This 1967 meeting of the FOMC nearly 46 years ago is clear and indisputable evidence of gold price suppression and currency manipulation of the world's "free" and "open" market exchanges.
This criminal cabal has certainly built up their mechanisms since this time to conceal their sinister scheme from issuing dishonest money. It's blatant now and all of "in your face" is their behavioral response to inquiry. Damn the torpedoes, full steam ahead.
Great snapshot into the scheming mind of those we've entrusted with our lives. These are minds without wholesome values or principles.
Remember, an ethical person knows the difference between right and wrong... but a moral person lives it. Because this evil cluster makes the laws to accommodate themselves, they want you to conclude they are "ethical". In the common man's mind these thieves are nothing but immoral. Our cultures, religions and values are embellished in our constitutions which are defined by values, not ethics.
If you find this too cumbersome to read, the Fed source is here in pdf format.
--------------------------------------- 1
MEMORANDUM OF DISCUSSION
A meeting of the Federal Open Market Committee was held in
the offices of the Board of Governors of the Federal Reserve System
in Washington, D. C., on Monday, November 27, 1967, at 9:30 a.m.,
at the call of Chairman Martin.
PRESENT: Mr. Martin, Chairman 1/
Mr. Brimmer
Mr. Francis
Mr. Maisel
Mr. Mitchell
Mr. Robertson
Mr. Scanlon
Mr. Sherrill
Mr. Swan
Mr. Wayne 1/
Messrs. Ellis, Hickman, and Galusha, Alternate
Members of the Federal Open Market Committee
Mr. Irons, President of the Federal Reserve Bank
of Dallas
Mr. Holland, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Broida, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Brill, Economist
Messrs. Baughman, Garvy, Hersey, Koch, Partee,
and Solomon, Associate Economists
Mr. Holmes, Manager, System Open Market
Account
Mr. Cardon, Legislative Counsel, Board
of Governors
Mr. Fauver, Assistant to the Board of
Governors
Mr, Williams, Adviser, Division of Research
and Statistics, Board of Governors
Mr. Reynolds, Adviser, Division of International
Finance, Board of Governors
1/ Left the meeting at the point indicated.
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11/27/67 -2
Mr. Axilrod, Associate Adviser, Division of
Research and Statistics, Board of Governors
Miss Eaton, General Assistant, Office of the
Secretary, Board of Governors
Miss McWhirter, Analyst, Office of the
Secretary, Board of Governors
Messrs. Bilby, Eastburn, Mann, Brandt, and
Tow, Vice Presidents of the Federal
Reserve Banks of New York, Philadelphia,
Cleveland, Atlanta, and Kansas City,
respectively
Mr. MacLaury, Assistant Vice President,
Federal Reserve Bank of New York
Mr. Deming, Manager, Securities Department,
Federal Reserve Bank of New York
Mr. Anderson, Financial Economist, Federal
Reserve Bank of Boston
Mr. Kareken, Consultant, Federal Reserve
Bank of Minneapolis
Before this meeting there had been distributed to the members
of the Committee a report from the Special Manager of the System Open
Market Account on foreign exchange market conditions and on Open
Market Account and Treasury operations in foreign currencies for
the statement week ended November 22, 1967. A copy of this report
has been placed in the files of the Committee.
In supplementation of the written report, Mr. MacLaury
remarked that the financial world was quite different today from
what it was when the Committee last met, less than two weeks ago:
sterling had been devalued and, to paraphrase Secretary Fowler, the
dollar had moved to the forefront in the defense of the international
financial structure. Mr. Coombs was in Europe, along with Under
Secretary Deming, Governor Daane, and President Hayes, trying to
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11/27/67 -3
hammer out an agreement among the financial allies of the United
States for dealing with the unprecedented pressures in the London
gold market that broke loose last week, as anticipated, following
sterling's devaluation. In a past report to the Committee Mr.
Coombs had described the sterling and gold markets as like twin
time bombs: if one exploded, the other would explode as well.
That had now happened.
Mr. MacLaury said he would comment first on developments
in the gold market. In the week preceding sterling's devaluation,
the pool's losses amounted to $68 million; this past week, the
pool lost $578 million. The latter week started relatively slowly
since the London market was closed on Monday. In order to fore
stall any breakout of the price that day in other continental
markets--mainly Zurich and Paris--arrangements had been made on
Sunday to have gold made available through the Bank for International
Settlements acting for the Bank of England as Manager of the pool.
Total sales by the pool on Monday amounted to $27 million, a large
figure by former standards but small in comparison with the rest of
the week. With the reopening of the London market on Tuesday, demand
increased each successive day. Sales on Tuesday were $44 million;
on Wednesday, $106 million; on Thursday, $142 million; and on Friday,
$259 million. Although the demand for gold would have been heavy
in any case following the sterling devaluation, a report on Monday
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11/27/67 -4
in the Paris newspaper Le Monde to the effect that the Bank of
France had withdrawn from the gold pool and that two other central
banks (of Belgium and Italy) were about to do the same undoubtedly
exacerbated the situation, as no doubt it was intended to. In point
of fact, the pool members had continued to support the pool's
operations this past week, and had agreed to make contributions to
the pool up to a cumulative total of $1,370 million. As of Friday
evening, a leeway of only $113 million remained under that total.
However, yesterday in Frankfurt there was agreement not to let the
pool operations falter, as was indicated in the public statement
issued yesterday by Chairman Martin and Secretary Fowler.1/ Turn
over in the London market was only about $35 million thus far
today, down considerably from the levels of last week.
1/ The statement referred to is given below:
"The Secretary of the Treasury and the Chairman of
the Federal Reserve Board made available a communique
issued in Frankfurt, Germany, today which reads as
follows:
"'The Governors of the Central Banks of Belgium,
Germany, Italy, Netherlands, Switzerland, United
Kingdom and the United States convened in Frankfurt
on November 26, 1967.
"'They noted that the President of the United
States has stated:
"'"I reaffirm unequivocally the commitment of
the United States to buy and sell gold at the
existing price of $35 per ounce."' (Footnote
continued on next page)
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11/27/67 -5
As yet, Mr. MacLaury noted, the recent huge gold sales by
the pool had not been reflected in gold losses by member countries.
That was because the Bank of England provides the supply of bars
to the London market from its own stocks during the month, with
settlement by the other members of the pool early in the succeeding
month. Thus, while the Treasury might get through this month
without showing any reduction in its gold stock (and with perhaps
$50 million in the Stabilization Fund), it would face the prospect
of selling $434 million of gold to the Bank of England early in
December, representing the U.S. share of the pool's losses of $723
million thus far in November. That figure made no provision for the
possibility that France might convert all or part of its November
dollar gains into gold, as reported in the press last week. Such
conversion could cost another $200 to $300 million of gold, judging
by the New York Bank's estimate of French reserve gains. Obviously,
statements of central bank solidarity such as that issued yesterday
(Footnote continued from previous page)
"'They took decisions on specific measures to
ensure by coordinated action orderly conditions
in the exchange markets and to support the present
pattern of exchange rates based on the fixed price
of $35 per ounce of gold.
"'They concluded that the volume of gold and
for ign exchange reserves at their disposal
guarantees the success of these actions; at the
same time they indicated that they would welcome
the participation of other central banks.'"
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11/27/67 -6
in Frankfurt would help calm market fears temporarily, and it was
his hope that last week's surge of demand would not be repeated
this week. But it would take more than statements to calm the
market if the Treasury's published figures began to indicate U. S.
gold losses of several hundred million dollars. In the short run
the Treasury might be able to limit the size of the losses shown
by the published figures by borrowing gold from the BIS through a
temporary gold-dollar swap. Such a palliative would be futile,
however, unless action was being taken at the same time to deal
with the problem of gold losses through the London market. Such
action was what the U.S. representatives were now working toward
at the current meeting in Frankfurt. It went without saying,
however, that the ultimate restoration of confidence in the dollar
would await action to correct the U.S. balance of payments deficit.
Before leaving the subject of gold, Mr. MacLaury said, he
should mention that with the cooperation of the U.S. Air Force the
Treasury and the Federal Reserve were involved in a crash program
to airlift gold from this country to London. Although under normal
circumstances the Bank of England supplied market demand during the
course of the month from its own reserves, private demand had been
so heavy this month that the Bank of England's readily available
supplies in London had been exhausted with last Thursday's transac
tions. Arringements had been made to have gold held in London by
the German lederal Bank and the BIS placed at the disposal of the
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11/27/67 -7
Bank of England, in sufficient quantity to meet immediate demands,
while "operation airlift" got into gear. While he would not go
into the details, it was a formidable task to ship hundreds of
tons of gold across the Atlantic and process them at the other
end.
Turning to sterling, Mr. MacLaury noted that the New York
Bank had provided a fairly detailed account of the final days of
the $2.80 parity in its written report on recent foreign currency
operations. As Mr. Coombs had mentioned at the previous meeting
of the Committee on November 14, various types of credit packages
were being discussed just prior to and at the time of the last
Basle meeting on the weekend of November 12. In essence, the
impasse was that continental central banks refused to provide
credit to the British in the form of guaranteed sterling holdings
although some of them were prepared to provide credit in the form
of currency swaps; the Bank of England, however, was not prepared
to take on any more short-term debt. At the initiative of
Governor Carli of the Bank of Italy, a proposal for a $3 billion
British standby credit from the Fund was considered, only to be
rejected by the Fund itself, and possibly by the British Government
as well, since it feared that unacceptable conditions might be
attached to long-term credit in any form other than guaranteed
sterling. The New York Bank's written report had quoted from Prime
--------------------------------------- 8
11/27/67 -8
Minister Wilson's explanation to the British public of the reasons
for devaluing the pound. He (Mr. MacLaury) would be remiss if he
did not add that President Stopper of the Swiss National Bank,
echoing a similar statement attributed to the German Federal Bank,
had said explicitly last week that the British could have had
additional credit if they had wanted it, and that insofar as
central bank credit was involved, no unacceptable conditions
would have been attached. The blunt fact was that the British
Government made the decision to devalue on its own accord.
Prior to the devaluation, Mr. MacLaury continued, personnel
at the New York Bank were awaiting word of completion of a credit
package as anxiously as was the market. On Thursday of that week,
however, their hope for maintenance of the existing sterling parity
began to fade fast when the news ticker carried a report that
Chancellor Callaghan had refused in Parliament to confirm or deny
rumors of a credit package. Market participants similarly inter
preted that refusal as confirmation of their worst fears, and they
sold sterling from morning till night on Friday at an unbelievable
rate, draining more than $1 billion from British reserves on that
single day. Less than half that amount was promptly reflected in
reserve gains of major countries, and the presumption was that
much of the difference was placed temporarily in the Euro-dollar
market or represented short selling.
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11/27/67 -9
On Monday following devaluation, Mr. MacLaury said, the
exchange markets were, of course, stunned and there was little real
trading, especially since London was closed. Market participants
were preoccupied with trying to assess the damage, keeping track
of what other currencies were being devalued, straightening out
trading positions in sterling (a subject to which he would return
in a moment), and, of course, watching developments in the gold
market.
Tuesday was the first day of real trading, and even then
quotations for most currencies were wide and forward quotations
non-existent. Sterling, however, was at the new ceiling of $2.42
and the Bank of England took in $500 million. During the final
three days of the week, however, British reserve gains were not
very large, given the circumstances; they aggregated about $250
million, excluding the dollars taken in against market sales of
gold.
Thus, in the first week following devaluation the British
had recouped less than three-quarters of what they lost on the
preceding Friday alone. Although it was too early to tell, the
British might have some uneasy times before they were out of the
woods, despite the 14.3 per cent devaluation and apparently
stringent domestic measures.
As the Committee knew, Mr. MacLaury remarked, last Tuesday
the Bank of England drew the full $500 million still available
under its swap line with the System to make payments against their
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11/27/67 -10
purchases of sterling on the preceding Friday. At the same time
the British liquidated their remaining holdings of U.S. agency
securities, paying out the proceeds. He expected that the Bank
of England would be repaying some amount of its swap drawings
today. Although he did not know that amount at the moment, part
of it probably would be financed by use of dollars taken in
against market gold sales. If so, the British would need addi
tional dollars by the date of the pool settlement, and hopefully
they would have acquired them in market transactions.
Mr. MacLaury then said that he would digress from his
report on market developments at this point to discuss the sales
of sterling to U.S. commercial banks on a short-term (two- or
three-day) swap basis on Tuesday and Wednesday of last week, for
System and Treasury account respectively. A separate memorandum
on that technically complicated question was in preparation and
would be distributed to the Committee as soon as Mr. Coombs had
had a chance to review it. However, since the Committee would
be asked to ratify and confirm those transactions today, he would
do his best to explain the matter succinctly.
On the Friday prior to sterling's devaluation, Mr. MacLaury
observed, banks were inundated with offers of forward sterling from
their commercial customers and correspondent banks. Since for all
practical purposes it was impossible for the banks in turn to lay
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11/27/67 -11
off those offers in the forward market, they had two alternatives:
they could refuse to quote a rate to their customers, or they could
lay off sterling in the spot market where the Bank of England was
a steady buyer. Even in normal market circumstances, the latter
was the method used by the banks to keep their over-all positions
even, adjusting the time spectrum of their "books" subsequently.
Under the highly abnormal circumstances that day, the banks found
they had no choice but to sell out cash sterling balances they did
not have, anticipating that they could buy in those balances on
Monday in time to meet delivery commitments Tuesday. It was worth
emphasizing that the banks were not going short on sterling; rather,
they were acting to avoid being long as a result of customer sales
of sterling to them. When the British suddenly declared Monday to
be a bank holiday in London, many of the U.S. banks in question
found that they were not going to be able to deliver on their
sterling commitments on Monday in the manner they had anticipated.
Their predicament was brought to the attention of the New York
Reserve Bank on Sunday and it was taken up by the Foreign Exchange
Committee the following morning. That Committee, composed mainly
of the heads of the foreign departments of the major New York
banks, recommended that the Federal Reserve survey banks to
ascertain the dimensions of the problem, and that it act to
prevent defaults or losses by those banks that could certify
--------------------------------------- 12
11/27/67 -12
that their short cash positions were attributable to transactions
undertaken at the initiative of their commercial customers or
correspondent banks and were not the result of over-all short
positions undertaken by the banks themselves.
The New York Reserve Bank staff was convinced that the case
put to it was legitimate, Mr. MacLaury noted. It was also convinced
that failure on its part to act would be detrimental to the reputa
tion of the New York foreign exchange market and--unjustly--to the
banks involved, and would also threaten to produce disorderly
conditions in the exchange markets when sterling trading opened
on Tuesday.
Because of the limited time available, the New York
Bank's staff simultaneously surveyed the positions of foreign
exchange banks throughout the country with the assistance of the
other Reserve Banks, sought the views of the Bank of England--which
concurred in a proposal that the System use holdings of guaranteed
sterling for the operation--and submitted the proposed transaction
for approval to the Subcommittee of the Federal Open Market
Committee established by paragraph 6 of the authorization for
System foreign currency operations. The Subcommittee's approval
was sought because an operation of the type under consideration
was not explicitly authorized by the foreign currency directive,
and there was insufficient time to consult with the members of
the full Committee.
--------------------------------------- 13
11/27/67 -13
With the concurrence of a majority of the Subcommittee,
Mr. MacLaury observed, the New York Bank sold to commercial banks
a total of $87.2 million of sterling, value Tuesday, at $2.40 and
repurchased an equivalent amount, value Friday, at $2.3925. The
spread of 75 points between the two prices reflected the Bank's
estimate of the market discount, as closely as that could be
gauged under the circumstances. A similar operation, in the
amount of $22.2 million, was carried out for Treasury account,
value Wednesday, with repurchase value Friday.
He was convinced that those operations did much to prevent disorderly conditions
in the exchange markets that would otherwise have resulted from
the unanticipated closing of the London market, without in any
way bailing out speculators against sterling. Certificates from
the banks involved attesting to their positions in sterling were
on file at the Federal Reserve Bank of New York.
Before turning to other currencies, Mr. MacLaury said, he
would note that the New York Bank had sold to the Bank of England
the small System and Treasury balances of uncovered sterling on
the Friday preceding devaluation. The United States therefore had
suffered no exchange losses from its support operations in sterling.
Also, as the members knew, this past week Chairman Martin had
activated the authorization approved by the Committee at its
preceding meeting to increase System holdings of covered or guaran
teed sterling from $200 to $300 million equivalent, and to warehouse
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11/27/67 -14
an additional $150 million equivalent of foreign currencies for
the Stablilization Fund. On the basis of those actions and a
Treasury authorization, the United States had made available to
the Bank of England $500 million of additional credit facilities-
$400 million for Treasury account and $100 million for System
Account--in the form of a swap arrangement, entirely separate from
the System's present $1,350 million facility. That $500 million
credit line was part of the $1,500 million package of credits
announced by the U.K. authorities as a supplement to its requested
standby of $1.4 billion from the IMF to back up its new parity.
With respect to other currencies, Mr. MacLaury continued,
it was difficult to make generalizations. There were major inflows
to continental central banks on two days--the Friday preceding
sterling's devaluation, as he had mentioned, and the Friday
following (November 24). In between, there were either some
losses, notably by the Netherlands, or small gains. Over the six
trading days from Friday, November 17 through Friday, November 24,
there were net increases of reserves by France, of $315 million;
Germany, $303 million; the Netherlands, $116 million; Belgium, $55
million; and Switzerland, $75 million.
On the other hand, it was known that Sweden and Japan lost about $50
million each during the week following devaluation, and Canada lost $86 million.
Those flows of dollars had required certain operations by the New York
--------------------------------------- 15
11/27/67 -15
Bank, for either System or Treasury account. In the case of the
Netherlands, since the swap line with the System was fully utilized
prior to developments in the period, it was agreed that the Treasury
would provide temporary swap facilities to cover any dollars taken
in by the Netherlands Bank. A total of $126 million was covered in
that fashion, with $40 million of that amount first repaid and then
redrawn as the Netherlands Bank lost dollars immediately following
devaluation and regained roughly the same amount on Friday. In
addition, on Thursday and Friday the Netherlands Bank sold forward
guilders for System and Treasury account totaling $16 million each.
In the case of Belgium, Mr. MacLaury observed, the System
first bought $10 million equivalent of Belgian francs from the
National Bank, value November 20, in a transaction unrelated to
market developments, and then resold the same amount the following
day to absorb dollars taken in on the Friday prior to devaluation.
The Belgian arrangement had been fully utilized at the beginning
of the period, but the Treasury issued a Belgian franc bond of
approximately $60 million equivalent on November 24, thus freeing
that amount under the swap arrangement. It had been Mr. Coombs'
intention not to use that leeway since the Belgian arrangement
was the one swap line on which drawings had been outstanding for
more than six months. However, the choice was either to use the
leeway or to sell gold; and given that choice the decision was made
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11/27/67 -16
to use the leeway, at least temporarily. Accordingly, this past
Friday the System drew approximately $41 million equivalent under
the Belgian arrangement, using the proceeds to cover dollars taken
in by the National Bank on Thursday and Friday of last week.
In transactions unconnected with recent developments, Mr.
MacLaury remarked, the New York Bank acquired nearly $20 million
equivalent of Swiss francs from the Swiss National Bank and the
Bank of England and used them to reduce the System's swap drawings
with the Swiss National Bank and the BIS to $123 million and $119
million equivalent, respectively. However, the Swiss National
Bank took in nearly $70 million on Friday, and the chances were
that cover would have to be provided for that amount.
In conclusion, Mr. MacLaury noted that it was hardly
necessary to say that conditions in the gold and foreign exchange
markets had been about as turbulent as one could imagine during
the past two weeks. Whether or not less stormy weather lay ahead
remained to be seen. One could say with certainty, however, that
the problems ahead would be more manageable so long as central
banks stood together, and that was the importance of yesterday's
Frankfurt statement. He would make some recommendations intended
to give further effect to that cooperation at a later point today.
He had talked by phone with Mr. Coombs just before the meeting and
could report that Mr. Coombs had been encouraged by the develop
ments over the weekend.
--------------------------------------- 17
11/27/67-17-
Mr. Maisel asked Mr. MacLaury to amplify his remarks about
foreign exchange market developments last Friday, and to comment
on the sources of demand in the gold market and the methods that
had been used in financing purchases of gold.
Mr. MacLaury replied that exchange market developments on
Friday were quite different from those earlier in the week. In
contrast to the small gains or losses of reserves by European
central banks in the days immediately following the devaluation of
sterling, there were large dollar gains on Friday. For example,
the central banks of Germany and France took in over $100 million
each on that day; the Netherlands Bank, about $40 million; and the
Belgian National Bank, about $50 million. His interpretation of
the week's developments was that in varying degree the continental
currencies were less strong after devaluation than they had been
before, so that there was an abatement or cessation of inflows to
the central banks. Also, the markets' attention was focused on
gold during that period, with participants speculating on a rise
in the market price of gold. On Friday, however, perhaps as a
result of developments in the gold market and the attendant
publicity, there seemed to have been a wave of nervousness about
the dollar; people simply wanted to convert holdings into their
national currencies, without necessarily having any rational
belief that those currencies would appreciate relative to the
dollar.
--------------------------------------- 18
11/27/67 -18
With respect to the second question, Mr. MacLaury continued,
most of the recent gold purchases were made through Swiss banks and
the sources of demand were not known. There were rumors in the
market that much of the demand in the past week originated in Paris
and Moscow. It seemed clear that some Iron Curtain countries were
buying, although not necessarily Russia. Communist China had bought
$5 million of gold this morning. As to how the gold purchases were
financed, as he had noted, less than half of the funds that moved
out of sterling on Friday were reflected in reserve gains of major
countries that day, and much of the remainder presumably went into
the Euro-dollar market. Some of the funds moving out of sterling
may have been used to buy gold. Also, gold was excellent collateral
for bank credit, and some purchases may have been financed by bank
loans in various countries. In that connection, he might note that
the Swiss National Bank had undertaken a number of measures to help
deal with the gold situation so far as it lay within its power.
One measure was to get the agreement of the major Swiss banks to
refrain from making loans against gold collateral, and to call any
such loans now outstanding.
Mr. Brimmer asked if Mr. MacLaury would comment on a recent
news report that some central banks were beginning to buy gold.
Mr. MacLaury remarked that last week the only central bank
gold purchase from the U.S, Treasury was an $8-1/2 million purchase
--------------------------------------- 19
11/27/67 -19
by Surinam. The New York Bank had asked the Bank of England to
advise it of any identifiable central bank purchases on the London
market, and none had been reported. Also, under a second measure
taken by the Swiss National Bank, Swiss commercial banks had in
effect agreed not to sell gold to foreign banks, including central
banks.
Mr. Brimmer then referred to Mr. MacLaury's comments
regarding the New York Bank's sales of sterling to commercial
banks last week, and asked whether the central banks of any other
countries had conducted a similar operation with their commercial
banks.
Mr. MacLaury replied affirmatively. He noted that the
Bank of Canada had done so, and also that the German Federal Bank
had provided equivalent facilities to German commercial banks.
Mr. Mitchell referred to Mr. MacLaury's statement that "a
majority" of the Subcommittee of the Federal Open Market Committee
had concurred in the operation in question. He asked whether that
implied that the Subcommittee was not unanimous on the matter.
Mr. Robertson said he had not concurred when the question
was raised because he had not felt that the Federal Reserve should
use its sterling holdings to assist banks that in turn had accom
modated forward sales of sterling by their customers.
Mr. Mitchell asked whether the customers of the banks in
question might have been speculating in sterling.
--------------------------------------- 20
11/27/67 -20
Mr. MacLaury replied that some of the customers might have
been speculating; indeed, there had been a press report on Monday
to the effect that some corporations had oversold their expected
sterling receipts. That possibility had been a matter of great
concern to the New York Bank. It seemed clear, however, that the
commercial banks involved had done all that might reasonably have
been expected of them to avoid facilitating speculation by their
customers. For example, they did not accommodate forward sales
of sterling by individuals. About the only way the banks could
have policed the transactions more effectively would have been to
ask every customer involved whether the sterling they wanted to
sell forward represented bona fide expected receipts.
He did not think it was reasonable to expect banks to do that under normal
circumstances, and certainly not under the circumstances prevailing
that Friday. While on the subject, he would note that in the
certifications required of the commercial banks, the New York
Bank had requested information on the banks' over-all position in
sterling, and had deducted the amount of any net short positions
from the sums of sterling made available to the banks, unless such
positions could be explicitly justified.
Mr. Mitchell then asked what the consequences would have
been if the New York Bank had not accommodated the commercial
banks.
--------------------------------------- 21
11/27/67 -21
Mr. MacLaury replied that the banks would not have been
able to deliver the sterling they had sold, despite the fact that
their over-all positions were in balance. By abrogating those
contracts, they would have been left in a long sterling position,
having acquired forward sterling from their customers at a price
of $2.76 or so.
Mr. Mitchell asked whether the amounts involved with respect
to individual banks were reasonably related to the normal volume of
their foreign exchange business or whether the transactions were
heavily concentrated in one or two banks.
Mr. MacLaury replied that the sterling swaps made on Tuesday
were heavily concentrated in one bank, but that bank was one of the
most active foreign exchange traders in the market. Those made on
Wednesday were more evenly spread among the total of ten banks
involved. Details on the transactions with each bank would be
included in the supplementary memorandum being prepared for the
Committee.
Mr. Robertson said that, irrespective of any member's view
of the operation, it should be noted that the Bank of England had
concurred in it, even though it suffered a loss as a result. The
Bank of England also had provided sterling to the Bank of Canada
to facilitate a similar operation. Moreover, as Mr. MacLaury had
reported, the German Federal Bank had provided such facilities to
German commercial banks.
--------------------------------------- 22
11/27/67 -22
Mr. Mitchell commented that he was not unhappy with Mr.
MacLaury's explanation of the operation, although he would be
interested in studying the more detailed memorandum when it
became available.
Mr. Robertson remarked that in his judgment the Account
Management was fully justified in carrying out the operation on
the basis of the approval it had received from a majority of the
Subcommittee. The main value of the memorandum, he thought, would
be in helping the Committee to determine how it should react if
a similar problem arose in the future.
Mr. Wayne noted that a member bank had reported to the
Richmond Reserve Bank that one of its commercial customers was
asking it to make arrangements for them to purchase gold to be
held in Canada. The Reserve Bank had replied that such a
transaction by an American citizen was illegal. One possible
implication of the inquiry was that the bank's customer knew of
similar transactions that had been made in the past. Mr. Wayne
asked whether this was likely to have been an isolated instance
or whether other persons had engaged in such transactions.
Mr. MacLaury replied that he heard of no such transactions
during the past week. Previously, however, he had heard that some
American citizens were buying options on gold in Canada, which in
effect were future contracts. Such purchases were considered by
--------------------------------------- 23
11/27/67 -23
some to be technically legal, so long as the contracts were sold
before the owner actually took possession of the gold.
Mr. Hickman commented that a news story over the weekend
had reported rumors of gold purchases not only by nationals of
foreign countries but also by American citizens. The article did
not specifically mention Canada as the place at which the gold was
held.
Mr. MacLaury remarked that there had been allegations of
illegal gold purchases by U.S. citizens for some time, but he had
no independent information on the subject.
Mr. Galusha referred to Mr. MacLaury's comment that the
British Government had decided to devalue sterling on its own
accord. He asked whether Mr. MacLaury thought the British had
any real alternative, in light of the prevailing circumstances.
Mr. MacLaury replied that in his judgment they did have
an alternative. Credits were available to them, and the period
was approaching in which seasonal forces would be working in
sterling's favor. He thought the British could have weathered
the storm if, instead of devaluing, they had taken all or even
some of the restrictive measures that they had found desirable
as accompaniments of devaluation--including a much higher Bank
rate, lower Government expenditures, curbs on bank loans, more
restrictive hire-purchase controls, and so forth. While they
had chosen to devalue it was still not clear that they were out
--------------------------------------- 24
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of the woods. In his opinion, they were really no better off now
in terms of their national interest than they would have been had
the sterling parity been maintained.
Mr. Galusha commented that having devalued at this time
the British might find it a little easier to do so again. He asked
whether Mr. MacLaury thought that was an imminent possibility or a
matter for concern over the longer run.
Mr. MacLaury replied that another sterling devaluation
certainly did not appear imminent. The imminent concern in con
nection with the British situation related rather to the question
of how quickly the Bank of England might be able to repay its
short-term debts to the Federal Reserve and to others.
In reply to another question by Mr. Galusha, Mr. MacLaury
said that Britain's reserve position was negative at the moment.
As of the Friday before devaluation they held exactly $45 million
in foreign currency reserves and approximately $1.5 billion in
gold. Their outstanding short-term debts were now close to $2
billion; they had borrowed the full $1,350 million available under
the Federal Reserve swap line and over $500 million under the
sterling balance arrangement.
Mr. Ellis remarked that one implication of the statement
that the British had a free choice with respect to devaluation
was that they had full opportunity to negotiate with respect
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to credit assistance. However, the press reports gave the impression
that they were not really free to conduct confidential negotiations;
that there had been deliberate leaks to forestall free negotiations.
Would Mr. MacLaury accept that as another reason the British chose
to devalue?
Mr. MacLaury replied that if the British had been prepared
to accept short-term credits he thought the necessary arrangements
could have been made expeditiously and confidentially, as had been
the case in the past. It was Britain's refusal to accept additional
short-term credit--and one could advance arguments for and against
their position--that prolonged the negotiations and led to the leaks.
Mr. Swan commented that while the U.S. Treasury would sell
gold only to central banks and governments, the London gold market
and the gold pool as presently operated provided private foreign
buyers with easy access to gold stocks. He recognized that the
present was not the time to make any structural changes in those
arrangements, but looking ahead he thought it would be desirable
to explore possible methods for restricting access to gold through
the London market, in line with the Treasury's policy respecting
sales out of its own stocks.
Mr. MacLaury then responded to a number of questions by
Messrs. Sherrill and Maisel concerning technical aspects of recent
flows through the sterling and gold markets. In the course of his
--------------------------------------- 26
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comments he noted that much of the large volume of funds flowing
out of sterling that had been temporarily lodged in the Euro-dollar
market was now apparently being rechanneled in three directions:
reflows into sterling, purchases of gold, and flows into continental
currencies.
Mr. Brimmer reported that while in Paris on the Friday just
before the devaluation of sterling he had spent some time with the
manager of a branch of one of the large American banks, and had
been told that Euro-dollar deposits at that branch and at the bank's
branch in Frankfurt had increased by one-third in the course of
Thursday and Friday. In the manager's judgment much of that inflow
was coming from U.S. corporations that had had balances in sterling.
That morning the newspaper Figaro had carried a front-page story
reporting that sterling would be devalued, although it mistakenly
set the new parity at $2.50 rather than $2.40. In light of such
reports, it was not surprising that there had been tremendous
inflows to the Euro-dollar market from sterling.
By unanimous vote, the System open market transactions in foreign
currencies during the period November 14 through 26, 1967, were
approved, ratified, and confirmed.
Chairman Martin invited Mr. Solomon to comment on the
devaluation of sterling and subsequent developments.
Mr. Solomon said that whatever one's views on the justification for
the decision to devalue the pound, it was clear that
--------------------------------------- 27
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once that decision had been taken the devaluation was accomplished
in an orderly manner, with such details as notifying foreign
monetary authorities handled appropriately. More important, the
amount of devaluation was kept to a figure that did not stimulate
other major countries to follow. It was fair to say that inter
national monetary cooperation had continued and had even been
strengthened under the stresses of the last ten days. Of extreme
importance was the fact that all of the Group of Ten countries and
many other countries as well had announced that they were holding
to the existing parities for their currencies. One of the major
concerns in the course of contingency planning had been that the
British would decide to devalue by an amount larger than other
major countries could tolerate, and that that would set off a
wave of devaluations that would bring enormous pressures on the
U.S. gold stock. That fear had not been realized.
In the contingency planning, Mr. Solomon continued, it
was assumed that if market participants reacted rationally to a
sterling devaluation they would conclude that it was not sensible
to shift their dollar holdings into other strong currencies. Such
a conclusion appeared warranted on the grounds that other countries
inevitably would follow any devaluation of the dollar in terms of
gold, so that there would be no speculative profits to be gained
by shifting from dollars into other currencies--except, perhaps,
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11/27/67 -28
sterling. For most of last week, it appeared that market partici
pants were acting in a rational manner; until Friday, flows into
continental central banks were quite moderate. On Friday, however,
following large market sales of gold, there was a sizable flow to
continental central banks, as Mr. MacLaury had indicated. Presumably
uncertainties about the dollar had mounted on that day.
Mr. Solomon went on to say that in the contingency planning
it had been anticipated that in the wake of a devaluation there
would be heavy pressures in the London gold market, with losses
by the pool on the order of $100 million per day. In fact, daily
losses by the pool last week averaged a bit more than that. But
the volume of private demands for gold should not be considered
surprising, particularly since it was augmented by the French leaks
to the press concerning their withdrawal from the pool and the
possible withdrawal of Belgium and Italy, and concerning the size
of recent losses by the pool--on which, incidentally, the French
supplied inaccurate figures. The reasons for the heavy speculation
on gold were a matter of interpretation, but it was his belief that
private gold buyers were not betting on a rise in the official
price of gold. It was likely, rather, that most of them were
expecting a higher price in the London market on the assumption
that pool members would stop supplying gold to that market.
Mr. Solomon commented that the weekend meeting in Frankfurt
had been arranged against the background of those heavy private
--------------------------------------- 29
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demands for gold. The meeting resulted in a strong reaffirmation
of international financial cooperation and, specifically, in a
decision to continue to support the gold pool. Meanwhile, consul
tations were continuing among the gold pool participants. The U.S.
delegation to Frankfurt carried a proposal for a so-called "gold
certificate" plan designed to strengthen the pool and to demonstrate
to the market that the participating countries intended to continue
to maintain the present price of gold. If that plan were agreed
upon and its announcement had the intended effect on the market,
the pool should have to sell very little gold because speculation
would stop. A summary of the plan, which at this point was, of
course, highly confidential, would be distributed to the Committee
later today.1/
Mr. Solomon observed that the Swiss authorities revealed
at Frankfurt that they had taken certain measures to tighten up on
private purchases of gold. Those included the measures Mr. MacLaury
had mentioned--prohibiting bank loans against gold collateral and
asking banks not to sell gold to foreign commercial or central
banks. In addition, forward sales of gold were stopped and maturing
forward contracts would not be renewed. Governors of the other
European central banks at the meeting agreed to do what they could
1/ A copy of this summary, dated November 24, 1967 and entitled
"A Gold Certificate Plan to Stabilize the Gold Market," has been
placed in the files of the Committee.
--------------------------------------- 30
11/27/67 -30
under the laws of their own countries to emulate the Swiss actions,
especially that with respect to loans against gold collateral.
It was also agreed at Frankfurt, Mr. Solomon said, that if
Friday's flows out of dollars into European currencies continued the
central banks would operate in a coordinated way in forward markets
to stem the flows and to encourage a reflow back to the Euro-dollar
market. Forward purchases of dollars by European central banks in
such operations would be covered largely by the U.S. Treasury but
also, if the Committee approved, by the Federal Reserve. He
understood that Mr. MacLaury would make a recommendation on that
subject today, as well as recommendations for increases in certain
of the System's swap lines that would be an essential part of the
coordinated effort. He should note that Secretary Fowler had asked
U.S. officials not to comment to the press with respect to the
Frankfurt meeting; it was better to let the statement that had been
issued stand on its own and let the market effects of the decisions
taken speak for themselves.
A question often asked, Mr. Solomon continued, was whether
it was necessary for the United States to be so concerned about
the free market price of gold in London as to undertake to sell
gold to private buyers there through the pool, when Americans were
not permitted to buy gold. In his judgment the major justification
for that course was that a break-out of the London price would be
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likely to affect the behavior of central banks. If the market
price was permitted to rise foreign central banks that had to sell
gold for one reason or another would be tempted to sell it on the
market, whereas those wanting to buy gold would take advantage of
the official U.S. price of $35 an ounce. In fact, some central
banks might be tempted to buy gold from the United States for the
purpose of reselling it at the higher market price. Secondly, a
rise in the market price might be regarded as a challenge to the
official price of gold and lead many central banks to feel obliged,
as a precautionary measure, to convert their dollar holdings into
gold.
Mr. Solomon concluded with a comment on the role played by
the French in recent developments. There was no doubt, he said,
that they had acted in an unfriendly and mischievous fashion. It
was important to note, however, that the French had little power to
affect developments by any means other than making press statements
and leaking confidential information in an effort to embarrass
the United States. It would be a self-delusion, he thought, to
conclude that the present problems would be much less serious than
they were if the French had not acted mischievously. He was, of
course, not trying to defend the French, but simply to put their
actions into perspective.
Mr. Brimmer said he wondered whether the French were quite
as impotent as Mr. Solomon had suggested. Mr. MacLaury had noted
--------------------------------------- 32
11/27/67 -32
that the Bank of France might convert its substantial dollar gains
of November into gold. Secondly, operations by the Bank of France
to supply gold to the Paris market, while tending to hold down the
price, appeared to run counter to the efforts the Swiss were making
to limit private demands.
In response to questions by Mr. Mitchell, Mr. Solomon said
that citizens of France, like those of Belgium, Germany, and other
continental European countries, were free to buy gold in the private
market. In general, gold was in circulation on the continent and
unlimited amounts could flow into private hands. No action by the
Bank of France was necessary to keep the price of gold bars in
Paris in line with that in London; that function was performed by
arbitrage between the two markets. In Paris, however, gold also
was traded in the form of Napoleons, and if the price of such coins
rose the Bank of France would sell them into the market. In his
judgment such operations were not harmful to the interests of the
United States.
Mr. MacLaury added that while Napoleons were freely avail
able in France and the Bank of France operated in the market, they
were not available "on tap" at the Bank. He then said, in
clarification of his earlier comment on the subject, that he knew
of no official indication that the French intended to convert their
November reserve gains into gold. However, they had taken in over
--------------------------------------- 33
11/27/67 -33
$300 million thus far in the month, and the press was noting they
now had the dollars with which to buy gold if they chose.
Mr. Sherrill referred to Mr. Solomon's comment that there
had been considerable speculation on a rise in the London price of
gold. He asked whether Mr. Solomon would anticipate a reflow of
gold to that market if participants concluded that the price would
remain firm.
Mr. Solomon replied that while the gold market this morning
was much calmer than it had been, he did not know whether there
would be a reflow.
Mr. Sherrill then asked whether there had been reflows in
the past following periods of speculation.
Mr. MacLaury responded in the negative. Past bursts of
speculation had been followed by abatements in demand, he said,
but what selling had occurred had been more than offset by buying.
On the other hand, market purchases had never been of the size
experienced last week.
Mr. Ellis noted that Mr. Solomon had characterized the
British devaluation as orderly. Certainly that was not the
unanimous view in Britain; the Conservative Party in particular
did not share it. Moreover, on the Friday before devaluation had
been announced the British had suffered a tremendous loss of reserves.
If the process was orderly, why had they not been able to forestall
that loss?
--------------------------------------- 34
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Chairman Martin commented that from conversations with
Governor O'Brien he had concluded that the devaluation had been
planned in a highly orderly manner, with time allowed for
dispatching people to the Commonwealth countries to explain the
action in advance. However, the plans had been upset by Chancellor
Callaghan's noncommittal answer to a question concerning a credit
package in Parliament on Thursday, which precipitated the final
wave of speculation against sterling. In retrospect, it appeared
that it would have been best for the Bank of England to announce
that their financial markets would be closed on Friday, but they
had not anticipated that the Chancellor would make the statement
he had.
Mr. Brimmer commented that in Paris on Thursday it was
thought even after Chancellor Callaghan's statement that difficul
ties in the negotiations for a credit package were the source of
the trouble. In his judgment the real mischief had been done by
leaks in Paris that the British had decided to devalue.
Chairman Martin remarked that Mr. Brimmer's view might
well be correct, since the news media were carrying reports on
the devaluation decision on Friday morning. It was likely that
analysts would be writing about the events in question for a long
time to come and perhaps they would never be fully clarified.
Mr. Maisel asked whether information was available on the
specific costs of speculating in gold, apart from foregone interest
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11/27/67 -35
earnings. For example, were transportation and storage costs
appreciable?
Mr. Solomon said he thought that the major cost was
represented by the loss of interest earnings on the assets used
to buy gold, which of course did not have to be dollar assets.
Mr. MacLaury agreed. There were no necessary transportation
costs, he said, because the gold bought could be held in London.
While he did not have exact figures on storage charges at hand,
they were less important than the interest lost. Until lately, at
least, there had been adequate storage facilities in Britain.
However, he had heard one ironical comment to the effect that U.S.
difficulties in supplying gold recently were matched by the buyers'
difficulties in digesting it.
Mr. Galusha asked whether information was available on
losses suffered by U.S. nationals as a result of the sterling
devaluation, and Mr. MacLaury replied in the negative.
Chairman Martin then said he would bring the Committee up
to date about other aspects of recent events. In his judgment the
System had performed very well during the whole period. In the
days immediately following the preceding meeting of the Committee
on November 14, the Board did not act with respect to the higher
discount rates that had been voted by the directors of two Reserve
Banks. On Friday, November 17, Mr. Kirbyshire of the Bank of
--------------------------------------- 36
11/27/67 -36
England came to the Board's offices at 1:15 p.m. to inform Governor
Robertson and himself of the decision that had been taken to devalue
sterling. He (Chairman Martin) had suggested to Secretary Fowler
that they talk with the President immediately, to urge him to press
for action on the tax bill in light of the devaluation, and they
did meet with the President. Later that afternoon he and Secretary
Fowler attended a White House meeting with the leadership of both
the House and Senate, including Chairman Mills of the House Ways
and Means Committee. At that meeting the President reported that
the British Ambassador had called at one o'clock to advise him
that a devaluation of sterling would be announced the next day.
The President placed considerable emphasis on the devaluation in
speaking to the Congressional leaders about the need for fiscal
action.
Subsequently on Friday, Chairman Martin continued, he,
Secretary Fowler, and Under Secretary Barr met with Congressman
Mills at the airport, from which the Congressman was leaving for
a speaking engagement, and urged him to go forward with the tax
bill. The Ways and Means Committee would hold open hearings on
the subject on Wednesday, November 29, at which Secretary Fowler,
Budget Director Schultze, Chairman Ackley of the Council of
Economic Advisers, and he were scheduled to testify. He anticipated
that each of those officials would urge the necessity of fiscal
--------------------------------------- 37
11/27/67 -37
action. What the outcome would be could not be predicted at this
time.
As the Committee members knew, Chairman Martin observed,
the Board had met on the afternoon of Saturday, November 18, to
approve the discount rate increases to 4-1/2 per cent that had
been established by the directors of three Reserve Banks as of
that time, as well as any similar increases at other Reserve Banks
concerning which notification was received by 1 p.m. Sunday. By
the latter time ten Reserve Banks had established 4-1/2 per cent
discount rates. Prior to its action the Board had discussed at
some length the question of whether the new discount rate should
be 4-1/2 or 5 per cent, and had decided unanimously to approve the
4-1/2 per cent rate. On the whole, he thought the action had been
well received as a moderate, precautionary move. It was acceptable
to the Administration.
Moving on to the more immediate past, the Chairman
continued, it had become apparent by Tuesday, November 21, that
pressures were building up in the London gold market. On Wednesday
the so-called "Deming group," on which the Federal Reserve, the
Council of Economic Advisers, the State Department, and the White
House were represented, began a series of meetings under the
chairmanship of Under Secretary Deming. The group concluded that
it would be desirable for the central banks participating in the
--------------------------------------- 38
11/27/67 -38
gold pool to issue a joint statement designed to calm the situation
in the gold market. Messrs. Deming and Daane brought to him
(Chairman Martin) a draft of such a statement and suggested that he
discuss it with the governors of the central banks concerned. While
the draft differed in wording from the statement that was eventually
issued, like the latter it included a quotation of the President's
earlier reaffirmation of the U.S. commitment to the existing official
price of gold. He was not able to reach Governor Carli of the Bank
of Italy until Thursday--that is, Thanksgiving Day--but he talked
with the other governors on Wednesday. Two of the governors were
agreeable to the statement. However, others thought there should
be some consultation before any announcement was made that the gold
pool would be continued, and one was inclined to the view that the
London gold market should be closed immediately.
By Thursday morning, Chairman Martin said, all of the
governors agreed that it would be unwise to issue a statement
without consulting with one another. Governor Blessing of the
German Federal Bank agreed to chair a meeting of the governors,
and arrangements were made to hold that meeting in Frankfurt on
Sunday. After many hours of discussion the governors reached the
agreements that had been outlined to the Committee today by Mr.
Solomon. At about noon yesterday he and Mr. Solomon had met with
Secretary Fowler and others, and received a full report from
--------------------------------------- 39
11/27/67 -39
Messrs. Deming, Hayes, and Coombs in Frankfurt on the outcome of
the meeting. As a result of that report Secretary Fowler and he
made available here copies of the statement to which reference
had already been made.
The Chairman added that before learning of the outcome
of the discussions he had been fearful that they would not be
successful, in light of the views some of the central bank
governors had expressed to him in the telephone conversations
leading up to the meeting, and in light of the enormous demands
for gold in London on Friday. In his judgment full credit should
be given to Mr. Deming, who had done an outstanding job in the
negotiations. The Frankfurt results were a major achievement in
multilateral financial cooperation. The problem was yet not
resolved by any means but at least the current wave of speculation
had been ended. It was obvious that further steps would have to
be taken soon, and others might be required as time passed. Mr.
Solomon had noted that one of the agreements reached at Frankfurt
concerned forward operations. A "command post" for forward
operations had already been established in Frankfurt, which was
manned at the moment by Messrs. Coombs, Tungeler, and Ikle.
The Chairman then suggested that at this point the Committee
hear the recommendations of Mr. MacLaury, which were designed to
facilitate the implementation of the agreements reached at Frankfurt.
--------------------------------------- 40
11/27/67 -40
Mr. MacLaury said he would start with a recommendation
relating to the forward transactions to which the Chairman had
just referred. As Mr. Solomon had noted, a number of the
continental central banks were prepared to operate in the forward
market, selling their currencies forward against dollars, which
amounted to offering a pledge to the market that their present
parities would be maintained. Such operations had been conducted
in German marks and Swiss francs in 1961 following the revaluation
of the mark and the guilder, and subsequently had been carried out
successfully for a long time by the British. The U.S. Treasury
had agreed to provide unlimited cover for any dollars bought
forward by the continental central banks, and the Account Manage
ment felt strongly that the Federal Reserve should participate
along with the Treasury in providing such cover. In fact, as he
had indicated earlier, the Netherlands Bank had already started
selling guilders forward against dollars, with the System and the
Treasury jointly providing cover. It was not possible at this
time to predict the amounts likely to be involved; if the market
remained calm they could be small. However, in order to be
prepared to carry out such operations in the amounts necessary,
he would recommend that the Committee double the limit on
authorized System commitments to deliver foreign currencies that
was specified in paragraph 1C(3) of the authorization. In other
--------------------------------------- 41
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words, he would recommend replacing the present limit of $275
million with a new limit of $550 million.
In reply to a question by Mr. Hickman, Mr. MacLaury said
that under the proposal the continental central banks would be
operating in their respective markets for the account of the System
and the U.S. Treasury, just as the Federal Reserve operated in the
New York market for the accounts of foreign central banks.
In effect they would be guaranteeing the availability of their currency
to participants in their markets who had forward commitments or
other needs for forward cover back into their currency, in order
to avoid pressures on the spot market. By way of illustration, he
might refer again to the situation with respect to German marks in
1961. As the Committee might recall, after the 5 per cent reval
uation of the mark in that year there was much speculation about a
possible additional 5 per cent revaluation. Traders who had forward
commitments in marks wanted cover, and had they been able to buy
forward marks at a reasonable premium they would have done so.
Initially, however, such cover was not available; the market was
one-sided. The traders, therefore, borrowed dollars and sold them
for marks in the spot market, and there was an immediate dollar
inflow into Germany. As soon as the nature of the problem became
apparent the New York Bank, acting for Treasury account and in
cooperation with the German Federal Bank, began to sell marks
--------------------------------------- 42
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forward to provide the cover traders were seeking, and that
substantially moderated the dollar inflow to the German Federal
Bank. Such operations could be used not only to reduce or pre
vent dollar inflows to foreign central banks but also to induce
outflows. So far today, according to the latest information he
had received, the German Federal Bank had sold $44 million of
three-month forward marks, reducing the forward premium on marks
from approximately 3 per cent to about 1-3/4 per cent in the
process and inducing an equivalent outflow--at least in the first
instance--of dollars from Germany into the Euro-dollar market.
Such operations could be of real benefit in the foreign exchange
markets, because in effect they guaranteed that present parities
would be maintained.
Mr. Maisel asked whether operations of the type under
discussion should not be evaluated in terms of more general policy
objectives.
Chairman Martin commented that in his judgment the policy
objective was to maintain present currency parities in terms of
gold.
Mr. Maisel said that there appeared to be other kinds of
policy questions involved as well; thus, decisions made under the
contemplated operations would affect the volume of dollar reserves
held by foreign central banks. He had raised the question because
--------------------------------------- 43
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he was concerned that the United States might find itself in the
same situation as the British had recently, in which the Bank of
England had to determine continually the extent to which it was
prepared to take on forward commitments as an alternative to
suffering losses of reserves. From the British experience, he
concluded that such forward operations could be very expensive
and critical They had various implications--for the balance
of payments, for monetary reserves, for costs--which had to be
considered together. It was for that reason that he thought some
sort of general policy objective had to be specified. For example,
was the objective to bring the deficit in the U.S. balance of
payments down to zero?
In reply, Mr. MacLaury first noted that the Treasury had
already determined that this type of operation would be beneficial
to the interests of the United States; in agreeing to provide
unlimited forward cover, it had already decided to take the same
route that the Bank of England had followed in trying to defend
the pound. Secondly, although forward operations had not by
themselves succeeded in avoiding devaluation, they had made it
possible for Britain to hold the pound at its previous parity
for three years; without them, he thought, Britain would have run
out of reserves as early as 1964. If the United States was deter
mined to hold the present dollar price of gold, forward operations
--------------------------------------- 44
11/27/67 -44
would be helpful as one means of reducing the inflows of dollars
into foreign central banks. As Mr. Maisel had suggested, a
judgment was involved between undertaking forward commitments or
having dollars accumulate in the reserves of foreign central
banks. One consideration affecting that judgment was the fact
that for the most part information on changes in reserves of
foreign central banks was published weekly, whereas information
on the volume of forward operations could be withheld so long as
it was in the public interest to do so. Thus, by forward opera
tions it might be possible to avoid a process in which reports of
dollar reserve gains abroad fed market speculation that continental
currencies were undervalued.
Mr. Maisel said he was not objecting to the proposed forward
operations. His point was that they were one possible prong of
policy. But there were other possible prongs that warranted serious
consideration--for example, measures to affect interest rates paid
domestically on foreign deposits and measures to affect Euro-dollar
flows to the United States. It seemed to him that the Committee
was being asked to make a policy decision without having all of the
relevant considerations before it. For a number of years the state
of the U.S. balance of payments had been one of the major factors
the Committee had been urged to weigh in making decisions on
domestic monetary policy. Now he gathered that it was being
--------------------------------------- 45
11/27/67 -45
suggested that the Committee use a different method to deal with
this problem. In his judgment the Committee should be clear in
what it hoped to achieve by choosing among the available policy
instruments, each of which might be best adapted to a particular
end.
Mr. MacLaury observed that the forward operations under
discussion, by affecting the dollar holdings of foreign central
banks, would have implications for the U.S. balance of payments
on the official settlements basis; however, they would not affect
the balance on the liquidity basis. He agreed that to some extent
the proposed provision of forward cover was an alternative to a
tighter domestic monetary policy as a means of limiting dollar
accruals by foreign central banks. Under present circumstances,
however, he felt that forward operations would be a useful
supplement to, rather than a substitute for, other policy tools.
The different types of measures could reinforce one another.
In response to Chairman Martin's request for comments,
Mr. Solomon said he thought the point Mr. Maisel had raised was a
valid one, and he agreed in general with the comments Mr. MacLaury
had made concerning it. He would add only that according to the
information received from Frankfurt yesterday, there was another
objective for forward operations in addition to that Mr. MacLaury
had mentioned. Any large shift out of dollars this week could
--------------------------------------- 46
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result in very high interest rates in the Euro-dollar market.
That in turn could increase the pressures already existing on
some countries, including Japan and Sweden, to devalue. It was
hoped that forward operations would help avoid that outcome.
Mr. MacLaury agreed. By way of background to Mr. Solomon's
observation, he noted that while the three-month rate in the Euro
dollar market was 5-3/4 per cent just prior to devaluation, during
the early part of last week it was 6-1/2 per cent; and on Friday
it rose to 7 per cent, where it remained today.
Mr. Mitchell asked whether the operations under discussion
amounted, in effect, to window dressing the position of the United
States. If so, for how long it was proposed to continue such
window dressing?
Mr. Solomon remarked that window dressing would seem to be
involved only to the extent that information was withheld on the
volume of forward operations.
Chairman Martin observed that the additional authority for
forward operations that Mr. MacLaury had recommended might never
have to be used. The proposal was a temporary one in the sense
that the goal was to stabilize market flows that were disorderly
at the present time. In the words of the Frankfurt communique,
the central bank Governors "took decisions on specific measures to
ensure by coordinated action orderly conditions in the exchange
markets . .. ."
--------------------------------------- 47
11/27/67-47-
Mr. Hickman asked whether it was proposed to continue to
engage in forward operations of the type discussed after the
present emergency had passed.
Chairman Martin said he thought the Committee should con
sider that question as it went along; the matter should be subject
to regular review. As he had indicated, the objective at the
moment was stabilization of flows in a crisis situation.
Mr. Wayne remarked that he was puzzled by the implication
of some of the preceding discussion that the proposal was for a
new type of operation. The Committee had resolved the policy
question when it had authorized forward operations some time ago;
what was at issue today was merely a matter of magnitudes.
Mr. Brimmer referred to Mr. MacLaury's earlier remark that
the Treasury had already decided to provide unlimited cover for
forward operations. He asked Mr. MacLaury to comment on the role
of the System in the matter as opposed to that of the Treasury.
Mr. MacLaury replied that since the System first undertook
foreign currency operations in 1962, the term "U.S. monetary
authorities" had been interpreted generally--and appropriately--as
encompassing both the Treasury and the System. The defense of the
dollar was certainly one of the main tasks of the Committee; the
Federal Reserve had as much responsibility to act in the interna
tional area as in the domestic, although in the former case it
--------------------------------------- 48
11/27/67 -48
presumably should act jointly with the Treasury. The operation
in question was one way the Federal Reserve could participate
with the Treasury in the defense of the dollar.
Mr. Brimmer then said he had been concerned that
Mr. MacLaury's earlier comment might be taken to imply that
the Committee was being asked today simply to ratify a decision
that had been made solely by the Treasury. He was satisfied in
his own mind that that was not the case. Members of the Committee
and its staff had in fact participated in the formulation of the
policy under discussion.
Mr. Sherrill asked whether the group now operating the
"command post" in Frankfurt had objectives formulated in terms of
interest rates on Euro-dollars.
Chairman Martin replied they did not; they were concerned
with stabilizing flows.
Mr. Brimmer reported that at the meetings of both Working
Party 3 and the Economic Policy Commission two weeks ago the U.S.
representatives had been urged to take steps to limit the inflows
of Euro-dollars to the United States. It was argued that those
flows were putting pressure not only on sterling but also on the
German mark. At the WP-3 meeting, Messrs. Deming and Solomon had
responded for the United States, but it had been suggested to him
(Mr. Brimmer) first privately and then during the EPC discussion
--------------------------------------- 49
11/27/67 -49
that the System should act to limit the inflows. Unlike Mr. Maisel,
he did not think that direct action with respect to Euro-dollar
flows to the United States was a feasible policy alternative. He
did think, however, that forward operations would be useful in
reducing the problems posed by the Euro-dollar market.
Chairman Martin concurred in Mr. Wayne's observation that
the matter at issue was one of magnitudes rather than adoption of
a new policy. He thought it might be desirable, however, for the
staff to prepare a study on the points Mr. Maisel had raised.
Mr. Maisel commented that the questions in his mind had
already been answered to his satisfaction. Earlier he had thought
the Committee was being asked to make a basic policy decision that
would have consequences for the next several years, but it was now
clear that the purpose was immediate market stabilization. While
he was willing to approve the proposed operations, he was not sure
that he agreed with Mr. Wayne that they represented no departure
from those of the past. In any case, he still felt that the
Committee should take pains to insure that it was using its various
policy tools in a logical manner. In the present case he thought
the Committee should recognize that it was employing one particular
instrument--appropriately, he hoped--in preference to others to
attain a particular objective.
Chairman Martin reiterated his view that the Committee
should plan on reviewing the matter continually; it was not a
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11/27/67 -50
closed book. The technique proposed might prove not to be the
best for the purpose, but emergencies often had to be dealt with
by experimental methods.
The Chairman then suggested that the Committee postpone a
vote on the proposed increase in the limit on forward operations
until it had heard Mr. MacLaury's other recommendations, which he
understood were to increase the size of certain swap lines. In
considering those recommendations the Committee members should
have in mind the possibility that they might prove to be desirable
on a temporary basis only. It was not clear to him that permanent
enlargements of the lines in the magnitudes Mr. MacLaury would
propose would be appropriate.
Mr. MacLaury said that, as Mr. Solomon had noted earlier,
the proposed swap line increases were an essential part of, and
had grown out of, the agreements reached in Frankfurt to stand
firm on the present parities and to insure stability in the market.
Mr. MacLaury then listed the proposed changes in the swap
lines with the central banks of the indicated countries and with
the BIS as follows, with all figures in millions of dollars:
Increase From To
Belgium 75 150 225
Netherlands 75 150 225
Germany 350 400 750
Italy 150 600 750
Sweden 100 100 200
Japan 300 450 750
BIS (Other European
currencies/dollars) 300 300 600
England 150 1,350 1,500
--------------------------------------- 51
11/27/67 -51
In explaining the proposed increases Mr. MacLaury noted
that the present swap line with the Netherlands Bank was already
fully drawn and there was a leeway of only about $19 million
remaining under the present Belgian line. There had been no
drawings on the German line recently, but a drawing of $50 million
was planned for the very near future to enable the System to offer
marks spot in the New York market. With that arrangement about to
be activated the increase proposed appeared to be desirable. At
the moment drawings of $300 million were outstanding on the arrange
ment with the Bank of Italy, and the System had been asked to draw
another $200 million to cover dollar inflows to Italy that had
occurred prior to the sterling devaluation. Accordingly, $500
million of the present $600 million Italian line would be in use
shortly.
Mr. MacLaury observed that the situation with respect to
the lines with Sweden and Japan was somewhat different. Those
countries had not been taking in dollars recently; indeed, they
had each lost about $50 million last week. However, as Mr. Solomon
had noted, their currencies could come under pressure in the
exchange markets in the wake of the sterling devaluation, and the
suggested swap line increases were intended to provide means for
coping with such pressures. As the Committee knew, relatively
few countries of any size had followed Britain's course thus
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11/27/67 -52
far--mainly New Zealand, Spain, and Denmark. If other major
countries that had initially decided to stand on their present
parity were forced off later, a new wave of speculation was
likely to break out.
The purpose of the proposed increase in the arrangement
with the BIS was also different, Mr. MacLaury continued, and was
connected with the objective of insuring stability in the Euro
dollar market. Some $68 million, drawn in mid-November, was now
outstanding on the affected line, which provided for drawings of
dollars by the BIS against European currencies other than Swiss
francs. However, the full amount of the existing line had been
utilized in the past, and the line was extensively used as
recently as midyear in the aftermath of the Middle East hostilities.
The increase in the line with the Bank of England had been
suggested by Mr. Coombs this morning, Mr. MacLaury said. In effect,
it was proposed to substitute a $150 million enlargement of that
swap line for the $100 million increase the Committee recently had
authorized in System holdings of guaranteed sterling and for $50
million of the $400 million of such holdings the Treasury had
indicated earlier that it was prepared to acquire. Briefly, that
substitution was suggested because the previous authorization to
acquire additional guaranteed sterling had been recommended at a
time when it was hoped that the British would be able to maintain
--------------------------------------- 53
11/27/67 -53
the prior sterling parity. As the Committee knew, there was no
definite time limit established in connection with guaranteed
sterling holdings. Under the new circumstances, with sterling
devalued, it seemed appropriate to have definite maturities apply
to any enlargement of the System's facilities with the Bank of
England. Increasing that swap line by $150 million also had the
incidental advantage of rounding off the total of the enlargements
to the figure of $1.5 billion.
If these increases were approved and the arrangements for
them satisfactorily completed, Mr. MacLaury observed, it was planned
to announce the enlargement of the System's network late in the day
on Thursday, November 30. That timing was suggested because the
impact of the announcement--which he thought would be considerable-
would then occur initially on Friday, typically the day of maximum
difficulties in the exchange markets.
Mr. MacLaury said he would recommend that the Committee
approve today the proposed increases in the swap lines with the
central banks of Belgium, Italy, the Netherlands, and Sweden, and
that in the swap line with the BIS. In those cases the other
parties had indicated, in the course of discussions that had taken
place over the weekend, that they were agreeable to the enlargements.
However, negotiations had not yet proceeded similarly far with the
British, Germans, and Japanese. Accordingly, he recommended that
--------------------------------------- 54
11/27/67 -54
the Committee approve the increases in the lines with the latter
three central banks, subject to a determination by Chairman Martin
that the negotiations had been satisfactorily completed. Finally,
to implement the proposal that the enlargement of the British swap
line be made as a substitute for the recent increase in the limit
on guaranteed sterling holdings by the System, he recommended a
revision of paragraph 1 B(3) of the authorization to reduce the
limit specified there on guaranteed sterling holdings from $300
million to $200 million.
Mr. Scanlon asked whether the matter of swap line increases
had been discussed at all with the central banks of England,
Germany, and Japan.
Mr. MacLaury replied that preliminary discussions had been
held with officials of the three banks, but that certain formalities
had to be accomplished before they could give a definite reply.
Mr. Scanlon then asked whether a failure of any one of the
three central banks in question to agree to the proposed enlarge
ments would have implications for the increases contemplated for
the others, and Mr. MacLaury said it would not.
Mr. Robertson asked whether it might not be desirable to
increase the swap line with the Bank of England by $500 million
rather than $150 million, even if it was thought that the extra
facilities might never be used, on the grounds that the psychological
impact on the market would be greater.
--------------------------------------- 55
11/27/67 -55
Mr. MacLaury replied that he did not think a $500 million
increase in the British swap line would be desirable at this time,
since it would bring that line to the clearly disproportionate
level of $1,850 million and would increase the likelihood that
cut-backs in the lines from their new levels would be required at
a later date. He noted that the United States was participating
to the extent of $500 million in the $1.5 billion credit package
to the British that had already been announced, and that an
announcement was expected shortly by the International Monetary
Fund that a $1.4 billion standby facility to the British had been
approved.
Mr. Brimmer observed that no increases had been recommended
in the swap lines with a number of central banks. He was not
surprised to find the Bank of France in that group. However, if
the list of recommended increases was announced he suspected that
question would be raised as to the reasons for the omission of
certain other central banks.
Mr. MacLaury replied that increases had been recommended
in the cases in which they seemed desirable in light of the likely
sources of exchange market pressures. While the Committee might
want to consider enlarging other lines at some point, the need for
acting quickly suggested the advisability of limiting the number
of enlargements now to those considered necessary at this time.
--------------------------------------- 56
11/27/67 -56
Mr. Hickman commented that the omission of the line with
the Swiss National Bank in particular might lead to questions
about the willingness of the other party to cooperate with the
System.
Mr. MacLaury said that at present there were drawings of
$242 million under the System's two Swiss franc swap lines--with
the Swiss National Bank and the BIS--leaving a leeway of $258
million, which appeared adequate for the time being. If the
willingness of the Swiss authorities to cooperate with the System
should be questioned one need only point to the fact that they
had demonstrated such willingness by many individual actions.
Chairman Martin commented that there were no doubts in
his mind on that score. In each of four conversations he had had
recently with President Stopper of the Swiss National Bank the
latter had said that he would cooperate fully with the Federal
Reserve.
Chairman Martin then asked whether there were any further
comments or questions on Mr. MacLaury's recommendations. Hearing
none, the Chairman suggested that the Committee vote on those
recommendations.
.
By unanimous vote, paragraphs 1B(3)
and 1C(3) of the authorization for System
foreign currency operations were amended,
effective immediately, to read as follows:
--------------------------------------- 57
11/27/67-57-
1B(3). Sterling purchased on a
covered or guaranteed basis in terms
of the dollar, under agreement with
the Bank of England, up to $200
million equivalent.
* * *
1C(3). Other forward commitments
to deliver foreign currencies, up to
$550 million equivalent.
By unanimous vote, the table contained
in paragraph 2 of the authorization for
System foreign currency operations was
amended, effective immediately, to read
as follows:
Amount of
arrangement
(millions of
Foreign bank dollars equivalent)
Austrian National Bank 100
National Bank of Belgium 225
Bank of Canada 500
National Bank of Denmark 100
Bank of England 1,350
Bank of France 100
German Federal Bank 400
Bank of Italy 750
Bank of Japan 450
Bank of Mexico 130
Netherlands Bank 225
Bank of Norway 100
Bank of Sweden 200
Swiss National Bank 250
Bank for International Settlements
System drawings in Swiss francs 250
System drawings in authorized European
currencies other than Swiss francs 600
By unanimous vote, the table contained
in paragraph 2 of the authorization for
System foreign currency operations was
amended to change (1) the amount of the
--------------------------------------- 58
11/27/67-58-
reciprocal currency arrangement with the
Bank of England from $1,350 million
equivalent to $1,500 million equivalent;
(2) the amount of the arrangement with
the German Federal Bank from $400 million
equivalent to $750 million equivalent;
and (3) the amount of the arrangement
with the Bank of Japan from $450 million
equivalent to $750 million equivalent,
in each case to become effective upon
a determination by Chairman Martin that
the negotiations looking toward such
change had been satisfactorily completed.
Secretary's Note: Chairman Martin
determined that negotiations had been
satisfactorily completed with respect
to the increases described above in
the reciprocal currency arrangements
with (1) the Bank of England, on
November 28, 1967; (2) the Bank of Japan,
on November 28, 1967; and (3) the German
Federal Bank, on November 30, 1967.
Also on November 30, 1967, Committee members
approved a recommendation by the Special
Manager that the amount of the reciprocal
currency arrangement with the Bank of
Canada be increased from $500 million
equivalent to $750 million equivalent.
Accordingly, the table contained in
paragraph 2 of the authorization for
System foreign currency operations was
amended, effective on the indicated dates,
to give effect to the indicated increases
in the four reciprocal currency arrangements.
Mr. Wayne left the meeting at this point and Mr. Ellis,
alternate, served as a voting member for the remainder of the
meeting.
Before this meeting there had been distributed to the
members of the Committee a report from the Manager of the System
--------------------------------------- 59
11/27/67-59-
Open Market Account covering domestic open market operations for
the period November 14 through 22, 1967. A copy of this report
has been placed in the files of the Committee.
In supplementation of the written report, Mr. Holmes
commented as follows:
For the past week domestic financial markets have
been dominated by events surrounding the devaluation
of the pound sterling. In the securities markets,
there was an initial sharp downward adjustment of
prices after the devaluation and the change in the
discount rate, followed by a sharp rally based on the
news that hearings on the Administration's tax bill
would be held by the House Ways and Means Committee
in this session of Congress.
On Friday, however, the growing uncertainties in the gold and
foreign exchange markets worked their way into domestic financial
markets and security prices again moved sharply lower.
The written report to the Committee covers developments
through Wednesday, November 22, when rates on three
and six-month Treasury bills were 15 basis points
below the peak reached on Monday. By the close on
Friday, rates at 4.91 and 5.48 per cent, respectively,
were nearly back to the peak, and stood 25 - 30 basis
points above the levels prevailing at the time of the
last Committee meeting.
It scarcely needs to be said that future develop
ments in our domestic financial markets will depend
on the success that is attained in restoring order in
the gold and foreign exchange markets, on the resolution
of fiscal problems, on the future course of monetary
policy, and on how all of these things react on the
real economy, on credit demands, and on expectations.
In the meantime, we shall have to live with sharp and
erratic fluctuations in security prices and market
interest rates. We must also be prepared for a
flexible use of open market operations and other tools
of monetary and debt management policy to preserve the
orderly functioning of financial markets. International
uncertainties pose a serious threat to the dollar, and
the threat would only be compounded if our domestic
markets were to get out of hand.
--------------------------------------- 60
11/27/67-60-
Pending clarification of some of these basic
forces affecting both domestic and international
markets, it is virtually impossible to sort out the
kind of monetary aggregates, money market conditions,
and interest rates that would be compatible with the
new discount rate. In general, I would agree with the
approach taken in the staff's interim report on money
market and reserve relationships.1/ At the moment,
fortunately, bank credit appears to be expanding less
rapidly than earlier this year and a somewhat slower
rate of growth is tentatively being projected for
December. The current level of short-term interest
rates, however, is already beginning to raise questions
about disintermediation and Regulation Q.
Domestic open market operations, like the financial
markets, were strongly influenced over the period by the
British devaluation and the increase in the discount
rate to 4-1/2 per cent. While it was obviously impossible
to predict over the devaluation weekend what the
precise money and capital market reaction would turn
out to be on Monday morning, it was readily apparent
that prompt and decisive System open market operations
could do much to facilitate an orderly adjustment to
the new set of circumstances.
Prior to the weekend, as uncertainty about
sterling grew, we began to concentrate at the Trading
Desk on the general course of action that might be
required if a full-fledged exchange crisis developed
over the weekend. Our considerations were based on
the general philosophy contained in the contingency
planning memoranda that have been in the Committee's
files for some time--a late draft having been
submitted by the Committee staff at the last meeting.
The essential points were the desirability of avoiding
disorderly market conditions, while encouraging the
market to find a new viable level of prices and
yields--i.e., to provide for an orderly adjustment
while avoiding any suggestion of pegging of prices.
In approaching these twin objectives it seemed clear
that both the immediate and longer-run functioning
of the market could be seriously disturbed if dealers
1/ A copy of this report, prepared for the Committee by the
Board's staff, has been placed in the files of the Committee.
--------------------------------------- 61
11/27/67-61-
tried to dispose of their portfolios of Government
securities in an unreceptive and uncertain market.
As developments unfolded over the weekend--with an
actual devaluation accompanied by an 8 per cent British
Bank rate and a 1/2 per cent increase in our discount
rate--it became abundantly clear that domestic financial
markets would face a substantial problem of adjustment on
the following day. Accordingly, after the announcement
of the increase in the discount rate at 2 p.m. on Sunday,
the officers of the Securities Department met at the New
York Bank to plan a specific approach for next morning.
In order to make sure that the Government security
dealers had all the available facts to consider over
Sunday night, we called senior representatives of each
dealer firm late Sunday afternoon or early Sunday evening
to read them the full text of the Board's announcement-
which apparently was not being carried in detail on radio
news broadcasts. In addition, we told each dealer that
we hoped the market would function as smoothly as possible
on Monday under the circumstances, and that we would be in
the office early on Monday morning.
Our judgment was that early and decisive System
action to reduce dealer positions, particularly in coupon
issues, would help head off distress dealer selling that
would only have pushed prices lower in a vacuum. The
strategy decided on was to bid dealers for about 40 per
cent of their net long positions of issues maturing in 1
to 5 years and about two-thirds of their holdings of longer
maturities. In order to include all dealers in the
operation we decided to bid those dealers who had net
short positions in the 1- to 5-year area for a token
amount. Dealers who had net short positions in securities
maturing in over 5 years would not, however, be given bids
in that area. Under these guidelines, we would be bidding
for about $125 million 1- to 5-year Government securities
and about $75 million longer-term Governments. Parenthet
ically, I should add that the fact that the Desk now
receives individual dealer figures greatly facilitated
our planning.
In determining the prices that we would bid the
dealers, we decided that a differential of 2/32 to 8/32,
depending on maturity, below the prices that the market
was bidding at the close on Friday would be appropriate.
This would place our bids generally 6/32 to 24/32 below
composite dealer offering prices on Friday. We recognized
that these prices were arbitrary to a certain extent and
--------------------------------------- 62
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that market prices on Monday would be likely to fall
below these levels. Nonetheless, we concluded that this
approach would underscore our desire to preserve the
capacity of the dealers to make markets effectively, and
would encourage the market to adjust on its own to a new
and viable price level following what was obviously a
"clear the decks" System operation.
On Monday morning at 9:15--well before the market's
normal opening time--we called each dealer firm and bid
them for a specific amount of securities in the 1- to
5-year and over 5-year maturity range, indicating that
the amounts were based on positions as of the preceding
Thursday. Dealers were told that they were under no
obligation to accept our bids, but to inform us what
particular securities they wanted to sell and we would
indicate our bid price. Bids totaled $124.5 million in
the 1- to 5-year area, of which dealers accepted all but
$3.5 million, and $72.3 million in the over 5-year area,
of which all but $7.1 million were accepted.
At about 10:15 the System returned to the market
with a regular go-around to buy Treasury bills. Dealer
offerings were close to $1.2 billion at rates generally
25 - 35 basis points above Friday night's close. Our
purchases amounted to $427 million, or about 15 per cent
of dealers' net positions. Following these two opera
tions, the System was able to remain out of the market
for the remainder of the week.
As we had hoped, the market was quick to adjust
prices to the new set of circumstances, and in an
orderly and constructive fashion. Prices began to
stabilize by late Monday morning, and while trading
over the rest of the day was light, dealers were enough
encouraged by the System actions to make markets. And
with the announcement later in the afternoon that the
House Ways and Means Committee would take up the
President's tax bill before Congress adjourns, market
sentiment, as noted earlier, improved sharply.
I have dwelt on System open market operations on
Monday following the devaluation and the change in the
discount rate in some detail because they represented
something of a departure from the approach we would
normally make. We are in process of preparing a
detailed memorandum describing the operations and
hope to mail it to members of the Committee and to
the Presidents not now serving on the Committee as
soon as possible.
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11/27/67
Clearly the circumstances were extraordinary. The
actions undertaken, I believe, were in full accord with
the Committee's desire for prompt and decisive action
to avoid disorderly market conditions in an emergency
situation. The market's reaction to the System approach
was universally favorable, even though prices by Tuesday
night had risen above those we paid on Monday morning.
It is perhaps not surprising that dealers who were taken
out of long positions in a falling market reacted favorably.
More significant was the fact that a similar reaction came
from the dealers that were short and to whom we made only
a token bid. Dealers were saved capital losses by our
action, but more importantly the whole market was
encouraged to undertake an orderly adjustment, and
dealers did not withdraw to the sidelines.
Looking to the future, it is quite obvious that
reserve projections and domestic open market operations
will continue to be strongly influenced by international
flows of funds, by gold market developments, and by their
impact on bank reserves, on the Treasury's cash position,
and on foreign account operations in the Treasury bill
market. Last Friday, for example, we had indicated on
the morning call that we contemplated taking no action
to affect reserves that day. Later on, however, we
unexpectedly received large foreign account orders to
sell Treasury bills at the very time that the bill
market was undergoing a rapid upward adjustment of
yields. To avoid adding pressure to the market we
took directly into the System Account the $191 million
of bills for sale by the foreign accounts.
Obviously the System cannot afford to abandon its
reserve goals entirely in order to ensure orderly market
adjustments, but some give and take may be necessary. In
the last statement week free reserves were at a low level
despite a massive supply of reserves through both domestic
and foreign operations. (It is interesting to note that
last Tuesday, when payment was made for the $427 million
Treasury bills purchased the previous day, various foreign
operations were supplying nearly twice as many reserves
to the banking system.) Fortunately, the $92 million
free reserve level for last week--a number that came
about more through chance than design--was accompanied
by very comfortable money market conditions on Tuesday
and Wednesday.
--------------------------------------- 64
11/27/67-64-
For the period immediately ahead, reserve projections
will be subject to sudden change depending on the ability
of the United Kingdom to repay its swap drawings, on the
timing and amount of the gold pool settlement, on System
and Treasury operations to mop up dollar inflows into
central banks abroad, as well as on the usual factors
affecting bank reserves.
In addition, we still have major discrepancies in the projection
of the Treasury's cash balance in mid-December, and I fervently
hope that the Treasury's prediction that they will not have to
borrow from the System proves correct. Consequently, the
reserve projections contained in the spread sheet attached
to the written report to the Committee had best be ignored
for the present. We will need to maintain the closest
coordination among the Committee staff, the Treasury, the
foreign department of the New York Bank, and the Trading
Desk just to keep on top of the situation as it develops.
I apologize for taking up so much time with details.
But I believe it is important in the period ahead for us
to be clear about the problems involved in attaining
reserve objectives, in preserving orderly financial
markets, and in accommodating the international flow of
funds. Maximum flexibility in the conduct of open market
operations will be required and the Treasury has indicated
its willingness to cooperate to the extent that it can
by a flexible management of its balance with the Reserve
Banks.
In closing, I might note that the Federal National
Mortgage Association will price its offering of partici
pation certificates tomorrow morning. As of Friday night
the syndicate managers were anticipating a good reception,
particularly of the longer issue.
By unanimous vote, the open
market transactions in Government
securities, agency obligations,
and bankers' acceptances during
the period November 14 through 26,
1967, were approved, ratified, and
confirmed.
Mr. Brill then made the following statement on economic and
financial developments:
It is far too early to observe any meaningful
reactions in the domestic economy to last week's
--------------------------------------- 65
11/27/67-65-
international events. The most we can do is reassess
the state of the economy on the eve of the events, and
speculate as to their likely impact over coming months.
In this connection it is important to note that
the strength of economic expansion so far this quarter
has been somewhat less than we had projected earlier.
Just some five weeks ago, we were expecting GNP to
increase at about a $20 billion annual rate this
quarter. Today we would probably trim that estimate
by at least $3 billion--perhaps somewhat more--although
when November data come in, the situation may look a
bit rosier.
One can readily identify several factors contribut
ing to this reduced appraisal of economic activity. The
auto strike is making a bigger dent in incomes, consumption,
and stock-building than we had allowed for earlier. Ford
was down for about two weeks more than we had expected,
and some work stoppages--or at least some drag on output--at
General Motors is still a strong possibility. Moreover,
some of the inventory increase we had expected to show
up in the fourth quarter--especially in a build-up of
automobile stocks--had occurred earlier and was captured
in the latest revised figures for third-quarter GNP.
These developments in the auto industry would trim from
$2 to $3 billion from our earlier estimate of the GNP
rise in the current quarter.
Secondly, the enactment of the Federal pay raise
is, sorrowfully, coming later than penurious Government
workers had hoped. The raise won't be showing up in
pay checks until too late in the quarter to boost
consumption as much as had been projected earlier.
Offsetting these factors causing us to reduce our
estimates of the current pace of expansion is the
stronger showing being made in residential construction,
which has continued a strong recovery. Housing starts
hit the 1.5 million annual rate in October. Also, there
may be a catch-up underway in defense spending, which
fell significantly short of projections in the third
quarter, but may make up some of the short-fall by year
end. Balancing out these pluses and minuses, we would
now estimate GNP growth in current dollars this quarter
to be in the $16 - $18 billion range, instead of the
$18 - $20 billion range projected earlier.
We won't know until Wednesday--when the BLS releases
new price data--whether there is any reason to change our
--------------------------------------- 66
11/27/67-66-
estimate of how large a share of the current-dollar
increase in GNP reflects price increases, and how much
real output gains. You will recall that nearly half of
the third-quarter rise in GNP represented higher prices
rather than real growth, with the deflator increasing
at a shocking 3.8 per cent annual rate. Our estimate
for the deflator in the fourth quarter is for a rise of
about 3 per cent in prices, plus about a seven-tenths
of a percentage point increase for the Government pay
raise. The reduced number of newspaper reports of price
increases suggests that some slight improvement in price
performance may indeed be under way, but we will have to
wait another day or so to get official confirmation.
Looking ahead, one can also find several reasons
for trimming estimates of future GNP increases. The
principal modification relates to the expected increase
in social security benefits, for which three different
proposals are under consideration in the Congress.
Without getting into too many technical details, the
principal difference in the proposals under consideration
relate to the amount and timing of benefit payments. We
would now guess that the most likely compromise will be
closer to the version reported by the Senate Finance
Committee, rather than to the House version we had used
earlier. The Senate Finance Committee's version, while
providing larger benefits, would postpone the initial
payments to beneficiaries until April 1, and thereby
reduce significantly the projected income and consumption
flows in the first quarter.
On a more general basis, one would also have to
assume that if the domestic and international financial
developments of recent days have any effect on consumer
and business spending propensities, it would be in the
direction of inducing greater caution in spending. All
of the talk--however unfounded--of the collapse of
international monetary arrangements, and of possible
collapse in international trade, and of new restrictive
measures, must operate to cause reconsideration of some
major expenditure decisions.
Moreover, at today's levels of short-term interest
rates, there is no great financial hardship in temporarily
remaining relatively liquid, and in postponing commitments
for long-term physical or financial investments. And at
today's levels of longer-term interest rates, a growing
number of borrowers appear to be priced out of the market.
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11/27/67-67-
A tally of municipal bond postponements, for example,
shows a significant increase in the number and dollar
volume of issues recently postponed or cut back in size.
The level of mortgage rates has continued to creep
closer to the 1966 peak; even before the discount rate
increase, the data indicated that insured mortgages were
trading at a level only about an eighth of a percentage
point below that of last November. And reports abound
of more restrictive non-price terms, suggesting that
some potential home owners may find it difficult to
finance their intended purchases.
The record volume of mortgage commitments outstanding
should maintain construction activity at high, but not
significantly rising, levels into next spring. But if
thrift institutions experience significant withdrawal
symptoms over the year-end dividend crediting period--an
increasing possibility, given the tapering in inflows that
has already occurred and the increasing attractiveness to
savers of market instruments--the flow of new commitments
to support housing activity later next year is likely to
be cut back significantly.
Over all, then, there seem to be adequate reasons for
lowering somewhat our expectations as to the prospective
pace of economic expansion. But even after allowance
for all of the factors contributing to a lessening of
ebullience in the economy, we're still left with prospects
of an excessively rapid increase in demands. The projec
tion presented at the last Committee meeting indicated
that without adequate fiscal restraint, GNP would rise at
a rate of about $22 to $23 billion over the first half of
1968, patently too rapid a pace in a relatively fully
employed economy. But even lowering our estimate to $19
or $20 billion a quarter isn't much comfort. Expansion
of demands at this rate would still leave us with
intolerably large price pressures.
Thus, there is no occasion yet to modify our advocacy
of fiscal restraint, particularly since it is needed not
only on domestic grounds, but more than ever before to
reassure holders of dollars abroad of our determination
to maintain the strength of our economy and our currency.
Until we win the fiscal battle, we will have to run the
risks inherent in increased monetary restraint. Therefore,
as soon as orderly market conditions permit, I would
recommend implementing through open market operations the
action taken on the discount rate, in order to achieve the
money market conditions specified in the interim blue book.
--------------------------------------- 68
11/27/67 -68
Chairman Martin then invited Mr. Solomon to amplify his
earlier remarks about recent international developments.
Mr. Solomon noted that the staff materials distributed to
the Committee before this meeting included some details on the
British program, announced simultaneously with the devaluation,
to reduce domestic demand and thus free resources for expansion
of exports. The ultimate objective was an improvement in the U.K.
balance of payments of $1.2 billion per year at the new exchange
rate. After a preliminary analysis the staff had concluded that
the program was reasonable, but its success obviously would be
contingent on the way in which it was implemented as time passed.
The point had been made, Mr. Solomon continued, that by
devaluing in 1967 rather than in 1964 the British simply had
wasted three years. But that was not necessarily the case. For
devaluation to be successful it was necessary, first, that there
be some slack in the British economy to permit an expansion of
exports; and second, that increases in wages and prices not be
permitted to erode the competitive advantage offered by the change
in parity. If the British had accomplished nothing else over the
last three years, they had produced some domestic slack and they
had developed the beginnings of an incomes policy. Accordingly,
he thought it was misleading to say that they had simply wasted
three years.
--------------------------------------- 69
11/27/67 -69
Mr. Solomon added that as a matter of simple arithmetic an
improvement of $1.2 billion in the U.K. balance of payments would
involve an equivalent deterioration in the balance of payments of
the rest of the world. Meanwhile the United States also would be
trying to improve its payments balance. Continental Europe was
the only area in the world that could afford to sustain much of a
deterioration in its balance of payments; the Far East could
tolerate a little, but not much. It was reasonable, then, to
expect that in the months ahead there would be some acute discus
sions of the need for international payments adjustments not only
by countries in deficit but also by countries in surplus. Unless
continental Europe was willing to accept a smaller surplus in its
payments balance it would not be possible for the United Kingdom
and the United States to achieve the improvements they sought.
Chairman Martin then said that it was necessary for him
to leave at this point to attend another meeting. Accordingly,
he would briefly state his views on domestic monetary policy. In
his judgment a posture of "steady in the boat" was called for at
this juncture; there were too many crosscurrents at work for the
Committee to do anything but mark time until its next meeting, on
December 12. He favored adoption of the draft directive submitted
by the staff.1/
1/ Appended to this memorandum as Attachment A.
--------------------------------------- 70
11/27/67-70-
Chairman Martin then withdrew, and Mr. Robertson assumed
the chair.
Mr. Brimmer noted that Mr. Brill had recommended implement
ing through open market operations, when the opportunity arose, the
policy of less ease implied by the discount rate increase. He asked
whether Mr. Brill believed such an opportunity might arise before
December 12.
Mr. Brill said he thought the answer probably would have
to be in the negative, in light of Mr. Holmes' remarks today on the
problems facing open market operations in the period immediately
ahead.
Mr. Holmes commented that mainly by chance free reserves
in the last statement week were at their lowest level in a long
time, and the rate on Federal funds had moved up to a 4-1/2 - 4-5/8
per cent range. Thus, it might be possible to attain the complex
of money market conditions specified in the interim blue book, but
whether all of the conditions could be maintained was uncertain.
Mr. Hickman remarked that he had not interpreted the money
market conditions specified in the interim blue book as involving
further tightening. Although they included a somewhat higher bill
rate, they also included ranges for free reserves and borrowings
of $100 - $300 million and $75 - $150 million, respectively. But
Mr. Brill's suggestion for implementing through open market
--------------------------------------- 71
11/27/67 -71
operations the discount rate action seemed to imply seeking more
restrictive levels of marginal reserves and borrowings.
Mr. Mitchell asked whether Mr. Brill had intended to
suggest that the Committee shift to a tighter posture for monetary
policy just at the time when prospects for Congressional action on
a tax increase had brightened.
Mr. Brill said that, first, with respect to Mr. Hickman's
comment, interest rates could rise with relatively little change
in marginal reserves and borrowings under present circumstances,
as had been noted in the interim blue book. However, in view of
the many other factors that were likely to be impinging on reserves,
marginal reserves might turn out to be far from recent levels,
whatever the System's intent. As to Mr. Mitchell's question,
Mr. Brill noted that interest rates had already moved up; as of
this morning, the bill rate was 30 basis points higher than at the
time of the discount rate action.
As he saw it, the question was how soon the full amount of the discount
rate increase should be reflected in the level of bill rates. Not being as
convinced of the imminence of fiscal restraint, he would recommend
moving to achieve money market conditions consistent with the new
higher discount rate as soon as conditions in the markets had stabilized.
Mr. Hickman commented that the level of bill rates that
would emerge also would depend to a large extent on the action
taken by the Ways and Means Committee this week.
--------------------------------------- 72
11/27/67-72-
Mr. Brimmer remarked that he saw no basis for changing
policy before the next meeting of the Committee. He interpreted
the staff's draft directive as authorizing the Manager, in light
of the existing uncertainties, to exercise his best judgment in
dealing with any unusual pressures that might develop.
Mr. Robertson suggested that in view of the lateness of
the hour the members confine their comments in the go-around to
the subject of the directive. Personally, he thought that the
period until the next meeting would be one of adjustment to recent
events. Accordingly, he believed that the Committee should not
change policy today, and that it should give the Manager leeway
to adapt operations to emerging developments.
Mr. Bilby said that this was a time for the Committee to let
the dust settle. He found the draft directive to be satisfactory,
and would stress that the Manager had to have considerable freedom
to adjust to unforeseen developments in the period ahead. He hoped
that some assistance would be forthcoming from fiscal policy.
Mr. Ellis said he would accept the draft directive on the
grounds that the objective of facilitating orderly market adjust
ments was of overriding importance at the moment. He would
emphasize, however, that that was a short-range objective. He
also viewed the increases in the swap lines that had been approved
this morning as having a short-range objective; for the longer run,
--------------------------------------- 73
11/27/67 -73
their effect might not be entirely positive. One important
ingredient of a program to defend the dollar in the short run
might very well be convincing evidence that the Committee intended
to contribute to that defense over the longer run through its
domestic monetary policy. Accordingly, he would endorse Mr. Brill's
suggestion that when possible the Committee should make it clear
that it intended to validate the discount rate action through open
market operations.
Mr. Irons thought that under the existing circumstances
the draft directive submitted by the staff was appropriate for
the brief period until the next meeting, on the understanding that
the Committee would make a thorough review of the situation at that
time. He agreed that, when possible, open market operations should
be used to validate the discount rate action.
Mr. Swan said he would accept the draft directive for the
period until the next meeting. Obviously it carried no implica
tions for the policy to be pursued in the subsequent period.
Messrs. Galusha and Scanlon indicated that they found the
draft directive acceptable. The latter added that he shared the
views Mr. Ellis had expressed.
Mr. Tow commented that both clauses of the draft directive
appeared proper for the next two weeks.
Mr. Mitchell agreed that the draft directive was appropri
ate. He thought the policy course Mr. Brill had recommended was
--------------------------------------- 74
11/27/67 -74
inappropriate, and was inconsistent with the latter's own remarks
on the economic outlook.
Mr. Maisel agreed with Mr. Mitchell's observation. It was
not his understanding that the discount rate action necessarily
implied any basic change in the Committee's reserve targets
.
Messrs. Brimmer and Sherrill indicated that they approved
the draft directive. Mr. Sherrill remarked that the Desk was to
be complimented on its operations of last Monday, which in his
judgment were entirely appropriate.
Mr. Hickman approved the draft directive. He thought
Mr. Mitchell's comments were well taken, and he saw no reason
for any definite change in policy at this time. Such a change
would have the disadvantage of injecting monetary policy into
the forefront of the debate on fiscal policy at a time when
Congressional interest in a tax bill had been renewed.
Mr. Francis said he was no less concerned about the
domestic situation than he had been for some time. However, he
recognized the critical environment existing at the moment and
thought that the course indicated in the draft directive was
appropriate for the present. He hoped that economic visibility
would be improved by the time of the Committee's next meeting.
By unanimous vote, the Federal
Reserve Bank of New York was authorized
and directed, until otherwise directed
--------------------------------------- 75
11/27/67 -75
by the Committee, to execute
transactions in the System Account
in accordance with the following
current economic policy directive:
System open market operations until the next meet
ing of the Committee shall be conducted with a view to
facilitating orderly market adjustments to the increase
in Federal Reserve discount rates; but operations may be
modified as needed to moderate any unusual pressures
stemming from international financial uncertainties.
It was agreed that the next meeting of the Committee would
be held on Tuesday, December 12, 1967, at 9:30 a.m.
Thereupon the meeting adjourned.
Secretary
--------------------------------------- 76
ATTACHMENT A
November 24, 1967
Draft of Current Economic Policy Directive for Consideration by the
Federal Open Market Committee at its Meeting on November 27, 1967
System open market operations until the next meeting of the
Committee shall be conducted with a view to facilitating orderly
market adjustments to the increase in Federal Reserve discount
rates; but operations may be modified as needed to moderate any
unusual pressures stemming from international financial uncertain
ties.
This criminal cabal has certainly built up their mechanisms since this time to conceal their sinister scheme from issuing dishonest money. It's blatant now and all of "in your face" is their behavioral response to inquiry. Damn the torpedoes, full steam ahead.
Great snapshot into the scheming mind of those we've entrusted with our lives. These are minds without wholesome values or principles.
Remember, an ethical person knows the difference between right and wrong... but a moral person lives it. Because this evil cluster makes the laws to accommodate themselves, they want you to conclude they are "ethical". In the common man's mind these thieves are nothing but immoral. Our cultures, religions and values are embellished in our constitutions which are defined by values, not ethics.
If you find this too cumbersome to read, the Fed source is here in pdf format.
 | ||||
| President Roosevelt signs the Banking Act of 1933 In the Banking Act of 1933, Congress established the name and legal structure of the FOMC as a formal committee of all 12 Reserve Banks |
--------------------------------------- 1
MEMORANDUM OF DISCUSSION
A meeting of the Federal Open Market Committee was held in
the offices of the Board of Governors of the Federal Reserve System
in Washington, D. C., on Monday, November 27, 1967, at 9:30 a.m.,
at the call of Chairman Martin.
PRESENT: Mr. Martin, Chairman 1/
Mr. Brimmer
Mr. Francis
Mr. Maisel
Mr. Mitchell
Mr. Robertson
Mr. Scanlon
Mr. Sherrill
Mr. Swan
Mr. Wayne 1/
Messrs. Ellis, Hickman, and Galusha, Alternate
Members of the Federal Open Market Committee
Mr. Irons, President of the Federal Reserve Bank
of Dallas
Mr. Holland, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Broida, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Brill, Economist
Messrs. Baughman, Garvy, Hersey, Koch, Partee,
and Solomon, Associate Economists
Mr. Holmes, Manager, System Open Market
Account
Mr. Cardon, Legislative Counsel, Board
of Governors
Mr. Fauver, Assistant to the Board of
Governors
Mr, Williams, Adviser, Division of Research
and Statistics, Board of Governors
Mr. Reynolds, Adviser, Division of International
Finance, Board of Governors
1/ Left the meeting at the point indicated.
--------------------------------------- 2
11/27/67 -2
Mr. Axilrod, Associate Adviser, Division of
Research and Statistics, Board of Governors
Miss Eaton, General Assistant, Office of the
Secretary, Board of Governors
Miss McWhirter, Analyst, Office of the
Secretary, Board of Governors
Messrs. Bilby, Eastburn, Mann, Brandt, and
Tow, Vice Presidents of the Federal
Reserve Banks of New York, Philadelphia,
Cleveland, Atlanta, and Kansas City,
respectively
Mr. MacLaury, Assistant Vice President,
Federal Reserve Bank of New York
Mr. Deming, Manager, Securities Department,
Federal Reserve Bank of New York
Mr. Anderson, Financial Economist, Federal
Reserve Bank of Boston
Mr. Kareken, Consultant, Federal Reserve
Bank of Minneapolis
Before this meeting there had been distributed to the members
of the Committee a report from the Special Manager of the System Open
Market Account on foreign exchange market conditions and on Open
Market Account and Treasury operations in foreign currencies for
the statement week ended November 22, 1967. A copy of this report
has been placed in the files of the Committee.
In supplementation of the written report, Mr. MacLaury
remarked that the financial world was quite different today from
what it was when the Committee last met, less than two weeks ago:
sterling had been devalued and, to paraphrase Secretary Fowler, the
dollar had moved to the forefront in the defense of the international
financial structure. Mr. Coombs was in Europe, along with Under
Secretary Deming, Governor Daane, and President Hayes, trying to
--------------------------------------- 3
11/27/67 -3
hammer out an agreement among the financial allies of the United
States for dealing with the unprecedented pressures in the London
gold market that broke loose last week, as anticipated, following
sterling's devaluation. In a past report to the Committee Mr.
Coombs had described the sterling and gold markets as like twin
time bombs: if one exploded, the other would explode as well.
That had now happened.
Mr. MacLaury said he would comment first on developments
in the gold market. In the week preceding sterling's devaluation,
the pool's losses amounted to $68 million; this past week, the
pool lost $578 million. The latter week started relatively slowly
since the London market was closed on Monday. In order to fore
stall any breakout of the price that day in other continental
markets--mainly Zurich and Paris--arrangements had been made on
Sunday to have gold made available through the Bank for International
Settlements acting for the Bank of England as Manager of the pool.
Total sales by the pool on Monday amounted to $27 million, a large
figure by former standards but small in comparison with the rest of
the week. With the reopening of the London market on Tuesday, demand
increased each successive day. Sales on Tuesday were $44 million;
on Wednesday, $106 million; on Thursday, $142 million; and on Friday,
$259 million. Although the demand for gold would have been heavy
in any case following the sterling devaluation, a report on Monday
--------------------------------------- 4
11/27/67 -4
in the Paris newspaper Le Monde to the effect that the Bank of
France had withdrawn from the gold pool and that two other central
banks (of Belgium and Italy) were about to do the same undoubtedly
exacerbated the situation, as no doubt it was intended to. In point
of fact, the pool members had continued to support the pool's
operations this past week, and had agreed to make contributions to
the pool up to a cumulative total of $1,370 million. As of Friday
evening, a leeway of only $113 million remained under that total.
However, yesterday in Frankfurt there was agreement not to let the
pool operations falter, as was indicated in the public statement
issued yesterday by Chairman Martin and Secretary Fowler.1/ Turn
over in the London market was only about $35 million thus far
today, down considerably from the levels of last week.
1/ The statement referred to is given below:
"The Secretary of the Treasury and the Chairman of
the Federal Reserve Board made available a communique
issued in Frankfurt, Germany, today which reads as
follows:
"'The Governors of the Central Banks of Belgium,
Germany, Italy, Netherlands, Switzerland, United
Kingdom and the United States convened in Frankfurt
on November 26, 1967.
"'They noted that the President of the United
States has stated:
"'"I reaffirm unequivocally the commitment of
the United States to buy and sell gold at the
existing price of $35 per ounce."' (Footnote
continued on next page)
--------------------------------------- 5
11/27/67 -5
As yet, Mr. MacLaury noted, the recent huge gold sales by
the pool had not been reflected in gold losses by member countries.
That was because the Bank of England provides the supply of bars
to the London market from its own stocks during the month, with
settlement by the other members of the pool early in the succeeding
month. Thus, while the Treasury might get through this month
without showing any reduction in its gold stock (and with perhaps
$50 million in the Stabilization Fund), it would face the prospect
of selling $434 million of gold to the Bank of England early in
December, representing the U.S. share of the pool's losses of $723
million thus far in November. That figure made no provision for the
possibility that France might convert all or part of its November
dollar gains into gold, as reported in the press last week. Such
conversion could cost another $200 to $300 million of gold, judging
by the New York Bank's estimate of French reserve gains. Obviously,
statements of central bank solidarity such as that issued yesterday
(Footnote continued from previous page)
"'They took decisions on specific measures to
ensure by coordinated action orderly conditions
in the exchange markets and to support the present
pattern of exchange rates based on the fixed price
of $35 per ounce of gold.
"'They concluded that the volume of gold and
for ign exchange reserves at their disposal
guarantees the success of these actions; at the
same time they indicated that they would welcome
the participation of other central banks.'"
--------------------------------------- 6
11/27/67 -6
in Frankfurt would help calm market fears temporarily, and it was
his hope that last week's surge of demand would not be repeated
this week. But it would take more than statements to calm the
market if the Treasury's published figures began to indicate U. S.
gold losses of several hundred million dollars. In the short run
the Treasury might be able to limit the size of the losses shown
by the published figures by borrowing gold from the BIS through a
temporary gold-dollar swap. Such a palliative would be futile,
however, unless action was being taken at the same time to deal
with the problem of gold losses through the London market. Such
action was what the U.S. representatives were now working toward
at the current meeting in Frankfurt. It went without saying,
however, that the ultimate restoration of confidence in the dollar
would await action to correct the U.S. balance of payments deficit.
Before leaving the subject of gold, Mr. MacLaury said, he
should mention that with the cooperation of the U.S. Air Force the
Treasury and the Federal Reserve were involved in a crash program
to airlift gold from this country to London. Although under normal
circumstances the Bank of England supplied market demand during the
course of the month from its own reserves, private demand had been
so heavy this month that the Bank of England's readily available
supplies in London had been exhausted with last Thursday's transac
tions. Arringements had been made to have gold held in London by
the German lederal Bank and the BIS placed at the disposal of the
--------------------------------------- 7
11/27/67 -7
Bank of England, in sufficient quantity to meet immediate demands,
while "operation airlift" got into gear. While he would not go
into the details, it was a formidable task to ship hundreds of
tons of gold across the Atlantic and process them at the other
end.
Turning to sterling, Mr. MacLaury noted that the New York
Bank had provided a fairly detailed account of the final days of
the $2.80 parity in its written report on recent foreign currency
operations. As Mr. Coombs had mentioned at the previous meeting
of the Committee on November 14, various types of credit packages
were being discussed just prior to and at the time of the last
Basle meeting on the weekend of November 12. In essence, the
impasse was that continental central banks refused to provide
credit to the British in the form of guaranteed sterling holdings
although some of them were prepared to provide credit in the form
of currency swaps; the Bank of England, however, was not prepared
to take on any more short-term debt. At the initiative of
Governor Carli of the Bank of Italy, a proposal for a $3 billion
British standby credit from the Fund was considered, only to be
rejected by the Fund itself, and possibly by the British Government
as well, since it feared that unacceptable conditions might be
attached to long-term credit in any form other than guaranteed
sterling. The New York Bank's written report had quoted from Prime
--------------------------------------- 8
11/27/67 -8
Minister Wilson's explanation to the British public of the reasons
for devaluing the pound. He (Mr. MacLaury) would be remiss if he
did not add that President Stopper of the Swiss National Bank,
echoing a similar statement attributed to the German Federal Bank,
had said explicitly last week that the British could have had
additional credit if they had wanted it, and that insofar as
central bank credit was involved, no unacceptable conditions
would have been attached. The blunt fact was that the British
Government made the decision to devalue on its own accord.
Prior to the devaluation, Mr. MacLaury continued, personnel
at the New York Bank were awaiting word of completion of a credit
package as anxiously as was the market. On Thursday of that week,
however, their hope for maintenance of the existing sterling parity
began to fade fast when the news ticker carried a report that
Chancellor Callaghan had refused in Parliament to confirm or deny
rumors of a credit package. Market participants similarly inter
preted that refusal as confirmation of their worst fears, and they
sold sterling from morning till night on Friday at an unbelievable
rate, draining more than $1 billion from British reserves on that
single day. Less than half that amount was promptly reflected in
reserve gains of major countries, and the presumption was that
much of the difference was placed temporarily in the Euro-dollar
market or represented short selling.
--------------------------------------- 9
11/27/67 -9
On Monday following devaluation, Mr. MacLaury said, the
exchange markets were, of course, stunned and there was little real
trading, especially since London was closed. Market participants
were preoccupied with trying to assess the damage, keeping track
of what other currencies were being devalued, straightening out
trading positions in sterling (a subject to which he would return
in a moment), and, of course, watching developments in the gold
market.
Tuesday was the first day of real trading, and even then
quotations for most currencies were wide and forward quotations
non-existent. Sterling, however, was at the new ceiling of $2.42
and the Bank of England took in $500 million. During the final
three days of the week, however, British reserve gains were not
very large, given the circumstances; they aggregated about $250
million, excluding the dollars taken in against market sales of
gold.
Thus, in the first week following devaluation the British
had recouped less than three-quarters of what they lost on the
preceding Friday alone. Although it was too early to tell, the
British might have some uneasy times before they were out of the
woods, despite the 14.3 per cent devaluation and apparently
stringent domestic measures.
As the Committee knew, Mr. MacLaury remarked, last Tuesday
the Bank of England drew the full $500 million still available
under its swap line with the System to make payments against their
--------------------------------------- 10
11/27/67 -10
purchases of sterling on the preceding Friday. At the same time
the British liquidated their remaining holdings of U.S. agency
securities, paying out the proceeds. He expected that the Bank
of England would be repaying some amount of its swap drawings
today. Although he did not know that amount at the moment, part
of it probably would be financed by use of dollars taken in
against market gold sales. If so, the British would need addi
tional dollars by the date of the pool settlement, and hopefully
they would have acquired them in market transactions.
Mr. MacLaury then said that he would digress from his
report on market developments at this point to discuss the sales
of sterling to U.S. commercial banks on a short-term (two- or
three-day) swap basis on Tuesday and Wednesday of last week, for
System and Treasury account respectively. A separate memorandum
on that technically complicated question was in preparation and
would be distributed to the Committee as soon as Mr. Coombs had
had a chance to review it. However, since the Committee would
be asked to ratify and confirm those transactions today, he would
do his best to explain the matter succinctly.
On the Friday prior to sterling's devaluation, Mr. MacLaury
observed, banks were inundated with offers of forward sterling from
their commercial customers and correspondent banks. Since for all
practical purposes it was impossible for the banks in turn to lay
--------------------------------------- 11
11/27/67 -11
off those offers in the forward market, they had two alternatives:
they could refuse to quote a rate to their customers, or they could
lay off sterling in the spot market where the Bank of England was
a steady buyer. Even in normal market circumstances, the latter
was the method used by the banks to keep their over-all positions
even, adjusting the time spectrum of their "books" subsequently.
Under the highly abnormal circumstances that day, the banks found
they had no choice but to sell out cash sterling balances they did
not have, anticipating that they could buy in those balances on
Monday in time to meet delivery commitments Tuesday. It was worth
emphasizing that the banks were not going short on sterling; rather,
they were acting to avoid being long as a result of customer sales
of sterling to them. When the British suddenly declared Monday to
be a bank holiday in London, many of the U.S. banks in question
found that they were not going to be able to deliver on their
sterling commitments on Monday in the manner they had anticipated.
Their predicament was brought to the attention of the New York
Reserve Bank on Sunday and it was taken up by the Foreign Exchange
Committee the following morning. That Committee, composed mainly
of the heads of the foreign departments of the major New York
banks, recommended that the Federal Reserve survey banks to
ascertain the dimensions of the problem, and that it act to
prevent defaults or losses by those banks that could certify
--------------------------------------- 12
11/27/67 -12
that their short cash positions were attributable to transactions
undertaken at the initiative of their commercial customers or
correspondent banks and were not the result of over-all short
positions undertaken by the banks themselves.
The New York Reserve Bank staff was convinced that the case
put to it was legitimate, Mr. MacLaury noted. It was also convinced
that failure on its part to act would be detrimental to the reputa
tion of the New York foreign exchange market and--unjustly--to the
banks involved, and would also threaten to produce disorderly
conditions in the exchange markets when sterling trading opened
on Tuesday.
Because of the limited time available, the New York
Bank's staff simultaneously surveyed the positions of foreign
exchange banks throughout the country with the assistance of the
other Reserve Banks, sought the views of the Bank of England--which
concurred in a proposal that the System use holdings of guaranteed
sterling for the operation--and submitted the proposed transaction
for approval to the Subcommittee of the Federal Open Market
Committee established by paragraph 6 of the authorization for
System foreign currency operations. The Subcommittee's approval
was sought because an operation of the type under consideration
was not explicitly authorized by the foreign currency directive,
and there was insufficient time to consult with the members of
the full Committee.
--------------------------------------- 13
11/27/67 -13
With the concurrence of a majority of the Subcommittee,
Mr. MacLaury observed, the New York Bank sold to commercial banks
a total of $87.2 million of sterling, value Tuesday, at $2.40 and
repurchased an equivalent amount, value Friday, at $2.3925. The
spread of 75 points between the two prices reflected the Bank's
estimate of the market discount, as closely as that could be
gauged under the circumstances. A similar operation, in the
amount of $22.2 million, was carried out for Treasury account,
value Wednesday, with repurchase value Friday.
He was convinced that those operations did much to prevent disorderly conditions
in the exchange markets that would otherwise have resulted from
the unanticipated closing of the London market, without in any
way bailing out speculators against sterling. Certificates from
the banks involved attesting to their positions in sterling were
on file at the Federal Reserve Bank of New York.
Before turning to other currencies, Mr. MacLaury said, he
would note that the New York Bank had sold to the Bank of England
the small System and Treasury balances of uncovered sterling on
the Friday preceding devaluation. The United States therefore had
suffered no exchange losses from its support operations in sterling.
Also, as the members knew, this past week Chairman Martin had
activated the authorization approved by the Committee at its
preceding meeting to increase System holdings of covered or guaran
teed sterling from $200 to $300 million equivalent, and to warehouse
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11/27/67 -14
an additional $150 million equivalent of foreign currencies for
the Stablilization Fund. On the basis of those actions and a
Treasury authorization, the United States had made available to
the Bank of England $500 million of additional credit facilities-
$400 million for Treasury account and $100 million for System
Account--in the form of a swap arrangement, entirely separate from
the System's present $1,350 million facility. That $500 million
credit line was part of the $1,500 million package of credits
announced by the U.K. authorities as a supplement to its requested
standby of $1.4 billion from the IMF to back up its new parity.
With respect to other currencies, Mr. MacLaury continued,
it was difficult to make generalizations. There were major inflows
to continental central banks on two days--the Friday preceding
sterling's devaluation, as he had mentioned, and the Friday
following (November 24). In between, there were either some
losses, notably by the Netherlands, or small gains. Over the six
trading days from Friday, November 17 through Friday, November 24,
there were net increases of reserves by France, of $315 million;
Germany, $303 million; the Netherlands, $116 million; Belgium, $55
million; and Switzerland, $75 million.
On the other hand, it was known that Sweden and Japan lost about $50
million each during the week following devaluation, and Canada lost $86 million.
Those flows of dollars had required certain operations by the New York
--------------------------------------- 15
11/27/67 -15
Bank, for either System or Treasury account. In the case of the
Netherlands, since the swap line with the System was fully utilized
prior to developments in the period, it was agreed that the Treasury
would provide temporary swap facilities to cover any dollars taken
in by the Netherlands Bank. A total of $126 million was covered in
that fashion, with $40 million of that amount first repaid and then
redrawn as the Netherlands Bank lost dollars immediately following
devaluation and regained roughly the same amount on Friday. In
addition, on Thursday and Friday the Netherlands Bank sold forward
guilders for System and Treasury account totaling $16 million each.
In the case of Belgium, Mr. MacLaury observed, the System
first bought $10 million equivalent of Belgian francs from the
National Bank, value November 20, in a transaction unrelated to
market developments, and then resold the same amount the following
day to absorb dollars taken in on the Friday prior to devaluation.
The Belgian arrangement had been fully utilized at the beginning
of the period, but the Treasury issued a Belgian franc bond of
approximately $60 million equivalent on November 24, thus freeing
that amount under the swap arrangement. It had been Mr. Coombs'
intention not to use that leeway since the Belgian arrangement
was the one swap line on which drawings had been outstanding for
more than six months. However, the choice was either to use the
leeway or to sell gold; and given that choice the decision was made
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11/27/67 -16
to use the leeway, at least temporarily. Accordingly, this past
Friday the System drew approximately $41 million equivalent under
the Belgian arrangement, using the proceeds to cover dollars taken
in by the National Bank on Thursday and Friday of last week.
In transactions unconnected with recent developments, Mr.
MacLaury remarked, the New York Bank acquired nearly $20 million
equivalent of Swiss francs from the Swiss National Bank and the
Bank of England and used them to reduce the System's swap drawings
with the Swiss National Bank and the BIS to $123 million and $119
million equivalent, respectively. However, the Swiss National
Bank took in nearly $70 million on Friday, and the chances were
that cover would have to be provided for that amount.
In conclusion, Mr. MacLaury noted that it was hardly
necessary to say that conditions in the gold and foreign exchange
markets had been about as turbulent as one could imagine during
the past two weeks. Whether or not less stormy weather lay ahead
remained to be seen. One could say with certainty, however, that
the problems ahead would be more manageable so long as central
banks stood together, and that was the importance of yesterday's
Frankfurt statement. He would make some recommendations intended
to give further effect to that cooperation at a later point today.
He had talked by phone with Mr. Coombs just before the meeting and
could report that Mr. Coombs had been encouraged by the develop
ments over the weekend.
--------------------------------------- 17
11/27/67-17-
Mr. Maisel asked Mr. MacLaury to amplify his remarks about
foreign exchange market developments last Friday, and to comment
on the sources of demand in the gold market and the methods that
had been used in financing purchases of gold.
Mr. MacLaury replied that exchange market developments on
Friday were quite different from those earlier in the week. In
contrast to the small gains or losses of reserves by European
central banks in the days immediately following the devaluation of
sterling, there were large dollar gains on Friday. For example,
the central banks of Germany and France took in over $100 million
each on that day; the Netherlands Bank, about $40 million; and the
Belgian National Bank, about $50 million. His interpretation of
the week's developments was that in varying degree the continental
currencies were less strong after devaluation than they had been
before, so that there was an abatement or cessation of inflows to
the central banks. Also, the markets' attention was focused on
gold during that period, with participants speculating on a rise
in the market price of gold. On Friday, however, perhaps as a
result of developments in the gold market and the attendant
publicity, there seemed to have been a wave of nervousness about
the dollar; people simply wanted to convert holdings into their
national currencies, without necessarily having any rational
belief that those currencies would appreciate relative to the
dollar.
--------------------------------------- 18
11/27/67 -18
With respect to the second question, Mr. MacLaury continued,
most of the recent gold purchases were made through Swiss banks and
the sources of demand were not known. There were rumors in the
market that much of the demand in the past week originated in Paris
and Moscow. It seemed clear that some Iron Curtain countries were
buying, although not necessarily Russia. Communist China had bought
$5 million of gold this morning. As to how the gold purchases were
financed, as he had noted, less than half of the funds that moved
out of sterling on Friday were reflected in reserve gains of major
countries that day, and much of the remainder presumably went into
the Euro-dollar market. Some of the funds moving out of sterling
may have been used to buy gold. Also, gold was excellent collateral
for bank credit, and some purchases may have been financed by bank
loans in various countries. In that connection, he might note that
the Swiss National Bank had undertaken a number of measures to help
deal with the gold situation so far as it lay within its power.
One measure was to get the agreement of the major Swiss banks to
refrain from making loans against gold collateral, and to call any
such loans now outstanding.
Mr. Brimmer asked if Mr. MacLaury would comment on a recent
news report that some central banks were beginning to buy gold.
Mr. MacLaury remarked that last week the only central bank
gold purchase from the U.S, Treasury was an $8-1/2 million purchase
--------------------------------------- 19
11/27/67 -19
by Surinam. The New York Bank had asked the Bank of England to
advise it of any identifiable central bank purchases on the London
market, and none had been reported. Also, under a second measure
taken by the Swiss National Bank, Swiss commercial banks had in
effect agreed not to sell gold to foreign banks, including central
banks.
Mr. Brimmer then referred to Mr. MacLaury's comments
regarding the New York Bank's sales of sterling to commercial
banks last week, and asked whether the central banks of any other
countries had conducted a similar operation with their commercial
banks.
Mr. MacLaury replied affirmatively. He noted that the
Bank of Canada had done so, and also that the German Federal Bank
had provided equivalent facilities to German commercial banks.
Mr. Mitchell referred to Mr. MacLaury's statement that "a
majority" of the Subcommittee of the Federal Open Market Committee
had concurred in the operation in question. He asked whether that
implied that the Subcommittee was not unanimous on the matter.
Mr. Robertson said he had not concurred when the question
was raised because he had not felt that the Federal Reserve should
use its sterling holdings to assist banks that in turn had accom
modated forward sales of sterling by their customers.
Mr. Mitchell asked whether the customers of the banks in
question might have been speculating in sterling.
--------------------------------------- 20
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Mr. MacLaury replied that some of the customers might have
been speculating; indeed, there had been a press report on Monday
to the effect that some corporations had oversold their expected
sterling receipts. That possibility had been a matter of great
concern to the New York Bank. It seemed clear, however, that the
commercial banks involved had done all that might reasonably have
been expected of them to avoid facilitating speculation by their
customers. For example, they did not accommodate forward sales
of sterling by individuals. About the only way the banks could
have policed the transactions more effectively would have been to
ask every customer involved whether the sterling they wanted to
sell forward represented bona fide expected receipts.
He did not think it was reasonable to expect banks to do that under normal
circumstances, and certainly not under the circumstances prevailing
that Friday. While on the subject, he would note that in the
certifications required of the commercial banks, the New York
Bank had requested information on the banks' over-all position in
sterling, and had deducted the amount of any net short positions
from the sums of sterling made available to the banks, unless such
positions could be explicitly justified.
Mr. Mitchell then asked what the consequences would have
been if the New York Bank had not accommodated the commercial
banks.
--------------------------------------- 21
11/27/67 -21
Mr. MacLaury replied that the banks would not have been
able to deliver the sterling they had sold, despite the fact that
their over-all positions were in balance. By abrogating those
contracts, they would have been left in a long sterling position,
having acquired forward sterling from their customers at a price
of $2.76 or so.
Mr. Mitchell asked whether the amounts involved with respect
to individual banks were reasonably related to the normal volume of
their foreign exchange business or whether the transactions were
heavily concentrated in one or two banks.
Mr. MacLaury replied that the sterling swaps made on Tuesday
were heavily concentrated in one bank, but that bank was one of the
most active foreign exchange traders in the market. Those made on
Wednesday were more evenly spread among the total of ten banks
involved. Details on the transactions with each bank would be
included in the supplementary memorandum being prepared for the
Committee.
Mr. Robertson said that, irrespective of any member's view
of the operation, it should be noted that the Bank of England had
concurred in it, even though it suffered a loss as a result. The
Bank of England also had provided sterling to the Bank of Canada
to facilitate a similar operation. Moreover, as Mr. MacLaury had
reported, the German Federal Bank had provided such facilities to
German commercial banks.
--------------------------------------- 22
11/27/67 -22
Mr. Mitchell commented that he was not unhappy with Mr.
MacLaury's explanation of the operation, although he would be
interested in studying the more detailed memorandum when it
became available.
Mr. Robertson remarked that in his judgment the Account
Management was fully justified in carrying out the operation on
the basis of the approval it had received from a majority of the
Subcommittee. The main value of the memorandum, he thought, would
be in helping the Committee to determine how it should react if
a similar problem arose in the future.
Mr. Wayne noted that a member bank had reported to the
Richmond Reserve Bank that one of its commercial customers was
asking it to make arrangements for them to purchase gold to be
held in Canada. The Reserve Bank had replied that such a
transaction by an American citizen was illegal. One possible
implication of the inquiry was that the bank's customer knew of
similar transactions that had been made in the past. Mr. Wayne
asked whether this was likely to have been an isolated instance
or whether other persons had engaged in such transactions.
Mr. MacLaury replied that he heard of no such transactions
during the past week. Previously, however, he had heard that some
American citizens were buying options on gold in Canada, which in
effect were future contracts. Such purchases were considered by
--------------------------------------- 23
11/27/67 -23
some to be technically legal, so long as the contracts were sold
before the owner actually took possession of the gold.
Mr. Hickman commented that a news story over the weekend
had reported rumors of gold purchases not only by nationals of
foreign countries but also by American citizens. The article did
not specifically mention Canada as the place at which the gold was
held.
Mr. MacLaury remarked that there had been allegations of
illegal gold purchases by U.S. citizens for some time, but he had
no independent information on the subject.
Mr. Galusha referred to Mr. MacLaury's comment that the
British Government had decided to devalue sterling on its own
accord. He asked whether Mr. MacLaury thought the British had
any real alternative, in light of the prevailing circumstances.
Mr. MacLaury replied that in his judgment they did have
an alternative. Credits were available to them, and the period
was approaching in which seasonal forces would be working in
sterling's favor. He thought the British could have weathered
the storm if, instead of devaluing, they had taken all or even
some of the restrictive measures that they had found desirable
as accompaniments of devaluation--including a much higher Bank
rate, lower Government expenditures, curbs on bank loans, more
restrictive hire-purchase controls, and so forth. While they
had chosen to devalue it was still not clear that they were out
--------------------------------------- 24
11/27/67 -24
of the woods. In his opinion, they were really no better off now
in terms of their national interest than they would have been had
the sterling parity been maintained.
Mr. Galusha commented that having devalued at this time
the British might find it a little easier to do so again. He asked
whether Mr. MacLaury thought that was an imminent possibility or a
matter for concern over the longer run.
Mr. MacLaury replied that another sterling devaluation
certainly did not appear imminent. The imminent concern in con
nection with the British situation related rather to the question
of how quickly the Bank of England might be able to repay its
short-term debts to the Federal Reserve and to others.
In reply to another question by Mr. Galusha, Mr. MacLaury
said that Britain's reserve position was negative at the moment.
As of the Friday before devaluation they held exactly $45 million
in foreign currency reserves and approximately $1.5 billion in
gold. Their outstanding short-term debts were now close to $2
billion; they had borrowed the full $1,350 million available under
the Federal Reserve swap line and over $500 million under the
sterling balance arrangement.
Mr. Ellis remarked that one implication of the statement
that the British had a free choice with respect to devaluation
was that they had full opportunity to negotiate with respect
--------------------------------------- 25
11/27/67 -25
to credit assistance. However, the press reports gave the impression
that they were not really free to conduct confidential negotiations;
that there had been deliberate leaks to forestall free negotiations.
Would Mr. MacLaury accept that as another reason the British chose
to devalue?
Mr. MacLaury replied that if the British had been prepared
to accept short-term credits he thought the necessary arrangements
could have been made expeditiously and confidentially, as had been
the case in the past. It was Britain's refusal to accept additional
short-term credit--and one could advance arguments for and against
their position--that prolonged the negotiations and led to the leaks.
Mr. Swan commented that while the U.S. Treasury would sell
gold only to central banks and governments, the London gold market
and the gold pool as presently operated provided private foreign
buyers with easy access to gold stocks. He recognized that the
present was not the time to make any structural changes in those
arrangements, but looking ahead he thought it would be desirable
to explore possible methods for restricting access to gold through
the London market, in line with the Treasury's policy respecting
sales out of its own stocks.
Mr. MacLaury then responded to a number of questions by
Messrs. Sherrill and Maisel concerning technical aspects of recent
flows through the sterling and gold markets. In the course of his
--------------------------------------- 26
11/27/67 -26
comments he noted that much of the large volume of funds flowing
out of sterling that had been temporarily lodged in the Euro-dollar
market was now apparently being rechanneled in three directions:
reflows into sterling, purchases of gold, and flows into continental
currencies.
Mr. Brimmer reported that while in Paris on the Friday just
before the devaluation of sterling he had spent some time with the
manager of a branch of one of the large American banks, and had
been told that Euro-dollar deposits at that branch and at the bank's
branch in Frankfurt had increased by one-third in the course of
Thursday and Friday. In the manager's judgment much of that inflow
was coming from U.S. corporations that had had balances in sterling.
That morning the newspaper Figaro had carried a front-page story
reporting that sterling would be devalued, although it mistakenly
set the new parity at $2.50 rather than $2.40. In light of such
reports, it was not surprising that there had been tremendous
inflows to the Euro-dollar market from sterling.
By unanimous vote, the System open market transactions in foreign
currencies during the period November 14 through 26, 1967, were
approved, ratified, and confirmed.
Chairman Martin invited Mr. Solomon to comment on the
devaluation of sterling and subsequent developments.
Mr. Solomon said that whatever one's views on the justification for
the decision to devalue the pound, it was clear that
--------------------------------------- 27
11/27/67 -27
once that decision had been taken the devaluation was accomplished
in an orderly manner, with such details as notifying foreign
monetary authorities handled appropriately. More important, the
amount of devaluation was kept to a figure that did not stimulate
other major countries to follow. It was fair to say that inter
national monetary cooperation had continued and had even been
strengthened under the stresses of the last ten days. Of extreme
importance was the fact that all of the Group of Ten countries and
many other countries as well had announced that they were holding
to the existing parities for their currencies. One of the major
concerns in the course of contingency planning had been that the
British would decide to devalue by an amount larger than other
major countries could tolerate, and that that would set off a
wave of devaluations that would bring enormous pressures on the
U.S. gold stock. That fear had not been realized.
In the contingency planning, Mr. Solomon continued, it
was assumed that if market participants reacted rationally to a
sterling devaluation they would conclude that it was not sensible
to shift their dollar holdings into other strong currencies. Such
a conclusion appeared warranted on the grounds that other countries
inevitably would follow any devaluation of the dollar in terms of
gold, so that there would be no speculative profits to be gained
by shifting from dollars into other currencies--except, perhaps,
--------------------------------------- 28
11/27/67 -28
sterling. For most of last week, it appeared that market partici
pants were acting in a rational manner; until Friday, flows into
continental central banks were quite moderate. On Friday, however,
following large market sales of gold, there was a sizable flow to
continental central banks, as Mr. MacLaury had indicated. Presumably
uncertainties about the dollar had mounted on that day.
Mr. Solomon went on to say that in the contingency planning
it had been anticipated that in the wake of a devaluation there
would be heavy pressures in the London gold market, with losses
by the pool on the order of $100 million per day. In fact, daily
losses by the pool last week averaged a bit more than that. But
the volume of private demands for gold should not be considered
surprising, particularly since it was augmented by the French leaks
to the press concerning their withdrawal from the pool and the
possible withdrawal of Belgium and Italy, and concerning the size
of recent losses by the pool--on which, incidentally, the French
supplied inaccurate figures. The reasons for the heavy speculation
on gold were a matter of interpretation, but it was his belief that
private gold buyers were not betting on a rise in the official
price of gold. It was likely, rather, that most of them were
expecting a higher price in the London market on the assumption
that pool members would stop supplying gold to that market.
Mr. Solomon commented that the weekend meeting in Frankfurt
had been arranged against the background of those heavy private
--------------------------------------- 29
11/27/67 -29
demands for gold. The meeting resulted in a strong reaffirmation
of international financial cooperation and, specifically, in a
decision to continue to support the gold pool. Meanwhile, consul
tations were continuing among the gold pool participants. The U.S.
delegation to Frankfurt carried a proposal for a so-called "gold
certificate" plan designed to strengthen the pool and to demonstrate
to the market that the participating countries intended to continue
to maintain the present price of gold. If that plan were agreed
upon and its announcement had the intended effect on the market,
the pool should have to sell very little gold because speculation
would stop. A summary of the plan, which at this point was, of
course, highly confidential, would be distributed to the Committee
later today.1/
Mr. Solomon observed that the Swiss authorities revealed
at Frankfurt that they had taken certain measures to tighten up on
private purchases of gold. Those included the measures Mr. MacLaury
had mentioned--prohibiting bank loans against gold collateral and
asking banks not to sell gold to foreign commercial or central
banks. In addition, forward sales of gold were stopped and maturing
forward contracts would not be renewed. Governors of the other
European central banks at the meeting agreed to do what they could
1/ A copy of this summary, dated November 24, 1967 and entitled
"A Gold Certificate Plan to Stabilize the Gold Market," has been
placed in the files of the Committee.
--------------------------------------- 30
11/27/67 -30
under the laws of their own countries to emulate the Swiss actions,
especially that with respect to loans against gold collateral.
It was also agreed at Frankfurt, Mr. Solomon said, that if
Friday's flows out of dollars into European currencies continued the
central banks would operate in a coordinated way in forward markets
to stem the flows and to encourage a reflow back to the Euro-dollar
market. Forward purchases of dollars by European central banks in
such operations would be covered largely by the U.S. Treasury but
also, if the Committee approved, by the Federal Reserve. He
understood that Mr. MacLaury would make a recommendation on that
subject today, as well as recommendations for increases in certain
of the System's swap lines that would be an essential part of the
coordinated effort. He should note that Secretary Fowler had asked
U.S. officials not to comment to the press with respect to the
Frankfurt meeting; it was better to let the statement that had been
issued stand on its own and let the market effects of the decisions
taken speak for themselves.
A question often asked, Mr. Solomon continued, was whether
it was necessary for the United States to be so concerned about
the free market price of gold in London as to undertake to sell
gold to private buyers there through the pool, when Americans were
not permitted to buy gold. In his judgment the major justification
for that course was that a break-out of the London price would be
--------------------------------------- 31
11/27/67 -31
likely to affect the behavior of central banks. If the market
price was permitted to rise foreign central banks that had to sell
gold for one reason or another would be tempted to sell it on the
market, whereas those wanting to buy gold would take advantage of
the official U.S. price of $35 an ounce. In fact, some central
banks might be tempted to buy gold from the United States for the
purpose of reselling it at the higher market price. Secondly, a
rise in the market price might be regarded as a challenge to the
official price of gold and lead many central banks to feel obliged,
as a precautionary measure, to convert their dollar holdings into
gold.
Mr. Solomon concluded with a comment on the role played by
the French in recent developments. There was no doubt, he said,
that they had acted in an unfriendly and mischievous fashion. It
was important to note, however, that the French had little power to
affect developments by any means other than making press statements
and leaking confidential information in an effort to embarrass
the United States. It would be a self-delusion, he thought, to
conclude that the present problems would be much less serious than
they were if the French had not acted mischievously. He was, of
course, not trying to defend the French, but simply to put their
actions into perspective.
Mr. Brimmer said he wondered whether the French were quite
as impotent as Mr. Solomon had suggested. Mr. MacLaury had noted
--------------------------------------- 32
11/27/67 -32
that the Bank of France might convert its substantial dollar gains
of November into gold. Secondly, operations by the Bank of France
to supply gold to the Paris market, while tending to hold down the
price, appeared to run counter to the efforts the Swiss were making
to limit private demands.
In response to questions by Mr. Mitchell, Mr. Solomon said
that citizens of France, like those of Belgium, Germany, and other
continental European countries, were free to buy gold in the private
market. In general, gold was in circulation on the continent and
unlimited amounts could flow into private hands. No action by the
Bank of France was necessary to keep the price of gold bars in
Paris in line with that in London; that function was performed by
arbitrage between the two markets. In Paris, however, gold also
was traded in the form of Napoleons, and if the price of such coins
rose the Bank of France would sell them into the market. In his
judgment such operations were not harmful to the interests of the
United States.
Mr. MacLaury added that while Napoleons were freely avail
able in France and the Bank of France operated in the market, they
were not available "on tap" at the Bank. He then said, in
clarification of his earlier comment on the subject, that he knew
of no official indication that the French intended to convert their
November reserve gains into gold. However, they had taken in over
--------------------------------------- 33
11/27/67 -33
$300 million thus far in the month, and the press was noting they
now had the dollars with which to buy gold if they chose.
Mr. Sherrill referred to Mr. Solomon's comment that there
had been considerable speculation on a rise in the London price of
gold. He asked whether Mr. Solomon would anticipate a reflow of
gold to that market if participants concluded that the price would
remain firm.
Mr. Solomon replied that while the gold market this morning
was much calmer than it had been, he did not know whether there
would be a reflow.
Mr. Sherrill then asked whether there had been reflows in
the past following periods of speculation.
Mr. MacLaury responded in the negative. Past bursts of
speculation had been followed by abatements in demand, he said,
but what selling had occurred had been more than offset by buying.
On the other hand, market purchases had never been of the size
experienced last week.
Mr. Ellis noted that Mr. Solomon had characterized the
British devaluation as orderly. Certainly that was not the
unanimous view in Britain; the Conservative Party in particular
did not share it. Moreover, on the Friday before devaluation had
been announced the British had suffered a tremendous loss of reserves.
If the process was orderly, why had they not been able to forestall
that loss?
--------------------------------------- 34
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Chairman Martin commented that from conversations with
Governor O'Brien he had concluded that the devaluation had been
planned in a highly orderly manner, with time allowed for
dispatching people to the Commonwealth countries to explain the
action in advance. However, the plans had been upset by Chancellor
Callaghan's noncommittal answer to a question concerning a credit
package in Parliament on Thursday, which precipitated the final
wave of speculation against sterling. In retrospect, it appeared
that it would have been best for the Bank of England to announce
that their financial markets would be closed on Friday, but they
had not anticipated that the Chancellor would make the statement
he had.
Mr. Brimmer commented that in Paris on Thursday it was
thought even after Chancellor Callaghan's statement that difficul
ties in the negotiations for a credit package were the source of
the trouble. In his judgment the real mischief had been done by
leaks in Paris that the British had decided to devalue.
Chairman Martin remarked that Mr. Brimmer's view might
well be correct, since the news media were carrying reports on
the devaluation decision on Friday morning. It was likely that
analysts would be writing about the events in question for a long
time to come and perhaps they would never be fully clarified.
Mr. Maisel asked whether information was available on the
specific costs of speculating in gold, apart from foregone interest
--------------------------------------- 35
11/27/67 -35
earnings. For example, were transportation and storage costs
appreciable?
Mr. Solomon said he thought that the major cost was
represented by the loss of interest earnings on the assets used
to buy gold, which of course did not have to be dollar assets.
Mr. MacLaury agreed. There were no necessary transportation
costs, he said, because the gold bought could be held in London.
While he did not have exact figures on storage charges at hand,
they were less important than the interest lost. Until lately, at
least, there had been adequate storage facilities in Britain.
However, he had heard one ironical comment to the effect that U.S.
difficulties in supplying gold recently were matched by the buyers'
difficulties in digesting it.
Mr. Galusha asked whether information was available on
losses suffered by U.S. nationals as a result of the sterling
devaluation, and Mr. MacLaury replied in the negative.
Chairman Martin then said he would bring the Committee up
to date about other aspects of recent events. In his judgment the
System had performed very well during the whole period. In the
days immediately following the preceding meeting of the Committee
on November 14, the Board did not act with respect to the higher
discount rates that had been voted by the directors of two Reserve
Banks. On Friday, November 17, Mr. Kirbyshire of the Bank of
--------------------------------------- 36
11/27/67 -36
England came to the Board's offices at 1:15 p.m. to inform Governor
Robertson and himself of the decision that had been taken to devalue
sterling. He (Chairman Martin) had suggested to Secretary Fowler
that they talk with the President immediately, to urge him to press
for action on the tax bill in light of the devaluation, and they
did meet with the President. Later that afternoon he and Secretary
Fowler attended a White House meeting with the leadership of both
the House and Senate, including Chairman Mills of the House Ways
and Means Committee. At that meeting the President reported that
the British Ambassador had called at one o'clock to advise him
that a devaluation of sterling would be announced the next day.
The President placed considerable emphasis on the devaluation in
speaking to the Congressional leaders about the need for fiscal
action.
Subsequently on Friday, Chairman Martin continued, he,
Secretary Fowler, and Under Secretary Barr met with Congressman
Mills at the airport, from which the Congressman was leaving for
a speaking engagement, and urged him to go forward with the tax
bill. The Ways and Means Committee would hold open hearings on
the subject on Wednesday, November 29, at which Secretary Fowler,
Budget Director Schultze, Chairman Ackley of the Council of
Economic Advisers, and he were scheduled to testify. He anticipated
that each of those officials would urge the necessity of fiscal
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11/27/67 -37
action. What the outcome would be could not be predicted at this
time.
As the Committee members knew, Chairman Martin observed,
the Board had met on the afternoon of Saturday, November 18, to
approve the discount rate increases to 4-1/2 per cent that had
been established by the directors of three Reserve Banks as of
that time, as well as any similar increases at other Reserve Banks
concerning which notification was received by 1 p.m. Sunday. By
the latter time ten Reserve Banks had established 4-1/2 per cent
discount rates. Prior to its action the Board had discussed at
some length the question of whether the new discount rate should
be 4-1/2 or 5 per cent, and had decided unanimously to approve the
4-1/2 per cent rate. On the whole, he thought the action had been
well received as a moderate, precautionary move. It was acceptable
to the Administration.
Moving on to the more immediate past, the Chairman
continued, it had become apparent by Tuesday, November 21, that
pressures were building up in the London gold market. On Wednesday
the so-called "Deming group," on which the Federal Reserve, the
Council of Economic Advisers, the State Department, and the White
House were represented, began a series of meetings under the
chairmanship of Under Secretary Deming. The group concluded that
it would be desirable for the central banks participating in the
--------------------------------------- 38
11/27/67 -38
gold pool to issue a joint statement designed to calm the situation
in the gold market. Messrs. Deming and Daane brought to him
(Chairman Martin) a draft of such a statement and suggested that he
discuss it with the governors of the central banks concerned. While
the draft differed in wording from the statement that was eventually
issued, like the latter it included a quotation of the President's
earlier reaffirmation of the U.S. commitment to the existing official
price of gold. He was not able to reach Governor Carli of the Bank
of Italy until Thursday--that is, Thanksgiving Day--but he talked
with the other governors on Wednesday. Two of the governors were
agreeable to the statement. However, others thought there should
be some consultation before any announcement was made that the gold
pool would be continued, and one was inclined to the view that the
London gold market should be closed immediately.
By Thursday morning, Chairman Martin said, all of the
governors agreed that it would be unwise to issue a statement
without consulting with one another. Governor Blessing of the
German Federal Bank agreed to chair a meeting of the governors,
and arrangements were made to hold that meeting in Frankfurt on
Sunday. After many hours of discussion the governors reached the
agreements that had been outlined to the Committee today by Mr.
Solomon. At about noon yesterday he and Mr. Solomon had met with
Secretary Fowler and others, and received a full report from
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Messrs. Deming, Hayes, and Coombs in Frankfurt on the outcome of
the meeting. As a result of that report Secretary Fowler and he
made available here copies of the statement to which reference
had already been made.
The Chairman added that before learning of the outcome
of the discussions he had been fearful that they would not be
successful, in light of the views some of the central bank
governors had expressed to him in the telephone conversations
leading up to the meeting, and in light of the enormous demands
for gold in London on Friday. In his judgment full credit should
be given to Mr. Deming, who had done an outstanding job in the
negotiations. The Frankfurt results were a major achievement in
multilateral financial cooperation. The problem was yet not
resolved by any means but at least the current wave of speculation
had been ended. It was obvious that further steps would have to
be taken soon, and others might be required as time passed. Mr.
Solomon had noted that one of the agreements reached at Frankfurt
concerned forward operations. A "command post" for forward
operations had already been established in Frankfurt, which was
manned at the moment by Messrs. Coombs, Tungeler, and Ikle.
The Chairman then suggested that at this point the Committee
hear the recommendations of Mr. MacLaury, which were designed to
facilitate the implementation of the agreements reached at Frankfurt.
--------------------------------------- 40
11/27/67 -40
Mr. MacLaury said he would start with a recommendation
relating to the forward transactions to which the Chairman had
just referred. As Mr. Solomon had noted, a number of the
continental central banks were prepared to operate in the forward
market, selling their currencies forward against dollars, which
amounted to offering a pledge to the market that their present
parities would be maintained. Such operations had been conducted
in German marks and Swiss francs in 1961 following the revaluation
of the mark and the guilder, and subsequently had been carried out
successfully for a long time by the British. The U.S. Treasury
had agreed to provide unlimited cover for any dollars bought
forward by the continental central banks, and the Account Manage
ment felt strongly that the Federal Reserve should participate
along with the Treasury in providing such cover. In fact, as he
had indicated earlier, the Netherlands Bank had already started
selling guilders forward against dollars, with the System and the
Treasury jointly providing cover. It was not possible at this
time to predict the amounts likely to be involved; if the market
remained calm they could be small. However, in order to be
prepared to carry out such operations in the amounts necessary,
he would recommend that the Committee double the limit on
authorized System commitments to deliver foreign currencies that
was specified in paragraph 1C(3) of the authorization. In other
--------------------------------------- 41
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words, he would recommend replacing the present limit of $275
million with a new limit of $550 million.
In reply to a question by Mr. Hickman, Mr. MacLaury said
that under the proposal the continental central banks would be
operating in their respective markets for the account of the System
and the U.S. Treasury, just as the Federal Reserve operated in the
New York market for the accounts of foreign central banks.
In effect they would be guaranteeing the availability of their currency
to participants in their markets who had forward commitments or
other needs for forward cover back into their currency, in order
to avoid pressures on the spot market. By way of illustration, he
might refer again to the situation with respect to German marks in
1961. As the Committee might recall, after the 5 per cent reval
uation of the mark in that year there was much speculation about a
possible additional 5 per cent revaluation. Traders who had forward
commitments in marks wanted cover, and had they been able to buy
forward marks at a reasonable premium they would have done so.
Initially, however, such cover was not available; the market was
one-sided. The traders, therefore, borrowed dollars and sold them
for marks in the spot market, and there was an immediate dollar
inflow into Germany. As soon as the nature of the problem became
apparent the New York Bank, acting for Treasury account and in
cooperation with the German Federal Bank, began to sell marks
--------------------------------------- 42
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forward to provide the cover traders were seeking, and that
substantially moderated the dollar inflow to the German Federal
Bank. Such operations could be used not only to reduce or pre
vent dollar inflows to foreign central banks but also to induce
outflows. So far today, according to the latest information he
had received, the German Federal Bank had sold $44 million of
three-month forward marks, reducing the forward premium on marks
from approximately 3 per cent to about 1-3/4 per cent in the
process and inducing an equivalent outflow--at least in the first
instance--of dollars from Germany into the Euro-dollar market.
Such operations could be of real benefit in the foreign exchange
markets, because in effect they guaranteed that present parities
would be maintained.
Mr. Maisel asked whether operations of the type under
discussion should not be evaluated in terms of more general policy
objectives.
Chairman Martin commented that in his judgment the policy
objective was to maintain present currency parities in terms of
gold.
Mr. Maisel said that there appeared to be other kinds of
policy questions involved as well; thus, decisions made under the
contemplated operations would affect the volume of dollar reserves
held by foreign central banks. He had raised the question because
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11/27/67 -43
he was concerned that the United States might find itself in the
same situation as the British had recently, in which the Bank of
England had to determine continually the extent to which it was
prepared to take on forward commitments as an alternative to
suffering losses of reserves. From the British experience, he
concluded that such forward operations could be very expensive
and critical They had various implications--for the balance
of payments, for monetary reserves, for costs--which had to be
considered together. It was for that reason that he thought some
sort of general policy objective had to be specified. For example,
was the objective to bring the deficit in the U.S. balance of
payments down to zero?
In reply, Mr. MacLaury first noted that the Treasury had
already determined that this type of operation would be beneficial
to the interests of the United States; in agreeing to provide
unlimited forward cover, it had already decided to take the same
route that the Bank of England had followed in trying to defend
the pound. Secondly, although forward operations had not by
themselves succeeded in avoiding devaluation, they had made it
possible for Britain to hold the pound at its previous parity
for three years; without them, he thought, Britain would have run
out of reserves as early as 1964. If the United States was deter
mined to hold the present dollar price of gold, forward operations
--------------------------------------- 44
11/27/67 -44
would be helpful as one means of reducing the inflows of dollars
into foreign central banks. As Mr. Maisel had suggested, a
judgment was involved between undertaking forward commitments or
having dollars accumulate in the reserves of foreign central
banks. One consideration affecting that judgment was the fact
that for the most part information on changes in reserves of
foreign central banks was published weekly, whereas information
on the volume of forward operations could be withheld so long as
it was in the public interest to do so. Thus, by forward opera
tions it might be possible to avoid a process in which reports of
dollar reserve gains abroad fed market speculation that continental
currencies were undervalued.
Mr. Maisel said he was not objecting to the proposed forward
operations. His point was that they were one possible prong of
policy. But there were other possible prongs that warranted serious
consideration--for example, measures to affect interest rates paid
domestically on foreign deposits and measures to affect Euro-dollar
flows to the United States. It seemed to him that the Committee
was being asked to make a policy decision without having all of the
relevant considerations before it. For a number of years the state
of the U.S. balance of payments had been one of the major factors
the Committee had been urged to weigh in making decisions on
domestic monetary policy. Now he gathered that it was being
--------------------------------------- 45
11/27/67 -45
suggested that the Committee use a different method to deal with
this problem. In his judgment the Committee should be clear in
what it hoped to achieve by choosing among the available policy
instruments, each of which might be best adapted to a particular
end.
Mr. MacLaury observed that the forward operations under
discussion, by affecting the dollar holdings of foreign central
banks, would have implications for the U.S. balance of payments
on the official settlements basis; however, they would not affect
the balance on the liquidity basis. He agreed that to some extent
the proposed provision of forward cover was an alternative to a
tighter domestic monetary policy as a means of limiting dollar
accruals by foreign central banks. Under present circumstances,
however, he felt that forward operations would be a useful
supplement to, rather than a substitute for, other policy tools.
The different types of measures could reinforce one another.
In response to Chairman Martin's request for comments,
Mr. Solomon said he thought the point Mr. Maisel had raised was a
valid one, and he agreed in general with the comments Mr. MacLaury
had made concerning it. He would add only that according to the
information received from Frankfurt yesterday, there was another
objective for forward operations in addition to that Mr. MacLaury
had mentioned. Any large shift out of dollars this week could
--------------------------------------- 46
11/27/67 -46
result in very high interest rates in the Euro-dollar market.
That in turn could increase the pressures already existing on
some countries, including Japan and Sweden, to devalue. It was
hoped that forward operations would help avoid that outcome.
Mr. MacLaury agreed. By way of background to Mr. Solomon's
observation, he noted that while the three-month rate in the Euro
dollar market was 5-3/4 per cent just prior to devaluation, during
the early part of last week it was 6-1/2 per cent; and on Friday
it rose to 7 per cent, where it remained today.
Mr. Mitchell asked whether the operations under discussion
amounted, in effect, to window dressing the position of the United
States. If so, for how long it was proposed to continue such
window dressing?
Mr. Solomon remarked that window dressing would seem to be
involved only to the extent that information was withheld on the
volume of forward operations.
Chairman Martin observed that the additional authority for
forward operations that Mr. MacLaury had recommended might never
have to be used. The proposal was a temporary one in the sense
that the goal was to stabilize market flows that were disorderly
at the present time. In the words of the Frankfurt communique,
the central bank Governors "took decisions on specific measures to
ensure by coordinated action orderly conditions in the exchange
markets . .. ."
--------------------------------------- 47
11/27/67-47-
Mr. Hickman asked whether it was proposed to continue to
engage in forward operations of the type discussed after the
present emergency had passed.
Chairman Martin said he thought the Committee should con
sider that question as it went along; the matter should be subject
to regular review. As he had indicated, the objective at the
moment was stabilization of flows in a crisis situation.
Mr. Wayne remarked that he was puzzled by the implication
of some of the preceding discussion that the proposal was for a
new type of operation. The Committee had resolved the policy
question when it had authorized forward operations some time ago;
what was at issue today was merely a matter of magnitudes.
Mr. Brimmer referred to Mr. MacLaury's earlier remark that
the Treasury had already decided to provide unlimited cover for
forward operations. He asked Mr. MacLaury to comment on the role
of the System in the matter as opposed to that of the Treasury.
Mr. MacLaury replied that since the System first undertook
foreign currency operations in 1962, the term "U.S. monetary
authorities" had been interpreted generally--and appropriately--as
encompassing both the Treasury and the System. The defense of the
dollar was certainly one of the main tasks of the Committee; the
Federal Reserve had as much responsibility to act in the interna
tional area as in the domestic, although in the former case it
--------------------------------------- 48
11/27/67 -48
presumably should act jointly with the Treasury. The operation
in question was one way the Federal Reserve could participate
with the Treasury in the defense of the dollar.
Mr. Brimmer then said he had been concerned that
Mr. MacLaury's earlier comment might be taken to imply that
the Committee was being asked today simply to ratify a decision
that had been made solely by the Treasury. He was satisfied in
his own mind that that was not the case. Members of the Committee
and its staff had in fact participated in the formulation of the
policy under discussion.
Mr. Sherrill asked whether the group now operating the
"command post" in Frankfurt had objectives formulated in terms of
interest rates on Euro-dollars.
Chairman Martin replied they did not; they were concerned
with stabilizing flows.
Mr. Brimmer reported that at the meetings of both Working
Party 3 and the Economic Policy Commission two weeks ago the U.S.
representatives had been urged to take steps to limit the inflows
of Euro-dollars to the United States. It was argued that those
flows were putting pressure not only on sterling but also on the
German mark. At the WP-3 meeting, Messrs. Deming and Solomon had
responded for the United States, but it had been suggested to him
(Mr. Brimmer) first privately and then during the EPC discussion
--------------------------------------- 49
11/27/67 -49
that the System should act to limit the inflows. Unlike Mr. Maisel,
he did not think that direct action with respect to Euro-dollar
flows to the United States was a feasible policy alternative. He
did think, however, that forward operations would be useful in
reducing the problems posed by the Euro-dollar market.
Chairman Martin concurred in Mr. Wayne's observation that
the matter at issue was one of magnitudes rather than adoption of
a new policy. He thought it might be desirable, however, for the
staff to prepare a study on the points Mr. Maisel had raised.
Mr. Maisel commented that the questions in his mind had
already been answered to his satisfaction. Earlier he had thought
the Committee was being asked to make a basic policy decision that
would have consequences for the next several years, but it was now
clear that the purpose was immediate market stabilization. While
he was willing to approve the proposed operations, he was not sure
that he agreed with Mr. Wayne that they represented no departure
from those of the past. In any case, he still felt that the
Committee should take pains to insure that it was using its various
policy tools in a logical manner. In the present case he thought
the Committee should recognize that it was employing one particular
instrument--appropriately, he hoped--in preference to others to
attain a particular objective.
Chairman Martin reiterated his view that the Committee
should plan on reviewing the matter continually; it was not a
--------------------------------------- 50
11/27/67 -50
closed book. The technique proposed might prove not to be the
best for the purpose, but emergencies often had to be dealt with
by experimental methods.
The Chairman then suggested that the Committee postpone a
vote on the proposed increase in the limit on forward operations
until it had heard Mr. MacLaury's other recommendations, which he
understood were to increase the size of certain swap lines. In
considering those recommendations the Committee members should
have in mind the possibility that they might prove to be desirable
on a temporary basis only. It was not clear to him that permanent
enlargements of the lines in the magnitudes Mr. MacLaury would
propose would be appropriate.
Mr. MacLaury said that, as Mr. Solomon had noted earlier,
the proposed swap line increases were an essential part of, and
had grown out of, the agreements reached in Frankfurt to stand
firm on the present parities and to insure stability in the market.
Mr. MacLaury then listed the proposed changes in the swap
lines with the central banks of the indicated countries and with
the BIS as follows, with all figures in millions of dollars:
Increase From To
Belgium 75 150 225
Netherlands 75 150 225
Germany 350 400 750
Italy 150 600 750
Sweden 100 100 200
Japan 300 450 750
BIS (Other European
currencies/dollars) 300 300 600
England 150 1,350 1,500
--------------------------------------- 51
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In explaining the proposed increases Mr. MacLaury noted
that the present swap line with the Netherlands Bank was already
fully drawn and there was a leeway of only about $19 million
remaining under the present Belgian line. There had been no
drawings on the German line recently, but a drawing of $50 million
was planned for the very near future to enable the System to offer
marks spot in the New York market. With that arrangement about to
be activated the increase proposed appeared to be desirable. At
the moment drawings of $300 million were outstanding on the arrange
ment with the Bank of Italy, and the System had been asked to draw
another $200 million to cover dollar inflows to Italy that had
occurred prior to the sterling devaluation. Accordingly, $500
million of the present $600 million Italian line would be in use
shortly.
Mr. MacLaury observed that the situation with respect to
the lines with Sweden and Japan was somewhat different. Those
countries had not been taking in dollars recently; indeed, they
had each lost about $50 million last week. However, as Mr. Solomon
had noted, their currencies could come under pressure in the
exchange markets in the wake of the sterling devaluation, and the
suggested swap line increases were intended to provide means for
coping with such pressures. As the Committee knew, relatively
few countries of any size had followed Britain's course thus
--------------------------------------- 52
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far--mainly New Zealand, Spain, and Denmark. If other major
countries that had initially decided to stand on their present
parity were forced off later, a new wave of speculation was
likely to break out.
The purpose of the proposed increase in the arrangement
with the BIS was also different, Mr. MacLaury continued, and was
connected with the objective of insuring stability in the Euro
dollar market. Some $68 million, drawn in mid-November, was now
outstanding on the affected line, which provided for drawings of
dollars by the BIS against European currencies other than Swiss
francs. However, the full amount of the existing line had been
utilized in the past, and the line was extensively used as
recently as midyear in the aftermath of the Middle East hostilities.
The increase in the line with the Bank of England had been
suggested by Mr. Coombs this morning, Mr. MacLaury said. In effect,
it was proposed to substitute a $150 million enlargement of that
swap line for the $100 million increase the Committee recently had
authorized in System holdings of guaranteed sterling and for $50
million of the $400 million of such holdings the Treasury had
indicated earlier that it was prepared to acquire. Briefly, that
substitution was suggested because the previous authorization to
acquire additional guaranteed sterling had been recommended at a
time when it was hoped that the British would be able to maintain
--------------------------------------- 53
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the prior sterling parity. As the Committee knew, there was no
definite time limit established in connection with guaranteed
sterling holdings. Under the new circumstances, with sterling
devalued, it seemed appropriate to have definite maturities apply
to any enlargement of the System's facilities with the Bank of
England. Increasing that swap line by $150 million also had the
incidental advantage of rounding off the total of the enlargements
to the figure of $1.5 billion.
If these increases were approved and the arrangements for
them satisfactorily completed, Mr. MacLaury observed, it was planned
to announce the enlargement of the System's network late in the day
on Thursday, November 30. That timing was suggested because the
impact of the announcement--which he thought would be considerable-
would then occur initially on Friday, typically the day of maximum
difficulties in the exchange markets.
Mr. MacLaury said he would recommend that the Committee
approve today the proposed increases in the swap lines with the
central banks of Belgium, Italy, the Netherlands, and Sweden, and
that in the swap line with the BIS. In those cases the other
parties had indicated, in the course of discussions that had taken
place over the weekend, that they were agreeable to the enlargements.
However, negotiations had not yet proceeded similarly far with the
British, Germans, and Japanese. Accordingly, he recommended that
--------------------------------------- 54
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the Committee approve the increases in the lines with the latter
three central banks, subject to a determination by Chairman Martin
that the negotiations had been satisfactorily completed. Finally,
to implement the proposal that the enlargement of the British swap
line be made as a substitute for the recent increase in the limit
on guaranteed sterling holdings by the System, he recommended a
revision of paragraph 1 B(3) of the authorization to reduce the
limit specified there on guaranteed sterling holdings from $300
million to $200 million.
Mr. Scanlon asked whether the matter of swap line increases
had been discussed at all with the central banks of England,
Germany, and Japan.
Mr. MacLaury replied that preliminary discussions had been
held with officials of the three banks, but that certain formalities
had to be accomplished before they could give a definite reply.
Mr. Scanlon then asked whether a failure of any one of the
three central banks in question to agree to the proposed enlarge
ments would have implications for the increases contemplated for
the others, and Mr. MacLaury said it would not.
Mr. Robertson asked whether it might not be desirable to
increase the swap line with the Bank of England by $500 million
rather than $150 million, even if it was thought that the extra
facilities might never be used, on the grounds that the psychological
impact on the market would be greater.
--------------------------------------- 55
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Mr. MacLaury replied that he did not think a $500 million
increase in the British swap line would be desirable at this time,
since it would bring that line to the clearly disproportionate
level of $1,850 million and would increase the likelihood that
cut-backs in the lines from their new levels would be required at
a later date. He noted that the United States was participating
to the extent of $500 million in the $1.5 billion credit package
to the British that had already been announced, and that an
announcement was expected shortly by the International Monetary
Fund that a $1.4 billion standby facility to the British had been
approved.
Mr. Brimmer observed that no increases had been recommended
in the swap lines with a number of central banks. He was not
surprised to find the Bank of France in that group. However, if
the list of recommended increases was announced he suspected that
question would be raised as to the reasons for the omission of
certain other central banks.
Mr. MacLaury replied that increases had been recommended
in the cases in which they seemed desirable in light of the likely
sources of exchange market pressures. While the Committee might
want to consider enlarging other lines at some point, the need for
acting quickly suggested the advisability of limiting the number
of enlargements now to those considered necessary at this time.
--------------------------------------- 56
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Mr. Hickman commented that the omission of the line with
the Swiss National Bank in particular might lead to questions
about the willingness of the other party to cooperate with the
System.
Mr. MacLaury said that at present there were drawings of
$242 million under the System's two Swiss franc swap lines--with
the Swiss National Bank and the BIS--leaving a leeway of $258
million, which appeared adequate for the time being. If the
willingness of the Swiss authorities to cooperate with the System
should be questioned one need only point to the fact that they
had demonstrated such willingness by many individual actions.
Chairman Martin commented that there were no doubts in
his mind on that score. In each of four conversations he had had
recently with President Stopper of the Swiss National Bank the
latter had said that he would cooperate fully with the Federal
Reserve.
Chairman Martin then asked whether there were any further
comments or questions on Mr. MacLaury's recommendations. Hearing
none, the Chairman suggested that the Committee vote on those
recommendations.
.
By unanimous vote, paragraphs 1B(3)
and 1C(3) of the authorization for System
foreign currency operations were amended,
effective immediately, to read as follows:
--------------------------------------- 57
11/27/67-57-
1B(3). Sterling purchased on a
covered or guaranteed basis in terms
of the dollar, under agreement with
the Bank of England, up to $200
million equivalent.
* * *
1C(3). Other forward commitments
to deliver foreign currencies, up to
$550 million equivalent.
By unanimous vote, the table contained
in paragraph 2 of the authorization for
System foreign currency operations was
amended, effective immediately, to read
as follows:
Amount of
arrangement
(millions of
Foreign bank dollars equivalent)
Austrian National Bank 100
National Bank of Belgium 225
Bank of Canada 500
National Bank of Denmark 100
Bank of England 1,350
Bank of France 100
German Federal Bank 400
Bank of Italy 750
Bank of Japan 450
Bank of Mexico 130
Netherlands Bank 225
Bank of Norway 100
Bank of Sweden 200
Swiss National Bank 250
Bank for International Settlements
System drawings in Swiss francs 250
System drawings in authorized European
currencies other than Swiss francs 600
By unanimous vote, the table contained
in paragraph 2 of the authorization for
System foreign currency operations was
amended to change (1) the amount of the
--------------------------------------- 58
11/27/67-58-
reciprocal currency arrangement with the
Bank of England from $1,350 million
equivalent to $1,500 million equivalent;
(2) the amount of the arrangement with
the German Federal Bank from $400 million
equivalent to $750 million equivalent;
and (3) the amount of the arrangement
with the Bank of Japan from $450 million
equivalent to $750 million equivalent,
in each case to become effective upon
a determination by Chairman Martin that
the negotiations looking toward such
change had been satisfactorily completed.
Secretary's Note: Chairman Martin
determined that negotiations had been
satisfactorily completed with respect
to the increases described above in
the reciprocal currency arrangements
with (1) the Bank of England, on
November 28, 1967; (2) the Bank of Japan,
on November 28, 1967; and (3) the German
Federal Bank, on November 30, 1967.
Also on November 30, 1967, Committee members
approved a recommendation by the Special
Manager that the amount of the reciprocal
currency arrangement with the Bank of
Canada be increased from $500 million
equivalent to $750 million equivalent.
Accordingly, the table contained in
paragraph 2 of the authorization for
System foreign currency operations was
amended, effective on the indicated dates,
to give effect to the indicated increases
in the four reciprocal currency arrangements.
Mr. Wayne left the meeting at this point and Mr. Ellis,
alternate, served as a voting member for the remainder of the
meeting.
Before this meeting there had been distributed to the
members of the Committee a report from the Manager of the System
--------------------------------------- 59
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Open Market Account covering domestic open market operations for
the period November 14 through 22, 1967. A copy of this report
has been placed in the files of the Committee.
In supplementation of the written report, Mr. Holmes
commented as follows:
For the past week domestic financial markets have
been dominated by events surrounding the devaluation
of the pound sterling. In the securities markets,
there was an initial sharp downward adjustment of
prices after the devaluation and the change in the
discount rate, followed by a sharp rally based on the
news that hearings on the Administration's tax bill
would be held by the House Ways and Means Committee
in this session of Congress.
On Friday, however, the growing uncertainties in the gold and
foreign exchange markets worked their way into domestic financial
markets and security prices again moved sharply lower.
The written report to the Committee covers developments
through Wednesday, November 22, when rates on three
and six-month Treasury bills were 15 basis points
below the peak reached on Monday. By the close on
Friday, rates at 4.91 and 5.48 per cent, respectively,
were nearly back to the peak, and stood 25 - 30 basis
points above the levels prevailing at the time of the
last Committee meeting.
It scarcely needs to be said that future develop
ments in our domestic financial markets will depend
on the success that is attained in restoring order in
the gold and foreign exchange markets, on the resolution
of fiscal problems, on the future course of monetary
policy, and on how all of these things react on the
real economy, on credit demands, and on expectations.
In the meantime, we shall have to live with sharp and
erratic fluctuations in security prices and market
interest rates. We must also be prepared for a
flexible use of open market operations and other tools
of monetary and debt management policy to preserve the
orderly functioning of financial markets. International
uncertainties pose a serious threat to the dollar, and
the threat would only be compounded if our domestic
markets were to get out of hand.
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Pending clarification of some of these basic
forces affecting both domestic and international
markets, it is virtually impossible to sort out the
kind of monetary aggregates, money market conditions,
and interest rates that would be compatible with the
new discount rate. In general, I would agree with the
approach taken in the staff's interim report on money
market and reserve relationships.1/ At the moment,
fortunately, bank credit appears to be expanding less
rapidly than earlier this year and a somewhat slower
rate of growth is tentatively being projected for
December. The current level of short-term interest
rates, however, is already beginning to raise questions
about disintermediation and Regulation Q.
Domestic open market operations, like the financial
markets, were strongly influenced over the period by the
British devaluation and the increase in the discount
rate to 4-1/2 per cent. While it was obviously impossible
to predict over the devaluation weekend what the
precise money and capital market reaction would turn
out to be on Monday morning, it was readily apparent
that prompt and decisive System open market operations
could do much to facilitate an orderly adjustment to
the new set of circumstances.
Prior to the weekend, as uncertainty about
sterling grew, we began to concentrate at the Trading
Desk on the general course of action that might be
required if a full-fledged exchange crisis developed
over the weekend. Our considerations were based on
the general philosophy contained in the contingency
planning memoranda that have been in the Committee's
files for some time--a late draft having been
submitted by the Committee staff at the last meeting.
The essential points were the desirability of avoiding
disorderly market conditions, while encouraging the
market to find a new viable level of prices and
yields--i.e., to provide for an orderly adjustment
while avoiding any suggestion of pegging of prices.
In approaching these twin objectives it seemed clear
that both the immediate and longer-run functioning
of the market could be seriously disturbed if dealers
1/ A copy of this report, prepared for the Committee by the
Board's staff, has been placed in the files of the Committee.
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tried to dispose of their portfolios of Government
securities in an unreceptive and uncertain market.
As developments unfolded over the weekend--with an
actual devaluation accompanied by an 8 per cent British
Bank rate and a 1/2 per cent increase in our discount
rate--it became abundantly clear that domestic financial
markets would face a substantial problem of adjustment on
the following day. Accordingly, after the announcement
of the increase in the discount rate at 2 p.m. on Sunday,
the officers of the Securities Department met at the New
York Bank to plan a specific approach for next morning.
In order to make sure that the Government security
dealers had all the available facts to consider over
Sunday night, we called senior representatives of each
dealer firm late Sunday afternoon or early Sunday evening
to read them the full text of the Board's announcement-
which apparently was not being carried in detail on radio
news broadcasts. In addition, we told each dealer that
we hoped the market would function as smoothly as possible
on Monday under the circumstances, and that we would be in
the office early on Monday morning.
Our judgment was that early and decisive System
action to reduce dealer positions, particularly in coupon
issues, would help head off distress dealer selling that
would only have pushed prices lower in a vacuum. The
strategy decided on was to bid dealers for about 40 per
cent of their net long positions of issues maturing in 1
to 5 years and about two-thirds of their holdings of longer
maturities. In order to include all dealers in the
operation we decided to bid those dealers who had net
short positions in the 1- to 5-year area for a token
amount. Dealers who had net short positions in securities
maturing in over 5 years would not, however, be given bids
in that area. Under these guidelines, we would be bidding
for about $125 million 1- to 5-year Government securities
and about $75 million longer-term Governments. Parenthet
ically, I should add that the fact that the Desk now
receives individual dealer figures greatly facilitated
our planning.
In determining the prices that we would bid the
dealers, we decided that a differential of 2/32 to 8/32,
depending on maturity, below the prices that the market
was bidding at the close on Friday would be appropriate.
This would place our bids generally 6/32 to 24/32 below
composite dealer offering prices on Friday. We recognized
that these prices were arbitrary to a certain extent and
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that market prices on Monday would be likely to fall
below these levels. Nonetheless, we concluded that this
approach would underscore our desire to preserve the
capacity of the dealers to make markets effectively, and
would encourage the market to adjust on its own to a new
and viable price level following what was obviously a
"clear the decks" System operation.
On Monday morning at 9:15--well before the market's
normal opening time--we called each dealer firm and bid
them for a specific amount of securities in the 1- to
5-year and over 5-year maturity range, indicating that
the amounts were based on positions as of the preceding
Thursday. Dealers were told that they were under no
obligation to accept our bids, but to inform us what
particular securities they wanted to sell and we would
indicate our bid price. Bids totaled $124.5 million in
the 1- to 5-year area, of which dealers accepted all but
$3.5 million, and $72.3 million in the over 5-year area,
of which all but $7.1 million were accepted.
At about 10:15 the System returned to the market
with a regular go-around to buy Treasury bills. Dealer
offerings were close to $1.2 billion at rates generally
25 - 35 basis points above Friday night's close. Our
purchases amounted to $427 million, or about 15 per cent
of dealers' net positions. Following these two opera
tions, the System was able to remain out of the market
for the remainder of the week.
As we had hoped, the market was quick to adjust
prices to the new set of circumstances, and in an
orderly and constructive fashion. Prices began to
stabilize by late Monday morning, and while trading
over the rest of the day was light, dealers were enough
encouraged by the System actions to make markets. And
with the announcement later in the afternoon that the
House Ways and Means Committee would take up the
President's tax bill before Congress adjourns, market
sentiment, as noted earlier, improved sharply.
I have dwelt on System open market operations on
Monday following the devaluation and the change in the
discount rate in some detail because they represented
something of a departure from the approach we would
normally make. We are in process of preparing a
detailed memorandum describing the operations and
hope to mail it to members of the Committee and to
the Presidents not now serving on the Committee as
soon as possible.
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11/27/67
Clearly the circumstances were extraordinary. The
actions undertaken, I believe, were in full accord with
the Committee's desire for prompt and decisive action
to avoid disorderly market conditions in an emergency
situation. The market's reaction to the System approach
was universally favorable, even though prices by Tuesday
night had risen above those we paid on Monday morning.
It is perhaps not surprising that dealers who were taken
out of long positions in a falling market reacted favorably.
More significant was the fact that a similar reaction came
from the dealers that were short and to whom we made only
a token bid. Dealers were saved capital losses by our
action, but more importantly the whole market was
encouraged to undertake an orderly adjustment, and
dealers did not withdraw to the sidelines.
Looking to the future, it is quite obvious that
reserve projections and domestic open market operations
will continue to be strongly influenced by international
flows of funds, by gold market developments, and by their
impact on bank reserves, on the Treasury's cash position,
and on foreign account operations in the Treasury bill
market. Last Friday, for example, we had indicated on
the morning call that we contemplated taking no action
to affect reserves that day. Later on, however, we
unexpectedly received large foreign account orders to
sell Treasury bills at the very time that the bill
market was undergoing a rapid upward adjustment of
yields. To avoid adding pressure to the market we
took directly into the System Account the $191 million
of bills for sale by the foreign accounts.
Obviously the System cannot afford to abandon its
reserve goals entirely in order to ensure orderly market
adjustments, but some give and take may be necessary. In
the last statement week free reserves were at a low level
despite a massive supply of reserves through both domestic
and foreign operations. (It is interesting to note that
last Tuesday, when payment was made for the $427 million
Treasury bills purchased the previous day, various foreign
operations were supplying nearly twice as many reserves
to the banking system.) Fortunately, the $92 million
free reserve level for last week--a number that came
about more through chance than design--was accompanied
by very comfortable money market conditions on Tuesday
and Wednesday.
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11/27/67-64-
For the period immediately ahead, reserve projections
will be subject to sudden change depending on the ability
of the United Kingdom to repay its swap drawings, on the
timing and amount of the gold pool settlement, on System
and Treasury operations to mop up dollar inflows into
central banks abroad, as well as on the usual factors
affecting bank reserves.
In addition, we still have major discrepancies in the projection
of the Treasury's cash balance in mid-December, and I fervently
hope that the Treasury's prediction that they will not have to
borrow from the System proves correct. Consequently, the
reserve projections contained in the spread sheet attached
to the written report to the Committee had best be ignored
for the present. We will need to maintain the closest
coordination among the Committee staff, the Treasury, the
foreign department of the New York Bank, and the Trading
Desk just to keep on top of the situation as it develops.
I apologize for taking up so much time with details.
But I believe it is important in the period ahead for us
to be clear about the problems involved in attaining
reserve objectives, in preserving orderly financial
markets, and in accommodating the international flow of
funds. Maximum flexibility in the conduct of open market
operations will be required and the Treasury has indicated
its willingness to cooperate to the extent that it can
by a flexible management of its balance with the Reserve
Banks.
In closing, I might note that the Federal National
Mortgage Association will price its offering of partici
pation certificates tomorrow morning. As of Friday night
the syndicate managers were anticipating a good reception,
particularly of the longer issue.
By unanimous vote, the open
market transactions in Government
securities, agency obligations,
and bankers' acceptances during
the period November 14 through 26,
1967, were approved, ratified, and
confirmed.
Mr. Brill then made the following statement on economic and
financial developments:
It is far too early to observe any meaningful
reactions in the domestic economy to last week's
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11/27/67-65-
international events. The most we can do is reassess
the state of the economy on the eve of the events, and
speculate as to their likely impact over coming months.
In this connection it is important to note that
the strength of economic expansion so far this quarter
has been somewhat less than we had projected earlier.
Just some five weeks ago, we were expecting GNP to
increase at about a $20 billion annual rate this
quarter. Today we would probably trim that estimate
by at least $3 billion--perhaps somewhat more--although
when November data come in, the situation may look a
bit rosier.
One can readily identify several factors contribut
ing to this reduced appraisal of economic activity. The
auto strike is making a bigger dent in incomes, consumption,
and stock-building than we had allowed for earlier. Ford
was down for about two weeks more than we had expected,
and some work stoppages--or at least some drag on output--at
General Motors is still a strong possibility. Moreover,
some of the inventory increase we had expected to show
up in the fourth quarter--especially in a build-up of
automobile stocks--had occurred earlier and was captured
in the latest revised figures for third-quarter GNP.
These developments in the auto industry would trim from
$2 to $3 billion from our earlier estimate of the GNP
rise in the current quarter.
Secondly, the enactment of the Federal pay raise
is, sorrowfully, coming later than penurious Government
workers had hoped. The raise won't be showing up in
pay checks until too late in the quarter to boost
consumption as much as had been projected earlier.
Offsetting these factors causing us to reduce our
estimates of the current pace of expansion is the
stronger showing being made in residential construction,
which has continued a strong recovery. Housing starts
hit the 1.5 million annual rate in October. Also, there
may be a catch-up underway in defense spending, which
fell significantly short of projections in the third
quarter, but may make up some of the short-fall by year
end. Balancing out these pluses and minuses, we would
now estimate GNP growth in current dollars this quarter
to be in the $16 - $18 billion range, instead of the
$18 - $20 billion range projected earlier.
We won't know until Wednesday--when the BLS releases
new price data--whether there is any reason to change our
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11/27/67-66-
estimate of how large a share of the current-dollar
increase in GNP reflects price increases, and how much
real output gains. You will recall that nearly half of
the third-quarter rise in GNP represented higher prices
rather than real growth, with the deflator increasing
at a shocking 3.8 per cent annual rate. Our estimate
for the deflator in the fourth quarter is for a rise of
about 3 per cent in prices, plus about a seven-tenths
of a percentage point increase for the Government pay
raise. The reduced number of newspaper reports of price
increases suggests that some slight improvement in price
performance may indeed be under way, but we will have to
wait another day or so to get official confirmation.
Looking ahead, one can also find several reasons
for trimming estimates of future GNP increases. The
principal modification relates to the expected increase
in social security benefits, for which three different
proposals are under consideration in the Congress.
Without getting into too many technical details, the
principal difference in the proposals under consideration
relate to the amount and timing of benefit payments. We
would now guess that the most likely compromise will be
closer to the version reported by the Senate Finance
Committee, rather than to the House version we had used
earlier. The Senate Finance Committee's version, while
providing larger benefits, would postpone the initial
payments to beneficiaries until April 1, and thereby
reduce significantly the projected income and consumption
flows in the first quarter.
On a more general basis, one would also have to
assume that if the domestic and international financial
developments of recent days have any effect on consumer
and business spending propensities, it would be in the
direction of inducing greater caution in spending. All
of the talk--however unfounded--of the collapse of
international monetary arrangements, and of possible
collapse in international trade, and of new restrictive
measures, must operate to cause reconsideration of some
major expenditure decisions.
Moreover, at today's levels of short-term interest
rates, there is no great financial hardship in temporarily
remaining relatively liquid, and in postponing commitments
for long-term physical or financial investments. And at
today's levels of longer-term interest rates, a growing
number of borrowers appear to be priced out of the market.
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11/27/67-67-
A tally of municipal bond postponements, for example,
shows a significant increase in the number and dollar
volume of issues recently postponed or cut back in size.
The level of mortgage rates has continued to creep
closer to the 1966 peak; even before the discount rate
increase, the data indicated that insured mortgages were
trading at a level only about an eighth of a percentage
point below that of last November. And reports abound
of more restrictive non-price terms, suggesting that
some potential home owners may find it difficult to
finance their intended purchases.
The record volume of mortgage commitments outstanding
should maintain construction activity at high, but not
significantly rising, levels into next spring. But if
thrift institutions experience significant withdrawal
symptoms over the year-end dividend crediting period--an
increasing possibility, given the tapering in inflows that
has already occurred and the increasing attractiveness to
savers of market instruments--the flow of new commitments
to support housing activity later next year is likely to
be cut back significantly.
Over all, then, there seem to be adequate reasons for
lowering somewhat our expectations as to the prospective
pace of economic expansion. But even after allowance
for all of the factors contributing to a lessening of
ebullience in the economy, we're still left with prospects
of an excessively rapid increase in demands. The projec
tion presented at the last Committee meeting indicated
that without adequate fiscal restraint, GNP would rise at
a rate of about $22 to $23 billion over the first half of
1968, patently too rapid a pace in a relatively fully
employed economy. But even lowering our estimate to $19
or $20 billion a quarter isn't much comfort. Expansion
of demands at this rate would still leave us with
intolerably large price pressures.
Thus, there is no occasion yet to modify our advocacy
of fiscal restraint, particularly since it is needed not
only on domestic grounds, but more than ever before to
reassure holders of dollars abroad of our determination
to maintain the strength of our economy and our currency.
Until we win the fiscal battle, we will have to run the
risks inherent in increased monetary restraint. Therefore,
as soon as orderly market conditions permit, I would
recommend implementing through open market operations the
action taken on the discount rate, in order to achieve the
money market conditions specified in the interim blue book.
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11/27/67 -68
Chairman Martin then invited Mr. Solomon to amplify his
earlier remarks about recent international developments.
Mr. Solomon noted that the staff materials distributed to
the Committee before this meeting included some details on the
British program, announced simultaneously with the devaluation,
to reduce domestic demand and thus free resources for expansion
of exports. The ultimate objective was an improvement in the U.K.
balance of payments of $1.2 billion per year at the new exchange
rate. After a preliminary analysis the staff had concluded that
the program was reasonable, but its success obviously would be
contingent on the way in which it was implemented as time passed.
The point had been made, Mr. Solomon continued, that by
devaluing in 1967 rather than in 1964 the British simply had
wasted three years. But that was not necessarily the case. For
devaluation to be successful it was necessary, first, that there
be some slack in the British economy to permit an expansion of
exports; and second, that increases in wages and prices not be
permitted to erode the competitive advantage offered by the change
in parity. If the British had accomplished nothing else over the
last three years, they had produced some domestic slack and they
had developed the beginnings of an incomes policy. Accordingly,
he thought it was misleading to say that they had simply wasted
three years.
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11/27/67 -69
Mr. Solomon added that as a matter of simple arithmetic an
improvement of $1.2 billion in the U.K. balance of payments would
involve an equivalent deterioration in the balance of payments of
the rest of the world. Meanwhile the United States also would be
trying to improve its payments balance. Continental Europe was
the only area in the world that could afford to sustain much of a
deterioration in its balance of payments; the Far East could
tolerate a little, but not much. It was reasonable, then, to
expect that in the months ahead there would be some acute discus
sions of the need for international payments adjustments not only
by countries in deficit but also by countries in surplus. Unless
continental Europe was willing to accept a smaller surplus in its
payments balance it would not be possible for the United Kingdom
and the United States to achieve the improvements they sought.
Chairman Martin then said that it was necessary for him
to leave at this point to attend another meeting. Accordingly,
he would briefly state his views on domestic monetary policy. In
his judgment a posture of "steady in the boat" was called for at
this juncture; there were too many crosscurrents at work for the
Committee to do anything but mark time until its next meeting, on
December 12. He favored adoption of the draft directive submitted
by the staff.1/
1/ Appended to this memorandum as Attachment A.
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11/27/67-70-
Chairman Martin then withdrew, and Mr. Robertson assumed
the chair.
Mr. Brimmer noted that Mr. Brill had recommended implement
ing through open market operations, when the opportunity arose, the
policy of less ease implied by the discount rate increase. He asked
whether Mr. Brill believed such an opportunity might arise before
December 12.
Mr. Brill said he thought the answer probably would have
to be in the negative, in light of Mr. Holmes' remarks today on the
problems facing open market operations in the period immediately
ahead.
Mr. Holmes commented that mainly by chance free reserves
in the last statement week were at their lowest level in a long
time, and the rate on Federal funds had moved up to a 4-1/2 - 4-5/8
per cent range. Thus, it might be possible to attain the complex
of money market conditions specified in the interim blue book, but
whether all of the conditions could be maintained was uncertain.
Mr. Hickman remarked that he had not interpreted the money
market conditions specified in the interim blue book as involving
further tightening. Although they included a somewhat higher bill
rate, they also included ranges for free reserves and borrowings
of $100 - $300 million and $75 - $150 million, respectively. But
Mr. Brill's suggestion for implementing through open market
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11/27/67 -71
operations the discount rate action seemed to imply seeking more
restrictive levels of marginal reserves and borrowings.
Mr. Mitchell asked whether Mr. Brill had intended to
suggest that the Committee shift to a tighter posture for monetary
policy just at the time when prospects for Congressional action on
a tax increase had brightened.
Mr. Brill said that, first, with respect to Mr. Hickman's
comment, interest rates could rise with relatively little change
in marginal reserves and borrowings under present circumstances,
as had been noted in the interim blue book. However, in view of
the many other factors that were likely to be impinging on reserves,
marginal reserves might turn out to be far from recent levels,
whatever the System's intent. As to Mr. Mitchell's question,
Mr. Brill noted that interest rates had already moved up; as of
this morning, the bill rate was 30 basis points higher than at the
time of the discount rate action.
As he saw it, the question was how soon the full amount of the discount
rate increase should be reflected in the level of bill rates. Not being as
convinced of the imminence of fiscal restraint, he would recommend
moving to achieve money market conditions consistent with the new
higher discount rate as soon as conditions in the markets had stabilized.
Mr. Hickman commented that the level of bill rates that
would emerge also would depend to a large extent on the action
taken by the Ways and Means Committee this week.
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Mr. Brimmer remarked that he saw no basis for changing
policy before the next meeting of the Committee. He interpreted
the staff's draft directive as authorizing the Manager, in light
of the existing uncertainties, to exercise his best judgment in
dealing with any unusual pressures that might develop.
Mr. Robertson suggested that in view of the lateness of
the hour the members confine their comments in the go-around to
the subject of the directive. Personally, he thought that the
period until the next meeting would be one of adjustment to recent
events. Accordingly, he believed that the Committee should not
change policy today, and that it should give the Manager leeway
to adapt operations to emerging developments.
Mr. Bilby said that this was a time for the Committee to let
the dust settle. He found the draft directive to be satisfactory,
and would stress that the Manager had to have considerable freedom
to adjust to unforeseen developments in the period ahead. He hoped
that some assistance would be forthcoming from fiscal policy.
Mr. Ellis said he would accept the draft directive on the
grounds that the objective of facilitating orderly market adjust
ments was of overriding importance at the moment. He would
emphasize, however, that that was a short-range objective. He
also viewed the increases in the swap lines that had been approved
this morning as having a short-range objective; for the longer run,
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11/27/67 -73
their effect might not be entirely positive. One important
ingredient of a program to defend the dollar in the short run
might very well be convincing evidence that the Committee intended
to contribute to that defense over the longer run through its
domestic monetary policy. Accordingly, he would endorse Mr. Brill's
suggestion that when possible the Committee should make it clear
that it intended to validate the discount rate action through open
market operations.
Mr. Irons thought that under the existing circumstances
the draft directive submitted by the staff was appropriate for
the brief period until the next meeting, on the understanding that
the Committee would make a thorough review of the situation at that
time. He agreed that, when possible, open market operations should
be used to validate the discount rate action.
Mr. Swan said he would accept the draft directive for the
period until the next meeting. Obviously it carried no implica
tions for the policy to be pursued in the subsequent period.
Messrs. Galusha and Scanlon indicated that they found the
draft directive acceptable. The latter added that he shared the
views Mr. Ellis had expressed.
Mr. Tow commented that both clauses of the draft directive
appeared proper for the next two weeks.
Mr. Mitchell agreed that the draft directive was appropri
ate. He thought the policy course Mr. Brill had recommended was
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11/27/67 -74
inappropriate, and was inconsistent with the latter's own remarks
on the economic outlook.
Mr. Maisel agreed with Mr. Mitchell's observation. It was
not his understanding that the discount rate action necessarily
implied any basic change in the Committee's reserve targets
.
Messrs. Brimmer and Sherrill indicated that they approved
the draft directive. Mr. Sherrill remarked that the Desk was to
be complimented on its operations of last Monday, which in his
judgment were entirely appropriate.
Mr. Hickman approved the draft directive. He thought
Mr. Mitchell's comments were well taken, and he saw no reason
for any definite change in policy at this time. Such a change
would have the disadvantage of injecting monetary policy into
the forefront of the debate on fiscal policy at a time when
Congressional interest in a tax bill had been renewed.
Mr. Francis said he was no less concerned about the
domestic situation than he had been for some time. However, he
recognized the critical environment existing at the moment and
thought that the course indicated in the draft directive was
appropriate for the present. He hoped that economic visibility
would be improved by the time of the Committee's next meeting.
By unanimous vote, the Federal
Reserve Bank of New York was authorized
and directed, until otherwise directed
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11/27/67 -75
by the Committee, to execute
transactions in the System Account
in accordance with the following
current economic policy directive:
System open market operations until the next meet
ing of the Committee shall be conducted with a view to
facilitating orderly market adjustments to the increase
in Federal Reserve discount rates; but operations may be
modified as needed to moderate any unusual pressures
stemming from international financial uncertainties.
It was agreed that the next meeting of the Committee would
be held on Tuesday, December 12, 1967, at 9:30 a.m.
Thereupon the meeting adjourned.
Secretary
--------------------------------------- 76
ATTACHMENT A
November 24, 1967
Draft of Current Economic Policy Directive for Consideration by the
Federal Open Market Committee at its Meeting on November 27, 1967
System open market operations until the next meeting of the
Committee shall be conducted with a view to facilitating orderly
market adjustments to the increase in Federal Reserve discount
rates; but operations may be modified as needed to moderate any
unusual pressures stemming from international financial uncertain
ties.
