Ask the Scholar
Document scope · 1 page
Scholar
Ask about this object, its catalog metadata, its source description, or the page inventory.
For page-specific OCR and visual context, open one of the page chats.
Scholar Source Context
Document identity
localId
324660812
label
International Monetary Crisis, 1971 (3)
core
doc
dtoType
document
citationUrl
pageCount
1
Source metadata
id
324660812
contentType
document
title
International Monetary Crisis, 1971 (3)
citationUrl
collections
Arthur F. Burns Papers
Federal Reserve Board Subject Files
subjects
Netherlands
Belgium
Austria
Spain
Switzerland
Brazil
France
Canada
Germany (West)
Great Britain
Japan
International Monetary Fund. (07/1944 - )
Department of the Treasury. (1789 - )
Gold
Finance
Foreign exchange
Monetary systems
Commerce
Bankruptcy
International economy
Stocks
Balance of payments
Money
thumbnailUrl
largeImageUrl
imageCount
1
hasImages
yes
source
import
hasTranscription
no
Source extras
naId
324660812
coverageEndDate
logicalDate
1971-11-30
month
11
year
1971
coverageStartDate
day
1
logicalDate
1971-03-01
month
3
year
1971
levelOfDescription
fileUnit
recordType
description
ocrSource
nara-archive
Single page context
seq
1
pageIndex
0
type
document
mediaId
67e8f4a9abd41a1c
ocrText
The original documents are located in Box B65, folder "International Monetary Crisis,
1971 (3)" of the Arthur F. Burns Papers at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald R. Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
BOARD OF GOVERNORS
OF THE
f
FEDERAL RESERVE SYSTEM
Office Correspondence
Date August 17, 1971
To
Chairman Burns
Subject: Checklist of Issues to be
From
Ralph C. Bryant RCB
Resolved in Coming Weeks
CONFIDENTIAL (FR)
The international aspects of the Administration's New
Economic Policy have not yet been explicitly spelled out. The over-
ture has been played, and augurs well for the remainder of the score.
But it is the dénouement in Act III, not the overture, that will de-
termine the ultimate success of the show.
A resolution of the current period of uncertainty in inter-
national financial markets -- both the substantive character of this
resolution and the timeliness with which it can be brought about --
depends critically on strong leadership from the U.S. Government. A
prerequisite for strong leadership on our part is a clear conception
of our own preferred outcome. How do we want the script to read for
Act III? I believe it is a matter of great urgency for the Adminis-
tration to develop a well-thought-out answer to this question, and to
do so quickly. As far as I can tell from my limited perspective, we
have not yet done so.
In my opinion, all of the following issues need to be con-
sidered carefully in formulating our preferred outcome:
(1) The "post-resolution" pattern of exchange
rates among national currencies;
-
FORD is GENALO LIBRARY
To: Chairman Burns
- 2 -
(2) The post-resolution values of national
currencies in terms of gold, SDRs, and
reserve positions in the IMF -- in par-
ticular, of course, the dollar price of
gold;
(3) Institution of procedures for ensuring
greater flexibility of exchange rates in
the future;
(4) Reduction of the reserve-currency role
of the dollar as part of a move towards
the consolidation of reserve assets;
(5) Methods for increasing the ability of
the United States in the future to
initiate changes in the exchange rate
of the dollar vis-à-vis other curren-
cies;
(6) Cooperative international management of
the growth of world reserves; and
(7) Removal of restrictions on U.S. capital
outflows.
Several further issues, although important, seem to me
secondary compared with those listed above. They include:
(8) Possible "compensation" for official holders
of dollars in the event of any change in the
dollar price of gold; and
(9) Possible understandings with other industrial
countries about regulation of short-term
capital flows.
I am assuming that the 10 per cent import surcharge is essentially
a bargaining chip that we intend to bargain away in the course of
the negotiations with other countries. If the import surcharge is
FORD is LIBRARY GERALD
To: Chairman Burns
- 3 -
not clearly seen in this light, I would want to add its retention
to the list of major issues.
Issues (1) and (2) above will be jointly determined when
the United States and other countries agree on a post-resolution
pattern of par values in the IMF.
Issues (3) through (6) are the most complex. And they
are the issues on which we are furthest from having a carefully
worked out position. In my view, they are every bit as important
to us as the first two issues.
Although we have addressed ourselves to all of these
issues in the past, the current circumstances naturally demand an
urgent reconsideration and refining of earlier views. I would
like to be of any assistance I can in this regard, and I know that
other members of the International Division share this sentiment.
Intensive work is already in process in some obvious areas -- par-
ticularly on Issues (1) and (7) -- and I believe we ought to be
preparing position papers for you on issues (2) through (6).
cc: Governor Daane
Mr. Holland
Mr. Robert Solomon
Mr. Pizer
FORD i LIBRARY GERALD
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date August 18, 1971.
To
Chairman Burns
Subject:
From
Samuel Pizer
CONFIDENTIAL (FR)
The attached material provides a somewhat more full account
of the Japanese market situation.
PA
FORD & GERALD LIBRARY
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date August 18, 1971
To
Mr. Reed Pizer P J Irvine
Subject:
Latest Japanese Developments.
From
A source at the Japanese Embassy informs me that
there has been only a slight decline on the Tokyo stock
market today, and it looks like the fall has bottomed out.
This source reports that the Bank of Japan has bought an
additional $300 million worth of dollars today, bringing
the three-day total to $1.6 billion.
The Dow-Jones ticker this morning reports that the
Japanese Government is studying all possibilities for action
on the exchange rate front, but at present they will continue
to support the dollar within the existing IMF band. The D-J
says that resistance to revaluation is probably being
reinforced by growing anti-American feeling in Japan.
The Dow-Jones index for the Tokyo Stock Exchange
closed at ¥2328.28 yesterday. The drop was ¥210.50 on Monday
and ¥89.66 on Tuesday. Yesterday's decline was attributed
largely to rumors that European countries might put restrictions
on Japanese goods.
I am attaching a memorandum from Mr. Emery that
responds to the questions raised by Chairman Burns.
GERALD FORD LIBRARY
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date August 18, 1971
To
Mr. Reed J. Irvine
Subject: Recent Economic Developments
From
Robert F. Emery
RRE
in Japan.
On Monday and Tuesday of this week (August 16 and 17), the
Japanese foreign exchange banks reacted to the United States August 15
economic measures by selling large amounts of dollars to the Bank of
Japan. According to the Representative Office of the Bank of Japan
in New York City, this was primarily because the banks had a substan-
tial net asset position in dollars, but the dollar sales also reflected
some leads and lags in foreign transactions. The Bank of Japan
reportedly purchased about $600 million on Monday and $700 million on
Tuesday, bringing Japan's official foreign exchange reserves to
$9.9 billion, or $2 billion higher than at the end of July. According
.to Mr. Akita, there was virtually no influx of speculative funds on
Monday and Tuesday. Only a small amount of additional purchases of
Japanese securities.
The spot rate for the dollar on Monday and Tuesday apparently
was maintained at about ¥357 to the dollar, or approximately the same
level as prevailed during the previous week. Transactions in the
forward market were very thin on Monday, with the four-month discount
for the dollar quoted at 5.94 per cent.
For some time the Bank of Japan has indicated that it has
the necessary powers and controls to restrain any large influx of
speculative funds into Japan. But there is a difference of opinion as
to whether the Japanese authorities will really be able to do this
successfully. The Bank of Japan has various controls including guide-
lines on foreign short-term borrowing by individual Japanese banks, and
ceilings on each banks' net foreign asset position. The latter ceilings
apply to both the net amount in dollars for the individual banks as well
as the absolute amount of increase over a certain time period. In
general, the net foreign asset ceilings must be observed either at the
end of the month or semi-monthly.
Last Saturday the foreign exchange banks had a net foreign
asset position of approximately $1 billion. However, on Monday and
Tuesday they sold $1.3 billion in dollars to the Bank of Japan. The
Bank of Japan contends it can use moral suasion to prevent the banks
from assuming a heavy net foreign liability position, and therefore the
banks are not likely to continue their heavy sales of dollars. However,
a contact at the U.S.-Japan Trade Council has indicated that the
Japanese trading companies are engaging in speculation and the Japanese
FORD & LIBRARY
-2-
have about $6 billion in foreign assets. These are mostly deferred
payments credits. Although he would not say whether there would
continue to be an influx of dollars into Japan this month, the
implication was that it was possible unless the Bank of Japan took
new strong measures to halt the influx.
Besides the above restraints, there are also some
restraints on the volume of foreign purchases of Japanese securities.
Since May 17, 1971, foreigners have been forbidden to purchase
unlisted securities in Japan, as well as short-term (60 days or less)
government securities. In addition, no single foreigner is allowed to
hold more than 10 per cent of the outstanding shares of a Japanese
company, and the share holdings of two or more foreigners in a
Japanese company are not allowed to exceed 25 per cent.
On Monday and Tuesday, stock prices on the Tokyo exchange
fell 11 per cent from the previous level on Saturday. Mr. Akita
indicated that most of the decline involved the stocks of firms that
would be adversely affected by the new U. S. import surcharge. Other
issues were not affected significantly.
GERALD FORD LIBRARY
OARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date August 19, 1971
Mr Samuel Pizer
To
Subject: Late Japanese Developments
From
R
J. Irvine
The Dow-Jones ticker this morning reports that the Bank
of Japan has purchased another $600 million worth of dollars today.
This brings the four-day total to $2.2 billion. The Bank of Japan
has ordered Japanese banks not to increase the total of foreign currency
borrowing above the level of August 18. Four leading commercial banks
announced they were temporarily suspending spot transactions in dollars.
However, inter-bank transactions were not affected. This is apparently
the basis for the broadcast report that the Japanese had suspended trad-
ing in dollars. The Bank of Japan did not suspend dollar purchases.
The Tokyo stock exchange was hard hit again today, the Dow-
Jones average declining by ¥138 to ¥2190, a 5.9 per cent decline. This
brings the decline for the week to 20 per cent.
The Japanese steel industry has asked for an exemption from
the U.S. 10 per cent import surcharge on the ground that they are main-
taining quotas on steel exports to the U.S. The Japanese industry indicated
that it would be willing to see a formal government-to-government agreement
on steel quotas negotiated.
FORD & LIBRARY 938470
OARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date August 18, 1971
To
Mr. Reed J. Irvine
Subject: Recent Japanese Economic
From
Robert F. Emery
Developments
Central bank intervention
On Wednesday, August 18, the Bank of Japan intervention in
the foreign exchange market in support of the dollar reportedly amounted
to $300 million. Total intervention for the first three days of this
week thus came to $1.5 billion. This reportedly raised Japanese official
reserves to $10.2 billion. The Bank of Japan office in New York indicated
that while this partly reflected leads and lags in foreign transactions,
there was virtually no speculative inflow of funds.
Exchange rate
For the third straight day this week the Bank of Japan con-
tinued to support the dollar at the minimum interbank rate of ¥357.35
to the dollar. Prime Minister Sato is also reported by the AP news
ticker to have said that Japan would continue to maintain the present yen
parity since he did not want to have deflation at a time when the economy
was already very sluggish.
Stock market
Stock prices continued to decline on Wednesday and fell 4.6
per cent. This compares with declines of 7.7 per cent on Monday and 3.5
per cent on Tuesday. Since Saturday, the market has declined 15.1 per cent.
Run on gold objects
The AP news ticker reported on Wednesday that there has been
a rush on the part of Japanese consumers to buy objects made of gold.
This was attributed to the possibility of yen revaluation.
Ministry of Finance Official
Mr. Yusuke Kashiwagi, formerly Vice Minister of the Ministry
of Finance, and currently Special Adviser to the Minister of Finance, has
left Japan and will be in Paris on Thursday for consultations. He will
continue on to Washington and be here over the weekend.
Revaluation rumor
Unofficial trading sources reported in New York Wednesday
morning that the yen had been revalued by 8 per cent. This was later
denied by Ambassador Ushiba after a visit with Secretary John Connally
and also by the Ministry of Finance in Tokyo.
GERALD FORD LIBRARY
- 2 -
Supplemental import duty
The New York Times reported on Wednesday that the 10 per cent
supplemental import duty is expected to affect about 90 per cent of
the United States' imports from Japan. The same issue reported one
U.S. Government official (unspecified) as saying that the yen was very
undervalued and should be revalued by 20 to 25 per cent.
FORD j LIBRARY 936870
THE WHITE HOUSE
WASHINGTON
August 19, 1971
FOR:
<
ARTHUR BURNS
PAUL McCRACKEN
GEORGE SHULTZ
This is something I got from Paul
Volcker that relates to our meeting
tomorrow morning.
Attachment:
"International Negotiations"
8/18/71
FORD is LIBRARY GERALD
SECRET
August 18, 1971
INTERNATIONAL NEGOTIATIONS
OBJECTIVES, ISSUES, AND CONCLUSIONS
The state of flux in the international monetary order
presents large opportunities and risks. On the favorable
side, we may be able to re-establish the strength of our
external position in a framework of a stronger, orderly
multilateral system. At the least, we may ease the transition
to a world more closely aligned into regional blocs -- with
open trade and investment between the blocs. At worst, the
world economy will degenerate into uncooperative, protectionist
blocs. A time for critical decision is at hand.
We can press now for certain of major objectives in a
multilateral setting and get a firm start on others, along
the road to rebuilding a multilateral order. This initial
effort may well have a relatively high probability of failure --
but, even if it fails in its immediate objectives, it could
be important in keeping open the path to "benign regionalism."
A passive stance by the United States now, in an effort
to maximize later gains, also maximizes risks. The rest of
DECLASSIFIED
SECRET
E.O. 12356, Sec. 3.4
MR 92-31, #29, # Treasury Hr 10/25/92
FORD & LIBRARY 9ERALD
By KBH NARA, Date 12/24/92
SECRET
- 2 -
the world -- and particularly Europe -- is capable of "going
it alone. " Left to themselves, they are likely to do so in
a divisive manner, arguing, rightly or wrongly, we cast the
first stone.
Objectives
We have two inter-related objectives:
(1) We want to secure our own external position, both
to strengthen the position of the dollar as an
anchor for the international system and, even more
directly, to support a prosperous domestic economy,
trading freely with others.
(2) We want a strong and durable international monetary
system, offering stable conditions for growth and
investment and an economic setting for political
cooperation.
The first objective requires both exchange rate adjust-
ments and, in time, a revision in trading arrangements and
burden sharing. The trick will be to obtain sufficient
SECRET
FORD & GERALD LIBRARY
SECRET
- 3 -
action or assurances to be reasonably confident the objective
is achieved (assuming satisfactory internal performance).
The second objective will require extended negotiation,
with the proper agenda and will for agreement.
Proposed Approach
A. Try to get agreement on the exchange rate question
promptly, using the Group of Ten. If achieved
in sufficient measure, with necessary further
assurances from Japan on our bilateral balance and
some consensus on the framework for other negotia-
tions, the surcharge could be removed. (Holdouts
could be penalized by maintenance.) (The new rates
might have a wider band.)
Convertibility would be restored only in
limited and tentative form, pending (a) visible
rebuilding of strength and (b) progress on trade
and burden sharing. Other countries would assume
the principal burden of market intervention and
SECRET
FORD is LIBRARY 038870
SECRET
- 4 -
agree to refrain from converting present dollar
holdings pending further agreements on monetary
reform.
Questions: How large an exchange rate adjust-
ment is needed?
Is the gold price negotiable under
any circumstances?
How can the role of gold be depressed?
What assurances do we need from Japan?
B. Following the realignment (and surcharge end), monetary
negotiations would extend to:
(a) Exchange flexibility. (The present U. S. position
is a minimal need. )
(b) Role of SDR's.
(c) Methods of funding dollar holdings and moving
to some kind of reserve settlement account.
We would have ample time to review a detailed position
on these points. As they are satisfactorily resolved,
a modified form of full convertibility could be re-
established.
SECRET
FORD & LIBRARY GERALD
SECRET
- 5 -
C. In parallel negotiations, we would:
(a) Deal with outstanding trade issues.
(b) Develop multilateral burden sharing.
As in B, this will be time consuming. Progress will
help determine our recommitment to convertibility,
as well as removal of any residual surcharge on
imports from particular countries.
Conclusions
The size of the adjustments needed may make any early
agreed solution impossible. But we have much to gain from
trying.
(1) While others are off balance, our advantage is
considerable; after markets settle down, the
advantage might be gone.
(2) The image of cooperativeness is important; others
have pride and prestige considerations that will
drive them to autarchy. Politically, this
Administration will get the blame.
SECRET
FORD & LIBRARY GERALD
SECRET
- 6 -
(3) To try and fail is not to lose. It will tend, in
all probability, to maintain a more constructive
attitude internationally than an appearance of
turning our back.
Consequently, we should soon join the call for a Group
of Ten meeting -- in Washington -- with a prepared exchange
rate, convertibility, surcharge position.
SECRET
FORD is LIBRARY 071839
BOARD 0 OVERNORS OF THE FEDERAL RESERVE S EM IMP
CONFIDENTIAL (FR)
August 19, 1971
To: Chairman Burns
From; Robert Solomon
Subject: The U.S. Negotiating
Stance on International
Monetary Matters.
Suspension of convertibility and imposition of the
temporary import surcharge have created a unique opportunity
for U.S. leadership in the achievement of an improved inter-
national monetary system. In fact President Nixon on the evening
of August 15 said that "we will press for the necessary reforms to
set up an urgently needed new international monetary system."
Since we have taken drastic action internationally,
there is much to be said for trying to achieve some lasting improve-
ments, in addition to an immediate realignment of exchange rates.
U.S. Objectives
I would list U.S. negotiating objectives as
follows:
1. Substantial revaluation of other currencies
against the dollar.
2. An understanding on greater flexibility of
exchange rates in the future.
3. Improvements in trade policy (by Japan but
also a reduction of EC preferential arrangements with
-
non-EC countries and an agreement to do something on
non-tariff barriers.
DECLASSIFIED
ERALD FORD LIBRARY
AUTHORITY Fed. Res its 11/16/82; State girliam
BV
hh
Treasury Hn- 8/22/06
NARA, DATE
9/29/09
To: Chairman Burns
-2-
4. Better offset of U.S. military expenditures in
Europe (here we must weigh the danger that the Germans
will insist on revocation of the Blessing/Martin letter
as a quid pro quo).
5. Agreement that the SDR needs to be kept alive,
since SDR creation will be a necessary condition for the
maintenance of balance of payments equilibrium (in the
absence of U.S. deficits there will be no other adequate
source of growth of international reasons).
6. A willingness by the United States to start
negotiating a consolidation of reserve assets in the
IMF that is, to give up our role as the reserve currency.
Negotiating Package
In the actual negotiations, it would be useful to add to
the above objectives a U.S. objective to get rid of our capital
controls. Although we may have to defer achievement of this objective,
the very willingness to do so may be a useful negotiating device.
Furthermore, inclusion of this item makes it possible to push for a
larger revaluation of other countries than is specified in the IMF
table.
RS
FORD & LIBRARY GERALD
UNITED STATES INFORMATION AGENCY
OFFICE OF THE DIRECTOR
August 19, 1971
NOTE FOR: The Honorable
Arthur F. Burns
The French Gallup affiliate IFOP
conducted for the newspaper
L'Express a poll on the President's
economic measures on August 18.
The results will be published next
Monday, August 23. We have them
on the basis that we will not release
these findings prior to publication.
FORD & LIBRARY GERALD
Frank If Shakespeare
CONFIDENTIAL
August 19, 1971
French Attitudes Toward President Nixon's New Economic Policies
On Wednesday, August 18, the French Instiute of Public Opinion (IFOP)
conducted a public opinion survey commissioned by the French weekly
'Express. The sample comprised 360 white collar workers and persons
in higher-level occupations living in cities with 20,000 or more inhabitants.
'Express will publish the findings next Monday, August 23.
The following findings were transmitted by phone and the exactness of
of the translations have not yet been verified. There could also be minor
discrepancies in the "don't know" and "no effect" categories.
IFOP has asked that we not release these findings to the public prior
to publication.
1. Have you heard about the measures decided by President
Nixon to protect the dollar?
1. Yes, have heard
90%
2. No, have not heard
10
100%
2. Do you think that the dollar crisis will have a good or a
bad influence on your standard of living?
1. Good
8%
2. Bad
41
3. No effect (voluntary)
51
100%
3. In your opinion should the French government support the
dollar?
1. Yes
43%
2. No
31
3. Don't know
26
100%
Determined to be an administrative marking
Cancelled per E.O. 12356, Sec. 1.3 and
CONFIDENTIAL
FORD & LIBRARY 076830
Archivist's memo of March 16, 1983
By go
NARS date 6/11/84
CONFIDENTIAL
-2-
4. In your opinion, is the current dollar crisis a rather
disquieting or rather reassuring phenomenon for the
French economy?
1. Disquieting
63%
2. Reassuring
10
3. Don't know
27
100%
5. Which among the following currencies appears to you
currently to be the most solid one?
1. Deutsche Mark
50%
2. Swiss Franc
31
3. French Franc
6
4. American Dollar
4
5. British Pound
2
6. Can you conceive of a monetary system that would be
founded on another basis than gold?
1. Yes
32%
2. No
45
3. Don't know
23
100%
7. Do you believe that this crisis will favor or hinder the
establishment of a European currency?
1. Favor
51%
2. Hinder
28
3. Don't know
21
100%
FORD is 939870 LIBRARY
CONFIDENTIAL
CONFIDENTIAL
August 19, 1971
Requirements for Balance of Payments Equilibrium
I. U.S. Objectives
1. The United States should maintain a balance
in its international payments which will for
the foreseeable future:
(a) Not impose undue constraint on the pursuit
of full employment with reasonable price
stability and healthy economic growth in
the U.S.;
(b) Foster a stable international monetary
system conducive to a freer flow of
trade and payments across international
boundaries;
(c) Facilitate the achievement of a global
structure of peace, the promotion of
economic progress in less developed nations,
and a partnership with other nations which
"will make this planet a better place to live.
1/ President Nixon in "U.S. Foreign Policy for the
1970's," a report to the Congress.
DECLASSIFIED
CONFIDENTIAL
FORD is LIBRARY
AUTHORITY Trensury th 8/22/06
BY Wn NARA, DATE 9/29/09
State
CONFIDENTIAL
- 2 -
2. A balance of payments position meeting these
requirements should be recognized by the
world financial community as a strong and
stable position compatible with the balance
of payments positions of other major countries.
To meet these requirements the United States
will need a statistical position which over
a period of years assures:
(a) an official settlements balance averaging
around zero, excluding allocations of
Special Drawing Rights;
(b) a surplus on current and long-term
capital account of not less than $1 billion
annually -- a surplus sufficient to cover
a negative figure for errors and omissions,
which has been averaging roughly $1 billion annually;
(c) in order to finance a foreign aid program
worthy of the United States and to accommodate
foreign demands for U.S. private capital, a
surplus on goods, services and private
remittances of not less than .5% of
the U. S. GNP will be necessary
FORD is GERALD LIBRARY
CONFIDENTIAL
CONFIDENTIAL
- 3 -
for some years to come. For 1973, this
would mean a surplus on goods, services
and remittances of $6 to $7 billion. A
surplus of this magnitude would be sufficient
to maintain the desired position on current
and long-term capital only if there is a
substantial reduction in the relative attrac-
tiveness of other countries as a site for
investment in manufacturing industries.
(d) a surplus of this magnitude cannot be
achieved except through a surplus on
merchandise trade account. Given present
prospects --- both with respect to the
level of military expenditures and the
increase in investment payments as well as
receipts, a trade surplus of $5 billion
will be needed in 1973. The sooner a current
account surplus is restored the less interest
payments will increase.
II. The improvement required to meet U.S. objectives
1. Prior to recently announced actions, the U. S.
balance-of-payments position was projected as follows:
FORD & GERALD LIBRARY
CONFIDENTIAL
- 4 -
1st Half 1971
Year 1971
1972
1973
Merchandise Trade
-.8*
-1.9
-3.5
-6.5
Goods, Services and
-.2*
-1.0
-2.7
-5.5
Remittances
Current and long-term
-4.8
-8.4
-8.9
-11.4
Capital
* Actual Seasonally Adjusted Rate.
2. The deficit in 1971 would be substantially
larger in the U. S. economy were operating at
the full employment level. On a rough "full
employment" basis, the trade deficit for the
year 1971 would be in the range of $3 to $3-1/2
billion and the deficits on the other balances
would be increased by comparable amounts.
3. Even more importantly, our merchandise trade
position, based on the exchange rates in effect
prior to May 1, 1971, could have been expected
to deteriorate at a rate of nearly $2-1/2 billion
annually. Under these circumstances we could
not expect any net improvement in our investment
income, since liabilities would be rising more
rapidly than assets.
4. Any projection of the U. S. payments position is
subject to a wide margin of error. Nevertheless,
FORD & LIBRARY GERALD
CONFIDENTIAL
- 5 -
there is every indication that if there were
no exchange rate changes or other major policy
steps by
the U. S. or other major countries, the United
States would by 1973 have found its balance of
payments position short of its requirements
in the following orders of magnitude:
GERALD FORD LIBRARY
Billions of $
Projected
1973
Requirement
Position
Shortfall
Merchandise trade bal. +5 to +6
-6
11 to 12
Balance on goods, ser- +6 to +7
-5
11 to 12
vices and private
remittances
Balance on current and Over +1
-11
12
long-term capital
5. The foregoing projection takes no account of the
trade effects of the contemplated enlargement
of the European Common Market or any preferential
trade arrangements which might be concluded
between the enlarged EC and other nations. Damage
to our agricultural trade from U.K. entry is
expected to be at least $100 to $150 million
annually and preferential arrangements already
concluded by the EC could damage our manufactured
CONFIDENTIAL
CONFIDENTIAL
- 6 -
trade by a similar account. In addition we
could also suffer from trade diversion effects
of enlargement. These factors would need to be
taken into account over the longer term.
6. Neither does the projection allow for the removal
of the restraints on capital outflows currently
being maintained by the United States. These
restraints are believed to have an impact on the
net outflow of long-term capital of about $1
billion annually. Any balance of payments adjust-
ment program should be designed to produce a
position which would be in equilibrium without
the necessity of maintaining these restraints.
Since an exchange rate realighment would change
the market incentives to which capital movements
would respond in the absence of restraints,
removal of the restraints under such conditions
might not have a major impact on our balance.
QERALO FORD CIBRARY
- 7 -
Confidential
III. Extent of required exchange rate realignment
1. It is extraordinarily difficult to estimate the
effects of exchange rate changes. The IMF staff
has undertaken extensive econometric studies
which suggest that a series of changes in the
exchange rates of all other OECD countries
vis-a-vis the dollar averaging about 10 percent
might produce an improvement in the U.S.
position on goods, services and private remittances
of $8 billion.
2. We have had no experience with simultaneous
changes in the exchange rates of a number of
countries vis-a-vis the U.S. since 1949. Con-
sequently, all attempts to use econometric
studies to determine the extent of the change
required suffer from a lack of data. We are
reluctant to rely too heavily on the IMF
studies, although they may be helpful as an
indication of the maximum amount of impact
which could be expected from a given change.
FORD is LIBRARY GERALD
3. What is apparent is the need for a change
tendency
which eliminates the/trend of the trade balance
to deteriorate $2-1/2 billion a year and to
shift the expected trade balance in 1973 from
$-6 to $-7 to $+5 billion-- a shift of
$11 to $12 billion. The goods and services
Confidential
- 8 -
Confidential
balance would have to improve by roughly the
same amount.
4. To achieve an adjustment of this magnitude
a change in the rates of other OECD countries
averaging at least 15 percent would be required.
If the IMF studies of trade relationships and
the distribution of the effects of exchange
rate changes are employed, the required changes
in individual country rates would be along the
following lines:
Percent
Japan
22.5
Canada*
18
U.K.
11
Germany*
20
Belgium/Luxembourg
15
Italy
14
Netherlands*
11
GERALD FORD LIBRARY
France
11
Other OECD countries
14
5. These estimates are based on the assumption that
there would be no significant change in the
exchange rates of non-OECD countries. Given
exchange rate adjustments of this magnitude on
the part of the major industrial nations of the
* These changes are measured from the parities
prevailing before the Canadian dollar was
allowed to float in 1970.
Confidential
Confidential
- 9 -
world, it is quite possible that some countries
outside the OECD could appropriately appreciate
their rates while the economic assistance
requirements of others might be significantly
diminished. Nevertheless, the impact of such
changes would probably not be such as to permit
any significant lowering of the degree of change
in the rates of the major OECD countries which
must occur in order. to restore a sustainable
world payments equilibrium.
FORD is LIBRARY 076839
Confidential
CONFIDENTIAL
- 10 -
IV. Contributions of other measures to the achievement of
equilibrium
It would not be necessary to achieve the entire amount
of the balance of payments adjustment required through a
realignment of exchange rates if other nations were pre-
pared to assume greater responsibilities for the Free World
defense, to open up their domestic markets, and in other
ways to pursue more equitable trade and industrial policies.
Contributions of up to the following amounts might be made
in that way.
Millions of $
(a) Through the assumption by other NATO
1,000 to 1,500*/
countries of budgetary costs of main-
taining U.S. military forces in Europe
(b) The opening up of the Japanese market
250
by removal of import quotas (Removal
of the administrative guidance system
might provide a further gain.)
(c) Modification of the Canadian automotive
100 to 200
agreement and cessation of Canadian
Government pressure on U.S. firms to
construct plants in Canada for the
purpose of supplying their U.S. market
(d) Access for U.S. agricultural products
250
to the markets of the EC through elimina-
tion of the variable levy system
(e) Elimination of EC subsidies for agri-
150 to 200
cultural exports in U.S. traditional
third markets
*/ Currency revaluations by countries in which military
expenditures are incurred will increase the balance of
payments costs of these expenditures.
CONFIDENTIAL
FORD : LIBRARY 076839
FR 468
(Rev. 3-63)
BOARD OF GOVERNORS OF THE FEDERAL RES VE SYSTEM
8/20
MEMO
Date
Time
Chairman Burns
To:
Ralph Bryant
From:
FORD is LIBRARY GERALD
Tel. No.
Ext.
Please call
For your approval
Returned your call
For your information
Will call again
Note and return
Phone me re attached
For comments and suggestions
See me re attached
Preparation of reply
MESSAGE:
As Dewey will tell you, we spent
quite a lot of time at the Treasury
discussing these subjects. We also had an
hour with Jack Polak and others at the
Fund.
Although there are of course many
tenuous judgments embodied in this paper,
we have confidence that these estimates
are at least as soundly based as those
prepared at the Treasury. There are
significant differences between the
Treasury staff view and our own, which we
can explain if that would be helpful to you.
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date August 19, 1971
Chairman Burns and Governor Daane
To
Subject: The Magnitude of the U.S.
Imbalance and the Changes
From
Ralph C. Bryant, George B. Henry,
in Exchange Rates Required
Helen B. Junz, and Samuel Pizer
Confidential (FR)
This note summarizes, as of tonight, our best judgment on the
following three questions: (a) How large is the underlying disequilibrium
in the U.S. balance of payments? (b) At what balance-of-payments target
should we be aiming? and (c) What realignment of exchange rates might
enable the United States to reach this target?
Size of Disequilibrium
We estimate the disequilibrium in 1971 to be between $7-8
billion on a high-employment basis. For 1972, we believe the high-
employment deficit to be $1 billion higher, that is about $8-9 billion.
Our judgment of the size of the disequilibrium is based on
calculating what the U.S. payments balance might have been if the United
States and other industrial countries had been at high employment in
1971 and were to be at high employment in 1972. The calculations are
based on 1970 rates of exchange and assume that capital controls remain
in place.
The Appropriate Target
In our judgment, the adjustment should be sufficiently large
to give us a high-employment official settlements balance somewhere
between a $ 1/2 billion deficit and a $1 billion surplus. This would
imply an improvement in the official settlements balance of about
FORD & LIBRARY GERALD
-2- -
$8-10 billion based on the 1972 estimated shortfall.
Although a small improvement could be expected for the capital
account after realignment of exchange rates, we judge that the lion's
share would need to take place in the current account. Hence we judge
the needed improvement in the current account to amount to $7-9 billion,
of which about $6-8 billion would have to come in merchandise trade.
Removal of capital controls would require a somewhat greater adjustment,
but probably no more than $1-2 billion.
Treasury estimates tend to target on the 1973-75 period, but
this exaggerates the amount of change needed to remedy the present
imbalance. An attempt to offset now the deterioration that might come
from divergent economic trends or policies in the period after 1972
might well abort the adjustment process. The problem of adjusting
possible future payments imbalances would best be handled by greater
flexibility of exchange rates.
New Pattern of Exchange Rates
The accompanying table indicates a pattern of exchange-rate
changes that we believe would produce an improvement in the U.S. trade
balance in the required $6-8 billion range (a target of $7 billion is
used in the calculations). When these changes are weighted by countries'
shares in world exports, the depreciation of the U.S. dollar vis-a-vis
the entire world would be roughly 4 3/4%; weighted by U.S. import shares,
it would amount to 7 3/4%. If the rate changes are weighted by
countries' shares in OECD exports to the world, the average appreciation
of the revaluing countries would amount to 9%.
GERALD FORD LIBRARY
FR(Confidential)
- 3 -
August 19, 1971
Exchange-Rate Adjustments Needed to Achieve a
$7 billion Improvement in the U.S. Trade Balance
Estimated Effects
Percentage Revaluation
on U.S.
Already
To be
Trade Balance
2/
Total
Effected
Effected
($ billion)
Japan
15
15
S
--
15
1.50
Germany
12½
5
7½
-
13.4
1.25
BLEU
7½
--
7½
1
100
.30
Netherlands
6
1
5
7.3
.25
France
6
--
6
7,3
.35
Italy
6
--
6
9.4
.30
Switzerland
9
7
2
.25
Austria
7½
5
2½
7.2
.05
United Kingdom
5
--
5
.50
Canada
12½
5
7½
12.1
1.50
Other OECD
3/
5
--
5
9
.25
Non-OECD
- Lb
11%
.50
Total
7.00
Note: Total balance-of-payments improvement required is estimated to
be $8-10 billion. Of the $8-10 billion, $6-8 billion would need to
come in the trade balance. Devaluation benefits in the capital
and invisibles balances might yield an improvement on the order
of $1 billion.
1/ From mid-1970 parities.
2/ As of mid-July 1971.
3/ Australia included with non-OECD.
IMF almu8 Bellin
BERALD FORD LIBRARY
4
We estimate that the largest part of the impact of these
exchange-rate changes on the U.S. trade balance would occur some
time between 12-24 months after the changes were effected. If fewer
countries revalued, the total effects would be more than proportionately
smaller. A large amount of the improvement in the U.S. trade balance
occurs in third markets.
At the present time the current-account positions of the
countries listed in the table are such that the implied deteriorations
in their positions would not put intolerable strains on them. (A
possible exception to this judgment might be made for the United Kingdom
and the Scandinavian countries.) If the postulated exchange-rate
changes were of a much greater order of magnitude (e.g., over 20
per cent for Japan, over 10 per cent for France and the Benelux
countries, over 5 per cent for the U.K.), we strongly doubt that the
resulting deteriorations in other countries' positions would be
tolerable.
Impacts of the 10 Per Cent Import Surcharge
We will shortly have ready a detailed analysis of the
estimated effects of the surcharge on U.S. imports. Our preliminary
judgment is that a full year's effect, based on the fourth quarter
1971 level of imports, would fall into a range of $ 3/4 to 1-1/2 billion.
The countries hardest hit by the surcharge will be Japan
and Canada, as the following table suggests:
FORD is LIBRARY GERALD
- 5-
% of total exports affected
Japan
29.3
Canada
14.4
Italy
9.2
Germany
8.6
United Kingdom
8.4
While the import surcharge is a powerful factor in the
forthcoming negotiations, its force depends largely on the expectation
that it would in fact be removed. It does not have great effect
by itself on the trade balance, as compared with a change in exchange
rates. An average depreciation of the dollar by any given percent would
yield an improvement in the trade balance alone several times greater
than an import surcharge of the same amount maintained on a permanent
basis.
FORD & LIBRARY 07V839
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date August 20, 1971.
To
Chairman Burns
Subject:
From
Samuel Pizer
The attached memorandum regarding the yen revaluation
and long-term foreign credits prepared by Mr. Emery is for your
information.
FORD & LIBRARY 938870
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date August 19, 1971
To
Mr. Reed J. Irvine
Subject: Yen Revaluation and Long-term
From
Robert F. Emery
RTE
Foreign Credits.
This memo is in response to your request for additional
information on one of the main factors that has caused some hesitancy
on the part of the Japanese authorities to revalue the yen upward.
This is the large amount of long-term credits outstanding denominated
in foreign currencies.
According to a New York Federal Reserve Bank Research
Memorandum prepared by Mrs. Patricia Kuwayama ("Is the Yen Undervalued?"
August 5, 1971), the Japanese Government made a survey of the long-term
foreign credits outstanding of 48 major Japanese corporations as of
June 30, 1970. This survey indicated that 90 per cent of these firms
were not covered by any clause protecting them against losses from yen
revaluation on the $7.9 billion in long-term foreign credits which
they had outstanding on June 30, 1970.
The two industries most likely to suffer heavy losses if
the yen were revalued were shipbuilding and industrial-equipment man-
ufacturers. The survey indicated that almost $3 billion of the
$7.9 billion consisted of assets of the shipbuilding companies, while
an additional $2 billion in foreign credits outstanding were those of
the industrial-equipment manufacturers. If one were to assume a 12.5 per
cent revaluation, the loss in yen repayments would be approximately
$1 billion.
More recent information provided by the United States-Japan
Trade Council (Council Report No. 49, July 30, 1971, "Japanese Trade
Organizations Strongly Oppose Yen Revaluation") indicates that the
amounts involved are probably much larger than those reported in the
48-corporation survey. The Japan Shipbuilders Association reports that
the shipbuilding industry in March 1971 had $8.4 billion in outstanding
foreign credits of which only $2.7 billion were hedged against revaluation.
This left a balance of $5.7 billion. The Association estimates that a
10 per cent revaluation in September of this year would result in a loss
of $540 million to the industry. Two other industries that would be hard
hit by a revaluation are electric machinery and shipping. The Japan
Electric Machine Industry Association reports that in June 1971 the
industry had $570 million in outstanding foreign credits, mainly
deferred payment export credits. A 10 per cent revaluation would
presumably result in a foreign exchange loss of about $57 million.
Lastly, the Japanese Ship Owners' Association estimates that the loss
on long-term contracts combined with losses on three other types of
GERALD FORD LIBRARY
TO: Mr. Reed J. Irvine
-2-
operations (liners, tramps and miscellaneous operations) in the
event of a 10 per cent revaluation would amount to $143 million
this year, plus $310 million over the years until all the long-
term contracts expired. Thus the total loss for a revaluation
would be $453 million.
The amount of potential loss is being steadily
reduced since an increasing number of firms have been insisting
on yen-denominated export contracts. The Japanese authorities
would undoubtedly like to delay any move to revalue the yen
until more credits have been shifted to a yen-denominated basis.
It is also likely that the recent U. S. economic actions of
August 15 will accelerate the trend toward a shift to yen-
denominated credits.
FORD i LIBRARY GERALD
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date August 20, 1971
To
Board of Governors
Subject: Memorandum on System
From Samuel Pizer
foreign-currency liabilities
STRICTLY CONFIDENTIAL (FR)
The attached memorandum prepared by Mr. Katz is an attempt to
provide guidance on the basic elements of the problems associated with
System foreign-currency liabilities outstanding at the time the U.S.
Treasury gold window was closed on August 15. This piece is being
circulated, although it is still somewhat tentative, since it is
expected that the Special Manager will touch on elements of these
problems in his report to the FOMC on August 24th.
AS
Attachment
FORD is LIBRARY
STRICTLY CONFIDENTIAL (FR)
August 20, 1971
To:
Board of Governors (Thru Mr. Pizer)
From:
Samuel I. Katz
Subject: Problems Associated With Foreign-Currency Liabilities of the
Federal Reserve and Treasury.
This memorandum is intended to provide basic information on
the question of potential dollar-currency losses on the foreign-currency
liabilities of the Federal Reserve and Treasury which were outstanding
at the time of the closing of the gold window on August 15. It is
intended to summarize:
a. The foreign-currency assets of U.S. agencies;
b. The foreign-currency liabilities of the Federal
Reserve and U.S. Treasury currently outstanding;
c. An approximation of potential losses in each
of the major European currencies; and
d. The repayment options open to U.S. agencies.
These topics will be treated in turn.
The estimates of U.S. foreign-currency liabilities and assets
used in this memorandum are approximations of the position as of August
15 (adjusted for transactions initiated but not completed by Sunday
evening). Of course the magnitudes are altered daily as we learn of
new transactions. However, these estimates can serve as an approxima-
tion of the magnitudes involved.
GERALD FORD LIBRARY
- 2 -
Foreign-currency assets of U.S. agencies
When the gold window was closed on August 15, the U.S. gold
stock (adjusted for transactions in process) stood at $10,229 million
and SDR holdings at $1,097 million.
There remained $570 million in the United States gold tranche
at the Fund.
U.S. agencies also held about $250 million in convertible-
currency balances primarly in the form of:
(in million of dollars equivalent)
Treasury
System
DM
227.0
12.0
Swiss francs
0.2
8.3
U.S. agencies: foreign-currency liabilities
The combined foreign-currency commitments of the Federal
Reserve and U.S. Treasury at the time the gold window was closed were
about $4.5 billion or equivalent to nearly 39% of U.S. holdings of gold,
SDRs and convertible currencies: $3.0 billion in Federal Reserve swap
liabilities and about $1.4 billion in (net) Treasury foreign-currency
liabilities. (See Table 1.) The currencies-of-denomination of these
liabilities are shown in Table 1. Excluded from this table are the
$ 34.3 billion of uncovered dollars held by foreign central banks.
(See Table 2.)
FORD i LIBRARY 078870
- 2a -
STRICTLY CONFIDENTIAL (FR)
Table 1.
Federal Reserve and U.S. Treasury: Foreign-currency liabilities
by currency of denomination as of August 18, 1971
(in millions of U.S. dollars equivalent)
Pound
German
Swiss
Belgian
BIS (swiss
Total
sterling
mark
francs
francs
francs)
(BNS)
1. Liabilities outstanding:
a. Federal Reserve
swaps
750
60
1,000
635ᵃ/
600
3045
b. Net Treasury
liabilities b/
--
448
832
--
158
1438
c. Total outstanding
liabilities
750
508
1,832
635
758
4483
2. Potential dollar-
currency loss per 1%
appreciation of
foreign currency (millions) 7.5
5.1
18.3
6.4
7.9
45.2
3. Computed loss in
dollars at exchange
market rates on
August 18, 1971
a. Approximate
exchange rate c/
at time of
drawings
241.97
27.548
24.585
2.0151
24.630
b. Exchange rate
Wed. Aug. 18
(2:30 pm call)
246.25
29.450
25.106
2.0800
25.106
c. Foreign-currency
appreciation (%)
1.77
6.90
2.12
3.22
1.93
d. Computed losses in
terms of dollarson:
(millions)
Federal Reserve
swaps
13.3
4.1
21.2
20.4
11.6
70.6
Net Treasury
liabilities
--
30.9
17.6
--
3.0
51.5
Total losses
13.3
35.0
38.8
20.4
14.6
122.1
a/ Includes $35 million in Belgian francs drawn on BIS.
b/ Treasury foreign-currency securities less a balance of $227 million in DMs. Treasury
balances in other currencies less than $500,000.
c/ U.S. cents per unit of foreign currency.
d/ Weighted average rate.
GERALD FORD JBRARY
- 2b -
STRICTLY CONFIDENTIAL (FR)
August 19, 1971
Table 2
Estimated Total Reserves, Dollar Reserves, and Uncovered
Dollar Holdings of Major Foreign Central Banks,
as of August 19, 1971
Dollar Assets
Net Reserve
covered by
Uncovered
Central Bank of:
Assets 1/
Total
F.R. swaps
Dollar Holdings
Germany
16,483
10,253
--
10,253
Italy
6,383
2,421
--
2,421
Netherlands
3,452
371
--
371
France
6,962
3,369
:
3,369
Belgium
3,525
830
635 2/
195
United Kingdom
5,166 3/
4,763 3/
750
4,013
Canada
4,954
3,338
--
3,338
Japan
11,083
9,152
--
9,152
Switzerland
6,691
2,867
1,600
1,267
Total
64,609
37,274
2,985
34,289
1/ Reserve assets net of official liabilities; based upon central bank data as of
the end of July 1971, adjusted for reported exchange market purchases of dollars
during August 1 - 19.
2/ Of this amount, $35 million is covered by a System drawing on the BIS matched
by a swap between the BIS and the National Bank of Belgium.
3/ Including $1.79 billion held with the BIS under a special transaction.
FORD & LIBRARY 9ERALD
- 3 -
Nature of System liability under swap network
There are complications in assessing the exposure to dollar-
loss of the Federal Reserve on its drawings (at the request of our swap-
partners) under the terms of the reciprocal-currency agreements because
of uncertainties about the interpretation of the revaluation clause.
Protection of revaluation clause - Under the swap arrangements,
the Federal Reserve has always been obligated to settle outstanding
balances by delivering on maturity a given amount of foreign-currency
to the swap-partner. The primary risk assumed by the System in accepting
foreign-currency liabilities (when swap-partners asked us to draw on
the credit lines) was that of a revaluation of the other currencies
against the dollar. The solution to this danger was to introduce a
revaluation clause into the reciprocal-currency arrangements. Under
the standard clause, the swap-partner accepted a standing order to be
executed (when necessary) to purchase its currency at the parity in
effect prior to revaluation to repay any Federal Reserve obligations
in that currency. This indirect procedure of the standing order to
obtain foreign currencies had to be followed because there were legal
obstacles which made it impossible to incorporate formal exchange-rate
guarantees against revaluation into the swap agreements.
European dissatisfaction with revaluation clause Increasingly,
European officials came to the view that the swap agreements, in this
formulation, protected their dollar holdings only against a risk they
no longer regarded as likely: that is, a devaluation of the dollar in
GERALD FORD LIBRARY
- 4 -
the form of a formal increase in the U.S. Treasury buying price for
gold. But, as they saw it, the terms failed to protect them against
two risks which they came to anticipate as more likely possibilities:
(a) the formal suspension by the U.S. Treasury of gold sales without
any change in the $35 gold price; and (b) their need to revalue their
currencies on the basis of urgings by the United States.
European officials had conversations with Federal Reserve
personnel interpreting the terms of the reciprocal-currency agree-
compensation
ments to cover such contingencies. Swiss officials have proposed/
for any losses suffered by the Swiss National Bank (and also by the
Swiss Confederation and the Bank for International Settlements) on covered
dollar balances because a partial or total suspension of gold redemp-
tion by the U.S. Treasury "would not be regarded by us as a revaluation
of the Swiss franc in the sense of that clause. "
In response, Federal Reserve officials stated that "we would
anticipate dealing with any contingency in the spirit of cooperation
and are confident that you would do the same, taking into full account
the specific facts and circumstances. " There could be a question of
interpretation in the light of the facts in each specific U.S. drawing;
but the FOMC Special Manager and Assistant General Counsel have
expressed the opinion that the Swiss National Bank "was on sound legal
ground" in their interpretation.
LIBRARY GERALD ? FORD
- 5 -
Estimate of Federal Reserve dollar-currency losses on foreign liabilities
Federal Reserve exposure to dollar-losses on outstanding
drawings is calculated in Table 1 at some $71 million on the basis of
the exchange rates which prevailed at 2:30 p.m. on Wednesday (August 18).
The exposure is concentrated mostly in Swiss and Belgian francs and in
sterling. (See Table 1.) The loss-exposure would be much larger if
U.S. agencies assumed liability for any of the uncovered dollar holdings
of any foreign central bank. (See Table 2.)
The estimate will be increased when the further appreciation
of foreign currencies, now being expected, materializes. For estimating
purposes, the potential dollar-currency losses are shown in Table 1 in
terms of a 1% appreciation of each European currency.
To what extent does the revaluation clause apply to outstanding
balances? - The calculations in Table 1 must remain uncertain until the
extent of the protection of the revaluation clause to specific Federal
Reserve drawings has been agreed upon with our swap-partners. At least
five different types of situations can be distinguished:
Situation I. Obligations incurred in European currencies
which revalued prior to the gold-window action: that is, the Swiss
franc. There were no Federal Reserve liabilities in Swiss francs at
that time.
Situation 2. Obligations incurred in European currencies
which floated upward prior to the gold-window action: that is, the
Dutch guilder and the German mark. The facts differ in these two cases.
FORD & LIBRARY 07V839
- 6 -
- Guilders - There were $250 million drawings outstanding
in guilders when the guilder floated upward in May. At that time, the
Dutch authorities agreed that the revaluation clause applied and provided
the System with $250 million-equivalent of guilders at (or close to)
the guilder's former upper limit. Shortly thereafter, however, these
$250 million (which were uncovered dollars) plus other uncovered dollars
held by the Netherlands Bank were funded by a U.S. drawing on the Fund
and an SDR sale to them.
- D-mark - The Dutch episode may establish the precedent
that System obligations in a floating currency prior to the gold-window
action would be protected by the revaluation clause. Unfortunately,
the facts as to the $60 million System obligation to the Bundesbank
differ from the Dutch case. The DM drawing did not cover German dollar
accruals at the time but provided the Federal Reserve with DM balances
in order to make delivery on DM-forward contracts (which we arranged
in April for value in July).
To the extent that the Dutch prece-
dent were applicable, however, the $4.1 million loss shown in Table 1
would be reduced.
Situation 3. Obligations incurred in European currencies
which floated upward after the gold-window action: that is, virtually
every major European currency. As of Friday, August 20, it is under-
stood that the European markets will reopen on Monday and that most
value of
European currencies will be allowed to float. It is expected that the dollar/
System liabilities in DM, Belgian francs and perhaps Swiss franc and
pounds could be affected by subsequent upward movements in these
market quotations.
FORD is LIBRARY
- 7 -
Situation 4. European currencies which will later be formally
revalued. An interpretation will have to be made whether the Federal
Reserve is, or is not, protected by the revaluation clause on any
balances outstanding when the new parities are announced for the major
European currencies. But there are cooperative as well as legal con-
siderations involved in this situation: System officials must recognize
that some European officials feel that they are morally entitled to
compensation because their revaluations have been "forced" on them by
the United States. An unwillingness of the Federal Reserve to recognize
this obligation could leave a residue of bad feeling.
Situation 5. European central banks which held uncovered
dollars over the August 15-16 week-end. Total uncovered dollars in the
hands of the major central banks exceeded $34 billion on August 19.
The Federal Reserve has no legal obligations on these dollars but it
is to be expected that foreign officials might raise a question about
whether the System would provide coverage on some parts of these holdings.
The President has instructed the Federal Reserve not to make new swap
drawings but the Swiss and the Bank of England are already seeking cover
on portions of their uncovered holdings.
BERALD FORD LIBRARY
Liquidation options available to U.S. agencies
There would seem to be essentially five different ways by which
the United States could pay off remaining Federal Reserve and Treasury
foreign-currency liabilities. Some of them involve a dollar-currency
loss and others would not. These are:
- 8 -
Option I.
Wait for a reversal in market flows
Option II. Use U.S. reserve assets (gold or SDRs);
Option III. Draw foreign currencies from the Fund;
Option IV. Fund through a medium-term U.S. Treasury
obligation; or
Option V.
Purchase foreign currencies in the open
market against dollars.
We will consider each of these options in turn.
Option I. We can regard as unlikely repayment through exchange-
market proceeds on the ground that the private funds are not likely to
be returned to dollar-denominated assets until new parities are established.
Once they are established, however, inflows could occur 1 before the swaps
finally mature; in that case, the question of compensation to swap-partners
could arise.
Option II. If the United States were to repay through the use
of reserve assets, the repayment would be at the $35 parity and there
would be no dollar losses to be accounted for by any U.S. agency.
Option III. The United States could obtain only marginal
amounts of foreign currencies from the Fund unless it was prepared to
make a "first credit-tranche" drawing. Such a drawing would require
formal consultations with the Fund on terms and conditions.
Option IV. Funding through a medium-term U.S. Treasury
obligation has (i) legal and (ii) negotiating limitations. Foreign-
series Treasury obligations are specifically under the Treasury debt
GERALD LIBRARY
- 9 -
ceiling. This restriction is not a material limitation, however, since
dollars obtained from foreign-currency issues can be used to finance
the debt as a substitute for borrowings in dollar-denominated securities.
On the other hand, there is the cost that the Treasury would assume
additional foreign-currency liabilities in a period of exchange-rate
uncertainty.
On the negotiating side, there would always be the question
of the willingness of foreign official dollar holders to accept a
Treasury obligation. Foreign officials would very likely press to
obtain some U.S. reserve assets as part of a tied-in package which
included some Treasury funding. Similarly, they might accept Treasury
obligations if U.S. officials would include in the package a funding
of additional uncovered dollars. (See Table 2.)
Option V. There would be an identifiable dollar-currency
loss on repaying swap balances if, under Option V, U.S. agencies should
to into the exchange market and buy foreign currencies against dollars
at market rates. The difference between the amount of dollars needed
to buy the foreign currencies at some future date compared with the
(lower) amount of dollars covered in the original drawing would then
have to appear as a financing cost on the books of some U.S. agency.
There seem to be four sub-options if this approach to repay-
ment were followed. That is, the losses could:
a. Appear as a loss in terms of dollars in the
accounts of the Federal Reserve Banks;
b. Become a charge against the resources of
the Stabilization Fund;
FORD is LIBRARY 076839
- 10 -
C. Become a charge against some other Treasury
account; or
d. Be covered by a specific Congressional
appropriation to the Treasury.
FORD it LIBRARY 076835
BOARD OF GOVERNORS OF THE FEDERAL
,
IRVE SYSTEM
Date
August 20, 1971
To
Chairman Burns
$
From
J. Dewey Daane
Orp-
This is draft put together by
McCracken and myself just prior
to his departure for upstate
New York.
Mes
J. D. D.
FORD is LIBRARY 076870
P icCracken/Aug. 20, 1971
Second Draft
The immediate position, for operating purposes seems
to be about as follows:
1. Negotiations should begin now on a new pattern of exchange
rates, looking toward an early return to stable rates.
a. The change in exchange rates must be large enough
atlintized,
DECLASSIFIED
E.O. 12958 (as amended) SEC 3.3 SEC 3.3 stressuryth 8/22/06
relative to the dollar to give promise of a clear
surplus in our basic balance.
b. A part of the package would be our rescinding the
NSC, Memo, 3/30/06, State Dept. Guidelines
NARA, Date 9/29/09
surcharge generally, or selectively if necessary.
The average exchange rate adjustment must exceed the
1
10 percent surcharge. It is essential that
we take a hard line on the magnitudes of exchange
rate adjustments that are required as a condition
By Wa
of returning to a position of stable rates. There
is, however, an advantage for us to get rid of the
make March
surcharge promptly - the longer we have it, the more
securely it will be fastened on us.
C. Accompanying this restoration must be provision for
more flexibility - -- wider bands, transitional floats,
etc.
2. Gold -- No change in the dollar price of gold.
3. Convertibility initially would be limited to supporting
the dollar up to the gold tranche.
FORD & LIBRARY 9ERALD
4.
Potential systemic questions.
a.
Is the United States willing to give up its reserve
currency role for the dollar and move to a consolidation
of reserve assets in the Fund?
b. If it becomes clear that to achieve other needed
adjustments it could be necessary for us to go for
a small change in the price of gold (e.g., 5-10%),
would we accept this as a part of some otherwise
acceptable total package. If this were the case
should we then also include in the request for
legislation authority for some subsequent discretionary
capability to initiate an exchange rate adjustment for
the dollar.
5.
Fallback position -- If it is impossible to achieve
exchange rate adjustments of the needed magnitude, what
then? In that case other currencies continue to float
against the dollar as is now the case. The import
surcharge remains.
What kind of a world will then be shaping up? How do
we minimize dangers of multiple rates, currency blocs
crunching against each other, etc?
GERALD FORD LIBRARY
Onlyno
BOARD OF GOVERNORS
RESERVE THE do SYSTEM JO.BOARD OF DEPARTMENT
OFTHE
FEDERAL RESERVE SYSTEM
WASHINGTON, D.C. 20551
August 20, 1971
To: Federal Open Market Committee
From: Arthur L. Broida
Enclosed is a copy of a press release issued by
the International Monetary Fund today.
Within 1 Broide
Arthur L. Broida
Deputy Secretary
Federal Open Market Committee
Enclosure
GERALD FORD LIBRARY
INTERNATIONAL MONETARY FUND
Press Release No.
For Immediate Release:
August 20, 1971
The United States authorities, in a letter from the Secretary of the Treasury
to the Managing Director, have notified the International Monetary Fund that, effec-
tive August 15, 1971, the United States no longer, for the settlement of interna-
tional transactions, in fact, freely buys and sells gold. The United States will
continue to collaborate with the Fund to promote exchange stability, to maintain
orderly exchange arrangements with other members, and to avoid competitive
exchange alterations. The Fund notes that exchange transactions in the territories
of the United States have been occurring outside the limits around par, and the
actions taken by the United States authorities do not at the present time ensure
that transactions between their currency and the currencies of other members take
place within their territory only within the limits around par.
The Fund notes the circumstances which have led the United States authorities
to take the actions described above. The Fund emphasizes the undertaking of mem-
bers to collaborate with it to promote exchange stability, to maintain orderly ex-
change arrangements with other members, and to avoid competitive exchange
alterations, and therefore welcomes the intention of the United States authorities
to act in accordance with this undertaking.
The Fund will remain in close consultation with the authorities of the United
States and the other members with a view to the prompt achievement of & viable
structure of exchange rates on the basis of parities established and maintained
in accordance with the Articles of Agreement.
LIBRARY GERALD FORD
Qt Thant Policy
BOARD OF GOVERNORS
OF THE
OF
FEDERAL RESERVE SYSTEM
THE
WASHINGTON, O.C. 20551
RESERVE
August 20, 1971
CONFIDENTIAL (FR)
TO:
Federal Open Market Committee
FROM: Mr. Broida
Attached for your information are copies of messages
dated today, from the Managing Director of the International
Monetary Fund to the Governors of the Fund and to the Ministers
of the Group of Ten.
anthor 1 Bwida
Arthur L. Broida,
Deputy Secretary,
Federal Open Market Committee.
Attachment
FORD & LIBRARY 976879
Confidential
FOR IMMEDIATE RELEASE
August 20, 1971
Statement by the Managing Director of the
International Monetary Fund, Mr. Pierre-Paul Schweitzer
Following is the text of a cable that Mr. Pierre-Paul Schweitzer,
Managing Director of the International Monetary Fund, sent to all
Governors of the Fund last night:
"The recent developments which have overtaken the international
monetary system give great cause for concern but at the same time create
the opportunity for strengthening the system. Unless prompt action is
taken, the prospect before us is one of disorder and discrimination in
currency and trade relationships which will seriously disrupt trade and
undermine the system which has served the world well and has been the
basis for effective collaboration for a quarter century. We must not
sacrifice the efforts and achievements of the postwar period, which I
fear are in jeopardy.
Piecemeal approaches to change are not likely to yield beneficial
results even for a single or a few countries and much less for the whole
community of countries represented in the Fund. In my view it is vitally
important to take prompt collective and collaborative action in the interest
of the prosperity of all members.
This is the assigned task of the Fund which is in a position tomake
a contribution of great importance to the establishment of a better
monetary system. I intend to press for rapid action to reach agreement
on appropriate exchange rates and other measures which will restore the
system to effective and lasting operation."
cc:; Chairman Burns
Governor Daane
Messrs. Holland and Broida
Officers in the Div. of Int. Fin.
molory
GERALD FORD LIBRARY
August 19, 1971
Message from the Managing Director for Transmittal
to the Ministers of the Group of Ten
Following up on the message to all Governors which I have just sent
I would ask you to convey to your Ministers a somewhat more detailed
exposition of my views and of the action to be considered in present
circumstances.
1. I would first like to stress again the deep concern I feel
about the deteriorating international situation which is liable to
degenerate into serious economi and financial disorder. This situation
carries with it real risks of both currency warfare and trade warfare--the
very dangers which the Fund was established to prevent.
2. It is clear to me that a solution to the various issues cannot
be found piecemeal. For example, in addition to all the other weaknesses
that attach to floating rates, one cannot possibly see how such rates,
operating while the U.S. surcharge is in effect, could function as indicators
of the rates of exchange that would be appropriate in the absence of such
a surcharge.
3. Any hope of moving out of the present difficulties within a
reasonably short period must, therefore, rest on a decision being taken
on a number of issues at the same time. In my opinion, the most effective
first step would be a meeting of the Group of Ten. Such a meeting at the
earliest possible date is, therefore, in my opinion imperative. That is
why I have requested the Chairman of the Group of Ten to call such a
meeting as soon as possible.
DECLASSIFIED
E.O. 12958 Sec. 3.6
MR 92-29 #31, st ltr 6/8/00
GERALD FORD LIBRARY
By due NARA, Date 2/23/01
- 2 -
4. I have indicated previously that I think it would be desirable
for such a meeting to be held in Washington at the Fund's Headquarters,
which would provide the best opportunity to coordinate the interests of
all other countries with those of the main industrial countries. This
is still my strong view, but I consider the question of venue secondary
to the overriding question that a meeting be held.
5. At such a meeting I will be prepared to put before Ministers and
Governors concrete proposals dealing with the following interrelated
issues:
(a) Relative rates of exchange.
(b) The price of gold in terms of currencies.
(c) Temporary wider margins;
(d) The U.S. import surcharge.
(e) A transitional regime for convertibility.
6. These issues must be resolved to reestablish an effective inter-
national monetary and trading system, and it is, therefore, essential that
we make every effort toward this end.
FORD is GIRATO LIBRARY
I
BOARD OF GOVERNORS OF THE FEDERAL
SERVE SYSTEM
DATE
8/20
Chairman Burns
TO
FROM ROBERT SOLOMON
FORD is 938A70 LIBRARY
IMP
FOR IMMEDIATE RELEASE
August 20, 1971
Statement by the Managing Director of the
International Monetary Fund, Mr. Pierre-Paul Schweitzer
Following is the text of a cable that Mr. Pierre-Paul Schweitzer,
Managing Director of the International Monetary Fund, sent to all
Governors of the Fund last night:
"The recent developments which have overtaken the international
monetary system give great cause for concern but at the same time create
the opportunity for strengthening the system. Unless prompt action is
taken, the prospect before us is one of disorder and discrimination in
currency and trade relationships which will seriously disrupt trade and
undermine the system which has served the world well and has been the
basis for effective collaboration for a quarter century. We must not
sacrifice the efforts and achievements of the postwar period, which I
fear are in jeopardy.
Piecemeal approaches to change are not likely to yield beneficial
results even for. a single or a few countries and much less for the whole
community of countries represented in the Fund. In my view it is vitally
important to take prompt collective and collaborative action in the interest
of the prosperity of all members.
This is the assigned task of the Fund which is in a position tomake
a contribution of great importance to the establishment of a better
monetary system. I intend to press for rapid action to reach agreement
on appropriate exchange rates and other measures which will restore the
system to effective and lasting operation. "
FORD is GERALD LIBRARY
August 19, 1971
Message from the Managing Director for Transmittal
to the Ministers of the Group of Ten
Following up on the message to all Governors which I have just sent
I would ask you to convey to your Ministers a somewhat more detailed
exposition of my views and of the action to be considered in present
circumstances.
1. I would first like to stress again the deep concern I feel
about the deteriorating international situation which is liable to
degenerate into serious economic and financial disorder. This situation
carries with it real risks of both currency warfare and trade warfare--the
very dangers which the Fund was established to prevent.
2. It is clear to me that a solution to the various issues cannot
be found piecemeal. For example, in addition to all the other weaknesses
that attach to floating rates, one cannot possibly see how such rates,
operating while the U.S. surcharge is in effect, could function as indicators
of the rates of exchange that would be appropriate in the absence of such
a surcharge.
3. Any hope of moving out of the present difficulties within a
reasonably short period must, therefore, rest on a decision being taken
on a number of issues at the same time. In my opinion, the most effective
first step would be a meeting of the Group of Ten. Such a meeting at the
earliest possible date is, therefore, in my opinion imperative. That is
why I have requested the Chairman of the Group of Ten to call such a
meeting as soon as possible.
DECLASSIFIED
E.O. 12958 Sec. 3.6
MR 92.29 #31, stltr 4/8/00
DERALD FORD LIBRARY
By dal NARA, Date 2/23/01
- 2 -
4. I have indicated previously that I think it would be desirable
for such a meeting to be held in Washington at the Fund's Headquarters,
which would provide the best opportunity to coordinate the interests of
all other countries with those of the main industrial countries. This
is still my strong view, but I consider the question of venue secondary
to the overriding question that a meeting be held.
5. At such a meeting I will be prepared to put before Ministers and
Governors concrete proposals dealing with the following interrelated
issues:
- (a) Relative rates of exchange.
(b) The price of gold in terms of currencies.
(c) Temporary wider margins;
(d) The U.S. import surcharge.
(e) A transitional regime for convertibility.
6. These issues must be resolved to reestablish an effective inter-
national monetary and trading system, and it is, therefore, essential that
we make every effort toward this end.
FORD is 071839 LIBRARY
CONFIDENTIAL (FR)
August 23, 1971
The attached reports were presented to the Board during the
briefing session on Monday morning, August 23.
Samuel Pizer
FORD is LIBRARY 976835
CONFIDENTIAL (FR)
BOARD PRESENTATION
Samuel Pizer
August 23, 1971
The actions taken by the President a week ago marked the
end of an era for the international monetary system. At the same
time the stage was set for a wide-ranging review of many inter-related
issues. The key issue for us at the moment, of course, is to get a
realignment of exchange rates sufficient to establish an equilibrium
for the U.S. balance of payments, and to couple that with progress
toward a better adjustment process.
We have done considerable work in the past week on the question
of the extent of the U.S. disequilibrium and the size and shape of
the exchange rate adjustment that is called for. Some reports on
that subject have already been prepared, and you will be hearing
more from us on it.
This morning, we would like to begin with some comments by
Mr. Smith on the situation in exchange and other markets abroad as
trading is resumed.
While the exchange markets are functioning, they are far
from being in the position the European countries would ultimately
prefer to establish. Mr. Siegman has prepared some comments on the
issues faced by the Europeans in establishing a new exchange rate
regime.
LIBRARY GERALD
CONFIDENTIAL (FR)
-2-
Finally, one element of the President's actions that can
have very serious immediate and longer-run consequences is the
10 per cent surcharge on dutiable imports. Mrs. Junz has prepared
an analysis of that measure.
********
I believe there is a very strong case against retention
of the import surcharge. We have chosen to emphasize it this morning
because we believe it is especially important to recognize that
retention of the surcharge could cause us to miss an opportunity to
achieve a sufficiently large realignment of exchange rates and make
real progress toward a more rational international system.
FOR & LIBRARY GERALD
CONFIDENTIAL (FR)
Foreign Exchange
Board Briefing
Ralph W. Smith
August 23, 1971
All European exchange markets are officially open today,
with the exception of the Swiss market, under a wide variety of
national exchange rate policies:
1. U.K. -- upper limit suspended, lower limit in force,
de facto upward float; will not intervene above the old upper limit.
Sterling is currently about 1.8 per cent over par.
2. Germany -- continues to float; still wants to sell
dollars if rate low enough, but would buy dollars if DM appreciated
sufficiently. DM is currently about 7 per cent above par, and the
Bundesbank sold $22 million early today.
3. France -- two-tier system with fixed rate (old parity)
for commercial transactions, floating rate for other transactions.
Currently the commercial franc is at the ceiling, and the financial
franc at about 2.3 per cent over par. The Bank of France has not
intervened in the commercial market yet today.
4. Italy -- suspended upper limit; will not intervene
within the old margins, but may intervene from time to time if rate
moves too high. Lira currently about 1.8 per cent over par.
5. Netherlands -- continues to float;
Belgian -- two-tier float;
Will support each other's currency within old bands of old cross
QERALD FORD LIBRARY
CONFIDENTIAL (FR)
-2-
rates, forming a separate currency bloc within the EEC; neither will
intervene in dollars. Guilder currently 4.2 per cent over par;
Belgian franc, 3.6 per cent.
6. Switzerland -- central bank not operating in market
for time being, waiting to see how other markets are operating and
rates moving; de facto upward float; has indicated to FRBNY that it
would like to sell dollars if rate moved low enough (presumably
within old band). Franc currently about 2.5 per cent over par.
The Japanese market has remained open. On Saturday the
Bank of Japan purchased $343 million, and, today, $11 million.
Today's smaller intake was a result of a further tightening of Japanese
exchange controls, aimed at reducing the "leads" in conversion of
export proceeds by Japanese exporters. Last week it purchased $2-1/2
billion. Revaluation rumors produced another sharp decline on the
Japanese stock market this morning, around 4 per cent, bringing the
total decline since August 15 to about 20 per cent. Reuters carried
a report this morning that Japan's Cabinet will met tomorrow to
discuss a purported American offer to drop the 10 per cent import
surcharge in return for a yen revaluation.
To summarize, the general picture this morning is one of
most major currencies floating against the dollar, the chief exception
being Japan, with a partial exception in the case of France. Only
FORD i LIBRARY 938870
CONFIDENTIAL (FR)
-3-
Japan, France, and Germany are prepared as of now to intervene in
dollars, with Germany being willing to either sell or buy dollars.
Activity in the markets is picking up, and may be expected
to return gradually to more or less normal level as dealers and
commercial customers become used to operating under more than just
very temporarily floating rates.
The dollar is somewhat stronger, on this morning's quotes,
than on most days last week. We must emphasize, however, that today's
rates are not at all representative of long-run equilibrium rates.
Leads and lags in commercial payments, which probably accounted for
a good part of the selling pressure against the dollar prior to
August 13, may be beginning to be reversed, lending some support to
the dollar. In general, we should expect to see major European
currencies appreciating further in coming weeks or months, more so if
the Japanese yen were to float or be revalued. In addition, we
should note that the 10 per cent import surcharge is a partial
substitute for appreciations of foreign currencies, and the latter
would be greater in the absence of the surcharge.
There have been no announcements of revaluations of other
currencies. Israel, however, announced, a devaluation of its currency
by 16-2/3 per cent, a development only remotely related to recent
U.S. moves.
GERALE FORD LIBRARY
CONFIDENTIAL (FR)
-4-
Euro-dollar rates declined somewhat further this morning
from the peak rates of early last week. Three-month deposits were
quoted at 8-3/8 per cent, down from a peak of 10 per cent, one-
month deposits at 8 per cent, down from 13 per cent. Liabilities of
U.S. banks to their foreign branches rose by $285 million in the week
ended last Wednesday, difficult to explain in view of the very high
levels of Euro-dollar rates in this period.
Gold was fixed at $43.25 this morning in London, little
changed from levels prevailing last week.
GERAL FORD LIBRART
BOARD PRESENTATION
Charles Siegman
August 23, 1971
Inability of the European Communities to reach a joint position to
deal with U.S. economic measures
1. Internal divisions within the European Communities (EC)
on measures to cope with consequences of U.S. actions announced
last week were great, and, to some extent, exceeded differences
of opinion between the United States and individual European countries.
But, at the same time, it is important to note that this was not the
first serious crisis which the EC has encountered, and, somehow, the
European Common Market has managed to survive.
2. To deal with the new exchange rate conditions resulting
from the U.S. actions the EC faced four main options:
(a) The EC countries could have adopted a joint float --
either controlled or uncontrolled; or
(b) they could have revalued their currencies outright --
at a uniform rate or through individual parity adjustments; or
(c) they could have adopted a joint two-tier exchange rate
system -- a fixed or controlled rate for commercial transactions and
a free market for other transactions, principally capital movements; or
(d) they each could have pursued independent national policies.
3. For a number of reasons, the EC countries opted for the path
of independent action.
(a) The immediate concern was the need to reopen the markets
by today. For several of the EC countries it technically would have
been impossible to introduce a joint two-tier exchange-rate system
GERALD FORD LIBRARY
- 2 -
that quickly. For the EC countries to float their currencies jointly
against third countries, while maintaining fixed rates among them-
selves, it would have been necessary to form a pool from members'
central banks reserves for intervention purposes. In addition, if
a joint EC float against third countries were to be a managed float,
it would have been necessary to formulate procedures and criteria
for joint intervention policy. The Common Market countries simply
were unprepared to deal with these matters by today.
(b) France stubbornly opposed revaluing her currency for
commercial transactions. She feels that her current account is not
strong enough to absorb a franc revaluation, and she appears eager
to retain the trade advantage derived from the recent German, Swiss
and Dutch currency appreciations. It should be noted, however, that
if a large number of countries would revalue their currencies
vis-à-vis the United States, a small franc revaluation against the
dollar still might turn out to be an effective devaluation of the
French franc in third markets.
France also favored the two-tier solution in order to
protect her interests in the EC Common Agricultural Policy, which
GERALD FORD CIBRARY
requires fixed exchange rates for its smooth operation.
Finally, France opposed a revaluation or appreciation
of the franc except one that would result from a direct devaluation
of the dollar.
(c) Germany, on the other hand, strongly opposed the adoption
of a common EC two-tier exchange-rate system principally on ideological
- 3 -
grounds. A two-tier system would involve exchange controls. In
addition, a uniform Common Market two-tier system would require the
coordination of exchange controls among EC members -- a system even
more difficult to erect and manage than national exchange controls.
(d) Besides France's opposition to an immediate revaluation
of her currency, other EC countries also preferred taking a cautious
attitude before fixing new parities. None was quite sure what would
constitute an equilibrium exchange rate for its currency, especially
given the uncertainty regarding the duration of the 10 per cent U.S.
import surcharge. In addition, since foreign countries were not
certain what kind of exchange rate system or structure of exchange
rates the United States had in mind as its final objective, foreign
countries considered it premature to fix new parities. They may
be treating the fixing of their exchange rates as a bargaining
element in future negotiations. Finally, the EC countries are keeping
a watchful eye on Japan; they are reluctant to give Japan any
permanent competitive advantage from their exchange rate actions,
and, in fact, undoubtedly prefer that the existing trading advantages
enjoyed by Japan should be reduced by a yen revaluation.
4. There are a number of implications of the failure by the EC
to act as a unit.
(a) The inability to act jointly is a serious set-back to
the long-range objective of forging the EC into a full economic and
monetary union and of enabling the EC to act as a counterweight to
the United States.
FORD LIBRART
- 4 -
(b) The failure to reach a joint exchange policy gives the
Common Agricultural Policy another severe shock. With exchange rates
of individual EC countries moving independently, the unit-of-account
pricing system becomes increasingly difficult to operate. If the
exchange rates of EC countries continue to move independently for
a longer period, the Common Agricultural Policy may suffer a fatal
blow and eventually may have to be dissolved, Although the Common
Agricultural Policy was considered a major achievement of the EC,
its dissolution, in our opinion, would be beneficial on welfare
grounds for most EC countries and for the United States. The
protectionist orientation of the EC agricultural policy is detrimental
to EC consumers as well as to agricultural producers in non-EC
countries. The budgetary costs of the Common Agricultural Policy
for EC countries are becoming exorbitant. Replacing the Common
Agricultural Policy with a more rational system of assistance to
farmers in the EC would benefit most parties concerned, although
France clearly would be a net loser should this occur.
(c) The decision to act independently probably will result
in a smaller revaluation of foreign currencies on average than could
be expected with a common EC upward float. In the case of France,
for example, only a quarter of her international transactions will
take place in the free market (and even this will be subject to capital
controls), and, in fact, this free rate might even depreciate. All
commodity trade will continue to be transacted at the existing
dollar exchange rate.
FORD & LIBRARY 938870
BOARD PRESENTATION
Helen B. Junz
August 23, 1971
The import surcharge is important both, because of what
it does and what it does not do.
It does not necessarily have an impact of any significance
on U.S. employment; it does not yield a trade balance improvement
anywhere near even the lower end of the range of adjustment thought
necessary; however, it does -- if not truly temporary -- make it more
difficult to obtain the sort of exchange rate adjustment thought
necessary to achieve a viable balance of payments position for the
United States.
On the domestic side, the surcharge will affect the quantity
of U.S. imports and of U.S. consumption expenditures on imports. In
a paper to be distributed to the Board shortly, Mrs. Lowrey estimates
the potential effect of the surcharge on U.S. imports -- on a full
year basis -- to be around $3 billion.
How much of this potential effect actually materializes
depends in the first instance upon how much of a price effect can
be expected. This in turn depends upon three major factors:
First, the extent to which suppliers and consumers expect
the surcharge to be temporary. If expectations are for a relatively
short period of duration, effects will depend largely upon the size
of dealers inventories. Further, the size of expected exchange rate
changes will influence buying decisions: for example, if there is
an expectation that exchange rate changes may exceed the surcharge,
imports may even be stimulated temporarily.
FORD & 076670 LIBRARY
- 2 -
A second factor determining the effectiveness of the sur-
charge is the cyclical situation in supplying countries: if they
have spare capacity, suppliers are likely to absorb a significant
share of the surcharge in their profits; if export sales provide
them with large profit margins relative to sales at home, they
will do so in any event.
A third factor is the importance of the U.S. market to
the foreign producer and his ability to shift sales to other markets.
Assuming for the moment that the public expects the surcharge
to stay on for longer than six months or so, we can say something
about what a reasonable pass-through assumption for prices might be.
The cyclical situation abroad is such that producers in a number of
industrial countries probably would accept smaller profit margins:
this would be true for Japan, Canada, France, Italy, the United
Kingdom and even for Germany as far as capital goods and automobiles
are concerned. Given this situation, and also looking at past
experience with temporary changes in border taxes which are akin
in their effects to import surcharges -- it might be reasonable to
assume that foreign suppliers would absorb something like one fourth
of the surcharge; assuming also that distributors in the United
States would scale their profits down a bit, we might, at best, get
a price effect on imported goods amounting to around 70 per cent of
the surcharge. We estimate that an increase of almost 7 per cent in
the price of imports subject to the surcharge would affect total
GERALD FORD LIBRARY
- 3 -
imports by only $2 - $2-1/4 billion, as compared with the potential
effect of $3 billion.
It is important at this point to distinguish between the
effect of the surcharge on the balance of payments and its effect
on the domestic economy. Under our assumptions, the import account
in the balance of payments would improve by $2-1/4 billion. But,
the U.S. consumer would pay only about $1/4 billion less (and the
U.S. distributor would have a smaller profit). A bit over $2 billion,
the amount of the surcharge, would accrue to the U.S. Treasury. In
other words, the amount of spendable income that U.S. consumers
could shift away from imports to domestically produced goods would
be negligible: $1/4 billion, which might create 20,000 jobs at
best. Thus, the effect on employment resulting from the surcharge
depends almost entirely upon the decision of the fiscal authorities
about what to do with the surcharge revenue.
The price effect of the surcharge on the domestic price
level, given the price freeze, would be quite small -- about 0.3 per
cent on the goods GNP deflator and somewhat more on the goods component
of the CPI.
1/ The price change is somewhat less than a full 7 per cent because
there are some items, notably automobiles, on which there is no
authority to increase tariffs by a full 10 per cent ad valorem.
2/ This estimate is optimistic because it assumes that there is
100 per cent substitutability between domestically produced goods
and imports. To the extent that this is not true -- given the small
margin of spendable income freed to shift to U.S. sources of production
-- the effect on employment could even be negative.
GERALD FORD LIBRARY
4 -
The net effect on the trade balance depends not only on
the expected change in imports, but also on how exports might be
affected. This relates partly to the deflationary impact the
surcharge would have on activity abroad. It is, of course, quite
true that a shift of $2 billion or so -- as compared to world
output -- is very small indeed and that it would make relatively
little difference to aggregate activity. However, the impact on
particular countries could be quite significant and varies widely
among countries, depending upon the importance of the U.S. market
to each country. Calculations of the share of countries' exports
affected by the surcharge and of the relative importance these
exports have in their total exports show that industrial countries
are affected only moderately. Only two major industrial countries:
Japan and Canada, are hit relatively severely: the share of their
total exports subject to the surcharge is 29 and 25 per cent,
respectively. The deflationary effect on industrial production
could be roughly around 1-1/3 per cent for Japan and 3/4 of a per-
centage point for Canada. But some of the lesser developed countries
are equally, or more severely, affected: Mexico, with 52 per cent of
total exports, Korea, Taiwan, Hong-Kong, Macao and Haiti, all with
more than 30 per cent, and the Philippines and Israel with 16 per
cent each. The devaluation of the Israeli pound probably would have
occurred anyhow, but its size is not entirely unrelated to the
importance of the U.S. market to the Israeli economy.
FORD is GERALD LIBRARY
- 5 -
Thus, with the possible exception of Japan and Canada,
it seems that the import surcharge affects a significant number of
countries whose exchange rates are not necessarily out of line with
the U.S. dollar relatively more severely than it does those countries
which are in disequilibrium vis-à-vis the U.S. dollar, or even in
fundamental disequilibrium vis-à-vis the world. Consequently, the
import surcharge distributes the burden of adjustment in a way
which is severely out of line with the sort of exchange rate adjust-
ment line-up that seems needed.
The negative effect of these deflationary surcharge con-
sequences on U.S. exports, however, is not the most significant
offsetting factor. Much more important is the fact that countries
will be seeking alternative outlets for their products and that U.S.
exporters, therefore, will be facing keener competition abroad -- at a
time when exchange rate relationships (assuming they do not change
for the duration of the surcharge) already put them at a disadvantage.
The employment effect -- because of the adverse impact on exports --
may now indeed become negative. And, the net effect of the surcharge
on the trade balance -- not even allowing for the fact that other
countries are likely to retaliate after some time -- is reduced
further below the $2 billion or so figure cited earlier.
It is thus clear that the positive effect the surcharge
could have on the U.S. trade balance -- even under the most optimistic
assumptions -- can at best be no more than a fraction of the improve-
FO
GERALD LIBRARY
- 6 -
ment needed if the United States is to achieve a viable current
balance position. Further, the geographic distribution of the sur-
charge effects shifts a large part of the burden of even this small
an adjustment away from the countries who should bear most of it.
These obvious facts are likely to be just as clear to
other countries as they are to us. Consequently, the usefulness of
the import surcharge as a negotiating tool will erode rather quickly.
Foreign producers faced with the choice of a revaluation, which will
open their domestic markets as well as their export markets to U.S.
competition -- as well as to competition from countries whose currency
values change less -- may advise their governments that they can live
with the surcharge. Thus, one positive effect of the surcharge --
namely that it eased the political problem foreign governments had
vis-à-vis their export lobbies in deciding on revaluation -- will
erode quickly and could even be counterproductive. This is particularly
true in the case of Japan, where we would like to achieve a revaluation
in excess of the surcharge. However, in this case, the surcharge may
produce a helpful secondary effect: since the Japanese exchange
rate is in general disequilibrium, attempts by Japanese producers
to recoup in other markets what they may lose in the U.S. market, is
likely to increase pressure outside the U.S. for a yen revaluation.
Still, as time goes on, the surcharge is likely to have an
increasingly negative effect in any negotiation of exchange rate re-
alignment. So far, foreign governments have announced no intention
GERALD FORD LIBRARY
- 7 -
of retaliatory measures and will probably confirm this in the GATT
meeting, which is to take place tomorrow. But the foreign press is
telling its readers more and more that the surcharge is likely to
be a medium-term measure -- if only because of the seductive effect
on budget revenues. If this were to become a widely held belief,
retaliation -- which is legal according to GATT rules -- would be
more likely. In addition, a hardening of positions on exchange rate
changes might quickly follow.
GERALD FORD LIBRARY
BOARD PRESENTATION
Helen B. Junz
August 23, 1971
The following notes were not part of my formal presentation,
they attempt to clarify some of the points raised during the discussion:
(1) The question of the price pass-through as related to anti-
dumping: experience with surcharges, border taxes and parity changes
shows that suppliers can, and indeed will, absorb some of these
costs. As long as the price changes are sufficiently small, or
are subsumed as part of a general price change, they have never given
rise to anti-dumping charges. Some of the differentials that now
exist between prices charged in some markets and those charged in
others could well be used as a basis for anti-dumping actions, but
relatively little initiative has been taken by U.S. producers.
Although the U.S. Government can initiate action without waiting for
producers to do so, they have not used this authority widely.
(a) The pass-through question is not really fundamental to the
conclusion that direct employment effects of the surcharge would be
negligible. On a full pass-through assumption, spendable income
freed to shift to domestically produced goods would still, given
our elasticity assumptions, amount to only $800 million on a full
year basis (some 65,000 jobs as estimated by the Research Division).
The basic point is that the decline in dollar receipts of foreign
producers is almost offset by surcharge payments to the U.S. Treasury
(about $2.1 billion). Consequently, if there is to be a discrete
impact on domestic activity from the surcharge, discretionary action
FORD it LIBRARY 938870
- 2 -
by the fiscal authorities, to either increase expenditures or decrease
taxes, over and above what they would have been otherwise, is
required. We did not estimate any multiplier effects because of
the smallness of the overall changes.
(3) It is our judgment also that if the surcharge were to stay
on for any length of time beyond ninety days or so, it would become
very hard to remove. Our calculations were based on medium-term,
1-1/2
i.e., 1-1/2 years, assumptions in order to demonstrate the largest
reasonable effect.
FORD & LIBRARY
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date September 23, 1971
To
Chairman Burns
Subject:
Foreign Exchange Markets --
From
Michael P. Dooley
11:30 A.M. conditions.
CONFIDENTIAL (FR)
After purchasing $41.9 million spot and $62 million forward
early today, the Bundesbank withdrew from the market at about 11:00 A.M.
our time. The reversal of the Bundesbanks policy, coupled with
further leaks on proposed revaluations from the IMF, has resulted in
a new speculative flurry in favor of most European currencies.
The mark has firmed to 30.275 cents, 10.8 per cent over par.
The Netherlands guilder is 7.3 per cent over par in
New York; the Swiss franc 3.1 per cent over par in New York.
cc: Governor Daane, Governor Brimmer, Mr. Holland, Mr. R. Solomon and
Mr. Pizer
FORD is LIBRARY 938870
FEDERAL RESERVE BANK OF NEW York
NEW YORK, N.Y. 10045
AREA CODE 2!2 732-5700
CHARLES A. COOMBS
SENIOR VICE PRESIDENT
CONFI DENTIAL
November 5, 1971
Honorable Arthur F. Burns
Chairman
Board of Governors of the
Federal Reserve System
Washington, D. C. 20551
Dear Mr. Chairman:
In response to your request at the last Open
Market Committee meeting, I am enclosing a chronological
listing of the steps taken by various foreign governments
since August 15, to restrain the appreciation of their
exchange rates. We shall keep you regularly posted on
new developments in this area.
With best regards.
Sincerely,
Chantin
Charles A. Coombs
Enclosure
FORD : 976839 LIBRARY
MISC. 3.3-8/71
FEDERAL RESERVE BANK
OF NEW YORK
OFFICE CORRESPONDENCE
DATE November 5, 1971
Mr. Coombs
To
SUBJECT: Response of foreign authorities to
FROM H. David Willey
the United States measures of August 15
CONFIDENTIAL
Since August 15 all major industrial countries have taken steps to
limit, and in some cases to reverse, the appreciation of their exchange rates
against the dollar. The French have had perhaps the most notable success,
by introducing a split rate system and a set of controls which effectively forced
the unwinding of leads and lags built up in July and early August. Consequently,
the rate for French trade transactions has been below its official ceiling and the
Bank of France has sold a substantial amount of dollars from reserves. Initially,
the Japanese authorities also tried to hold the line by tightening an already
stringent set of exchange controls, but widespread violation by their own banks
and trading companies led to a breakdown in that mechanism and left the
authorities with little choice but to float. Further controls have been applied
since the float and the Japanese authorities have continued to intervene heavily--
in excess of $1 billion so to keep the yen rate from rising. The British
authorities set the pound sterling free once the market was reopened on August 23,
but have since made changes in their exchange controls which have effectively
closed London as an international money market to residents of countries
outside the sterling area. The Bank of England has intervened heavily in the
exchange market to keep the sterling rate from rising, also taking in more than
$1 billion so far. The German authorities, still in process of developing a set
of restrictions on private borrowing in the Euro-dollar market, also went heavily
into the exchange market, purchasing a total of about $1 billion spot and forward,
in response to the outcry from German export interests over how high the mark
rate had floated. Finance Minister Schiller, who last spring helped precipitate
the mark float, has made many recent statements in an attempt to keep the rate
down. Spokesman from other governments have also tried to talk their rates
down by exhortation or by unusually candid statements about how weak their
external position really has been. Most countries have, in addition, reduced
their official bank rates. These reductions, while justified in part on domestic
grounds, were also made to discourage inflows from abroad that might push up
their currency rates. (A chronology of exchange control measures and bank
rate actions since August 15 is attached.)
HW/j1
Attachment
LIBRARY GERALD FORD
CHRONOLOGY OF OFFICIAL ACTIONS
is
TAKEN ABROAD SINCE AUGUST 15 THAT HAVE
FORD
AFFECTED THE FOREIGN EXCHANGE MARKETS
GERALD
LIBRARY
Austria
August 16 - Official foreign exchange market closed.
August 24 - Official foreign exchange market reopened, with
prescribed upper intervention point suspended.
- Agreement concluded with credit institutions, pro-
viding for the sterilization of 75 per cent of the
foreign exchange inflows that occurred since
August 13.
- Schillings purchased by non-residents for purposes
not related to current-account payments may be
credited to bank accounts only with the permission
of the authorities.
Belgium
August 16 - Official foreign exchange market closed.
August 23 - Official foreign exchange market reopened, with pre-
scribed intervention points suspended. Under an
agreement with the Netherlands, the cross rate between
the Belgian franc and the guilder is to be kept with-
in limits of 1.5 per cent on either side of their
parities.
August 24 - Trade in farm products and foodstuffs with Germany,
Italy, and France subjected to licensing; a deposit
requirement is introduced on imports of such goods
from France and Italy.
Sept. 10 - Special export tax selectively reduced, effective
October 1, to help industries most affected by U. S.
import surcharge.
Sept. 15 - National Bank suspends its request of last June that
any increase in the banks' net external liability posi-
tions be matched by non-interest bearing deposits with
it, and the funds blocked under that measure are re-
leased. The National Bank's earlier request, of March,
that the banks exercise restraint in operations that
could lead to a deterioration in their net external
positions is likewise suspended.
Sept. 23 - National Bank's lending rates reduced for domestic
2.
considerations by 1/2 percentage point, the basic dis-
count rate being cut to 5 1/2 per cent.
Sept. 30 - Quantitative restrictions on expansion of short-term
bank credit allowed to expire.
Canada
Sept. 7 - Introduction of Employment Support Bill, which
provides Can. $80 million for payments of up to
two-thirds of U. S. import surcharge to individual
companies meeting certain conditions.
October 15 - Can. $1 billion package of expansionary fiscal measures
aimed at fighting unemployment introduced in
Parliament.
October 25 - Discount rate lowered by 1/2 percentage point to
4 3/4 per cent, "because the new rate was considered
to be more suitable with respect to both the domestic
and external situation".
Denmark
August 16 - Official foreign exchange market closed.
August 23 - Official foreign exchange market reopened, with pre-
scribed upper intervention point suspended.
October 20 - Import surcharge of 10 per cent introduced. Applies
to a little over half of total imports; rate to be
reduced to 7 per cent on July 1, 1972, to 4 per cent
on January 1, 1973, and surcharge to expire on
April 1, 1973.
October 26 - Parliament asked to authorize official borrowings
abroad of some $130 million (in addition to unex-
pired authorization of over $100 million), in order
to bolster foreign exchange reserves.
France
Early in August the authorities moved forcefully to ward off fur-
ther reserve gains. Exchange controls were relaxed to some extent
for outpayments, and drastically tightened for inflows. In
particular, the banks were instructed not to increase their net
external indebtedness or decrease their net claims on non-residents
from the levels prevailing on August 3, and to refrain from selling
francs to non-residents acting for speculative considerations.
August 16 - Official foreign exchange market closed.
FORD
GERALD
LIBRARY
3.
August 17 - Interest payments on non-resident franc deposits of
less than 91 days prohibited, thereby giving legal
force to informal ban agreed to by the banks on
August 5.
August
21 - Two-tiered system introduced:
- Official market (with franc rate defended at
prescribed intervention points) for trade,
trade-related, and official transactions
- Financial market (with floating franc rate)
for all other transactions except those re-
stricted to the security currency market.
- Payments for French exports prior to date required by
contract prohibited.
- Imports must be paid for within 3 months of their
entry (except for imports of capital goods, where
period can extend up to two years, if so provided
for in contract), and importers given one month to
comply.
August 31 - French banks prohibited from lending foreign currencies
to importers; also to exporters unless there is a com-
parable conversion into financial francs.
- Export proceeds received prior to contractual date
must be converted in the financial market.
Sept.
2 - Banks reminded that distinction between official and
financial markets applies to forward transactions as
well.
- Forward purchases of francs in official market in ex-
cess of export payments due to be received must be
annulled by September 30.
Sept. 5
- French corporations allowed to export unlimited amounts
of capital to finance foreign investments, provided in-
vestment projects are approved by authorities. (Hitherto,
annual ceiling of some $0.9 million.)
- Foreign investments in France must be financed with funds
from abroad to the extent of at least half of the per-
centage of foreign ownership in the project.
Sept. 24 - Individual banks may be allowed to purchase, if the Bank
of France agrees and under its supervision, limited
amounts of foreign currencies in the financial market
for investment abroad.
GERALD FORD LIBRART
4.
October 20 - Security currency market abolished, and French
residents allowed to buy foreign-held securities
freely with currencies purchased in the financial
market. (Hitherto, they could use for this pur-
pose only the foreign exchange that became avail-
able in the security currency market from sales by
residents to non-residents of French or foreign.
securities held abroad.)
- All loans by residents to non-residents subjected
to prior approval by the authorities; hitherto,
requirement applied only to bank loans.
October 28 - Bank of France cuts by 1/4 percentage point its
discount rate (to 6 1/2 per cent) and its rate
against secured advances (to 8 per cent). Also re-
duces for the fourth time in October its domestic
money market intervention rates by 1/8 percentage
point (to 5 5/8 per cent for one-month private
paper).
Germany
August 16 - Official foreign exchange market closed.
August 23 - Official foreign exchange market reopened, with mark
rate floating as before.
Sept. 21 - Bundesbank announces it is prepared to buy forward
dollars.
Sept. 27 - Economics Minister Schiller indicates anew that the
German government intends to impose reserve require-
ments against the foreign borrowings of German firms.
Says that the current rate of the mark is too high.
October 14 - Bundesbank's discount rate cut from 5 to 4 1/2 per
cent, and "Lombard" rate against secured advances from
6 1/2 to 5 1/2 per cent; reserve requirements against
domestic liabilities reduced by 10 per cent across-
the-board, effective November 1. Bundesbank President
Klasen states that these steps were taken to "assist
the domestic economy" and also in the hope that they
would "contribute to a firmer dollar on the exchange
market". (However, reserve requirements against
liabilities to non-residents were left unchanged at
twice the old rates applying to domestic liabilities,
and the additional marginal reserve requirement on non-
resident liabilities was maintained at 30 per cent.)
FORD is LIBRARY GERALD
5.
October 21 - Economics Minister Schiller confirms that the discount
rate cut and the plans to impose reserve requirements
against the German firms' borrowings abroad are designed
to put pressure on the dollar value of the mark,
and adds that exporters can expect further relief
through a scheme now being worked on to provide
them with insurance against foreign exchange risks.
Italy
August 16 - Exchange markets closed.
August 23 - Exchange markets reopened, with a controlled float
of the lira.
- The banks are requested to bring their net external
positions into balance by September 15 and to rigorous-
ly maintain a balanced position thereafter.
Sept. 10 - It is announced that the Italian Electricity Authority
(ENEL) will prepay in November a $300 million Euro-
dollar loan. Small Euro-dollar loans also being re-
paid by other Italian entities.
Sept. 30
- Government approves a massive, $5 billion, public
sector investment program for 1972, aimed at fighting
economic stagnation and unemployment.
October 14 - Discount rate cut from 5 to 4 1/2 per cent and "Lombard"
rate from 5 to 4 per cent in view of "recent trends in
economic and financial conditions abroad and in Italy".
Japan
August 19 - Banks prohibited from increasing their total gross ex-
ternal liabilities- including borrowings, other Euro-
dollar liabilities, and free-yen deposits. (Formerly,
ceilings had applied only to the total of net Euro-
dollar liabilities and free-yen deposits.) Banks and
trading firms also warned that existing exchange con-
trols would be strictly enforced.
August 25 - Guidelines for banks' net yen conversions (i.e., spot
dollar positions) during August eased by an estimated
$1 billion.
August 28 - Controlled yen float begins.
August 31 - Prepayments of exports virtually prohibited.
- Volume of free-yen deposits frozen at August 27 level.
FORDO in LIBRARY 07V839
6.
Sept. 1 - Daily (instead of monthly) enforcement begins for
guidelines governing yen conversions by banks.
Sept. 2 - Securities firms warned not to allow use of their
free-yen accounts for speculative purposes.
Sept.
6 - Legal force given to previously "voluntary" guide-
lines for banks regarding their free-yen deposit
volume, total foreign liabilities, and overall net
dollar positions.
Sept. 10 - Banks' free-yen deposit ceilings may be exceeded by
up to 5 per cent in cases involving the maturing of
previously entered into contracts to sell forward
yen.
Sept. 25 - Bank of Japan sets aside $300 million to buy export
bills of small and medium-sized industries.
- Ministry of Finance deposits $350 million with
Japanese commercial banks in order to facilitate
their purchases of dollar-denominated export bills,
$50 million of which is earmarked for small and
medium-sized industries. Such total deposits out-
standing amounted to approximately $1.2 billion on
October 1 (following the maturing of $200 million of
deposits made in June).
Sept. 29 - Conversion of dollars into yen by foreign banks in
Japan more severely restricted.
October 1 - Import quotas on 20 items liberalized, but tariff
rates on several of them simultaneously raised.
October 11 - Government approves supplementary budget for current
fiscal year, providing for some $1.2 billion in ad-
ditional expenditures and for some $0.5 billion in
personal income tax cuts.
October 22 - Ministry of Finance deposits additional $100 million
with commercial banks to facilitate their purchase
of forward export contracts of small and medium-sized
industries.
Netherlands
August 16 - Official foreign exchange market closed.
August 23 - Official foreign exchange market reopened, with
guilder continuing to float, but an agreement
with Belgium specifies that the cross rate be-
FORD
tween the guilder and the Belgian franc is to be
GERAL
LIBRARY
7.
kept within limits of 1.5 per cent on either side
of their parities. Operating under this agree-
ment during the following weeks, the Netherlands
Bank buys francs, thereby pulling the franc rate
up while limiting the appreciation of the guilder.
August 26 - While maintaining the official discount rate at
5 1/2 per cent, the Netherlands Bank lowers all its
other rates by 1/2 percentage point.
Sept.
6 - A "closed circuit for bonds" introduced, whereby
non-residents may buy guilder-denominated bonds
from residents only with the guilder proceeds of
sales of such bonds by non-residents to residents.
Sept. 15 - Discount rate lowered by 1/2 percentage point to 5
per cent "in support of the measures directed at
countering foreign capital inflows".
Sweden
August 16 - Foreign exchange market closed.
August 23 - Foreign exchange market reopened, with prescribed
upper intervention point suspended.
Sept. 10 - Discount rate cut from 6 to 5 1/2 per cent in view
of "the domestic business recession and new signs of
a trend towards lower rates abroad".
Switzerland
August 16 - Official foreign exchange market closed, and kept
closed even after August 23; the National Bank
suspends its exchange operations. Swiss franc rate
in effect allowed to float, since Swiss banks remain
free to trade in foreign currencies.
- "Gentlemen's agreement" between the National Bank
and the Swiss Bankers Association comes into force.
The National Bank immediately avails itself of the
powers given to it by the agreement to:
- Impose a 100 per cent reserve requirement
against increases in the banks' foreign
liabilities (net of placements abroad) over
the July 31 level, and
- Prohibit interest payments on non-residents'
deposits of less than 6 months' maturity
made after July 31.
blocked for 10 days the proceeds of dollar sales to EARD
(The August 9 agreement whereby the National Bank
it is concomitantly repealed.)
GERALD
LIBRARY
8.
August 26 - The three big banks agree to limit purchases from
any one customer to $2 million when the spot rate is
between SF3.95 and SF3.96, and to $1 million at rates
of SF3.95 or less. Franc proceeds of any sale in
excess of these amounts to be blocked for 3 months
in non-interest bearing accounts.
August 27 - The interest payment ban on foreign funds deposited
since July 31 is extended to all maturities.
Sept. 29
- Parliament passes legislation granting the cabinet
the additional powers it had requested in early
September to defend the franc against future specu-
lative inflows. The bill empowers the government to
declare the voluntary agreement between the National
Bank and the major commercial banks to be legally
binding on all Swiss banks, and to impose negative
interest rates on certain categories of deposits.
The bill came into effect October 15.
United Kingdom
August 16 - Foreign exchange market closed and British banks
prohibited from dealing in foreign exchange. (As
an interim measure, banks allowed on August 19 to
lend foreign currencies to residents for payment
to non-residents.)
August 23 - Exchange market reopened, with prescribed upper inter-
vention point suspended.
August 31 - Interest payments on increases in sterling bank de-
posits of non-Sterling Area residents prohibited.
- Local authorities, building societies, and the
various types of savings associations prohibited
from accepting additional deposits from non-
Sterling Area residents.
- Non-Sterling Area residents prohibited from buying
additional Treasury bills and British government,
British government-guaranteed, or local authority
securities, as well as sterling C.D.'s, maturing
before October 1, 1976.
- Authorized banks prohibited from converting foreign
currency deposits into sterling on a swap basis if
net short spot positions in foreign currencies
(covered by net long forward positions) were to en-
sue.
Sept. 2
- Bank rate cut from 6 to 5 per cent, in a move "con-
sistent with the exchange control measures
intro-
GERALD Aywyal7 FORD
9.
duced. to discourage speculative inflows from
abroad".
Sept. 14 - Exemptions from interest payment ban made under certain
conditions for personal accounts and for official
foreign and international accounts.
Sept. 23 - Authorized banks' individual limits on spot foreign
exchange balances held to cover forward foreign cur-
rency liabilities doubled, to ₺200,000.
October 7 - Non-Sterling Area residents prohibited from purchasing
sterling acceptances, commercial bills, and promissory
notes, and may not reinvest proceeds of such maturing
obligations.
- August 31 prohibition on additional purchases by non-
Sterling Area residents of specified securities ex-
tended to all such securities, irrespective of maturity;
permission for the reinvestment of the proceeds of
maturing obligations continues.
Federal Reserve Bank
of New York
November 5, 1971
FORD i LIBRARY 076830
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date November 9, 1971
To
Chairman Burns
Subject: Measures of Other Countries
From
Robert Solomon RS
in Reaction to the August 15 Program
Attached is the latest weekly report on measures taken
by other countries in reaction to the August 15 program of the
United States.
No new measures have come to our attention since the
previous report dated November 1, 1971.
Attachment
FORD is LIBRARY
November 9, 1971
MEASURES OF OTHER COUNTRIES IN
REACTION TO THE AUGUST 15 PROGRAM
FORD : LIBRARY GERALD
BELGIUM
Week of September 5-11. The Government announced that, effective
October 1, the export tax rate -- currently 1.75 per cent -- would
be reduced to 0.5 per cent for industries that export over 15 per
cent of their production to the United States, and to 0.75 for
industries for which such a percentage is 5 - 15 per cent.
FORD & 938470 LIBRARY
BRAZIL
Week of August 29-September 4. The government instituted additional
tax and other incentives for exports to all countries in order to
offset the estimated effect of the U.S. 10 per cent import surcharge.
GERALD R. FORD LIBRARY r
CANADA
Week of September 5-11. The Government introduced in Parliament
the Employment Support Bill under which it could compensate Canadian
exporters for about two-thirds of the increase in the U.S. dollar
price of their exports that would result from the U.S. surcharge.
This compensation would not be automatic, but would depend on certain
other conditions being met, one of which is that our surcharge is
causing (or is likely to cause) significant plant layoffs. The bill
became law on October 14.
FORD is LIBRARY GERALD
R.
FORD
FRANCE
GERALD
LIBRARY
Week of August 15-21.
1. French banks were told, effective August 17, not to pay
interest on additions to French franc deposits owned by nonresidents
with maturities up to 90 days.
2. On August 20, delays in payments for imports other than
equipment goods were limited to 90 days from date of customs clearance.
Payments for imports effected prior to June 21 could be delayed until
September 21.
Week of August 22-28. Effective August 23, a two-tier exchange
market came into being. Payments for imports and exports, payments
for trade-related services, and payments by and to governments (the
French Government and foreign governments) would continue to be made
in the official market (sometimes called the "commercial franc"
market), where the official parity of the franc would be maintained.
Most other transactions would be carried out on a newly-created free
market (sometimes called the "financial franc" market), where the
exchange rate would be allowed to float. Purchases of foreign secu-
rities by French residents would continue to be confined to a third
market, the devise-titres (security franc) market.
Week of September 5-11. On September 6 French companies were given
permission to finance direct investments abroad by unlimited capital
transfers from France (through the financial franc market). Previously,
a company could transfer only 5 million francs a year for this purpose,
and had to raise the rest of the funds abroad.
FRANCE
(continued)
Week of September 19-25. Effective September 24, French banks desiring
to increase their net position in foreign currency could, with the per-
mission of the Bank of France, purchase the necessary foreign currency
on the financial franc market. (No change was made in the regulation
of August 4 prohibiting banks from decreasing their combined net
position in foreign currency and French francs vis-à-vis nonresidents.)
Week of October 17-23. The devise-titres (security franc) market was
abolished on October 19. Residents' purchases of foreign securities
were transferred to the financial franc market.
GERALD FORD LIBRARY
JAPAN
Week of August 15-21. Banks were prohibited from increasing above
the August 18 level the sum of their gross foreign currency and
free yen liabilities to nonresidents. Existing ceilings on the
sum of banks' net Euro-dollar and free yen liabilities to foreigners
were retained.
Week of August 29-September 4.
1. Banks were prohibited from increasing their free yen deposits
owed to nonresidents above the level on August 27.
2. Effective September 1, banks were prohibited from purchasing
export bills or more than six-months maturity without specific approval.
3. Effective September 1, banks were required to observe daily
ceilings on conversions of foreign currency into yen, instead of
ceilings covering one-half of a month.
Week of October 3-9. The Finance Ministry announced that, to facilitate
exports by small- and medium-sized enterprises, it would make 4-month
deposits with banks in amounts related to banks' purchases of export
bills from small- and medium-sized firms.
Week of October 10-13. The Ministry of Labor reportedly decided to
establish a new system for paying workers compelled to leave their
jobs temporarily because of the U.S. August 15 measures and the
appreciation of the yen. The workers would receive at least 60 per
cent of their average normal pay.
FORD is LIBRARY GERALD
NETHERLANDS
Week of September 5-11. A two-tier exchange market was instituted
effective September 6. Purchases by foreigners of guilder-denominated
bonds from Netherlands residents can now be made only with guilders
obtained from other foreigners who have sold such bonds. This is to
prevent foreigners' acquisitions of guilders to buy guilder-denominated
bonds -- which have been heavy this year -- from pushing up the (floating)
rate for the guilder in the main foreign exchange market.
FORD is LIBRARY
SPAIN
Week of October 17-23. Banks were subjected to a 100 per cent
marginal reserve requirement on increases after October 20 in non-
residents' convertible peseta deposits of three-months maturity or
less.
FORD & LIBRARY
SWITZERLAND
Week of August 15-21.
1. Under a gentlemen's agreement effective August 16, banks
agreed not to pay interest on additions after July 31 to foreign-
owned Swiss franc deposits of up to six-months maturity. The
agreement was extended to funds of longer maturity effective August 29.
2. Under the same gentlemen's agreement, the banks agreed to
keep a 100 per cent reserve (a noninterest-bearing deposit at the
Swiss National Bank) against increases in liabilities to foreigners
above the level of July 31.
Week of August 22-28. On August 26 the three largest commercial
banks agreed, subject to certain exceptions, to block for three
months, in noninterest-bearing accounts, additions to nonresident
customers' Swiss franc deposits acquired, for reasons judged to be
speculative, by the sale of foreign currency at a depreciated exchange
rate. If the Swiss franc rate is between approximately 3.1 and 3.4
per cent above parity, the banks will block all purchases of francs
in excess of $2 million equivalent per customer per day, and if the
rate is higher, the amount of the purchases exempt from blocking is
$1 million equivalent per customer per day.
Week of September 5-11. On September 8 the Federal Council announced
it would ask the Federal Assembly for general emergency powers for
three years to deal with future capital inflows and to give legal force
to existing voluntary measures to discourage inflows. The legislation
i LIBRARY GERALD
SWITZERLAND
(continued)
was passed October 7. It gives the Council the power inter alia
to make existing voluntary agreements with the Swiss National Bank
binding on all banks and to impose negative interest rates on non-
resident deposits.
GERALD FORD LIBRARY
UNITED KINGDOM
Week of August 29-September 4.
1. Effective August 31, nonsterling area residents were
barred from acquiring any of a great number of short-term invest-
ments denominated in pounds sterling, including Treasury bills,
government and other public sector bonds maturing before late 1976,
and deposits with savings banks, building societies (akin to our
savings and loan associations), and local authorities.
2. Effective August 31, banks were prohibited from paying
interest on new deposits in pounds (or additions to existing deposits)
that are owed to nonsterling area residents.
3. Effective August 31, banks were restricted as to the amount
of dollars or other foreign currency they could convert into pounds.
Week of October 3-9. Sterling acceptances, commercial bills, and
promissory notes were added, effective October 7, to the list of
short-term investments that nonsterling area residents are prohibited
from buying. Effective the same date, the prohibition on purchases
of government and other public sector bonds was extended to bonds of
all maturities.
GERALD FORD LIBRARY
Arthur F. Burns
November 12, 1971
Realignment of Currencies
U.S. - 5. or 6.
France, Britain, Italy, Scandinavian countries - -- stand still.
Germany - up 6.
Japan - up 9.
Convertibility
1.
18 to 24 months: to enable IMF to function.
2.
After that -- -- guide convertibility into gold, SDR, IMF position.
This under IMF. Its decision at request of other countries.
3.
Trade and defense burden sharing - something positive.
XXXXX
Report in writing without identification of date or author.
XXXXX
The gold price to be handled through IMF - no commitment beyond.
To hear from X about this, as to French, etc., promptly.
XXXXX
GERALD FORD CIBRARY
Room for some U.S. bargaining.
DECLASSIFIED
AUTHORITY Sel. in th. 11/16/82 state girliness
BY Un NARA, DATE 9/29/09
Trusney in. 8/22/06