each Reserve Bank become a
first and paramount lien on all the assets of the Reserve Bank and are also
obligations of the U.S. government.

Annex I

Legislative History of Section 105(b)
of the Monetary Control Act of 1980

Testimony by Chairman Vblcker to Senate Banking
Committee, September 26, 1979
Statement by Senator Proxmire, March 27, 1980

FEDERAL RESERVE MEMBERSHIP

HEARINGS
BBFOBB THB

COMMITTEE ON
BANKING, HOUSING, AND URBAN AFFAIRS
UNITED STATES SENATE
NINETY-SIXTH CONGRESS
FIRST SESSION
OH

Amendment No* 398 to S. 85
S. 353
AND

H.R. 7
TO FACILITATE T H E IMPLEMENTATION O F M O N E T A R Y
POLICY A N D TO P R O M O T E COMPETITIVE EQUALITY A M O N G
DEPOSITORY INSTITUTIONS
SEP T E M B E R 26 A N D 27, 197»
Printed for the «se of tbt
Committee on Banking, Housing, and Urban Attain

0.6. GOVERNMENT PRINTING OFFICE
»4 0 0

WASHINGTON : 10T»

CONTENTS
W ednesday .September 26» 1979
Opening statement ofSenator Proxmire..........................
B l:
il s
.
Amendment No. 398 to S. 85 — .............................
S 353 ................................................
H.R. 7................................................

Pe t
ff
6
51
67
72

W itnesses
Henry Reuss, Chairman, Committee on Banking, Finance and Urban Affairs,
U.S. House of Representatives................................
1
Prepared statement......................................
3
Exemption level........................................
2
Stanton amendment......................................
2
Paul A. Volcker, Chairman, Board of Governors, Federal Reserve System ..
..
8
Prepared statement................... .
9
Convergence of views.................. *
..................
8
The treatment of transactions balances...•
..*.....................
10
Treatment of time and savings deposits ..— ......... ............
.. .....
11
Question of monetary control and the resei^e base---- .......-----.......
12
Provision and charge for services-------- -— .......---...... ....
.......
....
13
Collateral for Federal Reserve notes________ ...— ------------...
14
The phase-in...........................................
14
•Effecton Treasury revenue.................................
14
Conclusion.......................................... .
15
Reserve coverage and Treasury revenue effects of monetary improvement
program proposals ...
..----------- --- ......... .............. 16
........---..............
Reshape monetary control
17
Difference between bls............................................. 18
il.............................................
Monetary base
19
Transitional revenue loss cvrd............ ..........M............
oee............M........... ............ 20
Ratio importance to monetary policy
21
Reserve requirements .— ........................................... 22
. ..........................................
Transactions accounts
24
Supplement deposits with interest .»«•••••»•••••»»»•••«•••»•••••»»••«» 26
.»•••••»•«••••••••••••••••••••*•«••
Phase-m periods. . . . . . . . . . . . . . . . . . 3 0
■
Pricing or services relating to currençy disbursement................... 30
..................
Billion dollar surplus«.................•••••••••••»••••»•••••»••••••• 31
..................•••••••••••••*•••••••••••••••
John Perkins, president, American Bankers Association; accompanied by:
Robert W. Renner, chairman, Community Bankers Division, American Bankers Association ....................................................... 33
......................................................
Prepared statement....m.......................m*........m.......... 33
.... ....................... ......... .........
ABA consensus
... ........................ «.....»....
.
34
Legislative solutions
34
S. 8.............................................................. 3o
5.............................................................
H.R. 7
3d
S. 353 .............................................................
............................................................. 3d
Reasons for the ABA*s apoc................................---.. 36
prah................................ .
The universal reserve requirements approach.................--.................
36
The voluntary reserve requirement approach ...................... 36
.....................
The Treasury revenue issue
87
Conclusion
37
Mqor provisions of proposed Federal Reserve legislation
Consensus statement, ranking Leadership Conference:
Sept. ¿0,1979
40
July 18,1979
40

14
Open access and pricing of System services likely will induce major changes in
existing banking relationships. It may have differential effects on large and small,
or city and rural institutions. Moving too precipitously to put this new svstem into
place could cause disruptions in banking markets. Consequently, I woula urge that
the pricing provision allow some flexibility in timing and implementation. More
over, i should be clear that the Federal Reserve need not precisely match costs and
t
revenues for every service. Indeed, the Board questions whether a charge for the
receipt and disbursement of currency i appropriate at a l The Government might
s
l.
normally be «xpected to provide that service, and in any event, the Treasury
already earns some $7 billion per year from the provision of currency through
securities held by the Federal Reserve as collateral.
COLLATERAL FOR PEOERAL RESERVE NOTES

A technical problem regarding collateral against Federal Reserve notes does arise
in the b l . Under existing law, currency issued by the Federal Reserve must be
il
secured by certain assets of the Federal Reserve specified in the Federal Reserve
Act. If no chancres were to be made in this requirement, the reserve reductions
implied by the oills befo^ you could be technically unworkable for they might
resuit in insufficient amounts of government securities and other eligible financial
assets to meet tha collateral requirements against these notes. In mid-1979, for
instance, collateral in excess of currency was only $13 billion. In terms of deposits
outstanding at that time, balances at Federal Reserve Banks would be reduced
about $24nillion under H.R. 7 and roughly $14 billion under S. 85 without the
reserve requirement on time deposits. The reduction in government security hold
ings in the Fed portfolio that would have to accompany the decline in reserve
requirements would leave the System with too few eligible securities to meet the
legal collateral requirements.
S. 85 would meet this collateral problem by permitting al financial assets held by
l
Federal Reserve Banks to stand behind the Federal Reserve’
s currency liability and
by eliminating the requirement to collateralize notes remaining in the vaults of
Federal Reserve Banks. This approach, while clearly meeting the need, was rejected
by the House apparently on the grounds that i might open the way to the Federal
t
Reserve acquiring a broader range of assets. To meet that objection, assets eligible
for collateralizing currency might be confined to certain enumerated market-type
assets that may already be held by the Federal Reserve.
I would suggest addins to the present l s only assets acquired abroad arising from
it
time to time out of our foreign currency operations— a relatively small but fluctuat
ing amount— while removing the requirements for collateral against notes held by
the Federal Reserve i s l , in that connection, the Federal Reserve Act already
tef
permits us to hold foreign bank deposits and bills of exchange; itwould be helpful to
us operationally if short-term foreign government securities could be added to our
authorized holdings— an omission at the time of the original Federal Reserve Act
when such securities were not widely available.
.

THE PHASE-IN

S. 85 and H.R. 7 differ substantially in phase-in time for the application of
reserves to transaction balances of nonmember institutions: 4 yean for the former,
10 years for the latter. The Board feels the S. 85 approach— which itself provides
considerable time, i more in keeping with the purposes of the legislation, particu
s
larly for institutions newly entering or rapidly expanding transaction account busi
ness. At the same time, we are aware that this Committee and the Congress may be
in a better position to appraise the equities of particular situations and develop an
appropriate compromise.
EFFECT ON TREASURY REVENUE

There i understandable sensitivity to the implication for Treasury revenue from
s
alternative monetary improvement plans, particularly in these inflationary times
when the budget i under pressure. An attachment to this statement shows the
s
revenue input from H.R. 7 and S. 85. As can be seen, the bill acceptable to the
House had a cost of around $300 million, using 1977 data. S. 85 would not cost the
Treasury any revenue, but at the cost of increasing the reserve burden of many
depository institutions. Without a reserve requirement on time deposits, as I have
suggested, the revenue loss would be significantly smaller than in the House b l .
il
Iwould emphasize these calculations are artificial because, contrary to all expec
tations, they assume no revenue loss from rapid attrition of Federal Reserve mem
bership, ifno b l i passed. The net drain on Treasury revenues from H.R. 7 or S. 85
il s
as modified would be quite moderate, ifthere were any drain at a l after account i
l»
s

STATEMENT BY SENATOR PROXMIRE
(126 Cong# Rec« S 3167-8 (March 27, 1980))
COLLATCHAL FOR FEDERAL BJESCHVt H01CS

The Federal Reserve i required by the
s
Federal Reserve Act to maintain col*
lateral for all Federal Reserve notes. This
collateral consists of gold certificates,
special drawing rights certificates, eligit
b!e paper and U.S. Government, and
agency securities. The last category i by
s
far the largest. However, a portion of the
Federal Reserve's securities portfolio of
U.S. Government and agency securities
represent purchases made with reserves
deposited by member banks. Since the
Monetary Control Act would release
about $15 billion In reserves, a compar
able amount of securities would need to
be sold. This would reduce the amount of
collateral available for Federal Reserve
notes.
The Monetary Control Act changes
the provision for collateralization of
Federal Reserve notes In order to handle
the problem created by the reduction in
required reserves. The act eliminates the
current requirement that collateral
must be provided for Federal Reserve
notes held In reserve bank vaults. The
act also expands the types of Federal Re*
serve accounts that can be used to col*
laterallze Federal Reserve notes. It also
authorizes the Federal Reserve to pur*
chase and sell obligations Issued by
foreign governments.
Under existing statutory authority, the
Federal Reserve, in the course of Its
normal activities In the foreign exchange
markets from time to time acquires
balances In foreign currencies. Under
present arrangements there is no con*
venient way In which foreign currency
balances held by the Fed can be invested
to earn Interest.
The Monetary Control Act would
amendsectlon 14 of the Federal Reserve
ActFlo provide a vehicle whereby such
foreign currency holdings could be In*
vested In obligations of foreign govern*
ments and thereby earn Interest. This
authority would be used only to purchase
such obligations with foreign currencies
balances acquired by the Federal Re*
serve in the normal course of business.

Annex I I
Documents of the Federal Open Market Gomnittee

Authorization for Foreign Currency Operations in Effect
January 1, 1980

Foreign Currency Directive in Effect January 1, 1980

Authorization for Foreign Currency Operations in Effect
January 1, 1981

Foreign Currency Directive in Effect January 1, 1981

Excerpt from Record of POMC Policy Actions, March 1981

Authorization for Foreign Currency Operations in Effect
January l r 1982

Foreign Currency Directive in Effect January 1, 1982

Board cf Governors of the Federal Reserve System

P a rt 2

R e c o r d s , O p e r a t io n s ,
a n d O r g a n iz a tio n

R rc ORO Of POLICY ACTIONS—BOARD Ol GOVERNORS

RECORD 01 POI ICY ACTIONS—FEDERAL OPEN
MARKE T COMMITTEE

167
167
169
176
183
187

CONSUMER AND COMMUNITY AFFAIRS
Introduction
Truth in Lending
Equal Credit Opportunity
Federal Trade Commission Act
Home Mortgage Disclosure

191

IMPLEMENTATION OF THE
MONETARY CONTROL ACT OF 1980

195 LEGISLATIVE RECOMMENDATIONS
195 Amendments to the Financial Institutions Regulatory and
Interest Rate Control Act of 1978
195 Financial transactions with affiliates
196 Expansion o f Class C directors
196 Authority for bank holding companies to acquire banks across
state lines in emergency and failing-bank situations
197 Amendments to the International Banking Act
198 LITIGATION
198 Bank holding companies—Antitrust action
—Review of Board actions
202 Other litigation involving challenges to Board procedures and regulations

F O M C Policy Actions

bearing deposits included in M-2 re
mained strong, as a rise in net flows into
time deposits at commercial banks in
response to increased yields offset a con
traction in savings deposits. Inflows of
deposits at nonbank thrift institutions
slowed somewhat. Flows into money
market mutual funds accelerated. Growth
of commercial bank credit moderated in
October; nevertheless« banks increased
their reliance on the negotiable, largedenomination CD’s and other managed
liabilities that became subject to the
marginal reserve requirement in the state
ment week beginning Octobcr 11. Both
short- and long-term market interest rates
have risen sharply on balance since the
early October announcement of the Sys
tem’s policy actions, although most
recently rates have declined; mortgage in
terest rates have increased substantially
further.
Taking account of past and prospective
developments in employment, unemploy
ment, production, investment, real in
come, productivity, international trade
and payments, and prices, the Federal
Open Market Committee seeks to foster
monetary and financial conditions that
will resist inflationary pressures while en
couraging moderate economic expansion
and contributing to a sustainable pattern
of international transactions. At its
meeting on July 11, 1979, the Committee
agreed that these objectives would be fur
thered by growth of M-l, M-2, and M-3
from the fourth quarter of 1978 to the
fourth quarter of 1979 within ranges of
1Vz to 4 Vz percent, 5 to 8 percent, and 6 to
9 percent respectively, the same ranges
that had been established in February.
The range for M-l had been established
originally on the basis of an assumption
that expansion of ATS and NOW ac
counts would dampen growth by about 3
percentage points over the year. It now
appears that expansion of such accounts
will dampen growth by about 1Vz percent
age points over the year; thus after
allowance for the deviation from the
earlier estimate, the equivalent range for
M-l is now 3 to 6 percent. The associated
range for bank credit is IVz to 10'/2 per
cent. The Committee anticipates that for
the period from the fourth quarter of 1979
to the fourth quarter of 1980, growth may
be within the same ranges, depending
upon emerging economic conditions and

appropriate adjustments that may be re
quired by legislation or judicial
developments affecting interest-bearing
transactions accounts. These ranges will
be reconsidered at any time as conditions
warrant.
In the short run, the Committee seeks
to restrain expansion of reserve aggregates
to a pace consistent with deceleration in
growth of M -l, M-2, and M-3 in the
fourth quarter of 1979 to rates that would
hold growth of these monetary aggregates
over the whole period from the fourth
quarter of 1978 to the fourth quarter of
1979 within the Committee’s longer-run
ranges, provided that in the period before
the next regular meeting the weekly
average federal funds rate remains within
a range of WVz to 15'/2 percent.
It it appears during the period before
the next meeting that the constraint on the
federal funds rate is inconsistent with the
objective for the expansion of reserves,
the Manager for Domestic Operations is
promptly to notify the Chairman, who
will then decide whether the situation calls
for supplementary instructions from the
Committee.

Authorization for Foreign
Currency Operations
In Effect January 1 1 8
, 90
1.
The Federal Open Market Commit
tee authorizes and directs the Federal
Reserve Bank of New York, for System
Open Market Account, to the extent
necessary to carry out the Committee’s
foreign currency directive and express
authorizations by the Committee pur
suant thereto, and in conformity with
such procedural instructions as the Com
mittee may issue from time to time:
A.
To purchase and sell the following
foreign currencies in the form of cable
transfers through spot or forward transac
tions on the open market at home and
abroad, including transactions with the
U.S. Treasury, with the U.S. Exchange
Stabilization Fund established by Section
10 of the Gold Reserve Act of 1934, with
foreign monetary authorities, with the
Bank for International Settlements, and
with other international financial institu
tions:

F O M C Policy Actions

Austrian
schillings
Belgian francs
Canadian dollârs
Danish kroner
Pounds sterling
French francs
German marks

Italian lire
Japanese yen
Mexican pesos
Netherlands
guilders
Norwegian kroner
Swedish kronor
Swiss francs

Foreign bank

Amount of arrangement
(millions of
dollars equivalent)

250
Austrian National Bank.................................
National Bank of Belgium.............................. 1.000
Bank of Canada............................................. 2.000
National Bank of Denmark............................
250
Bank of England........................................... 3.000
Bank of France...............................................2.000
German Federal Bank.................................... 6,000
Bank of Ita ly .................................................3.000
Bank of Japan............................................... 5,000
700
Bank of Mexico.............................................
Netherlands Bank..........................................
500
Bank of Norway.............. ........................... 250
Bank of Sweden.............................................
300
Swiss National Bank...................................... 4.000
Bank for International Settlements:
Dollars against Swiss francs......................... 600
Dollars against authorized European
currencies other than Swiss francs......... 1.250

Any changes in the terms o f existing swap
arrangements, and the proposed terms of
any new arrangements that may be auth
orized, shall be referred for review and ap
proval to the Committee.
3. Currencies to be used for liquidation
o f System swap commitments may be pur
chased from the foreign central bank
drawn on, at the same exchange rate as
that employed in the drawing to be liq
uidated. Apart from any such purchases
at the rate o f the drawing, all transactions
in foreign currencies undertaken under
paragraph 1(A) above shall, unless other
wise expressly authorized by the Commit
tee, be at prevailing market rates.
4. It shall be the normal practice to ar
range with foreign central banks for the
coordination o f foreign currency transac
tions. In making operating arrangements
with foreign central banks o f System
holdings o f foreign currencies, the Federal
Reserve Bank o f New York shall not com
mit itself to maintain any specific balance,
unless authorized by the Federal Open
Market Committee. Any agreements or
understandings concerning the adminis
tration o f the accounts maintained by the
Federal Reserve Bank o f New York with
the foreign banks designated by the Board
o f Governors under Section 214.5 of
Regulation N shall be referred for review
and approval to the Committee.
5. Foreign currency holdings shall be
invested insofar as practicable, consider
ing needs for minimum working balances.
When appropriate in connection with ar
rangements to provide investment facili
ties for foreign currency holdings, U.S.

F O M C Policy Actions

government securities may be purchased
from foreign central banks under agree
ments for repurchase of such securities
within 30 calendar days.
6. All operations undertaken pursuant
to the preceding paragraphs shall be
reported daily to the Foreign Currency
Subcommittee. The Foreign Currency
Subcommittee consists of the Chairman
and Vice Chairman of the Committee, the
Vice Chairman o f the Board o f Gover
nors, and such other members of the
Board as the Chairman may designate (or
in the absence of members of the Board
serving on the f .^committee, other Board
Members designated by the Chairman as
alternates, and in the absence of the Vice
Chairman of the Committee, his alter
nate). Meetings of the Subcommittee shall
be called at the request of any member, or
at the request of the Manager, for the pur
poses of reviewing reccnt or contemplated
operations and of consulting with the
Manager on other matters relating to his
responsibilities. At the request of any
member o f the Subcommittee, questions
arising from such reviews and consulta
tions shall be referred for determination
to the Federal Open Market Committee.
7. The Chairman is authorized:
A. With the approval of the Com
mittee, to enter into any needed agree
ment or understanding with the Secretary
of the Treasury about the division of
responsibility for foreign currency opera
tions between the System and the Trea
sury;
B. To keep the Secretary of the
Treasury fully advised concerning System
foreign currency operations, and to con
sult with the Secretary on policy matters
relating to foreign currency operations;
C. From time to time, to transmit
appropriate reports and information to
the National Advisory Council on Inter
national Monetary and Financial Policies.
8. Staff officers o f the Committee are
authorized to transmit pertinent informa
tion on System foreign currency opera
tions to appropriate officials of the
Treasury Department.
9. All Federal Reserve Banks shall par
ticipate in the foreign currency operations

for System Account in accordance with
paragraph 3G(1) of the Board of Gover
nors’ Statement of Procedure with
Respect to Foreign Relationships of
Federal Reserve Banks dated January 1,
1944.

Foreign Currency Directive
In Effect January 1 1 8
, 90
1. System operations in foreign curren
cies shall generally be directed at counter
ing disorderly market conditions, pro
vided that market exchange rates for the
U.S. dollar reflect actions and behavior
consistent with the IMF Article IV, Sec
tion 1.
2. To achieve this end the System shall:
A. Undertake spot and forward pur
chases and sales of foreign exchange.
B. M aintain reciprocal currency
(“ swap” ) arrangements with selected
foreign central banks and with the Bank
for International Settlements.
C. Cooperate in other respects with
central banks of other countries and wi’h
international monetary institutions.
3. Transactions may also be under
taken:
A. To adjust System balances in
light of probable future needs for curren
cies.
B. To provide means for meeting
System and Treasury commitments in par
ticular currencies, and to facilitate opera
tions of the Exchange Stabilization Fund.
C. For such other purposes as may
be expressly authorized by the Commit
tee.
4. System foreign currency operations
shall be conducted:
A. In close and continuous consulta
tion and cooperation with the United
States Treasury;
B. In cooperation, as appropriate,
with foreign monetary authorities; and
C. In a manner consistent with the
obligations of the United States in the In
ternational Monetary Fund regarding ex
change arrangements under the IMF Arti
cle IV.

Board of Governors of the FederalReserve System

P a rt 2

65
65
65
67
69
69
69
70
71
72
73
73
74
74
76

R e c o r d s , O p e ra tio n s ,
a n d O r g a n iz a tio n

RECORD OF POLICY ACTIONS—BOARD OF GOVERNORS
Regulation C (Home Mortgage Disclosure)
Regulation D (Reserve Requirements of Depository Institutions)
Regulation D (Reserve Requirements of Depository Institutions)
and Regulation Q (Interest on Deposits)
Regulation E (Electronic Fund Transfers)
Regulation F (Securities of Member State Banks)
Regulation J (Collection of Checks and Other Items and
Wire Transfers of Funds)
Regulation K (International Banking Operations)
Regulation M (Consumer Leasing) and Regulation Z (Truth in Lending)
Regulation Q (Interest on Deposits)
Regulation T (Credit by Brokers and Dealers)
Regulation Y (Bank Holding Companies and Change in Bank Control)
Regulation Z (Truth in Lending)
Policy statements and other actions
1981— Discount rates

84 RECORD OF POLICY ACTIONS—FEDERAL OPEN
MARKET COMMITTEE
84 Authorization for domestic open market operations
86 Domestic policy directive
87 Authorization for foreign currency operations
89 Foreign currency directive
90 Meeting held on February 2 -3 ,1981
98 Meeting held on March 31,1981
108 Meeting held on May 18, 1981
113 Meeting held on July 6 -7 ,1 9 8 1
121 Meeting held on August 18,1981
128 Meeting held on October 5 -6,1981
134 Meeting held on November 17,1981
140 Meeting held on December 21-22,1981
147 CONSUMER A N D COMMUNITY AFFAIRS
148 Educational activities
148 Truth in Lending
153 Equal Credit Opportunity
156 Home Mortgage Disclosure
157 Federal Trade Commission Act

F O M C Policy Actions
the period from the fourth quarter of
1980 to the fourth quarter of 1981,
the Committee looked toward a reduc
tion in the ranges for growth of Ml-A,
M 1-B, and M2 on the order of xi per
/
centage point from the ranges adopted
for 1980, abstracting from institutional
influences affecting the behavior of the
aggregates. These ranges will be recon
sidered as conditions warrant.
In the short run, the Committee
seeks behavior of reserve aggregates
consistent with growth of M l-A, Ml-B,
and M2 over the period from September
to December at annual rates of about
2 V percent, 5 percent, and IV a percent
4
respectively, or somewhat less, provided
that in the period before the next regular
meeting the weekly average federal
funds rate remains within a range of 13
to 17 percent.
If it appears during the period before
the next meeting that the constraint on
the federal funds rate is inconsistent
with the objective for the expansion of
reserves, the Manager for Domestic
Operations is promptly to notify the
Chairman, who will then decide whether
the situation calls for supplementary
instructions from the Committee.

Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks

Italian lire
Japanese yen
Mexican pesos
Netherlands guilder
Norwegian kroner
Swedish kronor
Swiss francs

B. To hold balances of, and to
have outstanding forward contracts to
receive or to deliver, the foreign cur
rencies listed in paragraph A above.
C. To draw foreign currencies and
to permit foreign banks to draw dollars
under the reciprocal currency arrange
ments listed in paragraph 2 below, pro
vided that drawings by either party to
any such arrangement shall be fully
liquidated within 12 months after any
amount outstanding at that time was
first drawn, unless the Committee, be
cause of exceptional circumstances,
specifically authorizes a delay.
D. To maintain an overall open
position in all foreign currencies not
exceeding $1.0 billion, unless a larger
position is expressly authorized by the
Committee. [Note. An overall open
position not exceeding $8.9 billion had
been expressly authorized by the Com
mittee on December 19, 1978, and was
in effect as of January 1, 1981.) For
A u th o riz a tio n fo r I* o reig n
this purpose, the overall open position in
( u r r e i u \ O p e ra tio n s
all foreign currencies is defined as the
sum (disregarding signs) of net posi
In Effect January 1,1981
tions in individual currencies. The net
1.
The Federal Open Market Com position in a single foreign currency is
mittee authorizes and directs the Fed defined as holdings of balances in that
eral Reserve Bank of New York, for currency, plus outstanding contracts for
System Open Market Account, to the future receipt, minus outstanding con
extent necessary to carry out the Com tracts for future delivery of that cur
mittee's foreign currency directive and rency, i.e., as the sum of these elements
express authorizations by the Committee with due regard to sign.
2.
The Federal Open Market Com
pursuant thereto, and in conformity with
such procedural instructions as the Com mittee directs the Federal Reserve Bank
of New York to maintain reciprocal cur
mittee may issue from time to time:
rency arrangements ( “swap” arrange
A.
To purchase and sell the follow
ing foreign currencies in the form of ments) for the System Open Market
cable transfers through spot or forward Account for periods up to a maximum
transactions on the open market at home of 12 months with the following foreign
and abroad, including transactions with banks, which are among those desig
the U.S. Treasury, with the U.S. Ex nated by the Board of Governors of the
change Stabilization Fund established Federal Reserve System under Section
by Section 10 of the Gold Reserve Act 214.5 of Regulation N, Relations with
of 1934, with foreign monetary authori Foreign Banks and Bankers, and with
ties, with the Bank for International the approval of the Committee to renew
Settlements, and with other international such arrangements on maturity:
financial institutions:
Any changes in the terms of existing

FOMC Policy Actions

Foreign bank

Amour.', o f
•n*.!; io~ .. OS

Austrian National Bank ..................
National Bank of B elgium ................
Bank of Canada ................................. ..
National Bank of Denmark ..............
Bank of England ...............................
Bank of France ..................................
German Federal Bank .......................
Bank of Japan .................................... •
Netherlands B a n k ............................... ..
Bank of Norway ...............................

150
i.OOO

.:,oeo
550

5.00*3
500

Swiss National Bank ..........................
Bank for International SetUemente:
Dollars against Swiss francs ............ 600
Dollars against authon’zcd European
currencies other than S*iss iiancs ¡,2 SO
1. Pursuant to an action toUr. &y ijh Conv
mittee on May 20, 1980, tfie ¿mount of the
reciprocal currency arrangemf.ni with the Hank
of Sweden was raised to $500 initiion» citeciive
May 23, 1980, for a period of one year, ?*';<
which it will revert to its fo<n*er level of
$300 million.

swap arrangements, and the proposed
terms of any new arrangements that may
be authorized, shall be referred for
review and approval to the Committee.
3. Currencies to be used for liquida
tion o f System swap commitments may
be purchased from the foidgn cent!aÎ
bank drawn on, at the same exchange
rate as that employed in the drawing to
be liquidated. Apart from any such
purchases at the rate o f the drawing, al!
transactions in foreign currencies under
taken under paragraph if A) Above
shall, unless otherwise ex pi ess! y autho
rized by the Committee, fc* si prevailing
market rates.
4. It shall be the nornuti practice to
arrange with foreign cental bank* for
the coordination of foreign cunency
transactions.
In making operating
arrangements with foreign ccnttal banks
of System holdings of foreign curren
cies, the Federal Reserve Bank of New
York shall not commit kself to main
tain any specific balance, unless autho
rized by the Federal Open Market
Committee. Any agreements or under
standings concerning the administration
o f the accounts maintained by the Fed
eral Reserve Bank of New York *hh
the foreign banks designated t> the
>
Board or Governors unie? Section
214.5 o f Regulation N shaft b«t referred

for review and approval to the Com
mittee.
5. Foreign currency holdings shall
be invested insofar as practicable, con
sidering needs for minimum working
balances. When appropriate in connec
tion with arrangements to provide invest
ment facilities for foreign currency hold
ings, U.S. Government securities may be
purchased from foreign central banks
under agreements for repurchase of
such securities within 30 calendar days.
6. All operations undertaken pur
suant to the preceding paragraphs shall
be reported daily to the Foreign Cur
rency Subcommittee. The Foreign Cur
rency Subcommittee consists of the
Chairman and Vice Chairman of the
Committee, the Vice Chairman of the
Board of Governors, and such other
members of the Board as the Chairman
may designate (or in the absence of
members of the Board serving on the
Subcommittee, other Board Members
designated by the Chairman as alter
nates, and in the absence of the Vice
Chairman of the Committee, his alter
nate). Meetings of the Subcommittee
shall be called at the request of any
member, or at the request of the Man
ager for Foreign Operations, for the
purposes of reviewing recent or con
templated operations and of consulting
with the Manager on other matters re
lating to his responsibilities. At the
request of any member of the Sub
committee, questions arising from such
reviews and consultations shall be re
ferred for determination to the Federal
Open Market Committee.
7. The Chairman is authorized:
A. With the approval of the Com
mittee, to enter into any needed agree
ment or understanding with the Secretary
o f the Treasury about the division o f
responsibility for foreign currency op
erations between the System and the
Treasury;
B. To keep the Secretary of the
Treasury fully advised concerning Sys
tem foreign currency operations, and
to consult with the Secretary on policy
matters relating to foreign currency
operations;
C. From time to time, to transmit
appropriate reports and information to
the National Advisory Council on International Monetary and Financial
Policies.

F O M C Policy Actions
8. Staff officers of the Committee
are authorized to transmit pertinent
information on System foreign currency
operations to appropriate officials of the
Treasury Department.
9. All Federal Reserve Banks shall
participate in the foreign currency «op
erations for System Account in accor
dance with paragraph 3G (1) of the
Board of Governors* Statement of Pro
cedure with Respect to Foreign Relation
ships of Federal Reserve Banks dated
January 1, 1944.

Foreign Currency Diredhc
In Effect January 1,1981
1. System operations in foreign cur
rencies shall generally be directed at
countering disorderly market conditions,
provided that market exchange rates for
the U.S. dollar reflect actions and be
havior consistent with the IMF Article
IV, Section 1.
2. To achieve this end the System
shall:
A. Undertake spot and forward
purchases and sales of foreign exchange.
B. Maintain reciprocal currency
( “swap”) arrangements with selected

foreign central banks and with the Bank
for International Settlements.
C.
Cooperate in other respects
with central banks of other countries
and with international monetary insti
tutions.
3. Transactions may also be under
taken:
A. To adjust System balances in
light of probable future needs for cur
rencies.
B. To provide means for meeting
System and Treasury commitments in
particular currencies, and to facilitate
operations of the Exchange Stabiliza
tion Fund.
C. For such other purposes as may
be expressly authorized by the Com
mittee.
4. System foreign currency opera
tions shall be conducted:
A. In close and continuous con
sultation and cooperation with the
United States Treasury;
B. In cooperation, as appropriate,
with foreign monetary authorities: and
C. In a manner consistent with the
obligations of the United States in the
International Monetary Fund regarding
exchange arrangements under the IMF
Article IV.

F O M C Policy Actions
than banks dem anded. Indeed, non
borrowed reserves were estim ated
to have declined at an annual rate o f
about 12 percent in April. In adjust
ing to the constrained availability o f
reserves, banks had a negative e x
c e ss reserve position on the average
in the latter part o f April and in
creased borrowings from the dis
count w indow sharply in late April
and early May; borrowings averaged
about $2.4 billion in the tw o w eeks
ending M ay 6. The federal funds
rate, which had been in a 15 to l5'/2
percent range for m ost o f April, rose
considerably in late April and early
May as banks intensified their efforts
to acquire reserves; trading in recent
days had been in a range o f 17 to 20
percent. Effective May 5, the basic
Federal R eserve discount rate was
raised from 13 to 14 percent and the
surcharge on frequent borrowing by
large depository institutions w as in
creased from 3 to 4 percentage
points, placing the surcharge rate at
18 percent.
In the telephone conference on
May 6, the Com m ittee agreed that in
the brief period before the next regu
lar m eeting scheduled for M ay 18,
the reserve path would continue to
be set on the basis o f the short-run
objectives for monetary growth e s
tablished at the March 31 meeting. It
w as noted that for a tim e actual
m oney growth might be high relative
to those objectives in view o f the
recent performance o f the monetary
aggregates. The Com m ittee recog
nized that short-term market interest
rates might w ell fluctuate around
levels prevailing in recent days and
that the federal funds rate «tight con
tinue to exceed the upper end o f the
range indicated for consultation at
the previous m eeting. The Com mit
tee agreed to consult further if n ec

105

essary to maintain adequate restraint
on the monetary and credit aggre
gates.
On May 6. the Committee agreed that
through the period before the next regu
lar meeting the reserve path should con
tinue to be set on the basis of the shortrun objectives for monetary growth
established at its meeting on March 31.
recognizing that the federal funds rate
might continue to exceed the upper end
of the range indicated for consultation at
the March 31 meeting.
Votes for this action: Messrs.
Volcker, Boehne, Boykin. Corrigan.
Gramley, Rice, Schultz. Solomon.
Mrs. Teeters, and Mr. Winn. Votes
against this action: None. Absent:
Messrs. Partee and Wallich. (Mr.
Winn voted as an alternate member.)

2. Review of Continuing
Authorizations
At this, the first regular m eeting o f
the Federal Open Market C om m ittee
following the election o f new mem
bers from the Federal R eserve
Banks to serve for the year begin
ning March 1, 1981, the Com m ittee
follow ed its custom ary practice o f
review ing all o f its continuing autho
rizations and directives. The Com
mittee reaffirmed the authorization
for dom estic open market opera
tions, the foreign currency directive,
and the procedural instructions with
respect to foreign currency opera
tions in the form s in w hich they w ere
currently outstanding.
Votes for these actions: Messrs.
Volcker, Boehne, Boykin, Corrigan.
Partee, Rice, Schultz. Solomon, Mrs.
Teeters, Messrs. Wallich, and Winn.
Votes against these actions: None.
Absent: Messrs. Gramley and Mayo.
(Mr. Winn voted as alternate for Mr.
Mayo.)

106

F O M C Policy Actions

In reviewing th authortealion for
e
dom
estic open m
arket operations,
th Com ittee took special n of
e
m
ote
paragraph 3 w
, hich authorizes th
e
Reserve Banks to engage inth lend*
e
ing of U.S. governm
ent securities
held in th System Open M
e
arket
Account under such instructions as
th Com ittee m t specify from
e
m
igh
tim to tim That paragraph had
e
e.
been added to th authorization on
e
October 7, 1 6 , on th basis of a
99
e
judgm
ent by th Com ittee th
e
m
at
such lending of securities was rea
sonably necessary to th effective
e
conduct of open m
arket operations
and to the im
plem
entation of open
m
arket policies, and on th under
e
standing th
at the authorization
would be reviewed periodically. At
th m
is eeting th Com ittee con
e
m
curred inth judgm of th M
e
ent
e anag
er for Dom
estic Operations th th
at e
lending activityinquestion rem
ained
reasonably necessary and th ac
at,
cordingly, th authorization should
e
rem in effect subject to annual
ain
review.
3. Authorization for Foreign
Currency Operations
The Com ittee adopted several
m
am
endm
ents to th authorization for
e
foreign currency operations to sim

plify and clarify its instructions to
the Federal Reserve Bank of New
York and to bring the docum up
ent
to date in ligh of recent develop
t
m
ents. None of these am
endm
ents
was intended as a change in policy
orientation.
As adopted in Decem
ber 1 7 ,
96
paragraph ID authorized th Federal
e
Reserve Bank of New York, for th
e
System Open M
arket Account, to
m
aintain an overall open position in
all foreign currencies n to exceed
ot
$ .0 billion, unless a larger position
1

was expressly authorized by th
e
C m
om ittee. The language suggested
th authorizations of larger posi
at
tions would be tem
porary. On De
cem 19,1978, th Com ittee had
ber
e
m
authorized an open position of $
8
billior. (shown as a footnote in th
e
authorization), w
hich had rem
ained
in effect since th date. At th
at
is
m
eeting, th Com ittee voted to in
e
m

corporate th long-standing lim of
e
it
$ billion in the text of paragraph
8
ID.
Paragraph 3 specifies th all
at
transactions in foreign currencies be
at prevailing m
arket rates except in
th case of certain transactions w
e
ith
foreign central banks. At th m
is eet
ing, th Com ittee voted to delete a
e
m
reference to an exception th is no
at
longer relevant and to add language
spelling out circum
stances in w
hich
transactions at nonm
arket rates m
ay
be undertaken.
Paragraph 5 is concerned w th
ith e
investm of System holdings of
ent
balances of foreign currencies. In
view of a provision in th M
e onetary
Control Act of 1 8 allowing th
90
e
Systemto invest in securities issued
or fully guaranteed by foreign gov
ernm
ents, the Com ittee voted to
m
lim investm of foreign currency
it
ent
holdings to liquid form and general
s
ly to instrum
ents having no m
ore
than 1 m
2 onths rem
aining to m
aturi
ty.
Hie Com ittee also am
m
ended
paragraph6toprovide th all opera
at
tions pursuant to th preceding para
e
graphs be reported prom
ptly, rather
than on a daily basis, to th Foreign
e
Currency Subcom ittee.
m
As am
ended, paragraphs ID, 3, 5
and 6 read as follows:
1.
The Federal Open Market Commit
tee authorizes and directs the Federal
Reserve Bank o f New York, for System

F O M C Policy Actions
Open Market Account, to the extent
neccssary to carry out the Committee's
foreign currency directive and express
authorizations b> the Committee pursu
ant thereto, and in conformity with such
procedural instructions as the Commit
tee may issue from time to time:
*

107

may designate (or in the absence of
members of the Board serving on the
Subcommittee, other Board Members
designated by the Chairman as alter
nates. and in the absence of the Vice
Chairman of the Committee, his alter
nate). Meetings of the Subcommittee
shall be called at the request of any
member, or at the request of the Manag
er for Foreign Operations for the pur
poses of reviewing recent or contemplat
po
ed operations and of consulting with the
Manager on other matters relating to his
responsibilities. At the request of any
member of the Subcommittee, questions
arising from such reviews and consulta
tions shall be referred for determination
to the Federal Open Market Committee.

D.
To maintain an overall open
sition in all foreign currencies not ex
ceeding $8.0 billion. For this purpose,
the overall open position in all foreign
currencies is defined as the sum (disre
garding signs) of net positions in individ
ual currencies. The net position in a
single foreign currency is defined as
holdings of balances in that currency,
Votes for these actions: Messrs.
plus outstanding contracts for future re
Volcker. Boehne, Boykin. Corrigan.
ceipt. minus outstanding contracts for
Partee, Rice. Schultz. Solomon. Mrs.
future delivery of that currency, i.e., as
Teeters, Messrs. Wallich. and Winn.
the sum of these elements with due re
Votes against these actions: None.
gard to sign.
Absent: Messrs. Gramley and Mayo.
3.
All transactions in foreign curren
(Mr. Winn voted as alternate for Mr.
cies undertaken under paragraph 1(A)
Mayo.)
above shall, unless otherwise expressly
authorized by the Committee, be at pre
vailing market rates. For the purpose of 4. Agreement with Treasury
providing an investment return on Sys
to Warehouse
tem holdings of foreign currencies, or for
Foreign Currencies
the purpose of adjusting interest rates
paid or received in connection with swap
eetin on January 1 -1 .
g
7 8
drawings, transactions with foreign cen At its m
1 7 . th C m
9 7 e om ittee h agreed to a
ad
tral banks may be undertaken at nonsuggestion by th Treasury th th
e
at e
market exchange rates.
5. Foreign currency holdings shall be Federal R
eserve undertake to
invested insofar as practicable, consider “warehouse" foreign currencies—
ing needs for minimum working bal
at
ake spot purchases of
ances. Such investments shall be in liq th is, to m
e
uid form, and generally have no more foreign currencies from th Ex
than 12 months remaining to maturity. change Stabilization Fund an
d
When appropriate in connection with sim
ultaneously to m
ake forward
arrangements to provide investment fa
e
e
t e
cilities for foreign currency holdings, sales of th sam currencies a th
e
e
U.S. Government securities may be pur sam exchange rate to th ESF. Pur
an
at
ent, th Com
e

chased from foreign central banks under su t to th agreem
agreements for repurchase of such secu m
ittee h agreed th th Federal
ad
at e
rities within 30 calendar days.
R
eserve would be prepared to ware
6. All operations undertaken pursuant
e
e
to the preceding paragraphs shall be re house for th Treasury or for th
5
ported promptly to the Foreign Currency ESF up to $ billion of eligible for
Subcommittee and the Committee. The eign currencies. At th m
is eeting th
e
Foreign Currency Subcommittee con C m
om ittee reaffirm th agreem
ed e
ent
sists of the Chairman and Vice Chairman
on th term adopted on M
e
s
arch 1 .
8
of the Committee, the Vice Chairman of
9 0 ith th understanding th it
e
at
the Board of Governors, and such other 1 8 , w
.
member of the Board as the Chairman would be subject to annual review

AUTHORIZATION FOR FOREIGN CURRENCY OPERATIONS
In Effect January 1. 1982
1« The Federal Open Market Committee authorizes and directs the Federal
Reserve Bank of New York, for System Open Market Account, to the extent
necessary to carry out the Committee's foreign currency directive and
express authorizations by the Committee pursuant thereto, and in conformity
with such procedural Instructions as the Committee may issue from time to
time:
A. To purchase and sell the following foreign currencies in the form
of cable transfers through spot or foward transactions on the open market at
home and abroad, Including transactions with the U. S. Treasury, with the
U. S. Exchange Stabilization Fund established by Section 10 of the Gold
Reserve Act of 1934, with foreign monetary authorities, with the Bank
for International Settlements, and with other international financial
institutions:
Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks
Italian lire
Japanese yen
Mexican pesos
Netherlands guilders
Norwegian kroner
Swedish kronor
Swiss francs
B. To hold balances of, and to have outstanding forward contracts to
receive or to deliver, the foreign currencies listed In paragraph A above.
C. To draw foreign currencies and to permit foreign banks to draw dollars
under the reciprocal currency arrangements listed In paragraph 2 below,
provided that drawings by either party to any such arrangement shall be
fully liquidated within 12 months after any amount outstanding at that time
was first drawn, unless the Committee, because of exceptional circumstances,
specifically authorizes a delay.
D. To maintain an overall open position in all foreign currencies not
exceeding $8.0 billion. For this purpose, the overall open position in all

foreign currencies is defined as the sum (disregarding signs) of net posi
tions in individual currencies. The net position in a single foreign
currency is defined as holdings of balances in that currency, plus out
standing contracts for future receipt, minus outstanding contracts for
future delivery of that currency, i.e., as the sum of these elements
with due regard to sign.
2.
The Federal Open Market Committee directs the Federal Reserve Bank of
New York to maintain reciprocal currency arrangements (NswapM arrangements)
for the System Open Market Account for periods up to a maximum of 12 months
with the following foreign banks, which are among those designated by the
Board of Governors of the Federal Reserve System under Section 214.5 of
Regulation N, Relations with Foreign Banks and Bankers, and with the approval
of the Committee to renew such arrangements on maturity:

Foreign bank
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
RegularSpecial
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International Settlements:
Dollars against Swiss francs
Dollars against authorized European
currencies other than Swiss francs

Amount of arrangement
(millions of dollars
_____ equivalent)
250

1,000
2,000
250
3.000

2.000
6,000
3.000
5.000
700
325
500
250
300
4,000
600
1,250

Any changes in the terms of existing swap arrangements, and the proposed
terms of any new arrangements that may be authorized, shall be referred
for review and approval to the Committee.

3. All transactions in foreign currencies undertaken under paragraph
1(A) above shall, unless otherwise expressly authorized by the Connittee,
be at prevailing market rates. For the purpose of providing an Investment
return on System holdings of foreign currencies, or for the purpose of
adjusting Interest rates paid or received in connection with swap drawings,
transactions with foreign central banks may be undertaken at non-market
exchange rates.
4. It shall be the normal practice to arrange with foreign central banks
for the coordination of foreign currency transactions. In making operating
arrangements with foreign central banks on System holdings of foreign
currencies, the Federal Reserve Bank of New York shall not commit Itself
to maintain any specific balance, unless authorized by the Federal Open
Market Committee. Any agreements or understandings concerning the
administration of the accounts maintained by the Federal Reserve Bank of
New York with the foreign banks designated by the Board of Governors under
Section 214.5 of Regulation N shall be referred for review and approval to
the Committee.
5. Foreign currency holdings shall be Invested insofar as practicable,
considering needs for minimum working balances. Such investments shall be
in liquid form, and generally have no more than 12 months remaining to
maturity. When appropriate in connection with arrangements to provide
investment facilities for foreign currency holdings, U. S. Government
securities may be purchased from foreign central banks under agreements
for repurchase of such securities within 30 calendar days.
6. All operations undertaken pursuant to the preceding paragraphs shall
be reported promptly to the Foreign Currency Subcommittee and the Committee.
The Foreign Currency Subcommittee consists of the Chairman and Vice Chairman
of the Committee, the Vice Chairman of the Board of Governors, and such other
member of the Board as the Chairman may designate (or in the absence of
members of the Board serving on the Subcommittee, other Board Members
designated by the Chairman as alternates, and In the absence of the Vice
Chairman of the Committee, his alternate). Meetings of the Subcommittee
shall be called at the request of any member, or at the request of the
Manager for Foreign Operations for the purposes of reviewing recent or
contemplated operations and of consulting with the Manager on other
matters relating to his responsibilities. At the request of any member
of the Subcommittee, questions arising from such reviews and consultations
shall be referred for determination to the Federal Open Market Committee.
7.

The Chairman is authorized:

A. With the approval of the Committee, to enter Into any needed
agreement or understanding with the Secretary of the Treasury about the
division of responsibility for foreign currency operations between the
System and the Treasury;
B. To keep the Secretary of the Treasury fully advised concerning
System foreign currency operations, and to consult with the Secretary on
policy matters relating to foreign currency operations;

C. From time to tlae, to transmit appropriate report* and lnforaatlon
to the National Advisory Council on International Monetary and Financial
Policies.
8. Staff officers of the Coamlttee are authorized to transmit pertinent
information on System foreign currency operations to appropriate officials
of the Treasury Department.
9. All Federal Reserve Banks shall participate in the foreign currency
operations for System Account in accordance with paragraph 3 G(l) of the
Board of Governors' Statement of Procedure with Respect to Foreign
Relationships of Federal Reserve Banks dated January 1, 1944.

FOREIGN CURRENCY DIRECTIVE
In Effect January 1. 1982
1. System operations in foreign currencies shall generally be directed at
countering disorderly market conditions, provided that market exchange rates
for the U. S. dollar reflect actions and behavior consistent with the IMF
Article IV, Section 1.
2«

To achieve this end the System shall:
A.

Undertake spot and forward purchases and sales of foreign exchange.

B. Maintain reciprocal currency ("swap**) arrangements with selected
foreign central banks and with the Bank for International Settlements.
C. Cooperate in other respects with central banks of other countries
and with International monetary institutions.
3.

Transactions may also be undertaken:

A. To adjust System balances in light of probable future needs for
currencies.
B. To provide means for meeting System and Treasury commitments in
particular currencies, and to facilitate operations of the Exchange
Stabilization Fund.
C. For such other purposes as may be expressly authorized by the
Committee.
4.

System foreign currency operations shall be conducted:

A. In close and continuous consultation and cooperation with the United
States Treasury;
B.

In cooperation, as appropriate, with foreign monetary authorities;

and
C. In a manner consistent with the obligations of the United States
in the International Monetary Fund regarding exchange arrangements under the
IMF Article IV.

Annex I I I

Federal Reserve Purchases
of Foreign Government Debt
October 1980 - January 1983
(millions of dollars equivalent)
3 months ending

End of period

Average Purchase

Number of
transactions

Size

$194.0

1.67

$ 62

April

171.1

3.88

1488

July

236.2

4.53

2246

October

141.7

2.22

2273

January

73.3

3.16

1306

April

94.9

2.98

1474

July

110.3

2.99

1137

October

88.8

2.99

1254

1.72 }/

1367

Months Held 1/

Amount
outstanding

1981
January 2/

1982

1983
January

2/ Weighted by transaction size

2/ Four-month period
3/ Through January

138.9

Annex IV

Days on Which Foreign Currency Assets Have Been Used as
Collateral for Federal Reserve Notes
By Specific Reserve Bank Issuers
(millions of dollars equivalent)
Federal Reserve Bank of Boston

Apr. 21
24
28

$ 12
38
17

5
7
12
13
27

18
37
64
97
9

June 9

45
109
1
27

May

1982

1981

10
23
30

July 1
10

18
49

13
14

$ 82
64
28
36
31
5
55
8
45
15
104
71
106
102
121
73
22

Nov. 17
18
24
27
30

2
3
4
7
8
9
15
16
18
21
22
23
24
28
29
30

49
76

Dec. 1

51
45
20
31
57

Oct.

1982
5
6
7

8
106
196

Apr. 6
7
13
14

246
239
42
1

4
5
8
9
10
31

125
86
188
216
235
64

July 7

1982
Mar.

6
13
19

$ 88

Mar.

8
9
10

9
77
90

Apr.

7
13
14

93
25
27

June 30

July 6
7
8

43
81
7

9
10
11
15
16

15
18
18
25
5

Nov.

Federal Reserve Bank of Richmond
1981

Jan.

31
8

- 2 -

Federal Reserve Bank of Kansas City
1983

1982

6
7
12
14

$ 76
183
31
51

15
29

17
11

121
40
40
52
69
39
50
10
18
14

11
12
13
14

21
28
29

1
2
3
4
5
8
9
10

15
16
18
19
23
24
25
26
29

Dec.

30
25
66
38
91
42
75
60
60
47
2
51
17
23
107
107
82
3

1
2
3
6
7
8
9
10
13
14
15
16
17
21
22
23
24
27
28
29
30
31

$ 89
82
13
75
213
191
108
14
77
45
10
66
44
85
153
133
134
87
187
205
143
107

Federal Reserve Bank of Philadelphia
1982
8
22
28
29
30

30
21
36
57
12

Jan.

3
5
6
7
10
11
12

Full text of Statements and Speeches of J. Charles Partee : Statement before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives

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