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NEWS RELEASE FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, D. C. 20429 | teph_ 3 93-8400 Br. 221 FOR RELEASE TO HEWS MEDIA FRIDAY P*M*, APRIL 3, PR-28-61+ ( ii—1-6^ ) Bold policy pronouncements by President Kennedy in 1961 and the imaginative leadership of the Treasury and the Federal Reserve in our foreign monetary relationships have strengthened the prestige of the American d o llar and reduced U.S. gold lo sse s, declared Joseph W. Barr, Chairman, Federal Deposit Insurance Corporation, in a speech today on the 'Balance of Payments Record: 1961-1961+” , before the 70th annual convention of the Florid a Bankers Association at Miami Beach. Mr. Barr said that at that time when losses of gold reserves were running at the rate of $5 b illio n a year and a d o llar c r is is threatened, President Kennedy, using the ''jaw-bone” technique fam iliar to the "1920 banker,” pledged to the world that th is country would defend the d o llar; liv e up to i t s international agreements and retain it s position as the fo cal point of the free world's fin an cial mechanism. Through foreign exchange measures worked out, the Treasury and Federal Reserve System in cooperation with world monetary agencies under the Bretton Woods and Basle agreements, the la te President's pledge has stood unshaken despite several world fin an cial shocks, Mr. Barr said, though he cautioned that i t is no time fo r complancency. While expressing confidence that the s t a b ilit y of the d o llar w ill be maintained, Mr. Barr declared that there is no illu sio n a t the Treasury or the Federal Reserve System that these measures are a substitute fo r the underlying d e fic it in our balance of statements. Continuing, he said: " I t was recognized from the f i r s t that la stin g balance of payments improvement would have to be achieved within the framework of an international fin an cial system secure from speculative threat and waves of currency liquidation. We have benefited from the active and w illin g assistance provided by foreign monetary authorities who recognize the key position the d o llar occupies and the great productive strength upon which i t re sts. * "The record of responsible fin an cial cooperation is a good one and one which I am proud to have been associated. Recent balance of pay ments trends have been extremely encouraging. No doubt the f i r s t quarter of th is year, ju st now concluded, w ill have seen the balance of payments d e fic it on regular transactions again reduced very sharply. The task now is to maintain the momentum of that improvement and remove our balance of payments d e fic it altogether. 'The fundamental lesson of these past years is the pre-eminent importance of active international cooperation. We have learned domestically that fin an cial in stitu tion s must have the freedom to compete, but that we must also cooperate to insure that the o verall national fin an cial structure is secure. Sim ilar lessons are being learned intern ationally. As a competitive international economy and the free flow of currencies have been achieved, i t has also been e ssen tial to cooperate in the evolutionary development of a more secure international fin an cial system. "There is an obvious lesson here fo r the American fin an cial community. I t has always been fie r c e ly competitive, but I am convinced of the need to keep th is competition within bounds. As internecine war between State banks and national banks; between commercial banks and savings and loans; between banking and branch banking -- waged unrelentingly, could bring d isaster to a l l of u s." NEWS RELEASE FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, D. C. 20429 Telephone: 393-8400 Br. 221 FOR RELEASE TO NEWS MEDIA FRIDAY P.M., APRIL 3, 1964 BALANCE OF PAYMENTS RECORD: 1961 - 1964 Address of JOSEPH W. BARR, CHAIRMAN FEDERAL DEPOSIT INSURANCE CORPORATION Washington, D. C. at the 70th ANNUAL CONVENTION o f the FLORIDA BANKERS ASSOCIATION at the Fontainebleau Hotel Miami Beach, Florida Friday, A p ril 3, 1964 V BALANCE OF PAYMENTS RECORD: 1961 - 1964 When President Johnson swore me into my present o ffic e with the Federal Deposit Insurance Corporation, he instructed me to remember 1933 and 1934. The President had come to Washington as Assistant to Congressman Dick Kleberg o f Texas in those te rrib le days and he remembered v iv id ly the fin an cial c r is is that gripped the country. Unfortunately, I can only vaguely re c a ll some boyhood memories o f those days and rereading the history never re a lly captures the fla v o r of the occurrence. However, I have recently completed three years with the United States Treasury as Assistant to the Secretary and the international fin an cial problems that we faced in those years gave me some insight into the problems that were faced by the banking community before the creation of the Corporation which I now head. - 2 - I am certain that the waves of bank fa ilu re s and the . almost complete loss o f confidence in the domestic banking system w ill not occur again. I am ju st as certain that the international s t a b ilit y of the dollar w ill be maintained. But the past three years in the Treasury taught me firsthand some of the lessons that an e a rlie r generation of bankers learned so w ell in the 19 30 's, Though ray experience was concerned with international rather than domestic finance the p o te n tia litie s in the d ifferen t settings followed much the same pattern, commencing with vague fears developing into apprehension and panic, the ensuing scramble fo r funds, and then the necessary countermeasures of marshalling resources to meet withdrawals and thereby maintain confidence. In th e ir en tirety both experiences demonstrated that the vigor of a fin an cial system depends on the soundness o f each of it s component. Now that I am away from the Treasury, I think i t is appropriate and proper to review with you th is three-year period in our international fin an cial h isto ry and to pay a special tribute to two men who helped bring th is country through a d iffic u lt period - 3 of economic and fin an cial adjustment -- Secretary of the Treasury Douglas Dillon and Under Secretary fo r Monetary A ffa irs Robert V. Roosa. The history of th is period r e a lly begins not in 1961, but with the Bretton Woods Agreement, reached by the United States and most of the free world in 19W-. of the Bretton Woods Agreement: The two p rin cipal instruments The World Bank and the International Monetary Fund were designed to bring some order into a disrupted world economy, and to work toward an eventual restoration o f an international fin an cial system in which currencies could move fre e ly between nations. during World War I . This freedom of circu lation had ceased The interwar restoration of currency con v e r t ib ilit y rested upon shaky foundations which were carried away by the Great Depression. Hence, the task at Bretton Woods was to recreate an environment within which both domestic and in te r national objectives could be achieved -- an environment which had not flourished for some three decades. - h - The Bretton Woods Agreement probably succeeded fa r beyond the expectations o f any o f the people who participated in i t s creation. Europe and Japan, with the help o f the World Bank and our aid program recovered to an amazing degree and by 1959 most o f the nations of Western Europe had subscribed to A rticle V III of the International Monetary Fund Agreement formally providing fo r free co n vertib ility of th e ir currencies. This was a milestone in the postwar establishment of a competitive international economy but i t had rather unexpected repercussions. The most unexpected was that i t revealed fo r the first.tim e that the United States could no longer expect to continue i t s policy of spending and lending more in the world than i t earned. This country had consistently run an overall d e fic it in i t s international accounts during the decade of the F if t ie s but i t excited no p articu lar concern because in effect we were merely redistributing the monetary reserves o f the world. Unless we had kept these reserves in circu latio n , we would have - 5 - ended up with a l l of them, and no country would have had the means to buy from us. over. In other words, the game would have been However, by 1959 "the countries o f Western Europe and Japan by th e ir vigorous recovery and by th e ir accumulation of our reserves were in a position to take th e ir old place o f power in the international fin an cial scene. We had a certain amount of d iffic u lt y in th is Nation recognizing that we had accomplished the goal o f the Bretton Woods Agreement and that now a certain amount o f prudence in our fin an cial a ffa ir s was called fo r. The d e fic its o f 195^^ 1959 and i960 fin a lly shocked the country into an understanding of the new order in which we were liv in g . These d e fic its totaled over $11 b illio n and our lo ss of gold reserves during the same three years amounted to $^.7 b illio n . This was the background fo r the Inaugural week of 19 6 1. The country had passed through an extremely close and hotly contested election — a quadrennial phenomenon that always - 6 - seems to amaze and d istress our friends in Europe and Japan. We had lo st a to ta l o f almost $1 b illio n gold reserves in the months o f October, November and December and our losses by the third week o f January were running at an annual rate of $5 b illio n a year. Unquestionably something had to be done in a hurry. The f i r s t weapon used by the la te President Kennedy was one that would be completely fam iliar to a 1920 banker — th is was the "jaw bone" technique. He announced firm ly to the world that the United States would defend the d o llar; liv e up to it s in te r national agreements and retain i t s position as the fo cal point of the free world’ s fin an cial mechanism. The e ffe c t of th is announcement was e le c trify in g . Speculation on a breakdown in the relationship between gold and the d o llar faded away. In October i960 the London gold market had become temporarily unhinged and the price of gold shot up to §k0 an ounce. The gold market had remained jit t e r y , but following President Kennedy’ s pledge, the London gold price declined stead ily - 7 - and stab ilized around $35.08 -- approximately the U.S. Treasury se llin g price of $35*00 an ounce plus l /4 percent service charge. The f i r s t serious c r is is had been surmounted; the new Administration had met i t s f i r s t fin an cial resp o n sib ility. It should be noted, in passing, that the outgoing Eisenhower Administration acted fo rth righ tly in issuing an Executive Order designed to prevent speculation in gold by U.S. citiz e n s, rather than simply passing the buck to the new Administration. Fortunately, both of our p o lit ic a l p arties closed ranks in defense of the d o llar. The next shock to international fin an cial s t a b ilit y was not long in coming. Over the weekend of March 4-5 the German mark was revalued ( i . e . , i t s gold value was increased) by 5 percent and the Dutch guilder followed su it. very strong in exchange markets. The mark had been In seeking to prevent domestic in fla tio n , the West German monetary authorities had e a rlie r raised th e ir in terest rates. However, the only e ffe c t was to - 8 - attra c t a flood of foreign c ap ital and further strengthen a mark that vas already too strong fo r the ccmfort of many other countries. F in a lly , the Germans decided to raise the external value of th eir currency and the Dutch followed because of the closeness o f th e ir trading relationship. The comparatively small size o f the German revaluation led many -to expect a further revaluation in the near future and caused them to buy marks fo r present and future delivery. Others in the market f e l t that the change in the value of the mark was bound to weaken ste rlin g and possibly cause i t s devaluation. There was a massive movement of funds frcm England to the Continent. attack. The d o llar, i t s e l f , was not under speculative However, the bulk of exchange market trading does take place through the use o f d o llars. In the spring o f 196 1 the fact that the d ollar was being used as a vehicle currency meant that i t came under heavy pressure in German exchange markets as i t was sold for marks. 9 - While the German central hank stab ilized the spot exchange market by supplying marks against foreign currencies, the postwar IMF agreements made no e x p lic it provision for stab ilizatio n of the forward exchange market -the foreign exchange equivalent of a commodity futures market. The U. S. Treasury, operating through the New York FederalReserve Bank, in close cooperation with the German monetary au th orities, undertook to sta b iliz e the forward market in marks and d o llars. This market had temporarily been subject to severe strain s growing out of the mark revaluation and the uncertainties that followed. The appearance of sizable discounts on the d ollar in the forward exchange market tended to cause extra accumulation o f d ollars by the German central bank and a potential claim on our gold stock. The precedent-shattering intervention by the U.S. Treasury was en tirely successful in calming the market and preventing speculative forces from 10 gaining momentum. Perhaps as important as the technical success o f the forward exchange operation, repeated la te r in 1961 with the Swiss franc and subsequently with other currencies in a variety of d ifferen t circumstances, was the important fact of mutual cooperation between U. S, and foreign monetary authorities. Speculation was dampened and the position of the dollar safeguarded. The main backwash of the German revaluation engulfed the pound sterlin g and threatened to force it s devaluation. In view of the importance of sterlin g as a trading and banking currency th is meant that the entire structure of international exchange rates was jeopardized. Had i t been the dog-eat-dog situation of the 1930’ s, there is no doubt what the outcome would have been. But the United Kingdom and the European countries were resolved to defend the currency c o n vertib ility they had only recently and laboriously established. The resu lt was the Basle Agreement. Its name arose from the fa c t that governors of the various European central banks met - 11 monthly at the Bank fo r International Settlements at Basle, Switzerland. The European central bankers agreed in e ffe c t to relend to the B ritish the massive flow of hot money which was disrupting international fin an cial networks. It was estimated at the time that more than $900 m illion of support was given to the B ritish under the informal Basle Agreement. Because the countermeasures were so sw ift and th eir scale so impressive, the speculative attack was thwarted and international monetary cooperation had won another impressive victory. The short-term credit o rig in a lly extended under the Basle Agreement was la te r refinanced, in part, by a B ritish drawing upon the International Monetary Fund. The overwhelming need had been for prompt action. Given co llective recognition of th is need, the d etails of the refinancing could be worked out la te r, as they were, very successfully. Developments in the f i r s t h a lf of 1961 t e s t ifie d to the effectiven ess of cooperative action between countries. They also 12 revealed that with currencies fre e ly convertible, destabilizin g cap ital movements could pose a real threat to international fin an cial s t a b ilit y . The Basle Agreement had been an inspired piece o f improvisation but many fin an cial experts fe lt that more permanent arrangements would be useful in meeting future th reats. From early spring 1961 u n til the end of the year, negotiations were conducted between ten in d u strial countries: The United States, West Germany, United Kingdom, France, I t a ly , Japan, Canada, Netherlands, Belgium, and Sweden. Extensive discussion of ways in which any impairment of the international monetary system might be fo restalled also took place at the 1961 meeting o f the international Monetary Fund in Vienna. These discussions led to the decision taken by the Executive Board o f the International Monetary Fund in January 1962 to provide fo r supplemental standby exchange resources of $6 b illio n to be loaned, under c learly specified circumstances, by the ten in d u strial countries. This agreement known as the General Arrangement to Borrow insured that - 13 i f the need should a rise the International Monetary Fund could speedily mobilize extra resources to cope with serious speculative disturbances. Ju st a month a fte r the IMF decision on the General Arrangements to Borrow, another important strengthening of the international fin an cial mechanism occurred when the Federal Reserve System, i t s e l f , decided to undertake foreign exchange operations. While the Treasury forward exchange operations were exceedingly valuable, they were necessarily somewhat lim ited in potential scope by the comparatively modest resources of the Treasury1 s Exchange Stab ilizatio n Fund. Federal Reserve o f f ic ia ls , with the f u l l approval of the Treasury, examined the p o s s ib ilitie s of reactivatin g Federal Reserve exchange operations. A fter carefu l study, the Federal Open Market Committee in February 1962 authorized open market transactions in foreign currencies. This meant that the weight and prestige of the Federal Reserve - 14 were fu lly committed to protect the external value o f the d o llar, ju st as they have long been committed to the protection of i t s internal value. The basic technique o f Federal Reserve foreign exchange operations has been the establishment o f a network of central bank reciprocal currency agreements, the so-called "swap" network. The d e ta ils of these swap arrangements can become extremely complicated but I w ill stick to the e ssen tials. They simply involve an agreement between the Federal Reserve and a foreign central bank to exchange each other’ s currencies up to certain amounts for a specified term. the swap on a standby b asis. The agreement i t s e l f only places I f a drawing i s actu ally made under a swap agreement, the central banks cross credit each other’ s accounts and agree to reverse the transaction, usually in three months’ time. The proceeds — say, the dollars received by the Bank of England in exchange fo r ste rlin g — may then be used in temporary exchange support operation. Nothing would prevent a - 15 - swap drawing from being ro lled over several times. However, i t has ordin arily seemed more desirable to use the swap technique only for reversib le operations. Ju st four swap agreements of $50 m illion each had been concluded with France, England, Netherlands, and Belgium by June of 1962. During June 1962 the Canadian d ollar came under very heavy se llin g pressure in the exchange markets. Between June 1 and June 25 almost h a lf o f Canada’ s gold and dollar reserves were used up. This threatened the newly established par value of the Canadian d o llar and could e a sily have led to a world-wide burst o f speculation against other currencies. Within four days, and very busy days they were, a combined program of over $ 1 b illio n in short-term credits was developed for Canada. The new swap technique played a pivotal role as :‘the Federal Reserve and the Bank of Canada concluded an agreement for $250 m illion. In addition, the Export-Import Bank granted Canada a $400 m illion standby cred it, the Bank of England - 16 opened a $100 m illion credit fo r the Bank of Canada, and the Canadians arranged a $300 m illion drawing upon the International Monetary Fund. This massive display of fin an cial s o lid a rity , along with monetary and f is c a l measures announced by the Canadians, broke the speculative attack and the reflow o f funds to Canada soon began in large volume. By February of th is year the network o f Federal Reserve swap arrangements had grown to an aggregate amount o f ju st over $2 b illio n involving twelve d ifferen t foreign monetary in stitu tio n s. Most of these arrangements were simply standby in character, availab le for reciprocal use i f needed. During the period from March 1962 through February 196k, to ta l drawings under swap agreements were ju st over $ 1.6 b illio n , while to ta l repayments were ju st under $1.3 b illio n . The net debtor position at the end of February o f the Federal Reserve System was $1^-5 m illion. As I mentioned e a r lie r , i t has been our policy not to use the swap credit except for. very short-run financing. - 17 Instead, beginning la te in 1962, the U.S. Treasury has issued medium-term secu rities payable in lo c a l currencies to foreign monetary au th orities. These "Roosa bonds" as they are frequently termed in the press, provide foreign central banks with a medium-term interest-earning asset and play a valuable role in holding the drain upon our gold stock to minimum proportions. Each issue of these bends, ranging in maturity from 15 to 2k months, is the outgrowth o f close consultation and discussion between our own and foreign monetary au th orities. There i s no compulsion involved, simply a recognition that there i s a need fo r a medium-term credit instrument a ttra c tiv e to foreign d o llar holders during the tran sitio n al period u n til our balance o f payments d e fic it i s removed. The aggregate amount of these foreign security issues outstanding at the end o f February 19&k was $730 m illion. Along with other special transactions, the sale of these bonds has played a cru cial role in conserving our gold stock. - 18 Cooperative e ffo rts with foreign governments to sta b iliz e the London gold market have forged a fin a l lin k in the chain of our fin an cial defenses. autumn o f 1961. The in i t i a l steps were taken in the On both sides of the A tlantic there was recognition of the need to avoid disorderly conditions in the gold market. Any repetition of the October i960 gold scare was sure to shake the foundations o f the entire international fin an cial system. When seme pressure did again begin to build up in the gold market in late 1961 an informal gold pool agreement was reached between th is country and Belgium, France, Germany, I t a ly , the Netherlands, Switzerland, and the United Kingdom. This called fo r each country to ante up a certain amount o f gold — the U.S. share was 50 percent of the to ta l — to be used in making net sales in the market i f required to hold the price down. The i n i t i a l experiment was highly successful. In 1962 when i t became apparent that there would temporarily be a - 19 surplus of gold on the market instead of a shortage, the United States approached the same countries and suggested that a gold buying arrangement be in itia te d as w ell. This met with approval. The net resu lt has been that o f f ic ia l gold buying and se llin g operations have been coordinated to achieve a common goal — the e ffe c tiv e stab ilizatio n of the London gold market. This, in turn, has meant that the cru cial relationship between gold and the d o llar has been protected. The fixed price o f gold i s the keystone upon which the entire postwar international fin an cial system has been b u ilt. In cooperation with foreign monetary au th orities, we have succeeded in sta b iliz in g the gold market even when i t has been subjected to severe shocks — shocks which, in the absence of cooperative e ffo r ts , might have sent the price of gold skyrocketing. The effectiven ess of cooperative action by our own and foreign monetary authorities in exchange and gold markets has 20 - been impressively demonstrated upon a number of recent occasions. A fter the stab ilizatio n of the Canadian d ollar in the summer of 1962, exchange and gold markets remained somewhat uneasy, p artly because of world-wide declines in stock market p rices. As things began to return to normal, the Cuban confrontation leading to the eventual removal of Soviet m issiles, set the hot money flows to moving. The extensive system of international cooperation was very e ffe ctiv e in minimizing the disturbance to fin an cial markets and preventing any snowballing speculative movements from occurring. Late in January 1963 the B ritish bid fo r membership in the Common Market was rejected and ste rlin g came under pressure in the exchange markets. Previously, ste rlin g had been re la tiv e ly strong and the Federal Reserve had actu ally been drawing ste rlin g under the swap agreement for routine support of the d o llar. Quickly the Federal Reserve switched and purchased ste rlin g . The Federal Reserve also stood ready to increase the credit available to the Bank of England under the swap agreement. However; from a l l indications; the speculative flow of funds away from London was going to the Continent. Consequently; the Bank of England negotiated $250 m illion of short-term credit d ire c tly from Continental central banks. The mere announcement o f these credits was su ffic ie n t to sta b iliz e sterlin g which soon strengthened. One outgrowth of the 1963 experience was the agreement announced on May 29 of the increase in the swap lin e between the Federal Reserve and the Bank of England from $50 to $500 m illion. This was tangible evidence o f firm agreement between th is country and the B ritish that the d o lla r, ste rlin g , and gold would be defended against speculative attack. The strength and re silie n c y o f present international fin an cial arrangements in the face of severe shocks to public confidence were amply shown in the somber hours and days that - 22 - followed President Kennedy^ assassination. European exchange markets were closed at the time of the trag ic news. The Federal Reserve Bank of New York, acting fo r the System, placed sizable o ffe rs for foreign currencies to demonstrate the continuity of U.S. p o licy. Welcome cooperation frcm the Bank of Canada insured that Canadian as w ell as our own exchange markets remained calm. Telephone contacts with European central banks quickly established the plan for a jo in t program of o f f ic ia l intervention. When European exchange markets opened on Saturday, there was no panic se llin g of d o llars. The fact o f cooperative o f f ic ia l action i t s e l f , when known to the market, was su ffic ie n t to a lla y an xieties, and the d o llar remained strong. Ju st la s t month the a b ilit y o f prompt countermeasures to stem speculative tendencies was again demonstrated — th is time in the case o f the Ita lia n l i r a . Ita lia n productivity has grown very rapidly but domestic in fla tio n has contributed - 23 to the development of a sizable balance of payments d e fic it. The Ita lia n government has stated that Ita ly * s program to correct i t s balance o f payments i s expected to become fu lly e ffe ctiv e th is year. However, when speculative pressures against the l i r a began to develop strength la s t month, i t was considered to be prudent to strengthen the Ita lia n position so that short-term disturbances would not impede the effectiven ess o f the Ita lia n programs, A package of credits to talin g about $1 b illio n was made availab le to It a ly from the U.S. Treasury, the Export-Import Bank, the Commodity Credit Corporation and from other nations. The l i r a improved sharply and there i s every reason to believe that the Ita lia n s w ill now be able to move ahead successfully with th e ir balance of payments program. Ho one at the Treasury or the Federal Reserve System has been under the illu s io n that the fin an cial measures I have described were in any sense a substitute fo r removal o f the underlying d e fic it in our balance of payments. However, i t was recognized from the f i r s t that la stin g balance o f payments improvement would have to be achieved within the framework of an international fin an cial system secure from speculative threat and waves of currency liquidation. We have benefited from the active and w illin g assistance provided by foreign monetary authorities who recognize the key position the d ollar occupies and the great productive strength upon which i t re sts. The record o f responsible fin an cial cooperation i s a good one and one with which I am proud to have been associated. Recent balance of payments trends since the program announced: by President Kennedy la s t Ju ly was set in motion have been extremely encouraging. Wo doubt the f i r s t quarter of th is year, ju st now concluded, w ill have seen the balance o f payments d e fic it on regular transactions again reduced very sharply. The task now i s to maintain the momentum o f that improvement and remove our balance of payments d e fic it altogether. - 25 - The fundamental lesson of these past years is the pre-eminent importance of active international cooperation. We have learned domestically that fin an cial in stitu tion s must have the freedom to compete, "but that we must also cooperate to insure that the o verall national fin an cial structure is secure. lessons are being learned in ternationally. Sim ilar As a competitive international economy and the free flow of currencies have been achieved, i t has also been essen tial to cooperate in the evolutionary development o f a more secure international fin an cial system. Much more remains to be done. But when I r e fle c t upon the distance we have come, and the tryin g times through which we have moved, I am confident o f our eventual success. There is an obvious lesson here fo r the American fin an cial community. It has always been fie r c e ly competitive but I am convinced of the need to keep th is competition within bounds. An internecine war between State banks and national banks; between - 26 - commercial banks and savings and loans; between unit banking and branch banking—waged unrelentingly—could bring d isaster to a l l of us. This th esis, I might add, applies with equal force to the regulatory agencies. Most of the basic problems in banking emerged in an aggravated form and demanded attention in the 1930's . As I see i t , these problems are not amenable to complete and fin an cial solution: they are continuing rather than unique. Though I do not claim firsthand knowledge of banking in the 19 3 0 's, my three years of experience with the Treasury has given me a fin an cial background with comparable problems and situation s. And i t is against th is background that I can discharge the President's order to remember the dark times of the Great Depression.
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