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Swap Arrangements - General, 1970-75 (3)
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Swap Arrangements - General, 1970-75 (3)
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The original documents are located in Box B98, folder "Swap Arrangements - General,
1970-75 (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States of America his copyrights in all of his unpublished writings in National Archives collections.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.
GSA FPMR (41 CFR) 101-11.8
UNITED STATES GOVERNMENT
Memorandum
CONFIDENTIAL
TO
: Under Secretary Volcker
DATE: January 12, 1972
FROM : T. P. Nelson M
SUBJECT: Foreign Exchange Losses and Maintenance of Value Obligations
Attached are two tables -- Table I shows the increment on
gold with the estimated exchange losses of the ESF and of the
Federal Reserve and the maintenance of value obligations.
A running subtotal of these losses and obligations is
shown for comparison with the increment.
If the increment on gold were appropriated to the ESF, it
could cover its own losses and the MOV to the IMF and come
out about $50 million ahead.
It could also accept the liabilities for present dollar
holdings and outstanding dollar loans of the international
banks with a net loss of $201 million, which is, however, about
$50 million less than its loss is estimated to be if the
increment on gold were not appropriated to it and it bore the
losses for which it already has liability.
Total losses and maintenance of value obligations for
Treasury Dept ltr 8/23/06
which the Treasury, including the ESF, has responsibility
amount to $1,875 million compared to the $828 million increment
on gold.
OBHISSVIOSO
dal NARA, DATE 2/17/15
Federal Reserve losses are estimated at about $177
million, which would bring the total U. S. losses to $2,052
million.
Table II shows in more detail how the profit on gold and
the exchange losses of the ESF and Federal Reserve are calcu-
lated.
Pending negotiations and actual settlements, which may
BY
be based on future market rates, the losses of the ESF and
the Federal Reserve cannot be firmly stated.
The data on MOV obligations are from Bradfield table.
CC: Messrs. Bennett, Bradfield.
CONFIDENTIAL
BERALD FORD LIBRARY
Buy U.S. Savings Bonds Regularly on the Payroll Savings Plan
5010-108
CONF IDENTIAL
TABLE I
(In millions of $)
A. Profit on gold ex IMF gold repurchase
$828
write up of gold ramili saltemynt for
while no address payment
144
B. Exchange losses and MOV Obligations
972
1. Estimated Exchange Loss in ESF
252
(Roosa bonds, SDR, IMF drawings)
2. MOV to IMF
524
Subtotal
776
3. MOV to International Banks
a. present $ holdings
167
Subtotal
943
b. dollar loans outstanding
86
Subtotal
1,029 (ex Item B (1)
$777)
C. Present callable Capital
586
Subtotal
1,615
d. Future Subscriptions, both
paid in and callable
260
Subtotal
$1,875
4. Estimated Federal Reserve losses
177
Grand Total
$2,052
1875
CONF IDENTIAL
1/12/72
7780
8086
FORD j LIBRARY 074870
sos
22
CONFIDENTIAL
TABLE II
A. Gold Increment Total U.S. gold holdings
$10,205.8
874.6
less amounts repayable by IMF
543.9
44.6
9,661.9
.0857
Increment
$ 828.0 830.0
B. (1) SDR (ESF) Holdings
$ 1,809.9
less Allocation
2,294.0
Difference
-484.1
.0857
Loss
$
41.5
(2) Roosa Bonds (ESF)
German offset $675.0
less DM held
225.0
450.0
Assumed loss
(subject to nego-.0857
tiation
Loss
38.6
Belgian franc
32.0
(no revaluation
protection)
.1157
Loss
3.7
Swiss franc 1,323.0
(from par to
par)
.0557
Loss
73.7
Total Estimated Loss 116.0
(3) IMF Drawing (ESF)
$ 1,105.0
.0857
Loss
94.7
(4) Total Estimated Loss to ESF
$252.2
CONFIDENTIAL
GERALD
CONFIDENTIAL
- 2 -
(TABLE II)
C. Federal Reserve Swaps
Belgian francs
635.00
to be negotiated
.0857
54.40
Sterling
750.00
estimated (old ceiling
.0557
to new floor)
41.80
Swiss franc
1,600.00
estimated (old ceiling
.0480
to new par)
76.80
Deutschemark
50.0
to be negotiated
.0857
4.3
Total estimated Fed loss
177.3
CONFIDENTIAL
1/12/72
GERALD ? FORD
CONFIDENTIAL
1/21/72
Profits, Losses and Obligations Resulting From Dollar
Devaluation - Treasury-ESF-Federal Reserve
(Calculated as of January 1, 1972 in millions of $)
Profits (Gross)
Amount
Remarks
1. Increment on gold in Treasury (10,132.2)
868.3
Will go to Miscellaneous Receipts unless
Increment on gold in ESF
(73.6)
6.3
legislation authorizes transfer to ESF.
874.6
Less increment on gold repur-
chases (543.9) by IMF
44.6
Net total
830.0
828.0
2. Write up of ESF For. Exch. holdings
a. due to U.S. devaluation 8.57%
19.8
To ESF - the profit due to revaluation of
b. due to revaluation other currencies
7.2
other currencies should perhaps be left
Total
27.0
out of these calculations since it is not
due to U. S. devaluation as are all other
items.
3. Increment U. S. gold tranche obtained
144.0
To Treasury Miscellaneous Receipts unless
without obligation under maintenance
legislation authorizes transfer to ESF.
of value provision.
4. Increment in Value SDR
155.1
To ESF
Treasury-ESF Total Profits
1,156.1
5. Write up of Federal Reserve For. Exch.
1.0
To Federal Reserve.
Grand Total
1,157.1
DECLASSIFIED
AUTHORITY Treasury Dept ltr 8/23/06
CONFIDENTIAL
BY dal NARA, DATE 2/17/15
GERALD FORD LIBRARY
CONFIDENTIAL
- 2 -
sses (Gross)
Amount
Remarks
German Offset Bonds ($675.0)
57.8
(To ESF - Estimated actual losses remain
Belgian bonds
3.7
(for determination through negotiation and on
Swiss franc bonds
73.7
(market rates in effect at time of payment.
IMF drawings (1,105.0)
94.7
To ESF - it would be reasonable to either
transfer the increment on the gold tranche
to the ESF or change the ESF commitment
to provide the Treasury foreign currencies
at the old parity rate. The arrangement
could be changed to provide at new parities
in which case profits in item 3 would
eventually be only $49.3 instead of the
$144.0 million indicated.
SDR Allocations (2,299.0)
196.6
To ESF - this results in net loss of $41.5
when compared with gain in item 4 of profit
total. It has been suggested that if
allocation considered as equity a write up
might not be necessary.
Treasury-ESF Total
426.5
Losses to Federal Reserve on Swaps
177.3
Estimated - subject to negotiation and market
fluctuations.
Grand total
603.8
CONFIDENTIAL
Agreest GERALD ? FORD
CONFIDENTIAL
- 3 -
Maintenance of Value Obligations
Amount
Remarks
1. To IMF
524.5
2. To International Banks
1,097.9
See attached table for breakdown.
1,622.4
SUMMARY
Treasury
ESF
Total
Federal Reserve
Grand Total
Losses
-0-
426.5
426.5
177.3
603.8
MOV
1,622.4
-0-
1,622.4
-0-
1,622.4
1,622.4
426.5
2,048.9
177.3
2,226.2
less Profits
940.0
182.1
1,156.1
1.0
1,157.1
Net
648.4
244.4
892.8
176.3
1,069.1
FORD de GERALD LIBRARY
CONFIDENTIAL
CONFIDENTIAL
MAINTENANCE OF VALUE IN IFI
(In $ millions)
Present
Dollar
Present
Future
dollar
loans
callable
Subscriptions
Grand
holdings
outstanding
capital
Paid in
Callable
total
IBRD
-
49.0
489.8
1.9
19.0
559.7
IDA
39.8
-
-
82.2
122.1
IDB
OC
15.4
23.1
116.6
8.6
28.9
192.6
FSO
107.1
13.7
85.8
206.6
ADB
8.6
-
8.6
17.2
IMF
524.5
524.2
IFI Total
695.4
85.8
615.0
178.5
47.9
1,622.4
GERALD FORD
CONFIDENTIAL
U. S. TREASURY DEPARTMENT
Office of the Assistant Secretary
For International Affairs
Date 2/22/72
To: Governor Daane
T. Page Nelson
Room 5221
Ext. 2884
Estimated Revaluation of Assets and Obligations
Arising from Devaluation of Dollar
With Respect to Gold
(In millions of $)
Gold revaluation results in increment of 8.57% of U.S. gold stock
$828
Maintenance of Value Obligations (MOVs) in International
Financial Institutions
The value of our subscriptions and capital stock, in
accordance with the Articles of Agreement to which we have
subscribed, must be revalued in terms of dollars to maintain
their initial gold value. This entails the acceptance of
liabilities with varying degrees of contingency.
International Monetary Fund
A. Additional letters of credit will be issued in the
following amounts representing the 8.57% increase in:
(i) amount of U.S. dollar subscription (3/4 of quota) 431
(ii) outstanding drawings by U.S.
94
525
B. The value of our subscription will increase by:
575
(The net increase of $50 million over the additional
letters of credit issued represents the portion of
our quota paid in gold and undrawn.)
The IMF transaction represents an exchange of assets
and is not a budgetary item.
International Banks
The maintenance of value obligations incurred for the
development institutions may be broken down as follows and
total approximately as follows for paid in and callable capital:
1,069
To be paid in
Callable
IBRD
51
509
IDA
122
--
IDB
224
146
ADB
9
9
406
663
The paid in amount reflects that portion of our subscrip-
tion already paid in or for which letters of credit are out-
standing, plus amounts to be paid in under subscriptions to
which we are committed and are now in the authorization
process. Budgetary expenditures will take place only as
payments are made under letters of credit and will be spread
over a number of years (see below).
GERALD FORD LIBRARY
- 2 -
The callable capital represents a highly contingent
liability. The likelihood of it being called and becoming
an expenditure at any time is remote.
The dollar value of our subscription and capital stock
in these institutions will increase commensurately with our
MOV obligations.
Estimated Impact on Budgetary Expenditures
Gold:
No direct impact because not treated as a receipt under
unified budgetary concept. Increment of $828 million will,
however, have a cash impact that may reduce Treasury borrowing
needs and thereby reduce interest cost which is a budgetary
expense item. (At an assumed interest rate of 4 percent,
interest savings would total about $33 million annually, which
would substantially offset the budgetary expenditures noted
below as they occur over the years.)
IMF: None
International Banks:
Paid in Capital
FY1972 and 1973 - None
FY1974 through FY1976 - representing MOV on capital
now paid in and held by institutions, or to be paid
in under authorizations in process
$343
FY1977 to FY1986 - representing MOV on paid in
capital now out on loan by institutions for which
letters of credit will be issued and payment made
as loans are repaid and new disbursements made:
63
Callable Capital: None expected.
Note: The precise amount of maintenance of value obligations
will have to be determined on the date the parity change
becomes effective. The above figures are therefore
subject to moderate change. Also, the IDB has under
consideration the relationship of MOV to pending
subscriptions to the FSO.
FORD LIBRARY
2/9/72
- 3 -
Foreign Currency Securities and SDR
In addition to MOVs in the international financial
institutions certain liabilities will be incurred by the
Exchange Stabilization Fund (ESF).
These arise from exchange guarantees on foreign
currency denominated securities estimated at:
$172
Against which there is an offset from gains on
foreign exchange of
27 $145
Also the value of both SDR held by and allocated
to the ESF will be written up. Since the U. S. is a net
user of SDR there will be a net book loss, realizable only
on dissolution of the SDR system or U. S. withdrawal
therefrom of:
42
The exchange transactions of the ESF are not
budgetary expenditures.
2/9/72
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Date February 22, 1972
To
Chairman Burns
From
J. Dewey Daane
I called Coombs this morning about
the swap arrangements and he dictated
the attached draft to my secretary
this afternoon. As you will note,
the loss figure on page 3 is still to
be supplied.
I am also attaching the Bodner memo
submitted to the FOMC on January 4
which gives the cumulative figures
in clear perspective on page 1 as
well as other relevant comments on
page 3.
MRJ
FORD is LIBRARY GERALD
2/22/72 - 3:30 p.m.
Memo dictated by phone
by Mr. Coombs secretary
to Gail
DRAFT
TO:
Governor Daane
SUBJECT: Federal Reserve Swap Arrangements
FROM: C. A. Coombs
(1) The rationale of the Federal Reserve swap network derived from
the legal obligation assumed by the United States under the Bretton Woods
system to convert upon request the dollar accumulations of foreign central
banks into gold or some other acceptable reserve asset such as a credit
on the books of the IMF or subsequently SDR's. In order to reduce, or at
least defer, such foreign central bank calls upon gold and other U.S.
reserve assets, the Treasury in 1961, and the Federal Reserve in 1962,
introduced an alternative to such convertibility in the form of Treasury
X issues of foreign currency bonds and Federal Reserve borrowings of foreign
currencies under its reciprocal credit arrangements or "swap lines" with
foreign central banks.
(2) Under these arrangements, if a foreign central bank, say
The Netherlands Bank, took in $100 million which it wished to convert into
gold or some other reserve assets, the U.S. Government was enabled to
shield our stock of gold and other reserve assets from such a conversion
by borrowing from The Netherlands Bank $100 million equivalent of guilders,
either through a Treasury issue of guilder bonds or by a Federal Reserve
borrowing of guilders under its swap line with The Netherlands Bank.
FORD i LIBRARY 038470
2
The guilder proceeds of such Treasury or Federal Reserve borrowings
could then be used to buy back the unwanted $100 million on the books
of the Netherlands Bank, thus forestalling a conversion of such dollars
into gold or other reserve assets. The guilder debt thus incurred by
the Treasury or Federal Reserve might subsequently be extinguished by
a Federal Reserve or Treasury purchase of guilders in the market or
directly from the Netherlands Bank, if subsequent outflows of funds
from the Netherlands created a demand for dollars. If such a
reversal in the flow of funds did not occur before the final maturity
dates of the Treasury bond issues or the Federal Reserve swap drawings,
the guilder debt thus incurred by the U.S. Government could always be
liquidated by U.S. sales to the Netherlands Bank of gold or other reserve
assets.
(3) In undertaking such foreign currency borrowing, the U.S.
was protected against the risk of losses arising from a revaluation of
the foreign currency concerned. This revaluation guarantee was invoked,
for example, following the revaluation of the Swiss franc and the move of the
Nethedands guilder to a floating rate basis in May 1971, and should also
be invoked when the revaluations, agreed on December 18, of the German
mark and the Belgian franc are formalized by a NAMAXM declaration by
these countries of new parities to the International Monetary Fund.
(4) In undertaking such borrowing of foreign currencies,
however, the U.S. Government naturally had to assume the risk of a formal
devaluation of the dollar through an increase in the official price of
gold. Otherwise, the foreign central bank whose currency was borrowed
BERALD FORD LIBRARY
3
(Figures to be supplied later.)
by the U.S. Government would not have regarded such U.S. issue of
foreign currency debt instruments as a satisfactory alternative to
conversion of U.S. dollars into gold or other reserve assets.
(5) When the U.S. delcared a new dollar parity to the IMF,
based on the change in the official gold price from $35 to $38 per ounce,
both the U.S. Treasury and the Federal Reserve will be compelled to
honor the exchange guarantees implicit in the Treasury's XMX foreign
currency bonds and the Federal Reserve swap debt by acquiring the
foreign currencies concerned at the new and higher exchange rate levels
caused by the devaluation of the dollar. Since the devaluation of the
dollar amounts to 8.57 per cent, this means that liquidation of the
currently outstanding Federal Reserve debt of $2,855 million, if
settled at rates corresponding to the new U.S. parity, would cost the
Federal Reserve roughly $
XMXXXXXX $
million more than the original
dollar value of such debt. This additional cost may, of course, be
significantly reduced if the foreign currencies concerned become available,
either through the market or through direct purchases from the central
bank concerned, at their new floor rates under the December 18 agreement
rather than at their par values.
(6) Against such exchange losses caused by devaluation of the
dollar, the Treasury will secure a roughly offsetting, perhaps more than
offsetting, profit on more than $2.8 billion of gold and other reserve
assets, which it still holds because of foreign central banks willingness
to accept foreign currency bonds or Federal Reserve drawings on the swap
GERALD FORD CIBRARY
4
lines as an alternative to taking $2.8 billion of gold or other reserve
assets from the U.S. Treasury. In effect, the Treasury's profit on
$2.8 billion of gold and other gold-denominated assets, such as SDRs,
which it would have lost in the absence of Treasury or Federal Reserve
assumption of foreign currency debt, fully washes out the exchange K
losses that will be incurred by the Treasury or Federal Reserve in
paying off such indebtedness. Alternatively, if the Treasury were now to
decide to pay off all such foreign currency debt by selling gold or SDRs
to the foreign central banks concerned exchange losses by both the
Treasury and the Federal Reserve would be eliminated NX but the Treasury
would secure a correspondingly smaller profit on its reduced holding of
gold and gold-denominated reserve assets.
GERALD FORD LIBRARY
BOARD OF GOVERNORS
OF THE
RESERVE THE of SYSTEM OF DOBOARDO
FEDERAL RESERVE SYSTEM
WASHINGTON. D.C. 20551
January 5, 1972
CONFIDENTIAL (FR)
TO:
Federal Open Market Committee
FROM: Mr. Broida
Enclosed for your information is a copy of a memorandum
from Mr. Bodner, dated January 4, 1972, and entitled "System
Losses on Foreign Exchange Transactions in 1971."
Anthm 1 Bwide
Arthur L. Broida,
Deputy Secretary,
Federal Open Market Committee.
Enclosure
GERALD FORD LIBRARY
2
CONFIDENTIAL (FR)
January 4, 1971
TO:
Federal Open Market Committee
Subject: System Losses on
Foreign exchange
FROM: David E. Bodner
Transactions in
1971.
Contrary to experience in previous years, the foreign exchange
operations of the Federal Reserve System generated a net loss in 1971,
amounting to $8.2 million. This compared with profits of $3.5 million
for distribution in 1970 and a previous cumulative total of $21.8
million of profits since the inception of the swap network. This
memorandum briefly reviews the reasons for the loss in 1971, and
assesses the immediate prospects for 1972. The respective shares of
loss will be reported in the annual statements of the Reserve Banks as
a deduction from earnings under the title "Loss on foreign exchange
transactions."
For the first seven months of 1971, the System had net profits
on foreign exchange operations amounting to $3.7 million. These profits
arose in connection with liquidation of guaranteed sterling holdings,
sales of German marks to the Netherlands and to the market, repayments
of Swiss-franc swap commitments, and write-up of Swiss franc balances
following the franc's revaluation last May. The profit would have
been even larger except that the System had incurred a loss on the
liquidation of Dutch-guilder swap commitments. These net profits were
more than offset by losses from repayment of swap drawings after
August 15.
GERALD FORD LIBRARY
1/ The System also has recorded substantial interest earnings
on foreign exchange balances. These amounted to $2.6 million in
1971, which raised the cumulative total since 1961 to $322.8 million.
-2-
As you know, swap drawings by the Federal Reserve have been
used as a shield for the U.S. gold stock and other international reserve
assets by providing foreign central banks with a short-term exchange
value guarantee on dollars that they might otherwise wish to convert.
As the U.S. payments deficit mounted last year, other central banks
accumulated large amounts of dollars and several asked the System to
provide cover under the swap arrangements. When President Nixon suspended
dollar convertibility on August 15, the Federal Reserve had a total of
$3,045 million of commitments under the swap arrangements. With the
subsequent rise in foreign currency rates in the market, and with the
efforts by the U.S. to negotiate a realignment of currency rates, it
became inevitable that the System would take a loss on these obligations,
particularly since it was, and is, the Treasury's position that those
debts should as far as possible be settled through the market rather than
through the use of reserve assets. As individual swap drawings matured,
they were generally renewed, given the fact that the negotiations were
still proceeding and that reflows had not yet developed. The National
Bank of Belgium, however, requested the System to begin making repay-
ments through purchases in the exchange market, and some $145 million
of the original $635 million equivalent of Belgian franc drawings was
repaid on that basis. The System also paid down $10 million equivalent
of German marks, but this was out of balances on hand and resulted in a
nominal profit. Agreement on a currency realignment was reached in
Washington on December 18, based on the United States' promise, pending
settlement of other international issues, to propose to Congress a
BERALD FORD VIBRARY
-3-
suitable means of devaluing the dollar. Since devaluation is precisely
the contingency that the swaps protect foreign creditors against, the
System has to make good on that guarantee. As reflows subsequently
began to develop in the exchange market, the System purchased sufficient
sterling to repay $35 million of its swap debt to the Bank of England.
Thus, at the end of the year, the remaining drawings outstanding under
the swap line were $2,855 million.
Looking ahead to 1972, additional losses can be expected on
the liquidation of the swap drawings. At present we estimate that these
losses could amount to $140-$150 million, based on the assumption that
the currency realignment negotiated in December is ultimately ratified
by the governments and that reflows drive the currencies to their
respective floors. Negotiations are continuing with other central
banks looking toward agreement on an appropriate sharing of the losses
in cases in which the new "central" rate reflects a combination of the
proposed U.S. devaluation and a proposed revaluation of the other currency.
It is anticipated that in those cases (Belgium and Germany) the respective
central banks will honor the revaluation clauses in the swap agreements.
As the losses are incurred, they will affect the System's over-all
earnings, and will reduce the amounts to be transferred to the U.S.
Treasury each month. Even for one month, however, the System's trans-
fers to the Treasury are much larger than the total expected loss, and
it is likely that the losses will be spread out over several months.
2/ It should be noted that, insofar as Federal Reserve swap
drawings substituted for sales of reserve assets, the Treasury will
FORD LIBRARY
have correspondingly larger "revaluation profits" on those assets.
Treasury losses on foreign currency bonds outstanding probably will
run to about $110 million.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Date Feb. 23, 1972
Chairman Burns
To
From
J. Dewey Daane
One more piece of relevant
material from the New York
Fed.
Daw
J. D. D.
FORD 3 GERALD LIBRARY
Dictated by Bodner's secy.
3:20 p.m. 2/23/72 (gr)
The Reporting of Federal Reserve Foreign Exchange Operations
The foreign exchange operation of the U.S. Treasury and the
Federal Reserve System has been regularly and fully reported in the
Special Manager's six-monthly reports published in the Federal Reserve
Bulletin and the Monthly Review of the Federal Reserve Bank of New York.
To the extent that the System's operations lead to indebtedness by the
Federal Reserve, these are in the form of forward commitments to deliver
foreign currency. In XXX conformity with standard accounting practice
among commercial and central banks here and abroad, forward commitments
are not reported in the regular statement of condition of the Federal
Reserve Banks or in the reports of the U.S. Treasury's Exchange Stabiliza-
tion Fund. If forward contracts were to be included in the regular
Condition Report, it would have to be in the form of a memorandum item,
since there is no category of regular assets or liabilities in which
future commitments can be appropriately reflected.
More generally, it has always been the views of treasuries
and central banks in particular that market knowledge of their outstanding
commitments on a current basis could have adverse consequences, both in
terms of other operations being conducted by the central banks and
treasuries and in terms of market psychology with respect to the value
of their currency. There have been numerous occasions in which governments
have made a decision to defend the value of their currency against specu-
lative pressures in the exchange markets where, through swaps with foreign
GERALD FORD LIBRARY
2
central banks or operations in the forward market, they have been able to
divert pressure from their current gold and exchange reserve, thereby
minimizing
reducing the visible impact of the pressures and extent
to which additional speculation might be drawn into the market. The
publication of outstanding forward commitments on a current basis could
in such circumstances negate the value of the forward operations and
could force governments into exchange adjustments that they might other-
wise regard as both undesirable and unnecessary.
There are other circumstances in which the market's knowledge
of outstanding forward commitments may lead it to draw erroneous conclusions
either about the pressures currently facing a government or about pressures
will
that XXX/ultimately be brought to bear in the exchange markets themselves,
because simple knowledge of the figures does not necessarily take
account of inter-governmental or inter-central bank understandings that
may govern the manner in which such commitments can ultimately be repaid.
For these reasons, the U.S. Treasury and the Federal Reserve have since
the resumption of their exchange operations in 1961 followed conventional
accounting practice. On the other hand, as noted above, unlike most foreign
central banks and governments, the System and the U.S. Treasury periodically
report all their swap transactions and forward exchange operations.
GERALD R. FORD
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date February 23, 1972
To
Mr. Bryant
Subject: Estimates of System Losses
From Samuel I. Katz
on Swap Obligations
Attached is a table prepared by Messrs. Pardee and
Bodner of the New York Reserve Bank which we requested.
S.K.
cc: Governor Daane
Mr. R. Solomon
Mr. Hersey
Mr. Pizer
LIS8684 GERALD R. FORD
Mr. Bodner - Mr. Pardee
your
Estimates of Federal Reserve dollar losses on
outstanding swap obligations, as of
February 22, 1972
(in millions of dollars)
Currency
Minimum loss
Parity loss
Maximum loss
Sterling
37.7
55.0
72.3
Swiss franc
56.3
93.6
132.6
Belgian franc
36.0
42.0
42.0
German mark
3.9
3.9
3.9
TOTAL
133.9
194.5
250.8
Explanatory notes
1. Sterling and Swiss francs - No discussions yet opened with the
foreign central banks concerned.
The three estimates are based on assumption that the pounds
and Swiss francs would be obtained as follows:
(1) Minimum loss - at new floors for the foreign currency
(ceiling for dollar);
(2) Parity loss - at new parity for the foreign currency;
and
(3) Maximum loss - at new ceiling for the foreign currency
(floor for dollar).
2. Belgian francs - New York Federal Reserve officials are already
near agreement with officials of the National Bank of Belgium
on the terms for the settlement of System swap obligations in
this currency. The estimates are based on these discussions.
In brief, System officials would expect to get the Belgian
francs from the Belgian central bank at 8.57% above the
former Belgian ceiling.
3. German mark - Estimates based on assumption that the Bundesbank
would provide the small amount of DMs involved at 8.57% above
the previous parity.
FORD is LIBRARY 838670
BOARD OF GOVERNORS
RCB
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date February 23, 1972
To
Mr. Bryant
Subject: Estimates of System Losses
From Samuel I. Katz
on Swap Obligations
Attached is a table prepared by Messrs. Pardee and
Bodner of the New York Reserve Bank which we requested.
S.K.
cc: Governor Daane
Mr. R. Solomon
Mr. Hersey
Mr. Pizer
Mr. Bodner - Mr. Pardee
GREATE GERALD FORD LIBRARY
Estimates of Federal Reserve dollar losses on
outstanding swap obligations, as of
February 22, 1972
(in millions of dollars)
Currency
Minimum loss
Parity loss
Maximum loss
Sterling
37.7
55.0
72.3
Swiss franc
56.3
93.6
132.6
Belgian franc
36.0
42.0
42.0
German mark
3.9
3.9
3.9
TOTAL
133.9
194.5
250.8
Explanatory notes
1. Sterling and Swiss francs - No discussions yet opened with the
foreign central banks concerned.
The three estimates are based on assumption that the pounds
and Swiss francs would be obtained as follows:
(1) Minimum loss - at new floors for the foreign currency
(ceiling for dollar);
(2) Parity loss - at new parity for the foreign currency;
and
(3) Maximum loss - at new ceiling for the foreign currency
(floor for dollar).
2. Belgian francs - New York Federal Reserve officials are already
near agreement with officials of the National Bank of Belgium
on the terms for the settlement of System swap obligations in
this currency. The estimates are based on these discussions.
In brief, System officials would expect to get the Belgian
francs from the Belgian central bank at 8.57% above the
former Belgian ceiling.
3. German mark - Estimates based on assumption that the Bundesbank
would provide the small amount of DMs involved at 8.57% above
the previous parity.
GERALD FORD LIBRARY
[.C. 2-72?]
Question:
Why did the Federal Reserve continue to draw on the swap net-
work in the spring and summer of 1971 when it was evident that a crisis
was ahead? Couldn't the Federal Reserve have avoided the commitments
that will involve it in losses of $200 million?
Answer:
If the Federal Reserve had refused to draw on its swap lines
with other central banks they would have had the right to come to the
U.S. Treasury and ask for conversion of those dollar balances into gold
and other reserve assets. Thus the Treasury would have been faced with
a very large drain on U.S. reserves. The decision to suspend con-
vertibility of the dollar into reserve assets, which was made on August
15, would thus have had to be faced considerably earlier. With hindsight
some might say that the decision should have been made earlier. Some,
including Mr. Reuss, were recommending it then. But the U.S. Government
clung to the hope that the balance of payments situation could be turned
around without precipitating a severe crisis such as, in fact, was pre-
cipitated by the suspension on August 15. In any event, the delay until
August 15 in suspending convertibility made it possible to combine the
international with the domestic aspects of the President's economic program,
thereby strengthening each of them.
FORD LIBRARY
February 28, 1972
MEMORANDUM
To:
Arthur F. Burns
From:
Charles Coombs, Federal Reserve Bank of New York
Subject:
Mechanics of Swap Drawings
(1) One of the difficulties in giving a simple explanation
of the mechanics of drawing on the Swap lines, is the lack of symmetry
between a drawing by a foreign central bank and one by the Federal.
This asymmetry reflects the fact that foreign central banks use the
dollar as a reserve and intervention currency, while we generally
do not use their national currency either as a reserve or for inter-
vention on the foreign exchange markets.
(2) In the case of a foreign central bank drawing, say
by the Bank of England in the amount of $100 million, the procedure
is fairly simple. The Bank of England buys from the Federal $100
million spot against an equivalent credit sterling to the Federal on
the books of the Bank of England and undertakes to reverse the trans-
action three months hence at the same rate. The Bank of England
may then disburse the $100 million intthe market to cover its reserve
losses while the Federal retains the sterling IOU, which is in reality
a dollar IOU, since the conversion back into dollars has been guar-
anteed by the Bank of England. In effect, the Bank of England
FORD is LIBRARY 938870
-2-
has simply borrowed $100 million from the Federal for disburse-
ment in the market or to add to its reserves. So long as the Swap
drawing is outstanding, our sterling claim is included in the "Other
Assets" item in our balance sheet.
(3) When the Federal draws on the Swap line, say $100
million on the National Bank of Belgium, the mechanics get a bit
more complicated. First of all, we normally do not intervene in
the exchange market to defend the dollar, but rather rely upon
foreign central banks to defend the dollar by buying dollars offered
to them by the market when the dollar falls to its official floor.
Assume that as a result of such market intervention by the National
Bank of Belgium, the Bank has taken in $100 million which it initially
holds on an uncovered basis. Under the Bretton Woods Agreement,
if the National Bank of Belgium was unwilling to hold such dollars
on an uncovered basis, it had a legal right to ask the U.S. to convert
such dollars into gold, SDR's, or other reserve assets, or, alter-
natively, to ask us to buy these dollars back with Belgian francs.
If the U.S. Treasury preferred settlement by the second alternative,
i. e., buying the dollars back with Belgian francs, the Federal Reserve
under its Swap arrangement with the National Bank of Belgium, would
then buy $100 million equivalent of Belgian francs from the National
Bank against a $100 million credit to the National Bank of Belgium on
GERALD
-3-
the books of the New York Fed. The Fed would simultaneously
agree to reverse the transaction 90 days hence at the same rate
of exchange. Initially this transaction was ld be reflected on our
books as a $100 million increase in our deposit liabilities and an
increase in the "Other Assets" item of $100 million equivalent of
Belgian francs. But, on the very same day, we would normally
employ our Belgian franc balance to buy uncovered dollars from the
National Bank of Belgium. We would simultaneously invest the
$100 million credited under the Swap to the National Bank of
Belgium in special Treasury securities. As a result of these
transactions, our assets would remain unchanged, since the
Belgian franc proceeds of the Swap drawing had been disbursed,
while our deposit liabilities would also remain unchanged, since
the Swap credit of $100 million to the National Bank of Belgium
had been invested in special Treasury issues. On the books of
the National Bank, however, the transaction has resulted in a
substitution of covered dollars for uncovered dollars. Thus, the
$100 million invested by the National Bank in special Treasury
issues is guaranteed against exchange risks by the agreement of
the Federal under the terms of the Swap to convert these dollars
back into Belgian francs at the same exchange rate. In effect,
FORD is LIBRARY 076839
-4- -
Federal has taken on a debt of $100 million equivalent in Belgian
francs in order to save the U.S. Treasury an equivalent loss of
gold or other reserve assets.
(4) Repayment of this Belgian franc Swap debt may
be effected, as has occurred many times in the past through out-
flows of funds from Belgium, which would require the National
Bank of Belgium to sell dollars to the market to keep the Belgian
franc from going through its floor. Assume that the National Bank
has to sell $100 million in the market tomorrow morning before
New York opens. To cover the market losses they would telex
us an offer to sell us $100 million equivalent of Belgian francs
against dollars. We would naturally agree, and the National Bank
of Belgium would use the dollar proceeds of this direct exchange
transaction with us to finance its dollar payments to the market.
The National Bank would still have on its books the $100 million
invested in special Treasury issues as a result of the original
Swap transaction. But the Federal Reserve would now have $100
million of Belgian francs to cover its Swap debt. Accordingly, the
Federal would propose immediate liquidation of the Swap contract
by using its Belgian franc balance to buy back the dollars held by
the National Bank in the special Treasury issues, with the result
that the dollar balance of the National Bank would be reduced to
zero, the original starting point.
GERALD R. FORD LIBRADA
February 28, 1972
MEMORANDUM
To:
Arthur F. Burns
From:
Charles Coombs, Federal Reserve Bank of New York
Subject:
Mechanics of Swap Drawings
(1) One of the difficulties in giving a simple explanation
of the mechanics of drawing on the Swap lines, is the lack of symmetry
between a drawing by a foreign central bank and one by the Federal.
This asymmetry reflects the fact that foreign central banks use the
dollar as a reserve and intervention currency, while we generally
do not use their national currency either as a reserve or for inter-
vention on the foreign exchange markets.
(2) In the case of a foreign central bank drawing, say
by the Bank of England in the amount of $100 million, the procedure
is fairly simple. The Bank of England buys from the Federal $100
million spot against an equivalent credit sterling to the Federal on
the books of the Bank of England and undertakes to reverse the trans-
action three months hence at the same rate. The Bank of England
may then disburse the $100 million in the market to cover its reserve
losses while the Federal retains the sterling IOU, which is in reality
a dollar IOU, since the conversion back into dollars has been guar-
anteed by the Bank of England. In effect, the Bank of England
GERALD FORD LIBRARY
-2-
has simply borrowed $100 million from the Federal for disburse-
ment in the market or to add to its reserves. So long as the Swap
drawing is outstanding, our sterling claim is included in the "Other
Assets" item in our balance sheet.
(3) When the Federal draws on the Swap line, say $100
million on the National Bank of Belgium, the mechanics get a bit
more complicated. First of all, we normally do not intervene in
the exchange market to defend the dollar, but rather rely upon
foreign central banks to defend the dollar by buying dollars offered
to them by the market when the dollar falls to its official floor.
Assume that as a result of such market intervention by the National
Bank of Belgium, the Bank has taken in $100 million which it initially
holds on an uncovered basis. Under the Bretton Woods Agreement,
if the National Bank of Belgium was unwilling to hold such dollars
on an uncovered basis, it had a legal right to ask the U.S. to convert
such dollars into gold, SDR's, or other reserve assets, or, alter-
natively, to ask us to buy these dollars back with Belgian francs.
If the U.S. Treasury preferred settlement by the second alternative,
i.e., buying the dollars back with Belgian francs, the Federal Reserve
under its Swap arrangement with the National Bank of Belgium, would
then buy $100 million equivalent of Belgian francs from the National
Bank against a $100 million credit to the National Bank of Belgium on
FORD & LIBRARY 9ERALD
-3-
the books of the New York Fed. The Fed would simultaneously
agree to reverse the transaction 90 days hence at the same rate
of exchange. Initially this transaction was ld be reflected on our
books as a $100 million increase in our deposit liabilities and an
increase in the "Other Assets" item of $100 million equivalent of
Belgian francs. But, on the very same day, we would normally
employ our Belgian franc balance to buy uncovered dollars from the
National Bank of Belgium. We would simultaneously invest the
$100 million credited under the Swap to the National Bank of
Belgium in special Treasury securities. As a result of these
transactions, our assets would remain unchanged, since the
Belgian franc proceeds of the Swap drawing had been disbursed,
while our deposit liabilities would also remain unchanged, since
the Swap credit of $100 million to the National Bank of Belgium
had been invested in special Treasury issues. On the books of
the National Bank, however, the transaction has resulted in a
substitution of covered dollars for uncovered dollars. Thus, the
$100 million invested by the National Bank in special Treasury
issues is guaranteed against exchange risks by the agreement of
the Federal under the terms of the Swap to convert these dollars
back into Belgian francs at the same exchange rate. In effect,
FORD : 938470 LIBRARY
-4-
Federal has taken on a debt of $100 million equivalent in Belgian
francs in order to save the U.S. Treasury an equivalent loss of
gold or other reserve assets.
(4) Repayment of this Belgian franc Swap debt may
be effected, as has occurred many times in the past through out-
flows of funds from Belgium, which would require the National
Bank of Belgium to sell dollars to the market to keep the Belgian
franc from going through its floor. Assume that the National Bank
has to sell $100 million in the market tomorrow morning before
New York opens. To cover the market losses they would telex
us an offer to sell us $100 million equivalent of Belgian francs
against dollars. We would naturally agree, and the National Bank
of Belgium would use the dollar proceeds of this direct exchange
transaction with us to finance its dollar payments to the market.
The National Bank would still have on its books the $100 million
invested in special Treasury issues as a result of the original
Swap transaction. But the Federal Reserve would now have $100
million of Belgian francs to cover its Swap debt. Accordingly, the
Federal would propose immediate liquidation of the Swap contract
by using its Belgian franc balance to buy back the dollars held by
the National Bank in the special Treasury issues, with the result
that the dollar balance of the National Bank would be reduced to
zero, the original starting point.
LIBRARY SERALD R. FORD
SCHEMATIC
Feb. 29, 1972
Assume Netherlands Bank buys $100 million in the foreign
exchange market in order to prevent the guilder from rising above
the ceiling. The dollars are invested in Treasury bills.
STEP 1
The Federal Reserve Bank of New York is requested by the
Netherlands Bank to draw $100 million on reciprocal currency arrangement.
Federal Reserve Bank of New York
(dollars)
+100 (deposit
+100 (deposit of
at Nether-
Nether lands
lands Bank)
Bank)
STEP 2
The Federal Reserve Bank of New York uses the guilders to
purchase the Treasury bills held by the Netherlands Bank.
Federal Reserve Bank of New York
-100 (deposit
at Nether-
lands Bank)
+100 (U.S.
Treasury
bills)
Net changes resulting from Steps laand 2:
Federal Reserve Bank of New York
+100 (U.S.
+100 (deposit of
Treasury
Netherlands
bills)
Bank)
FORD i 9ERALD LIBRARY
-2-
STEP 3
Netherlands Bank deposit at FRBNY is invested in Special
Treasury issue.
Federal Reserve Bank of New York
-100 (deposit of
Netherlands
Bank)
+100 (U.S. Trea-
sury)
Net changes resulting from Steps 1, 2 & 3:
Federal Reserve Bank of New York
+100 (U.S.
+100 (U.S. Trea-
Treasury
sury)
bills)
Memo item: must deliver 300 million guilders
to Netherlands Bank in 3 months.
STEP 4 (3 months later)
Federal Reserve Bank of New York buys guilders from
Netherlands Bank.
Federal Reserve Bank of New York
+100 (deposit
+100 (deposit of
at Nether-
Netherlands
lands Bank)
Bank)
STEP 5
The Federal Reserve Bank of New York fulfills its obligation
to pay 300 million guilders to the Netherlands Bank, and receives the
Special Treasury issue in return.
FORD & LIBRARY 076830
-3-
Federal Reserve Bank of New York
-100 (deposit
at Nether-
lands Bank)
+100 (Speical
Treasury
issue)
STEP 6
Treasury redeems Special Treasury issue held by FRBNY.
Federal Reserve Bank of New York
-100 (Special
-100 (U.S.
Treasury
Treasury)
issue)
STEP 7
Netherlands Bank buys Treasury bills with its deposit at
FRBNY.
Federal Reserve Bank of New York
-100 (U.S.
-100 (deposit of
Government
Netherlands
Securities)
Bank)
GERALD ? FORD
STRICTLY CONFIDENTIAL (FR)
SWAP ARRANGEMENTS BETWEEN THE SYSTEM
AND FOREIGN CENTRAL BANKS
March, 15, 1972
Listed below as of March 15, 1972, are the swap arrangements
concluded on behalf of the Federal Reserve System with foreign banks.
Amount of
Agreement
Maturity of
(millions of
latest authorized
Foreign Bank
dollars)
renewal
Austrian National Bank
200
December 1, 1972
National Bank of Belgium
600
December 22, 1972
Bank of Canada
1,000
December 30, 1972
National Bank of Denmark
200
December 1, 1972
Bank of England
2,000
December 1, 1972
Bank of France
1,000
June 28, 1972
German Federal Bank
1,000
June 15, 1972
Bank of Italy
1,250
June 30, 1972
Bank of Japan
1,000
December 1, 1972
Bank of Mexico
130
December 1, 1972
Netherlands Bank
300
June 30, 1972
Bank of Norway
200
December 1, 1972
Bank of Sweden
250
December 1, 1972
Swiss National Bank
1,000
December 1, 1972
(
600)
December 1, 1972
B.I.S.
1,600
(1,000)1 December 1, 1972
Total
11,730
1/ This reciprocal arrangement provides for swaps of dollars against
authorized European currencies other than Swiss francs.
FORD is LIBRARY 938470
STRICTLY CONFIDENTIAL (FR)
-2-
As of March 15, 1972, drawings on the above arrangements are
outstanding in the amounts indicated below:
Drawings Outstanding on Swaps
Date since
facility has
Initiated
Initiated
been in con-
Arrangements with
by System
by foreign bank
tinuous use
(millions
of dollars
equivalent)
National Bank of Belgium
455
--
June 30, 1970
German Federal Bank
50
--
May 7, 1971
Swiss National Bank
1,000
--
May 19, 1971
B.I.S.
635
--
August 12, 1971
Swiss francs
(600)
Belgian francs
( 35)
Bank of England
715
--
August 17, 1971
Total
2,855
FORD i GERALD LIBRARY
STRICTLY CONFIDENTIAL (FR)
SWAP ARRANGEMENTS BETWEEN THE SYSTEM
AND FOREIGN CENTRAL BANKS
May 17, 1972
Listed below as of May 17, 1972, are the swap arrangements
concluded on behalf of the Federal Reserve System with foreign banks.
Amount of
Agreement
Maturity of
(millions of
latest authorized
Foreign Bank
dollars)
renewal
Austrian National Bank
200
December 1, 1972
National Bank of Belgium
600
December 22, 1972
Bank of Canada
1,000
December 30, 1972
National Bank of Denmark
200
December 1, 1972
Bank of England
2,000
December 1, 1972
Bank of France
1,000
June 28, 1972
German Federal Bank
1,000
June 15, 1972
Bank of Italy
1,250
June 30, 1972
Bank of Japan
1,000
December 1, 1972
Bank of Mexico
130
December 1, 1972
Netherlands Bank
300
June 30, 1972
Bank of Norway
200
December 1, 1972
Bank of Sweden
250
December 1, 1972
Swiss National Bank
1,000
December 1, 1972
B.I.S.
1,600( 600) December 1, 1972
(1,000)1/December 1, 1972
Total
11,730
1/ This reciprocal arrangement provides for swaps of dollars against
authorized European currencies other than Swiss francs.
FORD & LIBRARY 938870
STRICTLY CONFIDENTIAL (FR)
-2-
As of May 17, 1972, drawings on the above arrangements are
outstanding in the amounts indicated below:
Drawings Outstanding on Swaps
Date since
facility has
Initiated
Initiated
been in con-
Arrangements with
by System
by foreign bank
tinuous use
(millions
of dollars
equivalent)
National Bank of Belgium
455
--
June 30, 1970
German Federal Bank
50
:
May 7, 1971
Swiss National Bank
1,000
--
May 19, 1971
B.I.S.
635
:
August 12, 1971
Swiss francs
(600)
Belgian francs
( 35)
Bank of England
715
--
August 17, 1971
Total
2,855
FORD & LIBRARY 976870
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date June 23, 1972
To
Mr. Bryant
Subject: Should the Federal Reserve
Now Indicate Willingness to Draw on
From
A.B. Hersey
aBH
the Central Bank Swap Network?
CONFIDENTIAL (FR)
As you asked, Gemmill and I have discussed the matter and we
arrived at the following conclusions.
(1)
The probable re-fixing of the pound sterling parity
at a rate that will be generally acceptable improves
the chances of maintaining a (modified) Smithsonian
structure of parities.
(2)
However, it has not yet been demonstrated whether the
Smithsonian structure of parities meets U.S. needs or
not. Stability of parities is desirable during the
reform negotiation period but progress toward a
satisfactory U.S. current account surplus is even
more desirable. The United States is not unalterably
opposed to necessary parity changes.
(3)
If and when it were to become generally recognized
that further revaluations and/or dollar devaluation
would be needed, nothing could then prevent new
closings of markets, floatings, and settings of new
parities. Existence or nonexistence of outstanding
swap drawings would be irrelevant, with no effect
on market psychology.
(4)
In the meantime, swap drawings by the United States
are unnecessary to cause foreign central banks to
intervene whenever rates against the dollar reach
the Smithsonian limits -- because they have at
least as great an interest in stability of parities
as we have.
(5)
Swap drawings by the United States are undesirable
for two reasons. First, but of minor importance:
the exchange value guaranty tends to bias foreign
central banks' thinking even farther toward favoring
dollar devaluation as against other currencies'
revaluations.
FORD & LIBRARY GERALD
Mr. Bryant
-2-
(6)
More importantly, swap drawings implicitly signal an
intention to settle U.S. deficits by delivering reserve
assets. Nothing that has happened this week alters the
undesirability of the United States making any move
toward convertibility or "asset settlement" until the
reform negotiations and other events give us assurance
that we can achieve an adequate current account surplus.
(7)
Finally, giving exchange value guaranties through
Federal Reserve swap drawings against future reserve
additions by particular countries would be inequitable
toward present holdings of uncovered dollars by those
countries and others. Moreover, capital flows and
current transactions among other countries can cause
shifts of reserves from one to another, and could
therefore bring an increase in U.S. exchange value
guaranties even though there were no U.S. payments
deficit.
(8)
There is no need to reactivate the swap network in
the other direction -- viz., to allow the U.K. to
draw. While they float they need no reserves. When
they stabilize they will have adequate reserve re-
sources in the IMF and EEC. The possible desirability
of supplementing these resources. is outweighed by the
undesirability of any reactivation of the swap network
during the reform negotiation period.
FORD in LIBRARY SERVIC
STRICTLY CONFIDENTIAL (FR)
CORRECTED COPY
SWAP ARRANGEMENTS BETWEEN THE SYSTEM
AND FOREIGN CENTRAL BANKS
August 9, 1972
Listed below as of Aug. 9, 1972, are the swap arrangements
concluded on behalf of the Federal Reserve System with foreign banks.
Amount of
Agreement
Maturity of
(millions of
latest authorized
Foreign Bank
dollars)
renewal
Austrian National Bank
200
December 1, 1972
National Bank of Belgium
600
December 22, 1972
Bank of Canada
1,000
December 30, 1972
National Bank of Denmark
200
December 1, 1972
Bank of England
2,000
December 1, 1972
Bank of France
1,000
December 28, 1972
German Federal Bank
1,000
December 15, 1972
Bank of Italy
1,250
December 29, 1972
Bank of Japan
1,000
December 1, 1972
Bank of Mexico
130
December 1, 1972
Netherlands Bank
300
December 29, 1972
Bank of Norway
200
December 1, 1972
Bank of Sweden
250
December 1, 1972
Swiss National Bank
1,000
December 1, 1972
1,600 ( 600)
December 1, 1972
B.I.S.
(1,000)1/
December 1, 1972
Total
11,730
1/ This reciprocal arrangement provides for swaps of dollars against
authorized European currencies other than Swiss francs.
FORD is LIBRARY 078835
STRICTLY CONFIDENTIAL (FR)
-2-
As of Aug. 9, 1972, drawings on the above arrangements are
outstanding in the amounts indicated below:
Drawings Outstanding on Swaps
Date since
facility has
Initiated
Initiated
been in con-
Arrangements with
by System
by foreign bank
tinuous use
(millions
of dollars
equivalent)
National Bank of Belgium
435
:
June 30, 1970
Swiss National Bank
700
--
May 19, 1971
B.I.S.
635
--
August 12, 1971
Swiss francs
(600)
Belgian francs
( 35)
Bank of England
98
--
August 17, 1971
Total
1,368
GERALD FORD VIBRARY
TABLE Ib
September 6, 1972
SYSTEM FOREIGN CURRENCY DOLLAR SWAP ARRANGEMENT
(in millions of dollars)
Drawings Outstanding*
Maturity
Amount Initiated by
Initial
Institution
Arrangement
Total Faciltiy
U. S. Other Party
Maturity
Date
Bank of England
12/ 1/72
2,000
Bank of France
12/28/72
1,000
Swiss National Bank
12/ 1/72
1,000
300.0
11/10/72
8/10/71
400.0
11/17/72
8/17/71
National Bank of Belgium
12/22/72
600
15.0
10/ 3/72
2/10/71
30.0
10/6/72
4% 7/71
40.0
10/20/72
7/21/71
25.0
10/27/72
7/28/71
55.0
11/3/72
8/4/71
65.0
11/10/72
5/10/71
40.0
11/10/72
8/10/71
70.0
11/13/72
8/12/71
20.0
11/16/72
8/16/71
10.0
11/17/72
8/17/71
35.0
11/24/72
2/24/71
30.0
11/24/72
5/26/71
*
Any System balances arising from swaps may be invested in interest-earning accounts
and foreign dollar balances may be invested in U. S. Treasury Certificates of Indebtedness
Foreign Series (except for BIS and BNS balances which may be invested in U. S. Treasury
bills).
GERALD FORD LIBRARY
TABLE Ib
September 6, 1972
(Cont'd)
SYSTEM FOREIGN CURRENCY DOLLAR SWAP ARRANGEMENT
(in millions of dollars)
Drawings Outstanding
Maturity of
Amount Initiated by
Initial
Institution
Arrangement
Total Facility
U. S.
Other Party
Maturity
Date
Bank of Italy
12/29/72
1,250
German Federal Bank
12/15/72
1,000
Netherlands Bank
12/29/72
300
Bank of Canada
12/30/72
1,000
Austrian National Bank
12/ 1/72
200
Bank of Sweden
12/ 1/72
250
Bank of Japan
12/ 1/72
1,000
National Bank of Denmark
12/ 1/72
200
Bank of Mexico
12/ 1/72
130
Bank of Norway
12/ 1/72
200
Bank for International
12/ 1/72
600
600.0
11/13/72
8/12/71
Settlements
1,000**
35.0***
11/17/72
8/18/71
11,730
1,770.0
** Under this arrangement, drawings take the form of swaps expressed in terms of dollars/authorized
European currencies other than Swiss francs.
*** Belgian franc drawing.
BERALD FORD VIBRARY
SEP 11 1972
Any reference in the attached report to exchange market
RB
operations by the Federal Reserve should be regarded as
being strictly confidential.
(ret)
C. A. Coombs
FORD is LIBRARY 076839
CONFIDENTIAL -- (F.R.)
REPORT ON OPERATIONS IN FOREIGN CURRENCIES FOR SYSTEM OPEN
MARKET ACCOUNT AND TREASURY ACCOUNT AND FOREIGN EXCHANGE
MARKET CONDITIONS FOR THE STATEMENT WEEK ENDED SEPTEMBER 6, 1972
PREPARED BY THE FEDERAL RESERVE BANK OF NEW YORK
EXCHANGE MARKET CONDITIONS
The dollar continued to show a firm underlying tone in the exchange
markets during the current statement week. Spot rates for most major currencies
fluctuated narrowly with some Continental currencies firming slightly by
the end of the period, as the favorable effect of the continuing rise in short-
term U.S. interest rates was by that time offset by prospects of tighter money
markets on the Continent. The yen remained at the ceiling, however, and the
Bank of Japan had to absorb close to $200 million, mostly before the weekend.
In all markets trading was quiet, with New York closed for the Labor Day holiday
and dealers generally awaiting the outcome of the upcoming international conferences.
The German mark traded narrowly throughout the period, closing at
$0.3136 1/4,little changed from the level of a week ago. The market turned quiet
with the passing of month-end, even though German banks still remained concerned
over their liquidity positions for September. The three-month forward mark
was quoted at a premium of 3.84 per cent per annum on Wednesday, virtually un-
changed from a week earlier.
The official French franc retreated to trade generally a point or so
away from its upper limit before the weekend. A firmer franc developed thereafter,
however; by Wednesday afternoon the spot rate was again straddling the ceiling and
the Bank of France took in $17 million that day. The financial franc, fluctuating
erratically downward, dropped 13 points to close the period at $0.2068. In the
forward market, the premium on three-month francs, at 0.86 per cent per annum on
Wednesday, was virtually unchanged from a week earlier.
GERALD FORD LIBRARY
- 2 -
With the passing of month-end demands, sterling opened the period at
$2.4490, some 1/4 of a cent lower than it had closed the preceding day. It continued
to drift downward, reaching $2.4481 by the time the market opened in New York on
Friday. The spot rate returned to $2.4490 and traded narrowly around that level
through Tuesday, as British interest rates remained relatively firm. Sterling came
into somewhat stronger demand on Wednesday, and the spot rate advanced to $2.4502 by
the close of the day. In the forward market, the discount on three-month sterling
narrowed by 3/16 of one percentage point over the week, to 2.73 per cent per annum
by Wednesday afternoon.
By Thursday, the market had become convinced that the Swiss National Bank
was going to postpone implementation of measures it had recently proposed to mop up
domestic liquidity. The Swiss franc, therefore, retreated to around $0.2645, and
held near to that level through the close of the period. In the forward market, the
premium on three-month francs widened by 1/4 of one percentage point, to 4.61 per
cent per annum by Wednesday.
With the Amsterdam money market still flooded with excess liquidity,
the Dutch guilder continued to ease, opening the period down 5 points from the day
before, at $0.3096 3/4. As a result of the recent decline, the spread between the
guilder and the Belgian franc widened to 1 1/2 per cent and the Netherlands Bank
was obliged to sell francs against guilders under the terms of the Benelux agreement.
This intervention brought the guilder's decline to a halt, and the spot rate held
a few points higher through Tuesday. On Wednesday, rumors that the central bank
was considering measures to absorb some of the excess domestic liquidity pushed
the spot rate up to as high as $0.3104 3/4 in New York. On Thursday morning, after
the period, the spot rate advanced further, to as high as $0.3108, after the
Netherlands Bank announced it would reintroduce minimum cash reserves
FORD & LIBRARY 078338
- 3 -
against the banks' deposit liabilities, and would resume open-market operations
as well. The bank made it clear, however, that it intended to maintain a certain
liquidity in the money market to prevent its policies from triggering new inflows
of foreign funds by unduly raising domestic interest rates. At the same time
the bank took the opportunity to cut its discount rate from 4 to 3 per cent and
to similarly lower all its other lending rates by 1 per cent, in order to bring
them more into line with the low rates prevailing in the Amsterdam market. In the
forward market, the premium on guilders narrowed by 1/2 of one percentage point
over the week, to 4.19 per cent by Wednesday.
The official Belgian franc eased in quiet trading to $0.022760 on
Thursday morning. Subsequently, the rate moved upward, advancing particularly
strongly on Wednesday to reach $0.022789, before retreating to $0.022775 by the
close of the day. The financial franc dropped sharply to $0.022753 on Thursday
morning in Europe, but then came back to $0.022789 on Wednesday before softening
to the official franc's level by the close. In the forward market, the premium on
three-month francs stood at 2.02 per cent per annum on Wednesday, for a narrowing
of 3/16 of one percentage point over the week.
FORD
The Italian lira continued to hold just above the central rate, at
LIBRARY
about $0.001721 throughout the statement period, showing little response to the
widespread strike actions underway on the Italian railways and in other sectors
of the economy. In the forward market, the discount on three-month lire, at 2.91
per cent on Wednesday, widened only slightly over the week.
The Canadian dollar advanced 2 1/2 points at the opening of the period,
to $1.0176 1/2. It subsequently edged downward in a generally featureless market,
however, closing the statement week at $1.0168, and the Bank of Canada sold $1 1/2
million while moderating the decline. In the forward market, the three-month
Canadian dollar, which had traded at par with the spot rate one week earlier, was
quoted at a premium of 0.08 per cent per annum on Wednesday afternoon.
- 4 -
The failure of working-level negotiations prior to the Nixon-Tanaka
summit meeting to resolve outstanding economic issues set off a short bout of
speculation in favor of the Japanese yen before the weekend. During the three
days through Saturday the Bank of Japan had to take in $180 million. At the
conclusion of the meeting, Japan announced, as had been expected, that it agreed
to $1.1 billion of special imports from the United States. After the weekend
pressures on the spot rate eased and the central bank bought only an additional
$19 million. However, speculation on the inevitability of another yen revaluation
was still reflected in the forward market, where the premium on yen for November
delivery stood at 9.37 per cent on Wednesday--6 3/8 percentage points wider than the
corresponding premium one week earlier.
After easing just prior to the period as month-end pressures passed,
short-term Euro-dollar rates firmed markedly on Thursday. Seven-day funds held
generally steady thereafter, to close the statement week at 4 3/4 per cent per
annum, a net gain of 3/4 of one percentage point. The one-month rate rose further
on technical factors to 5 5/8 per cent on Monday, but. then retreated to 5 1/16 per
cent on Wednesday, for a net gain of 1/16 of one percentage point. Three-and six-
month deposits strengthened by 3/16 and 1/16 of one percentage point to 5 9/16 and
6 3/16. per cent, respectively, by the end of the statement week.
The gold markets continued quiet, showing little reaction to the mounting
number of proposals to increase the official price of gold as part of a general
reform of the international monetary system. In London, the price stood at $67.00
an ounce at the second fixing on Wednesday, for a net gain of 10 cents over the
period. In Zurich, the price rose by 20 cents to $67.20 an ounce, while in Paris
the price of a standard bar was quoted at $68.31 an ounce, 32 cents more than one
week earlier.
BERALA FORD LIBRARY
- 5 -
FEDERAL RESERVE OPERATIONS
On Friday and Tuesday, the System repaid its recent swap drawings of
$10.2 million equivalent of Belgian francs. These repayments were financed
with francs purchased for this purpose against German marks by the National Bank
of Belgium as agent for the System, supplemented by some balances on hand. The
original Belgian franc swap commitments of $470 million equivalent (including
$35 million to the BIS) remained unchanged.
During the statement week the System purchased $3.2 million equivalent
of German marks while delivering $9.3 million equivalent in connection with
purchases of Belgian francs (see above).
During the statement week the System purchased $3.1 million equivalent
of Swiss francs (of which $2.1 million purchased in Europe through the BIS for
value after the period).
TREASURY OPERATIONS
On September 1, the U.S. Treasury issued a 15-month $29.1 million Swiss
franc-denominated security to the Swiss National Bank in exchange for a similar note
maturing that day.
OTHER OPERATIONS
For correspondents, this Bank purchased $9.3 million equivalent of
sterling and $0.4 million of other foreign currencies, while selling $7.3 million
of Japanese yen and $1.1 million of other foreign currencies. Also for correspondents,
this Bank purchased $3.9 million of sterling from the Bank of England, $4.3 million of
guilders from the Netherlands Bank, and $10.9 million of French francs from the Bank
of France.
Charles A. Coombs
Special Manager of the
GERALD R.FORD LIBRARY
System Open Market Account
September 8, 1972
For Foreign Currency Operations
TABLE I
STATEMENT WEEK
August 31 - September 6, 1972
FEDERAL RESERVE FOREIGN EXCHANGE TRANSACTIONS
(in millions of dollars equivalent)
Swaps
Other Spot
Forward
Deliveries
Currency
Drawings Repayments
Purchases
Sales
on Forwards
Purchases
Sales
Renewals
Pound sterling
French franc
German mark
3.2
9.3
Italian lira
Dutch guilder
Swiss franc
1.0
Belgian franc
10.2
9.3
FORD i 07V839 LIBRARY
Canadian dollar
Austrian schilling
Swedish krona
Japanese yen
Danish krone
Mexican peso
Norwegian krone
TABLE Ia
Close of Business
September 6, 1972
FEDERAL RESERVE SYSTEM FOREIGN EXCHANGE BALANCES AND COMMITMENTS
(in millions of dollars equivalent)
Balances in connection with Forward Sales (-) or Purchases (+)
Net Position
a. Market
3rd
Other
b. Official
Currency
Available
Currency
Swaps
Transactions
Total
Swaps*
Sector
Swap
Swaps*
Total*
under swaps**
Pound sterling
0.2
0.2
0.2
2,000.0
French franc
-0-
-0-
1,000.0
German mark
17.8
17.8
17.8
1,000.0
Italian lira
-0-
-0-
1,250.0
Dutch guilder
-0-
-0-
300.0
Swiss franc
8.4
#
8.4 -1,300.0
-1,291.6
-1,291.6
300.0
Belgian franc
0.3
0.1
0.4 -470.0***
-469.7
-469.6
165.0
Canadian dollar
0.1
0.1
0.1
1,000.0
Austrian schilling
-0-
-0-
200.0
Swedish krona
-0-
-0-
250.0
Japanese yen
1.0
1.0
1.0
1,000.0
Danish krone
-0-
-0-
200.0
Mexican peso
-0-
-0-
130.0
Norwegian krone
-0-
-0-
200.0
Total
8.8
19.2
27.9 -1,770.0
-0-
-0- -1,761.2
-1,742.1
*
Approximation only inasmuch as commitments are still stated on the basis of their original
contract amounts. All balances other than Canadian dollars were revalued following formal
GERALD R.
notice to the IMF of the U. S. dollar's devaluation.
** In addition, the System has a $1,000 million swap arrangement with the BIS under which
drawings take the form of swaps expressed in terms of dollars/authorized European currencies
other than Swiss francs. Presently the Federal Reserve has a $35.0 million equivalent
Belgian franc/dollar swap outstanding under this arrangement.
*** Of which $35.0 million equivalent due to the BIS.
# Less than $0.05 million.
TABLE II
STATEMENT WEEK
August 31 - September 6, 1972
TRANSACTIONS. FOR U. S. TREASURY ACCOUNT
(in millions of dollars equivalent)
Spot
Forward
Deliveries
Currency
Purchases
Sales
on Forwards
Purchases Sales Renewals
Pound sterling
French franc
German mark
Italian lira
Dutch guilder
Swiss franc
NO ACTIVITY
Belgian franc
19 ORD LIBRARY
Canadian dollar
Austrian schilling
Swedish krona
Close of Business
TABLE IIa
September 6, 1972
U. S. TREASURY FOREIGN CURRENCY BALANCES AND COMMITMENTS
(in millions of dollars equivalent)
Forward Commitments
Net Position
3rd
Excluding
Including
Currency
Other
Treasury
Treasury
Treasury
Currency
Balances
Swap
Swaps
Outright
Borrowings
Borrowings
Borrowings
Pound sterling
2.6
2.6
2.6
French franc
-0-
-0-
-0-
German mark
197.1
-612.0
197.1
-414.9
Italian lira
0.2
0.2
0.2
Dutch guilder
#
#
#
Swiss franc
#
-1,389.2
#
-1,389.2
Belgian franc
-0-
-0-
-0-
Canadian dollar
#
#
#
Swedish krona
#
#
#
Total
199.9
-0-
-0-
-0-
-2,001.2
199.9
-1,801.3
# Less than $0.05 million.
GERAL FORD JORARY
TABLE IIb
September 6, 1972
OUTSTANDING U. S. TREASURY SECURITIES DENOMINATED IN FOREIGN CURRENCIES
Maturity
Issue
Term
Interest
Foreign Currency
Dollar
Issued to
Date
Date
(in Months)
Rate
(in millions)
Equivalent a /
German Federal Bank
10/2/72
4/ 1/68**
54
5.73
DM
500.0
153.0
2/19/73
8/19/69**
42
3.05
DM
500.0
153.0
10/2/73
3/72**
/
48
2.051
DM
500.0
153.0
DM
1,500.0
459.0
German Banks (Spec.
12/22/72
6/24/68**
54
6.25
DM
500.0
153.0
Sec. Acc. of German
Fed. Bank)
Swiss National Bank
10/ 6/72
6/71*
15
6.15
SF
225.0
57.5
11/6/72
8/6/71*
15
6.35
SF
110.0
28.1
11/20/72
8/19/71**
15
5.65
SF
120.0
30.7
12/11/72
9/10/71*
15
5.45
SF
1,075.0
274.6
12/13/72
9/13/71**
15
5.55
SF
100.0
25.5
1/8/73
10/8/71**
15
5.25
SF
130.0
33.2
1/29/73
10/29/71*
15
4.85
SF
170.0
43.4
3/9/73
12/9/71*
15
4.80
SF
435.0
111.1
4/5/73
1/5/72*
15
4.50
SF
97.0
24.7
4/17/73
1/17/72*
15
4.15
SF
575.0
147.9
8/20/73
5/18/72*
15
4.77
SF
129.0
33.4
8/27/73
8/27/71*
24
5.67
SF
1,352.0
345.4
8/30/73
5/30/72**
15
4.55
SF
130.0
33.7
11/30/73
1/72*
15
5.50
SF
110.0
29.1
SF
4,758.0
1,218.3
Bank for International
1/19/73
7/21/72+
6
4.375
SF
430.0
114.0
Settlements
2/2/73
8/4/72+
6
4.24
SF
215.0
56.9
SF
645.0
170.9
* Convertible into cash upon two days' notice.
** Nonconvertible securities issued to the German Federal Bank, German banks and the Swiss
National Bank as fiscal agent of the Swiss Confederation.
+ Certificates of Indebtedness convertible upon two days' notice into U. S. Treasury bills.
/ Based on market rates for securities rolled over so far during 1972; otherwise on market
BERRAD FORD LIBRARY
rates as of December 31, 1971 for remainder of securities as per U. S. Treasury decision.
b / Security originally issued on August 19, 1968 but modified in January 1970 following agreement
between the U. S. Treasury and the German Federal Bank to compensate for the effect of the
1969 revaluation of the German mark by way of a lower interest rate (effective as of newly-
assigned issue date).
C / Security originally issued on April 12, 1969 but modified in January 1970 (effective as of
October 2, 1969) and again on March 3, 1972 following agreement between the U. S. Treasury
and the German Federal Bank to compensate in whole or in part for the effects of the revaluations
of the German mark by way of lower interest rates.
STATEMENT WEEK
TABLE III
August 31 - September 6,1972
EXCHANGE RATES FOR MAJOR FOREIGN CURRENCIES
(in U. S. dollars per unit)
Central
Intervention Limits*
New York Offered Rates During the Statement Week
Currency
Rate*
Upper
Lower
Open
High
Low
Close
Pound sterling
2.60571
Suspended
2.4490
2.4502
2.4481
2.4502
German mark
.310318
.317460
.303490
.3135 1/4
.3138
.3134 1/4
.3136 1/4
French franc
.195477
.199980
.191168
.1998
.2000
.1998
.2000
Swiss franc
.260417
.266418
.254680
.2645 1/4
.2646 3/4
.2644 1/4
.2645 1/2
Dutch guilder
.308195
.315271
.301432
.3096 3/4
.3105
.3096 3/4
.3102
Belgian franc
.022313
.022827
. 021822
.022760
.022789
.022760
.022775
Italian lira
.001720
.001759
.001682
.001721
.001721 1/4
.001720 1/2
.001721 1/4
Canadian dollar
None communicated to IMF
1.0176 1/2
1.0176 1/2
1.0167
1.0168
Japanese yen
.003247
.003322
.003175
.003324
.003324
.003323
.003323
*
Communicated to the IMF
GERALE FORD LIBRARY
September 12, 1972
Swap Network -- Maturity of Drawings
The FOMC authorization for System foreign currency oper-
ations authorizes and directs the FRBNY to "draw foreign currencies
and to permit foreign banks to draw dollars under the reciprocal
currency arrangements
provided that drawings by either party
to such an arrangement shall be fully liquidated within 12 months
after any, amount outstanding at that time was first drawn; unless
the Committee, because of exceptional circumstances, specifically
authorizes a delay.' " (1.D.) (The 12 months refers not to the duration
of any particular drawing, but rather the length of time a particular
swap line is in continuous use.)
lifealine
As of June 1968, the System had, for the first time, made
6018
continuous use of a swap facility for more than one year (with the
weeks
Swiss National Bank).
yer-
As of July 1969, the Bank of England had been in continuous
debt to the System for more than one year, the first instance in which
a foreign central bank had utilized the facility for more than one
year.
over ylaw
you bahay, a
None n 1
longest-
Any 151971
me X used
L r2 up
FORD LIBRARY GERALD
Unicalsdi
2xchg rate
September 12, 1972
Outstanding Swap Drawings
at end of period
Eml}
(millions of dollars)
Lizrine
System drawings
System claims
1962 - I
110
250
II
230
0
1963 - I
200
35
II
320
55
1964 - I
0
65
II
295
200
1965 - I
328
360
II
135
475
1966 - I
0
175
II
280
550
1967 - I
370
368
II
1,776
1,396
1968 - I
324
416
II
432
1,668
1969 - I
95
1,271
II
330
650
1970 - I
220
400
II
810
0
1971 - I
550
0
II
650
0
July
715
0
Aug. 15
3,045
0
Briton 750
Any 6-13 drew /, 840 Lillin
Smitz 1000
Aug. I in mate dres drainge
Dayne 90
TIBRARY GERALD FORD
STRICTLY CONFIDENTIAL (FR)
System Sales and Purchases of DM
(millions of DM)
Amt.
Date
offered-
1/
Rate
Amt. sold
Amt. purchased
July 19 (direct)
80
31.568
8²/
--
19 (brokers')
30
31.593
--
--
31.579
--
--
31.570
--
--
20
30
31.545
30³/
--
28
--
31.471
--
4.04/
--
31.489
--
4.04/
Aug. 1
--
31.472
--
4.8
--
31.476
--
5.2
22
--
31.427
--
10.2
8
--
31.445
--
5.2
9
--
31.429
--
4.7
16
--
31.324
--
3.2
--
31.328
--
3.1
30
31.345
--
--
31.343
--
--
31.335
30
--
17
--
31.308
--
4.8
--
31.305
--
4.8
18
--
31.317
--
4.8
--
31.318
--
5.2
--
31.319
--
10.0 (BIS)
21
--
31.261
--
4.5
--
31.261
--
5.5
--
31.267
--
15.0 (BIS)
25
--
31.319
--
5.0
--
31.316
--
5.0
28
--
31.331
--
5.0
30
n.a.
31.370
11.0 (Brussels) 5/
--
31
--
31.344
--
5.3
--
31.340
--
5.0
n.a.
31.333
10.0 (Brussels) 5/
--
Sept. 1
n.a.
31.344
8.8 (Brussels) 5/
--
FORD LIBRARY
12
--
31.345
--
10
Totals
170 (N.Y.)
68.0 (N.Y.)
134.3
28.8 (Brussels)
29.8
1/ Direct offers of DM totaling 80 million DM
made to eight major NYC banks
July 19. All other offers on July 19 and after were placed in brokers market with
a NYC bank acting as intermediary. On July 19 and August 16 we lowered our offer
rate twice as the market backed away.
2/ Balances borrowed from U.S. Treasury.
3/ System balances.
4/ Repaid to U.S. Treasury August 1.
5/ Sold against Belgian francs in Brussels.
STRICTLY CONFIDENTIAL (FR)
System Intervention in Belgian Francs
(millions of francs)
Amt.
Date
1/
offered
Rate
Amt. sold
Amt. purchased
Aug. 10
300
2.2826
--
--
2.2823
2802/
--
300
2.2822
452/
--
255
2.2819
402/
--
11
150
2.2825
--
--
2.2822
--
--
100
2.2820
--
100
2.2818
80²/
--
14
100.0
2.2821
--
--
16
100.0
2.2810
--
--
50.0
{
2.2805
--
--
50.0
2.2800
--
--
{
2.2800
--
--
2.2797
--
--
17
100.0
2.2802
--
--
18
100.0
2.2813
--
--
2.2803
--
--
30
--
2.2781
--
151.53/
31
--
2.2762
--
137.1 /
Sept. 1
--
2.2760
--
120.9³/
Total
445.0
410.1
1/ All offers placed in brokers' market with a NYC bank acting as intermediary.
We lowered our offer rate as the market backed away, but at times the market
was below our level. Occasionally we offered equal amounts at two levels
simultaneously (shown by brackets).
2/ Balances obtained by drawing on swap line with National Bank of Belgium.
3/ Purchased against mark balances held by System. National Bank of Belgium
acted as System's agent, doing these transactions in Bussels market. Francs
purchased used (along with balances purchased by System from customer) to repay
earlier swap drawings.
GERALD FORD LIBRARY
September 13, 1972
Interest Earnings and Expenses
Associated with Swap Drawings Prior to August 15, 1971
I. Federal Reserve Drawing:
1. During the life of the swap, the foreign central bank
holds a special Treasury Certificate of Indebtedness,
on which the Treasury pays interest.
2. If the Federal Reserve immediately uses the foreign
currency it acquires as a result of the swap (for
redeeming "uncovered" dollar holdings), it does not
hold the foreign currency during the life of the swap
and therefore earns no interest.
3. If the Federal Reserve had not made the drawing and
the Treasury had not arranged another related
alternative (e.g., a drawing from IMF), the foreign
central bank would either (a) have demanded reserve
assets from the Treasury or (b) have decided to hold
dollars without the protection of the swap.
4. In case (a), foreign dollar holdings would have been
smaller and therefore interest payments by the U.S.
Government would have been smaller.
5. In case (b), foreign dollar holdings would not have
been smaller and therefore interest payments by the U.S.
Government would have been no different than in the
swap case.
6. If the Federal Reserve had not been willing to make
swap drawings, more often than not (a) would have
been the outcome.
7. Conclusion: interest payments by the U.S. Government
to foreign central banks were somewhat higher than
they would have been if swap drawings had not been
made.
FORD is LIBRARY 938870
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date September 14, 1972
To
Mr. Bryant
Subject: Probable Losses on Swaps
From
John E. Reynolds
CONFIDENTIAL (FR)
I discussed the "about $160 million" figure with Dave
Bodner (in Mr. Coombs' absence). That is the figure which Coombs
thinks is the best one to use. But the Chairman should know how
it is constructed.
(1) A $50 million loss has already been taken.
(2) The remaining $110 million is the loss that will
result if we acquire the needed foreign currencies
at their central rates.
The maximum loss, if we should have to buy currencies at
ceiling rates, would be about $204 million. Even this figure, how-
ever, is exceeded by the Treasury's revaluation profits on the
reserve assets that the swap drawings permitted the Treasury to
conserve.
GERALD FORD LIBRARY
FEDERAL RESERVE
BANK
OF NEW YORK
FEDERAL RESERVE BANKOF 3 NEW YORK
MONTHLY REVIEW
SEPTEMBER 1972
Contents
FORD is LIBRARY QERALD
Treasury and Federal Reserve Foreign Exchange
Operations, by Charles A. Coombs
210
The Business Situation
233
The Money and Bond Markets in August
237
Volume 54
No. 9
210
MONTHLY REVIEW, SEPTEMBER 1972
FEDERAL RESERVE BANK OF NEW YORK
211
European partners bought sterling with their currencies.
Denmark formally withdrew from the EC monetary agree-
The general effect of such intervention to maintain the 21/4
ment, while Italy secured a temporary authorization to keep
percent Common Market band was to brake the decline
the lira within the 2½ percent band by intervening in dollars
of sterling toward its Smithsonian floor of $2.5471, while
rather than European currencies. The Finance Ministers
simultaneously pulling down the stronger EC currencies
then reaffirmed their determination to defend both the
well below their Smithsonian ceilings. In this strained pat-
Smithsonian parities and the Common Market band.
tern of rates, the markets may have sensed a two-way
Despite this reaffirmation and subsequent drastic controls
speculative opportunity to go short of sterling and long of
imposed by Switzerland and Germany to ward off unwanted
Continental currencies in the hope of profiting on both.
capital inflows, rumors of a European joint float continued
Most of the outflow from London seems to have ended up
to incite heavy speculative selling of dollars against the
Treasury and Federal Reserve Foreign Exchange Operations*
in the Common Market.
stronger European currencies and the yen. By Friday, July
On June 23 the British authorities announced their
14, the sterling crisis had generated not only the previously
By CHARLES A. COOMBS
decision to float the pound, in effect temporarily suspending
noted flight of $2.6 billion of funds from sterling into other
their participation in the Smithsonian and EC agreements.
Common Market currencies but also additional flows total-
Following that announcement, other European currencies
ing over $6 billion from dollars into various European
The Smithsonian agreement of December 18, 1971 was
in Europe, discount rate cuts were announced in Ger-
immediately rebounded to their Smithsonian ceilings,
currencies and the yen.
greeted with satisfaction and relief by the exchange mar-
many, Belgium, and the Netherlands, while the United
reflecting market fears of a severe tightening of capital
Meanwhile, the United States authorities had been con-
kets. Rates for a number of European currencies settled at
States Treasury bill rate rose significantly.
import controls, a joint float of the Common Market cur-
sidering the advisability of renewed operations in the ex-
or close to their new floor levels, and sizable reflows of
The dollar showed growing strength and resiliency
rencies, or some combination of both. The European
change markets, involving, if necessary, Federal Reserve
funds to the United States developed through the year-end.
throughout most of the spring months, as a return flow of
currency markets were then closed down, and an emergency
swap drawings which had been suspended on August 15,
Following the turn of the year, however, market optimism
short-term funds largely offset continuing deficits in
meeting of the Community Finance Ministers was set for
1971. On United States initiative and with the approval
shifted to an anxious and even skeptical mood as traders
other components of the United States balance of pay-
the following Monday in Luxembourg. At that meeting
of the Bundesbank, the first of such exchange operations
began to ponder the long negotiating path to a restruc-
ments. This encouraging trend was abruptly reversed mid-
was launched on July 19 in the form of repeated offerings
tured international financial system. Market concern fo-
way in June, however, as sterling was suddenly swept off
by the Federal Reserve Bank of New York of sizable
cused particularly on the risk that certain foreign central
its Smithsonian parity by a speculative wave that had been
amounts of German marks on the New York market. This
banks might suddenly withdraw from their Smithsonian
gathering force for many months past. In allowing sterling
Table I
intervention, which was continued briefly on the following
commitments to defend their currencies at the new upper
to float on June 23, the British authorities indicated that
FEDERAL RESERVE RECIPROCAL CURRENCY ARRANGEMENTS
day, was described by Chairman Burns as a move by the
limits, and successive waves of speculation in January and
the defense of sterling during the previous six days had
September 8, 1972
United States authorities to play their part to restore order
February drove the mark, the guilder, the Belgian franc,
cost the equivalent of $2.6 billion.
In millions of dollars
in foreign exchange markets and to do their part in uphold-
and the yen close to or hard against their official ceilings.
Such official intervention to defend sterling was almost
Institution
Amount of facility
ing the Smithsonian agreement, just as other countries were
The central banks concerned intervened decisively and
entirely conducted in Common Market currencies, in ac-
doing. The Chairman also indicated that the operation
without hesitation, however, and this demonstration had a
cordance with a British undertaking on May 1 to join with
Austrian National Bank
would continue on whatever scale and whenever trans-
200
reassuring effect. In early March, expeditious Congres-
its prospective Common Market partners in maintaining a
National Bank of Belgium
600
actions seemed advisable. The United States Treasury also
sional action on a "clean" gold price bill removed another
spread of no more than 21/4 percent between sterling and
Bank of Canada
1,000
confirmed the intervention, stating in part that: "The action
source of uncertainty that had been breeding unsettling
any other Common Market currency. This European Com-
National Bank of Denmark
200
reflects the willingness of the United States to intervene in
market rumors. Simultaneously, the German government
munity (EC) agreement had thus created a dual system of
Bank of England
2,000
the exchange markets upon occasion when it feels it is
took action to discourage borrowing abroad by German
exchange rate limits in which the 21/4 percent Common
Bank of France
1,000
desirable to help deal with speculative forces. The action
business firms, which had been a major source of buying
Market band became colloquially described as the "snake"
German Federal Bank
1,000
indicates absolutely no change in our basic policy ap-
pressure on the mark over the previous three years, while
in the "tunnel" represented by the 4½ percent Smithsonian
Bank of Italy
1,250
proach toward monetary reform and the necessary efforts
the Japanese government reinstated controls on specula-
band. A critical feature of the Common Market 21/4 percent
Bank of Japan
1,000
on all fronts to achieve a sustainable equilibrium in our
tive buying of the yen. Finally, the interest rate gap be-
band was that intervention in dollars was to be confined to
Bank of Mexico
130
balance of payments."
tween Europe and the United States began to be squeezed
circumstances in which a weakening Common Market cur-
Netherlands Bank
300
On August 10, the Federal Reserve Bank of New York
out from both sides. As recessionary tendencies continued
rency should decline the full distance to its Smithsonian
Bank of Norway
200
intervened in a second European currency, the Belgian
floor or a strong currency should rise to its Smithsonian
Bank of Sweden
250
franc, which had remained pinned to its ceiling. In a
ceiling. Otherwise, maintenance of the 21/4 percent Com-
Swiss National Bank
1,000
series of daily operations in some volume, the Belgian
mon Market band was to be carried out by intervening in
Bank for International Settlements:
franc rate was brought down appreciably below its ceiling
each other's currencies.
* This report, covering the period March to September 1972,
Swiss francs-dollars
600
and, in the process, some unwinding of speculation on the
is the twenty-first in a series of reports by the Senior Vice
As sterling came under selling pressure in June, the
Other authorized European currencies-dollars
1,000
Belgian franc may have been set in motion.
President in charge of the Foreign function of the Federal Reserve
Bank of England accordingly was called upon to offer
Bank of New York and Special Manager, System Open Market
Since July 19, the New York Reserve Bank has intervened
marks and whatever other Common Market currencies were
Total
Account. The Bank acts as agent for both the Treasury and Fed-
11,730
in the market on nine occasions and sold in the process
eral Reserve System in the conduct of foreign exchange operations.
being quoted at rates 21/4 percent above sterling, while its
$31.5 million of foreign currencies; total offerings were, of
212
MONTHLY REVIEW, SEPTEMBER 1972
FEDERAL RESERVE BANK OF NEW YORK
213
Table II
percent increase in the dollar price for gold. A middle rate
advanced to its middle rate. Over the course of that month,
FEDERAL RESERVE SYSTEM DRAWINGS AND REPAYMENTS
UNDER RECIPROCAL CURRENCY ARRANGEMENTS
for the pound of $2.60571-commensurate with the dollar's
sterling weakened from time to time, reflecting the
In millions of dollars equivalent
devaluation-was established, and the Bank of England
market's pessimism over the long-term implications of a
announced official buying and selling rates in conformity
protracted coal miners' strike, but once the strike was
Drawings (+) or repayments (-)
with the Smithsonian agreement's provision for a band of
settled the continuing general advance of other major
System swap
System swap
Transactions with
drawings
1972
drawings
4.5 percent around the new middle or central rates. At the
European currencies had a buoyant effect on sterling.
outstanding on
outstanding on
January 1, 1972
September 8, 1972
same time the British authorities relaxed the exchange con-
On March 7, against a background of widespread mar-
I
II
July 1-September 8
trol regulations they had announced in late August and early
ket uncertainty and growing speculation about the readi-
October to discourage inflows of nonresident funds. Spot
ness of individual central banks to absorb sizable new in-
National Bank of Belgium
455.0
20.0
10.2
435.0
10.2
sterling fell close to the new floor of $2.5471 in late De-
flows of dollars, the EC countries announced agreement
Bank of England
715.0
cember, as some speculative positions began to be un-
-
52.0
-663.0
to narrow the margin of fluctuation between their own
wound and year-end adjustments were made. Taking
currencies to 2½ percent by July 1. The market saw this
German Federal Bank
50.0
50.0
advantage of this development, the Federal Reserve ac-
agreement as greatly increasing the likelihood of a con-
Swiss National Bank
1,000.0
-300.0
700.0
quired sterling in the New York market and repaid, just
certed European attempt to stem further inflows of dollars
prior to the year-end, $35 million of the $750 million
-either through new controls or a joint float against the
Bank for International Settlements (Swiss francs)
600.0
600.0
equivalent swap drawing on the Bank of England that had
dollar-and there was a rush to stockpile currencies that
Bank for International Settlements (Belgian francs)
35.0
35.0
been entered into in August 1971.
might become more expensive or even unavailable later
After the year-end adjustments were completed, how-
on. Although the buying wave was directed with particular
Total
2,855.0
-372.0
(+ 10.2
1,770.0
1-723.2
ever, the initial post-Smithsonian euphoria in the markets
force toward Continental currencies, demand for sterling
faded. The outflow of funds from the United Kingdom
was also strong, and the spot rate shot up by almost 5
dried up rapidly, and spot sterling moved away from the
cents in three days to well over $2.65. The flurry soon
floor. Doubts about the durability of the new exchange
abated, however, as the United States Congress acted on
rates quickly surfaced, and by mid-January most other
the gold bill, short-term interest rates in this country began
major European currencies were bid up toward, or even
to firm, and, following the March central bank meeting in
course, much larger. All market sales of foreign currencies,
action with that institution. In May, swap debt in Belgian
above, their central rates. At the same time it became clear
either from balances or from small swap drawings, were
Basle, it was made clear that there was continuing firm
francs was reduced by a $20 million repayment to $470
fully covered by market purchases as the dollar strengthened
that the EC countries were approaching agreement on
support for the Smithsonian agreement. Sterling, in partic-
million equivalent. Finally, in August, new drawings of
on the exchanges.
narrowing the margin of fluctuation between their curren-
ular, fell back sharply, especially after the release of British
$10.2 million equivalent were made on the Belgian swap
As noted in the preceding report in this series, Federal
cies and that the United Kingdom probably would
trade figures showing a swing into deficit in February. Thus,
line, but these were fully liquidated by early September.
Reserve swap debt, which had reached a peak of $3,045
participate in the arrangements. Consequently, sterling
by the time the British budget was presented on March 21,
In March and July of this year, the United States Trea-
million on August 13, 1971, had been reduced to $2,855
was bid up into line with the Continental currencies, rising
sterling was down to the $2.61 level once again. The budget,
sury redeemed in two equal instalments a $153 million
million by the end of last year. Since then, further
by 4 cents to more than $2.59 before leveling off. In early
which was expansionary, stressed the need for combating
equivalent German mark-denominated note that had been
net repayments of $1,085 million have brought down the
February, following a further decline in Euro-dollar rates
the sluggish trend in the domestic economy and the persis-
issued to the Bundesbank under the 1967 military offset
total outstanding debt to $1,770 million (see Table II), a
relative to money market rates in London, the pound
tent high level of unemployment. In addition, there was a
agreement with Germany (see Table IV). Other foreign-
reduction of nearly 40 percent from the August 1971
currency-denominated securities were renewed at maturity.
peak. The bulk of such debt repayments during the period
As of September 8, outstanding United States Treasury
under review was accounted for by liquidation of the
foreign-currency-denominated securities amounted to $2.0
remaining $715 million of an original $750 million draw-
billion equivalent.
ing on the Bank of England. The sterling needed for such
Table III
repayments was acquired in regular purchases during
DRAWINGS AND REPAYMENTS BY FOREIGN CENTRAL BANKS
STERLING
AND THE BANK FOR INTERNATIONAL SETTLEMENTS
June, July, and early August, both through the market
UNDER RECIPROCAL CURRENCY ARRANGEMENTS
and in direct transactions with the Bank of England, plus
In 1971 the United Kingdom had recorded a large pay-
In millions of dollars
a sizable direct purchase from the United States Treasury
ments surplus, with a substantial gain in official reserves.
Drawings (+) or repayments (-)
of sterling previously acquired in a United States Govern-
Meanwhile, however, the British economy had become
Drawings on
Drawings on
ment drawing on the International Monetary Fund (IMF).
afflicted by a wage and price spiral which threatened to
Banks drawing on
Federal Reserve
1972
Federal Reserve
Federal Reserve System
System outstanding
System outstanding
In June, $300 million of swap debt to the Swiss National
weaken its competitive position in world markets. More-
on January 1, 1972
on August 31, 1972
I
II
July 1-August 31
Bank was repaid through a direct purchase of $250 mil-
over, a significant proportion of the 1971 reserve gain re-
lion of Swiss francs from the National Bank, supplemented
flected hot money inflows that could be reversed in short
Bank for International Settlements (against German marks)
(+8.0
+6.0
(+1.0
by Federal Reserve purchases of Swiss francs in the mar-
order. Consequently, at the Smithsonian meeting the United
(-8.0
-6.0
(-1.0
ket. In July, the remaining $50 million of swap debt due
Kingdom maintained sterling's gold parity, thereby limiting
Total
(+8.0
(+6.0
(+1.0
to the Bundesbank was liquidated through a direct trans-
the appreciation of sterling against the dollar to the 8.57
-8.0
1-6.0
(-1.0
214
MONTHLY REVIEW, SEPTEMBER 1972
FEDERAL RESERVE BANK OF NEW YORK
215
Chart
formally began its participation in the EC narrower band
sterling was pushed down to as low as $2.561/2 against the
drawal on the same day of the Continental central banks
UNITED KINGDOM
arrangement that had been put into effect one week earlier.
dollar, even as EC central banks continued their massive
from their respective markets, gravely weakened confi-
MOVEMENTS IN EXCHANGE RATE AND OFFICIAL RESERVES*
There was little reaction in the market, however, as
Millions of dollars
support effort to maintain the 21/4 percent band among
dence in the durability of the Smithsonian agreement and
Percent
1500
Changes in
sterling had been holding well within the 21/4 percent
their own currencies. In sum, over the six trading days June
the EC intervention arrangements. On Monday, June 26,
reserves
1000
-Scale
band for some two months.
15-22, such support amounted to $2.6 billion equivalent,
however, the EC Finance Ministers agreed in Luxembourg
Spot sterling remained fairly steady through most of
500
financed by exchange transactions with the Bank of Eng-
to continue to defend the Smithsonian rates and to retain
2
May. Nevertheless, an increasingly pessimistic atmosphere
XW
land which were to be liquidated by the end of July.
the narrower EC band arrangements, while the pound
0
Middle
rate
was developing in the market, as price and wage inflation
Early on the morning of Friday, June 23, with no end
continued to float.
-500
2
and the continuing series of labor disputes threatened
to the reserve losses in sight, the British authorities an-
On June 27, when London was the only major Euro-
to cut further into Britain's competitiveness in world
nounced:
pean foreign exchange market to resume normal oper-
-1000
4
markets. The trade deficits, which had appeared in Febru-
Exchange rate
ations, the sterling rate dropped almost to $2.47, but a
-1500
changes
-6
ary and had continued in March and April, were taken as a
Scale—
H.M. Government has decided that, as a tempo-
sharp squeeze for balances developed later in the day as
-2000
-8
sign that the huge current-account surplus of the past three
rary measure, sterling will be allowed to float. This
deliveries on earlier sales contracts had to be met, and
years was already being eroded and might soon be erased.
means that for the time being the market rate for
the spot rate temporarily rebounded to $2.513/4. Once the
-2500
10
Market pessimism first showed through in a widening of
sterling will not necessarily be confined within an-
squeeze for balances had passed, sterling dropped off
-3000
12
J
A
S
O
N
D
J
F
M
A
M
J
J
A
S
discounts on forward sterling late in May, and in early June
nounced limits either in respect of the U.S. dollar or
steadily, by a penny or two a day over the course of the
1971
1972
*In this and the following currency charts, movements in exchange rates are
spot sterling began to soften as well. The pound was still
in respect of EEC currencies.
next week, to as low as $2.411/4 on July 4 in London. At
measured as percentage deviations of weekly averages of New York noon
trading above the middle rate for the dollar but had
offered rates from the middle or central rates established under the
It is the Government's intention to return as soon
that point, commercial demand reappeared and the rate
Smithsonian agreement. Changes in reserves are computed from the
fallen close to the bottom of the EC band.
as conditions permit to the maintenance of normal
recovered to around $2.45. The revival of commercial
figures published in the International Monetary Fund' International Financial
Statistics and, as such, reflect for December 1971 not only actual movements in
On June 8, the release of first-quarter balance-of-
IMF margins round parity and participation in the
demand was underscored by the release of trade figures
reserve assets but also the revaluation, on the basis of the Smithsonian
agreement, of assets other than dollars. Changes for January 1972 include
payments statistics for the United Kingdom, showing a
special EEC currency arrangements.
for June, which had swung back into surplus and con-
this year's allocations of special drawing rights (SDRs).
sharp drop in Britain's current-account surplus, seemed to
Upper and lower intervention limits established in December 1971.
firmed that in fact the United Kingdom was still in current-
confirm market fears about the pound's prospects, and
At the same time, the London market was closed through
account surplus. Moreover, the continuing money market
sterling came on offer, with traders beginning to switch
the following Monday and most of the exchange controls
squeeze in London tended to support sterling in the ex-
into German marks, Swiss francs, and Dutch guilders.
applying to nonsterling-area countries were extended to
changes. Even so, new troubles on the labor front, cul-
Then, on June 15, out of a growing morass of legal and
the overseas-sterling-area countries other than the Repub-
minating in a dock strike beginning on July 21, had a dis-
jurisdictional controversies on the labor front, a wildcat
lic of Ireland.
turbing influence on the sterling market, occasionally
modest relaxation of exchange controls, primarily for capi-
dock strike triggered a new selling wave of both forward
The floating of the pound, and the subsequent with-
pulling the rate down sharply. Over the remainder of July,
tal outflows to the EC and candidate countries, and British
and spot sterling. With spot sterling now at the bottom of
firms controlled by residents of those nations were allowed
the EC band, the Bank of England and several Common
to raise unlimited sterling finance for their operations in the
Market central banks were obliged to intervene heavily
United Kingdom. Following the budget announcement,
in support of the pound against EC currencies. As the
forward sterling softened somewhat but, reflecting the gen-
pound dipped to $2.58½ against the dollar on June 16,
Table IV
eral pressure against the dollar, spot sterling rose close to
it tended to pull the whole band down vis-à-vis the dollar,
UNITED STATES TREASURY SECURITIES
$2.62 by the end of March.
thereby making the Continental currencies appear rela-
FOREIGN CURRENCY SERIES
In April the sterling market was reasonably well bal-
tively cheap.
In millions of dollars equivalent
anced, with the spot rate fluctuating around $2.61. On
Meanwhile, sterling's prospects had become a subject
Redemptions (-)
April 28 the United Kingdom discharged the remainder
of general debate in the United Kingdom, especially
Amount
Amount
of its debt to the IMF, thereby reconstituting its full draw-
against the background of Chancellor of the Exchequer
Issued to
outstanding on
1972
outstanding on
January 1, 1972
September 8, 1972
ing rights with the Fund for the first time since December
Barber's statement in the March budget address that "the
I
II
July 1-September 8
1964. The repayment required the cooperation of a number
lesson of the international balance-of-payments upsets of
of countries. Under the arrangement that was worked out,
the last few years is that it is neither necessary nor desir-
German Federal Bank
612.0
-76.5
-76.5
459.0
the United States Treasury drew SDR200 million equivalent
able to distort domestic economies to an unacceptable
of sterling from the IMF, thereby reducing the United
extent in order to maintain unrealistic exchange rates,
German banks
153.0
153.0
Kingdom's repurchase obligation by a corresponding
whether they are too high or too low". In Parliamentary
Swiss National Bank
1,215.4
1,218.3
amount to SDR950 million. The United Kingdom, in turn,
debate on June 19, an opposition spokesman stated that
discharged this residual commitment with SDR500 million
he did not see how a devaluation could be delayed beyond
Bank for International Settlements*
164.8
170.9
equivalent of currencies acquired from third countries
July or August of this year. Over the next three days, enor-
against dollars, with SDR50 million of gold and SDRs
mous amounts of sterling were dumped on the exchanges.
Total
2,145.2
-76.5
-0-
-76.5
2,001.2
purchased from Canada, and with SDR400 million out of
Forward sterling was driven to deep discounts (as much as
British reserves. Then, on May 1, the United Kingdom
15 percent per annum on one-month deliveries), and spot
Note: Discrepancies in totals result from valuation adjustments and from rounding.
Denominated in Swiss francs.
216
MONTHLY REVIEW, SEPTEMBER 1972
FEDERAL RESERVE BANK OF NEW YORK
217
sterling traded in the $2.44-$2.45 range. On July 31, the
lier in 1971 were removed, but the government announced
denominated bonds.
Chart
United Kingdom settled its debts in connection with the
that it would not avail itself for the time being of its new
GERMANY
The exchange markets were in better balance in May,
defense of sterling in June, utilizing $1,150 million of
power to impose deposit requirements of up to 50 percent
MOVEMENTS IN EXCHANGE RATE AND OFFICIAL RESERVES*
but the general uneasiness over the international monetary
funds previously swapped out under special arrangements,
against German firms' borrowings abroad. When exchange
Millions of dollars
Percent
3000
situation showed through on a number of occasions. Such
$634 million equivalent drawn under the United Kingdom's
trading was resumed, the mark settled well below its new
events as the intensification of the Vietnam war early in the
2500
IMF gold tranche position, and $823 million from reserves
central rate. Except for some modest outflows toward the
month and Treasury Secretary Connally's resignation to-
which at the end of July still amounted to $6,082 million
year-end, there was no significant reversal of the huge
2000
Changes
ward midmonth brought forth a spate of market and press
in reserves
(inclusive of Britain's remaining $126 million IMF gold
speculative positions in marks that had been built up over
1500
commentary on their ultimate significance for the monetary
tranche position).
the course of 1971.
system. Comments to the press by officials from either side
1000
4
Meanwhile, as sterling began to decline sharply against
Early in 1972 doubts began to spread in the exchange
III
of the Atlantic, or even rumors of what they might have
the dollar in mid-June, this Bank, acting in close
markets that a durable settlement of the international mon-
500
2
said, were closely scrutinized for any hint of further moves
consultation with the Bank of England, began to buy ster-
etary crisis really had been achieved. Moreover, many
Central
0
to be made on the international monetary front. Thus, sev-
rate
ling in the New York market to repay the Federal Re-
Europeans were expressing concern over the further de-
eral times in May the German mark was bid up sharply in
-500
2
serve's remaining swap commitment. By the end of June
cline taking place in the United States interest rates. With
the exchanges, pulling several other European currencies
the System had been able to reduce its swap commitment
the press and the markets focusing more and more on
-4
along with it. These bursts of demand were short-lived,
by another $52 million to $663 million equivalent. After
these issues, the atmosphere deteriorated progressively
Exchange rate
-6
however, and each time the spot rate quickly retreated.
changes
sterling was floated, the United States Treasury periodi-
over the early weeks of the new year, and almost any news
Scale
The mark was trading quietly around $0.3150 in early
-8
cally bought sterling on days when the rate was declining
item or rumor was seized upon as a reason for additional
June, when swiftly moving events in the sterling market
10
in New York and by mid-July had purchased a total of
selling of dollars. Funds were shifted into Germany partic-
J
A
S
O
Z
D
J
F
M
A
M
J
J
A
S
sent shock waves into other markets as well. The rush
1971
1972
$41.5 million equivalent. At that point the Federal Re-
ularly, and in heavy demand the spot mark rose through
*See footnote on Chart
out of sterling was directed mainly toward the mark, which
serve, in order to repay the remainder of its swap commit-
the new central rate by mid-January. Further waves of
Upper and lower intervention limits established in December 1971.
rose sharply against the dollar. By June 16, sterling had
ment in sterling, initiated a program of daily purchases of
nervousness swept through the foreign exchange markets
fallen to its intervention point against the mark under the
sterling, mainly on a direct basis from the Bank of England
in February. Each time the mark rate was bid up sharply,
EC arrangements and both the Bundesbank and the Bank
but also in the market. These purchases, together with ster-
and the pressures eased only after forceful intervention by
of England had to intervene massively (selling marks
ling acquired from the United States Treasury, including
the Bundesbank. Then, late in February, the German
against sterling) to keep the spread between their two cur-
the pounds drawn by the Treasury at the time of the
authorities announced new measures designed to lessen the
month that on April 24 the EC would implement its nar-
rencies from widening beyond 2½ percent. This heavy
British IMF repayment in April, enabled the System to
inflow of funds and to defend the Washington agreement.
rower trading band arrangement (the "snake in the
injection of marks into the exchanges tended to pull the
reduce its swap commitment by $405 million equivalent to
These included cuts in the Bundesbank's discount and
tunnel").
mark down against the dollar, and the rate dropped to
$258 million as of July 31. The program of daily pur-
Lombard rates and a hike in the marginal reserve require-
By that time, and indeed throughout the second quar-
$0.3131 by June 22.
chases continued through early August, and by August 14
ment against nonresident liabilities. More importantly, the
ter, Germany's international payments position was under-
When the British authorities announced the floating of
the Federal Reserve had acquired sufficient sterling to
Ministry of Economics and Finance imposed a 40 percent
going a substantial readjustment. The domestic economy
the pound on Friday, June 23, thereby dropping out of
liquidate the remainder of its original swap commitment of
deposit requirement (Bardepot) on most foreign borrow-
had leveled off, but wage and price pressures remained
the Smithsonian and EC agreements, traders immediately
$750 million.
ings of nonbanking enterprises, retroactive to January 1,
strong in Germany and the rise of the mark rate over the
began shifting funds out of dollars and into other European
Buoyed by a tight domestic money market and con-
moving for the first time to curb German corporate bor-
course of the previous year was beginning to exert an
currencies as they feared a general abandonment of the
tinuing commercial demand, sterling rose early in August
rowings abroad. Following the announcement of these
influence on the German trade balance. Thus the trade
Smithsonian rates. As a result, the Bundesbank was
to trade above $2.45. Announcement of an end to the
measures, the spot rate declined to almost 1½ percent
surplus, which had swelled to substantial proportions to-
flooded with nearly $900 million within the first hour of
dock strike and release of a second consecutive trade sur-
below its upper limit by late February. Over the month as
ward the end of 1971 and through the early months of
trading, after which it suspended operations and closed
plus gave additional support to the spot rate toward mid-
a whole, however, German official reserves had increased
1972, showed a decline in March and subsequent months.
the exchange market. In trading later that day and on
month. Subsequently, the squeeze for balances eased, with
by $744 million.
Coupled with a further deterioration in service items and
Monday, June 26, in New York, the spot mark jumped
British short-term interest rates declining abruptly, and
The demand for marks soon built up again in early
transfer payments, this moved the full current account
15 points above its Smithsonian ceiling. Following the EC
spot sterling edged to below the $2.45 level in early
March, and the mark was driven up almost to its Smith-
from surplus to rough balance.
Finance Ministers' decision on June 26 to continue to de-
September.
sonian ceiling in reaction to the growing press discussion
The continuing strength of the mark during the spring
fend the Smithsonian limits and to maintain the EC band,
of a possible concerted European response to the con-
reflected, therefore, an increasingly heavy influx of capital.
the German authorities announced they would reopen their
GERMAN MARK
tinued influx of dollars-through either the introduction
These inflows were mainly generated by the market's ex-
foreign exchange markets on Wednesday, June 28.
of controls or a joint float against the dollar. Following
pectation that there might be a further rise in the value
When normal trading resumed that day, the spot mark
Following the Smithsonian agreement, the German au-
encouraging reports of the Basle meeting of central bank-
of mark-denominated instruments. At the same time, more-
traded just below its ceiling, but marks for future delivery
thorities established a new central rate for the mark of
ers on the weekend of March 11-12 and indications that
over, German corporations continued to seek funds abroad
were quoted at large premiums. The next day the German
$0.31031/8, an effective appreciation of 13.58 percent
United States short-term interest rates were beginning to
through a variety of means. To avoid the Bardepot, the
government moved to back up the decision to support the
against the dollar, and set margins at $0.30347/8 and
firm, the mark backed off somewhat and traded around
corporations ran down their foreign market borrowings by
existing international exchange agreements by announcing
$0.31745/8 on either side of the central rate. None of the
the $0.3150 level. The mark held at this level well into
$1.3 billion in March and April but at the same time were
a series of measures to tighten controls. The Bardepot re-
restraints against inflows of foreign funds introduced ear-
April, with little reaction to the announcement early that
able to sell to foreigners a substantial volume of mark-
quirement was raised from 40 percent to 50 percent and
218
MONTHLY REVIEW, SEPTEMBER 1972
FEDERAL RESERVE BANK OF NEW YORK
219
was applied to a wider range of borrowings. Sales of do-
the need for par values. The reports out of London gave
scrambled to buy marks in the exchanges, setting off a sharp
pushed the franc up to as high as the central rate. At that
mestic fixed-income securities to nonresidents were made
pause to the markets, and the demand for marks let up
rise in the mark rate before the banks' liquidity needs were
time, in view of the continuing inflows from abroad, the
subject to the prior approval of the authorities, to be ad-
over the two days of the meeting. The huge technical posi-
met. When the July trade figures for the United States
Swiss National Bank instituted a requirement that 25
ministered restrictively. The Bundesbank again raised its
tions built up over previous days and weeks, short of dollars
showing a narrowing of the trade deficit were announced
percent of the proceeds of foreign bond issues in Switzerland
reserve requirements against the banks' foreign liabilities,
and long of marks and other currencies, nevertheless
on August 24, however, the mark eased once again.
(which were running at more than twice their volume of a
so that in effect reserves totaling between 90 percent and
remained intact.
In other operations during the period under review,
year earlier) had to be converted into dollars by the central
100 percent would be required against any additional for-
By Wednesday, July 19, the mark had edged slightly
the United States authorities, under agreements with the
bank at the franc's lower intervention limit. Another wave
eign liabilities of the banks. Finally, domestic reserve
away from its ceiling and eased further after New York
German Bundesbank, were able to liquidate certain Ger-
of demand for francs developed in early March when, in the
requirements were hiked to absorb the liquidity generated
opened that morning, to around $0.3160 by 11 o'clock.
man mark obligations entered into prior to the floating of
general strengthening of European currencies, the Swiss
by inflows of the nonbanking sector. This increase in do-
Shortly thereafter, on the basis of a United States Govern-
the mark in May 1971. In March and July the United
franc was rapidly bid up to some 1 percent above the central
mestic liquidity reflected the fact that Germany's official
ment policy decision, the Federal Reserve Bank of New
States Treasury purchased sufficient marks from the Bun-
rate. The tensions in the foreign exchanges eased abruptly at
reserves, which had risen by $121 million in April and
York placed large offerings of marks in the New York
desbank to redeem in two payments a $153 million mark-
that point, however, and the franc rate fell back sharply.
May, had been swelled by a further $2,763 million in June,
market. These offers were for System account, with marks
denominated note. Moreover, on July 24, the Federal
Since domestic liquidity remained extremely abundant in
largely as a result of the intervention to support both ster-
made available by the United States Treasury on a swap
Reserve liquidated its remaining $50 million equivalent
Switzerland, the decline was steeper in the Swiss franc
ling and the dollar.
basis. Such unexpected intervention generated an immedi-
mark swap commitment, also purchasing marks directly
market than elsewhere on the Continent, and after mid-
The tightening of controls by the German authorities
ate market reaction, and traders quickly moved their mark
from the Bundesbank. This repayment placed the $1
March the spot rate was again below the central rate.
did not immediately allay market anxieties and, in the
quotations down. As the market backed away, the Federal
billion swap arrangement with the Bundesbank on a fully
On April 5 the Swiss National Bank and the Swiss
generalized pessimism over the future of the Smithsonian
Reserve's offering rate was subsequently lowered several
standby basis, and no new drawings have been made.
Bankers Association agreed on two measures to mop up
agreement, traders hastened to shift even more funds into
times. The operation generated considerable market com-
some of the excess domestic liquidity. First, marginal re-
Germany ahead of the possible imposition of additional
ment and, in response to press inquiries, Chairman Burns
SWISS FRANC
serve requirements ranging up to 20 percent were intro-
controls. Consequently, the mark was in heavy demand
confirmed the System's intervention in marks, adding that
duced against the growth in the banks' domestic liabilities
early in July and the Bundesbank was obliged to absorb
such intervention would continue on whatever scale and
Under the Smithsonian agreement the Swiss authorities
since July 31, 1971. Second, the already existing 100 per-
dollars on a large scale. The buying of marks, and of most
whenever it was deemed desirable. The following morning
fixed a central rate for the franc of $0.2604½-in effect,
cent reserve requirement against increases in the banks'
major European currencies, continued until the Swiss
in Germany, with the market fully alerted to the news of the
an increase of 6.36 percent against the dollar from the
net foreign liabilities was considerably tightened through
authorities relieved some of the uncertainties by taking
United States initiative, the spot mark fell further, reaching
franc's previous parity and of 13.88 percent from the
a more restrictive interpretation, even though the required
forceful defensive measures of their own on July 4 and 5.
$0.3152 (some 3/4 percent below the upper limit) by the
parity in force prior to Switzerland's revaluation on May
ratio was halved. At first, there was little reaction to these
The Bundesbank then intensified its efforts to tighten up
time the New York market opened. The Federal Reserve
10, 1971-and announced their new intervention points,
measures in the Swiss franc market and the spot rate held
the Bardepot and also asked banks to enter into a
followed up with a further offering of marks out of previ-
21/4 percent on either side of the central rate. Actual
fairly steady. But, as the market came to appreciate the
gentlemen's agreement neither to sell assets out of their
ously accumulated System balances. Over succeeding days,
trading conditions were little changed, however, since the
possible consequences of the restriction on the banks' net
own portfolios to nonresidents nor to arrange or guarantee
with additional favorable press and market commentary
banks had been allowed to deal throughout and because
foreign currency positions, the franc weakened.
any sizable foreign credits to residents. In addition, the
on the Federal Reserve initiative, the mark rate continued
the restrictions imposed the preceding August remained in
Late in April the Swiss banks began to transfer funds
Bundesbank once again boosted its minimum reserve
to decline. This tendency persisted into early August, with
effect. Increases in the banks' net foreign liabilities over
to the National Bank under the terms of the tightened re-
requirements against domestic liabilities to mop up the li-
some unwinding of speculative positions, and the rate
the July 31, 1971 levels continued to be subject to a 100
serve requirement against increases in net liabilities to
quidity flowing directly into German corporations.
settled temporarily around $0.3140.
percent reserve requirement, and interest payments on
foreigners. An alternative for the banks was to reduce
These various measures helped settle the markets briefly,
By midmonth a more favorable atmosphere developed
nonresidents' deposits made after July 31 were still pro-
their net external liability positions by purchasing dollars
but a new rush into marks and other currencies soon
for the dollar, following the release of improved United
hibited. In the wake of the Smithsonian agreement there
from the National Bank, and on May 2 the National Bank
developed in the week prior to the scheduled July 17-18
States balance-of-payments figures for the second quarter
were modest outflows from Switzerland, and the franc
sold $150 million at the rate of $0.25771/4 (SF3.88)
London meeting of EC Finance Ministers. With the atmo-
and indications of new efforts by the United States to
gradually began to ease toward the new floor of
for this purpose. The following day the National Bank an-
sphere still tense following the floating of the pound, there
negotiate a settlement of the Vietnam conflict. In addition,
$0.25463/4. There was no substantial unwinding of specu-
nounced that it would henceforth be prepared to sell dol-
were reports in the European press suggesting that the
the various measures taken by the German authorities in
lative positions, however, and the Swiss banks remained
lars at this higher rate, rather than at the official lower
EC Finance Ministers would plan a joint float of their
July were beginning to bite. Consequently, the mark rate
highly liquid as the year-end approached.
intervention point of $0.25463/4, thereby reducing the ef-
currencies against the dollar, rather than stick to their
dropped further, reaching $0.3134 on August 16, and the
Early in January, with the current account of Switzer-
fective range of fluctuation of the Swiss franc. In a parallel
announced agenda. The market seized upon these reports
Federal Reserve again sold marks to consolidate the dollar's
land's balance of payments continuing in small surplus
move, it lifted to the same level the exchange rate for con-
to mount a new drive out of the dollar and into the
improvement. These sales brought to $21.4 million equiva-
and the markets hesitant in the face of the many monetary
versions of foreign bond proceeds raised in Switzerland,
mark and other European currencies. With the mark
lent the total of marks sold in market operations.
issues still to be resolved, the franc rate remained slightly
while increasing to 40 percent from 25 percent the share of
pushed once again to its upper limit, the Bundesbank had
The shift in sentiment in favor of the dollar continued,
above the floor, even as domestic monetary conditions
such proceeds that had to be converted at the central bank.
to absorb some $1.1 billion over the two days of July
pushing the mark rate to $0.31261/4 on August 21. On the
eased further. By midmonth the market was already begin-
These measures had no direct impact on the market but,
13-14. On Monday, July 17, the EC Ministers in London
next day, however, German commercial banks reportedly
ning to question the durability of the exchange rate
over succeeding weeks, resulted in a further decline in the
made clear their determination to maintain the Smith-
found themselves short of liquidity to meet their reserve
realignment, and the spot franc rose along with other
National Bank's dollar holdings.
sonian exchange rate structure and emerged with a general
requirements through the end of August. A squeeze devel-
European currencies. Over succeeding weeks, as traders
The nervousness that broke out in the exchanges at the
agreement on longer term monetary questions, including
oped in the Frankfurt money market, and the banks
grew increasingly jittery, several rounds of heavy buying
beginning of the second week of May pushed the franc
220
MONTHLY REVIEW, SEPTEMBER 1972
FEDERAL RESERVE BANK OF NEW YORK
221
somewhat higher, but there was never any severe pressure
own interpretation of Mr. Volcker's response to questions
be imposed if the inflow of funds became too large. Never-
be set at $0.022313, an effective revaluation of 2.76 per-
and the spot rate soon receded, declining until the mid-
and that the Under Secretary had in fact strongly sup-
theless, there was a heavy demand for francs, and the
cent against gold and a total appreciation of 11.57 per-
dle of that month. Trading in francs then turned quiet,
ported the Smithsonian alignment, the market did not
bank was forced to intervene at the upper intervention
cent against the dollar. New intervention points were es-
with the rate about 3/4 percent under the central rate and
immediately recover from the initial adverse reaction, and
limit. The Swiss authorities moved promptly, therefore, to
tablished at 2½ percent above and below the central rate.
well below the EC currencies. Taking advantage of the
the franc swung widely around the central rate over the
impose a quarterly 2 percent tax on any portion of foreign
At the same time, Belgium and the Netherlands (which ap-
relatively weak exchange rate, the Federal Reserve, with
subsequent days.
deposits with Swiss banks in excess of the balances held
preciated the guilder by the same percentage against the
the agreement of the Swiss National Bank, initiated a pro-
This misunderstanding was the first of a series of dis-
on June 30, 1972. In addition, they extended the prohibi-
dollar) decided to maintain the close link between their
gram of moderate purchases of Swiss francs in the market
quieting developments to hit the exchange markets in
tion of interest payments on nonresident deposits made
currencies by continuing to intervene when necessary to
to make a start on covering the System's swap commit-
rapid succession in the late spring, and the Swiss franc be-
after July 31, 1971 to all banks (this ban had previously
keep the rate between the franc and the guilder within a
ments in that currency-$1 billion equivalent to the Swiss
came increasingly subject to speculative pressures. Early
applied only to deposits with the larger banks), prohibited
1.5 percent spread. Moreover, the Belgian authorities
National Bank and $600 million to the BIS. By early June,
in June, free-market gold prices-which had already ad-
all banks from having net foreign exchange liability posi-
maintained the two-tier market structure, with only cur-
such Federal Reserve purchases were sufficient, together
vanced sharply the preceding month-surged in a strong
tions (including forward positions) at the close of business
rent transactions going through the official market. When
with $250 million of francs bought directly from the Swiss
speculative outburst on rumors of an increase in the offi-
on any day, subjected borrowings abroad by Swiss citizens
the Brussels exchange market was reopened on December
National Bank to replenish its dollar balances, to enable
cial price of gold. In response, the Swiss franc rose
and corporations to the prior approval of the Swiss National
21, the Belgian franc was quoted well above the new floor
the Federal Reserve to make swap repayments totaling
rapidly, moving through its $0.26041/8 central rate.
Bank, and placed on a legal basis the previous gentlemen's
and rose gradually thereafter. By the year-end, when Euro-
$300 million equivalent to that bank. The System's Swiss
Later in the month, the fever in the gold markets
agreement establishing the marginal reserve requirements
dollar quotations fell below comparable Belgian domestic
franc swap indebtedness to the National Bank was thereby
abated and the Swiss banks' concerns over their midyear
against banks' net foreign liabilities. This barrage of mea-
interest yields, the franc reached the new central rate.
reduced to $700 million, while the additional $600 million
liquidity positions were eased by the willingness of the
sures halted the inflows, and the Swiss franc fell away from
Early in 1972, the Belgian franc joined other currencies
equivalent Swiss franc drawing on the BIS remained out-
National Bank to extend assistance through short-term
its upper limit, reaching as low as $0.2647 on July 5.
in rising sharply against the dollar, and by February the
standing.
swaps. (In fact, it granted a total of $923 million in swaps
As the July 17-18 meeting of the EC Finance Ministers
National Bank had begun to take in dollars, both on a
Late in May the Swiss National Bank's sustained efforts
over the midyear period.) Nevertheless, demand for Swiss
approached, the Swiss franc again came into extremely
swap and an outright basis. Moreover, in the separate mar-
to absorb domestic liquidity began to take hold and the
francs began to pick up, as funds were switched out of
heavy demand, and the National Bank had to absorb just
ket for financial francs, quotations had risen to a significant
Swiss franc strengthened. On May 30, an erroneous press
sterling on a progressively heavier scale. Since Switzer-
over $1 billion. Once the meeting got under way, however,
premium over the commercial rate. To a large extent, the
report from Switzerland to the effect that Under Secretary
land is not a party to the EC currency arrangements, the
the market concluded that the anticipated joint EC float
run-up of the franc reflected relatively high interest rates in
Volcker had not absolutely ruled out the possibility of
franc rate was not pulled downward, as were many other
against the dollar probably would not materialize, and buy-
Belgium, as well as market fears over the prospects for the
another dollar devaluation set off a particularly sharp
Continental currencies, by the rapid drop of sterling vis-
ing pressure on the franc tapered off. When the meeting
Smithsonian agreement. For its part, the National Bank
reaction in the Swiss franc market. In heavy trading, the
à-vis the dollar. Instead, the spot franc was propelled
ended in a reaffirmation of official intent to defend the
cut its lending rates three times between the first of the
rate surged by ¼ percent within half an hour. Although
upward by speculative positioning to $0.2653 by June 22.
Smithsonian parities, some offerings of Swiss francs against
year and early March, with the discount rate reduced from
the wire service later admitted that it had transmitted its
Following the floating of the pound on June 23, the
dollars developed and the franc rate fell rapidly away from
5½ percent to 4 percent in ½ percent steps, but these ac-
Swiss National Bank announced that it would not inter-
its $0.26641/8 ceiling. The downward movement was accel-
tions served merely to bring Belgian rates down into line
vene in the foreign exchange market until further notice.
erated by the news of the United States authorities' reentry
with comparable rates in other centers. At the same time,
The Swiss banks were still free to trade, however, and the
into the exchanges on July 19 and by the favorable response
economic activity was only gradually recovering from a
franc immediately rose above its ceiling. On June 26 the
that action received. The franc reached as low as $0.2641
slow-down and Belgium's current-account surplus remained
Chart III
Swiss authorities took new and more drastic measures to
before leveling off. On July 21, in order to absorb part of
large. Once the spot rate began to rise, fears of a possible
SWITZERLAND
MOVEMENTS IN EXCHANGE RATE AND OFFICIAL RESERVES*
limit the inflow of foreign capital, this time banning the
the franc liquidity resulting from the heavy mid-July in-
further advance led to a buildup of leads and lags in trade
Millions of dollars
Percent
sale to foreign investors of domestic securities, foreign
flows, the National Bank raised its marginal reserve require-
payments, which in turn generated additional demand in
2500
securities denominated in Swiss francs, and mortgages on
ments against increases in the banks' domestic and foreign
both spot and forward markets for commercial francs.
2000
Changes
in reserves
land and also prohibiting all sales of Swiss real estate to
liabilities.
Early in March, when there was widespread discussion
Scale
1500
nonresidents. Following these steps, the franc rate moved
The Swiss franc market, no longer fueled by a rapid
of a possible common EC response to growing dollar in-
back down toward its official ceiling. When other Conti-
1000
succession of speculative rumors, then turned very quiet.
4
flows, either through a joint float of their currencies or
nental central banks reopened for business on June 28,
In mid-August, when sentiment toward the dollar improved
through administrative controls to bar these inflows, there
500
2
however, the National Bank stayed out of the market to
in response to the Federal Reserve's continuing market in-
was a jump in demand for several currencies, and the Na-
0
Central
assess the situation further, and the franc continued to
rate
tervention and release of improved second-quarter United
tional Bank of Belgium again had to take in dollars at the
trade erratically above the upper limit in a thin market
2
States balance-of-payments figures, the Swiss franc fol-
Smithsonian ceiling. On March 9, in an effort to discourage
-500
through the month end. During this period, the Federal
lowed the German mark downward. By early September,
short-term capital inflows, the authorities instructed the
-1000
4
Exchange rate
Reserve sold out of balances small amounts of francs in
the spot rate was fluctuating around the $0.2645 level.
banks to avoid any further buildup in their spot liabilities
changes
Scale
-6
the New York market, with most of the proceeds used to
to foreigners without a corresponding increase in their spot
8
purchase German marks.
BELGIAN FRANC
foreign assets. This tended to stem the tide for the time
J
A
S
O
N
D
J
F
M
A
M
J
J
A
S
1971
1972
When the National Bank resumed operations on Mon-
being, and the franc rate backed away.
* See footnote on Chart
day, July 3, it warned that a negative interest rate penalty
Upper and lower intervention limits established in December 1971.
Following the Smithsonian meeting, the Belgian
With the Brussels money market now highly liquid,
on increases in nonresident deposits in Switzerland would
authorities announced that the franc's central rate would
and with incentives having opened up in favor of moving
222
MONTHLY REVIEW, SEPTEMBER 1972
FEDERAL RESERVE BANK OF NEW YORK
223
into Euro-dollars, the Belgian franc continued to decline
not only some decline of the franc rate but also some sympa-
tional liquidity to the Amsterdam money market, first by
Chart IV
through mid-April. The generally improved exchange mar-
thetic easing of other currency rates. To consolidate the
open market purchases of Dutch Treasury bills and
BELGIUM
ket atmosphere also encouraged some unwinding of the
MOVEMENTS IN EXCHANGE RATE AND OFFICIAL RESERVES*
gain, the Federal Reserve followed up with further offers
subsequently through exchange market swaps, and these
earlier leads and lags in favor of the franc. Nevertheless,
Millions of dollars
Percent
400
on subsequent days, but, with the market continuing to
operations relieved some of the upward pressure on the
Changes
the Belgian current account was still in surplus, and when
in reserves
back away, only a small amount of Belgian francs was sold.
spot rate. Nevertheless, just after midmonth a new wave of
200
Scale
2
the domestic money market turned tighter once again late
By August 14, the Belgian franc was clearly following the
exchange market uncertainty briefly pushed the spot
Central
in April while Euro-dollar rates declined, the Belgian franc
0
rate
general downtrend of other European currencies, so that no
guilder to the ceiling, and the Netherlands Bank had to
began to advance. This tendency continued through May,
-200
2
further offers were made. As had been agreed at the
absorb a modest amount of dollars. The market turned
when renewed nervousness in the exchanges led to a number
Exchange rate
inception of the operation, the Federal Reserve covered its
quieter through the end of February, and in view of the
of brief spurts in the Belgian franc rate. Late in May, when
changes
Scale
franc sales by drawing on its swap line with the National
further decline in interest rates abroad, effective March 2,
the Belgian government needed dollars for current pay-
-6
Bank. These drawings totaling $10.2 million equivalent
the Netherlands Bank cut its discount rate by ½ percent-
ments, the Federal Reserve purchased francs in a direct
-8
were repaid by early September, as improved conditions
age point to 4 percent.
transaction with the National Bank and, using these francs
10
permitted the Federal Reserve to acquire the needed francs
By early March, however, the debate in Europe over
as well as some balances on hand, repaid a total of $20
J
A
S
O
N
D
J
F
M
A
M
J
J
A
S
through market operations.
alternative means of dealing with dollar inflows was in
1971
1972
million equivalent of its swap debt to the National Bank.
See footnote on Chart
With the generally improved sentiment for the dollar, the
full swing, with a further extension of capital controls
The System's Belgian franc swap commitments were thereby
t Upper and lower intervention limits established in December 1971.
franc continued to decline on its own through the end of
appearing to be the most likely route. Consequently, there
reduced to $470 million, including $35 million equivalent
August, reaching as low as $0.022743 before steadying in
was an influx of funds into guilders by traders and
owed to the BIS.
early September. As of September 8, the Federal Reserve
investors who feared that new controls could render
When sterling came under speculative attack in mid-
swap drawings in Belgian francs remained at $470 million
the guilder more expensive or even unavailable for
June, the Belgian franc was initially pushed up to its upper
equivalent.
certain kinds of transactions later on. The heavy demand
limit against the dollar. Sterling soon dropped to its mid-
other currencies, the franc edged away from its upper
pushed up the guilder rate, although the Netherlands Bank
dle rate, and the spread within the EC band thus reached
limit. Nevertheless, although the German mark, the Dutch
DUTCH GUILDER
slowed the advance by entering into new swaps with its
the full 21/4 percent. Consequently, as pounds continued to
guilder, and the Swiss franc all declined fairly sharply over
banks. Then, on March 7, the EC countries reached the
be dumped on the markets, the National Bank of Belgium
subsequent days, the Belgian franc hovered close to its
At the conclusion of the Smithsonian meeting, the
decision to narrow the band of fluctuation between their
joined other EC central banks in the support effort, buying
upper limit. By late July it had moved back to its ceiling
Dutch government announced that the guilder would be
currencies, and the market took the view that the Com-
sterling with francs in the market and making francs avail-
and held there into early August, with the National Bank
revalued by 2.76 percent against gold, thus producing an
munity would now be in a better position to take common
able to the Bank of England for corresponding intervention
again absorbing dollars almost every day.
effective appreciation of the guilder of 11.57 percent rela-
action against dollar inflows-perhaps through a joint
in London. As the whole EC band was pulled down against
In part, the relative strength of the Belgian franc re-
tive to the dollar. New intervention limits were set at 2½
float. The demand for guilders thus swelled even further,
the dollar by the pressure on sterling, the franc dropped
flected the continuing current-account surplus. In addition,
percent on either side of the new central rate of $0.3082.
pushing the spot rate to its Smithsonian upper limit, and
to as low as $0.022537 on June 22, or 1.3 percent below
the Belgian authorities had worked out a gentlemen's
There was little outflow of funds from the Netherlands
over the course of three days the Netherlands Bank had to
the ceiling. The floating of the pound on June 23 released
agreement with the Belgian commercial banks to absorb
when the Amsterdam market was reopened on December
absorb $417 million. On March 9 the Netherlands Bank
the downward pressure on the EC band, and the franc
some of the domestic liquidity created by the earlier offi-
21 and, with the Dutch current account strengthening
moved to curb inflows from abroad by prohibiting non-
snapped back to its ceiling. After absorbing some dol-
cial purchases of sterling and dollars, and the banks made
against the background of sluggish domestic economic
residents from making new guilder time deposits or renew-
lars, the National Bank of Belgium quickly withdrew from
sizable deposits with the central bank at the end of July
activity, the guilder rate began to rise during late Decem-
ing such deposits when they mature and by banning the
the market along with the other Continental central banks
and during most of August. Finally, it was clear that the
ber and early January.
payment of interest on nonresidents' demand deposits. At
that had opened that morning. In the limited trading that
speculative buildup of the previous month had not been
With interest rates falling in foreign centers early in
the same time, the central bank restated its determination
followed, the franc rate immediately rose above its Smith-
unwound, and the longer the rate held at the ceiling the
January, the Netherlands Bank reduced all its lending
to maintain its Smithsonian buying and selling rates for
sonian ceiling. After the EC Finance Ministers met in
more entrenched became market expectations that the
rates by ½ percentage point, the discount rate being cut
dollars. Following these moves, the market turned much
Luxembourg on June 26 and made clear their intention
Belgian authorities might not be able to resolve the situa-
to 4½ percent. Domestic money market rates declined in
quieter and, as new inflows tapered off, the spot rate soon
of upholding both the Smithsonian and EC currency ar-
tion within the context of the Smithsonian agreement.
response, but the exchange rate did not follow suit, as
retreated from the ceiling.
rangements, the Belgian exchange market was reopened
In these circumstances, on August 10, following consul-
there were sizable new direct investment inflows and the
The Dutch money market was now extremely liquid as
on June 28. At first, the rate held just below its upper limit
tations with the National Bank of Belgium, the Federal
underlying Dutch payments position remained strong.
a result of the earlier heavy influx of funds, and the guilder
and there was no need for the Belgian authorities to inter-
Reserve initiated a probing action in the New York ex-
Even more important, the demand for guilders reflected
tended to drift downward through the second half of
vene.
change market to see whether some shift of expectations
the exchange market's growing concern over the viability
March and well into April, steadying only after dropping
The grave uncertainties left in the wake of the floating
could be generated that would pry the Belgian franc loose
of the exchange rate realignment negotiated in Washing-
below $0.3100 in mid-April. Thereafter, the guilder fol-
of the pound soon led to new demands for Continental
from its ceiling. As in the case of the operation in German
ton, and the rise of the guilder followed closely the
lowed the gradual updrift of the German mark and other
currencies, however, and along with other European cen-
marks in July, this Bank placed a large offer of Belgian
advance of other Continental currencies, particularly the
Continental currencies, and by early June was trading
tral banks the National Bank had to intervene heavily
francs in the market at the current rate. As the market
German mark. Consequently, the guilder rate was ratcheted
quietly around $0.3125.
in early July, particularly on July 13-14, just prior to the
backed away, the offer was subsequently moved down
upward in several stages in January and early February,
The guilder was then caught up in the rush out of sterling.
EC Finance Ministers' meeting in London. Reports from
and a moderate amount of francs was sold over the course
reaching almost to the upper intervention level. In
Although the guilder rate was bid up at first, the operation
that meeting tended to reassure the markets and, as with
of the day. On the following morning in Europe there was
February, the Dutch authorities moved to provide addi-
of the EC currency arrangements eventually resulted in a
MONTHLY REVIEW, SEPTEMBER 1972
FEDERAL RESERVE BANK OF NEW YORK
225
224
decline of the whole EC band vis-à-vis the dollar. As ster-
larger amounts of dollars. In sum, from the time of the
of the franc against the dollar, and profit taking brought the
cial ceiling, also eased. At first, the softening reflected a
ling weakened, it reached its support point against succes-
floating of sterling through July 17, the Netherlands Bank
rate under heavy selling pressure as soon as the Paris ex-
normal technical reaction to the preceding excessive sales
sive Community currencies. By June 22, the guilder too
took in $543 million at the Smithsonian ceiling.
change market was reopened on December 21. With leads
of dollars. In mid-March, however, there was a per-
was at the ceiling of the Community band (now well below
Demand pressures for Continental currencies abated
and lags beginning to be unwound, the French authorities
ceptible improvement in market atmosphere following
the Smithsonian upper limit against the dollar) and the
considerably when, during the course of the London
sold a considerable amount of dollars in the market as the
the regular central bank meeting in Basle, Switzerland,
Netherlands Bank was obliged to buy sterling with guilders.
meeting, the EC Finance Ministers reaffirmed their deter-
spot franc edged downward almost to its new floor. Selling
Secretary Connally's indication of willingness to discuss the
This additional supply of guilders tended to push the guil-
mination to defend the Smithsonian agreement, while
pressure on the franc let up in the last days of December
forum for negotiations on international monetary reform,
der rate still lower against the dollar, to 1.4 percent below
focusing their discussion on longer term issues of monetary
and, as doubts began to develop in the markets over the
and President Pompidou's expression of optimism about
the ceiling at one point.
reform. Also, on July 17, the Netherlands Bank announced
durability of the Smithsonian agreement, the franc rate
the international monetary situation. Moreover, the French
On June 23, following announcement of the floating of
additional measures to curtail capital imports, both through
early in 1972 started a long steady advance. The finan-
authorities acted at this time to ease domestic monetary
sterling, the Netherlands Bank along with other European
leads and lags in payments for merchandise trade and
cial franc, in the meanwhile, had fallen below the official
conditions, cutting requirements against the banks' domes-
central banks withdrew from the market. After the EC Fi-
through intracorporate transfers by multinational firms.
franc's floor on December 21 as speculative positions
tic demand and time deposits (the requirements against
nance Ministers' meeting on June 26, the Dutch joined
These steps helped calm the guilder market further, and the
were unwound, but it subsequently converged with the
liabilities to nonresidents were, however, kept unchanged),
others in reaffirming their commitment to the Smithsonian
rate began to ease away from the upper limit. The Federal
official franc.
reducing those longer term interest rates directly controlled
and EC arrangements. The Amsterdam market was offi-
Reserve's reentry into the exchange market through offers
During the first quarter, the French current-account
by the Ministry of Finance, and lowering the Bank of
cially reopened on Wednesday, June 28, with the guilder
of marks in New York on July 19 brought about an easing
balance deteriorated. Furthermore, in January the French
France's domestic money market intervention rates.
trading below its official ceiling. Over subsequent days,
of the German mark against the dollar over the next few
authorities took a number of steps to stimulate the domes-
Further relaxations of monetary policy relieved buying
however, the dollar came under pressure in other Conti-
days, and the guilder rate too began to decline. Moreover,
tic economy, including reductions by the Bank of France
pressure on the franc until late April. Then, heavy month-
nental markets and, with exchange controls in other coun-
as the rate continued to soften through the end of July and
in its rates on discounts and secured advances of 1/2 per-
end conversions of export proceeds and, later, a temporary
tries deflecting funds away from those currencies, the
into August, previous leads and lags on trade transactions
centage point to 6 percent and 7½ percent, respectively.
liquidity squeeze during the tax payment period exerted
guilder came into strong demand, obliging the Netherlands
began to be unwound. As a result of this decline, the spread
While the franc rate might have been expected to soften
upward pressure on the franc, and the spot rate climbed
Bank to absorb substantial amounts of dollars. By July 7,
between the guilder and the Belgian franc reached 1½
in consequence, there was simultaneously a general
close to its ceiling. Underlying liquidity conditions con-
stiff measures by the Swiss authorities had helped calm the
percent. Under the terms of the Benelux agreement the
strengthening of European currencies against the dollar,
tinued to ease, however, and, once month-end factors were
European exchanges and the guilder edged away from its
Netherlands Bank was obliged to sell modest amounts of
and the spot franc quickly rose to a level only slightly
out of the way, the franc traded quietly just below the
ceiling. The respite proved only temporary, as the pro-
Belgian francs against guilders in order to prevent the
below the central rate. In early February, an additional
upper intervention point until the end of May.
spective EC Finance Ministers' meeting on July 17-18 in
spread from widening still further. By early September the
burst of demand, set off in part by open debate over mea-
At that point the franc rose to its ceiling in response to
London sparked new rumors of a possible joint float against
guilder was trading below $0.3100 in a quiet market.
sures to control short-term capital flows and rumors of
an erroneous news report of Treasury Under Secretary
the dollar that led to massive shifting out of dollars into
growing official support in Europe for a joint EC float,
Volcker's press conference on May 30. The pressure was
most Continental currencies. Along with other central
lifted the franc somewhat above the central rate. These
FRENCH FRANC
especially heavy on June 2, when the Bank of France
banks, the Netherlands Bank had to absorb progressively
speculative pressures continued through much of the
moved to restrain the growth of the French money supply
The French balance of payments had been in substan-
month and, with the Bank of France on the sidelines, the
by raising the reserve requirement against increases in bank
tial surplus in 1971, and the franc had remained strong
rate rose steadily. At the same time, the financial franc
credit from 2 percent to 4 percent. With interest rates in
throughout the year. As part of the Smithsonian agreement,
was pushed up to a modest premium above the official
France already higher than in other major European coun-
the French government agreed to keep the gold parity of the
rate.
tries, however, the authorities were confronted with a
franc unchanged, thereby permitting the franc to appreci-
The market atmosphere deteriorated further when, on
dilemma since they did not wish to draw in additional
Chart
ate relative to the dollar by 8.57 percent. The new central
March 3, French Finance Minister Giscard d'Estaing
funds from abroad. Consequently, the Bank of France
NETHERLANDS
MOVEMENTS IN EXCHANGE RATE AND OFFICIAL RESERVES*
rate for the franc was set at $0.19543/4, with intervention
warned that the European response to continuing dol-
reduced its money market intervention rates on successive
Millions of dollars
Percent
limits set at 21/4 percent on either side. Although many of
lar inflows would be a further extension of exchange
days to keep domestic interest rates below Euro-dollar
600
the exchange controls imposed in the second half of 1971
controls-perhaps at first on a piecemeal basis but later
yields. With each drop in the domestic intervention rates,
400
4
Changes
were eased or abolished following the Smithsonian agree-
in concert. It was shortly thereafter that the EC Finance
the pressure in the exchange market subsided and the
in reserves
200
2
Scale
ment, the French authorities maintained the basic structure
Ministers announced they would soon cut to 2½ percent
franc temporarily edged below its ceiling. Meanwhile, the
Central
0.000
of their two-tier exchange market. Under this system, which
the maximum permissible spread among their currencies.
financial franc had advanced to a premium of over 3 per-
rate
subsequently has been liberalized, the Bank of France de-
In the general rush into all European currencies that
cent above the commercial rate, reflecting flows of funds
-200
2
fends the franc at the prescribed intervention points only
followed, the commercial franc was pushed almost to its
into the French stock market and some switching of funds
in the official market (through which trade and most service
ceiling by March 9, and the financial franc, bid up not only
out of sterling.
Exchange rate
changes
-6
transactions as well as governmental transactions are ef-
by speculative pressures but also by heavy foreign pur-
The franc rate was again pushed hard against its ceiling
Scale
fected), while all capital transactions and some service
chases of French securities, surged almost 3 percent above
in mid-June, when speculation against sterling began.
-8
transactions are strictly segregated in a financial market
that level.
As the flight from sterling gathered momentum,
10
J
A
S
O
Z
D
J
F
M
A
M
J
J
A
S
where the franc rate is allowed to find its own level.
The flurry was short-lived, however, and the commercial
large-scale official intervention was required to keep
1971
1972
See footnote on Chart
Despite the strength of the franc during 1971, most mar-
franc quickly settled down to a rate well below its ceiling.
sterling within 2½ percent of the franc. Both the
Upper and lower intervention limits established in December 1971.
ket participants had not expected so large an appreciation
The financial franc, although staying above the offi-
Bank of France and the Bank of England had to inter-
226
MONTHLY REVIEW, SEPTEMBER 1972
FEDERAL RESERVE BANK OF NEW YORK
227
relatively tight rein on domestic liquidity by raising the
Chart VI
ceilings, the market responded to this announcement by
Chart VII
FRANCE
banks' minimum reserve requirements against both resident
pushing the lira up into the proposed band. For some days
ITALY
MOVEMENTS IN EXCHANGE RATE AND OFFICIAL RESERVES*
and nonresident liabilities by 2 percentage points, effective
the spot rate was, therefore, above the central rate. But the
MOVEMENTS IN EXCHANGE RATE AND OFFICIAL RESERVES
Millions of dollars
Percent
July 21. The franc remained close to the ceiling in early
European markets soon turned quieter and, when the other
Millions of dollars
Percent
1500
Changes
600
Changes
in reserves
1000
Scale
4
August, but a somewhat softer tone developed toward mid-
EC currencies edged away from their upper limits, the lira
in reserves
400
Scale
month following market and press reports that the Federal
-near the bottom of the 21/4 percent band-dropped back
500
2
Reserve had been selling Belgian francs. Moreover, the
to the central rate or just below, where it held through the
200
2
0
Central
rate
dollar was also helped by subsequent news of improved
Central
end of the month.
0
my
rate
-500
second-quarter United States balance-of-payments figures
2
A still softer tone developed in early April, especially
-200
-2
and reports of further United States efforts to find a settle-
when the Bank of Italy acted to help stimulate an upturn
ment of the war in Vietnam. The financial franc had
Exchange rate
-4
Exchange rate
in economic activity by relaxing domestic credit condi-
changes
changes
Scale
been dropping more sharply, falling to a premium of less
Scale
-6
tions. Taking advantage of the tendency toward lower
-6
8
than 2½ percent over the official franc's ceiling, as new
interest rates abroad, the bank cut its rates on discounts
-8
J
A
S
O
N
D
J
F
M
A
M
J
J
A
S
issues of franc-denominated Euro-bond issues slackened
J
A
S
O
Z
D
J
F
M
A
M
J
J
A
S
1971
1972
and secured advances by ½ percentage point to 4 per-
1971
1972
See footnote on Chart
Upper and lower intervention limits established in December 1971.
during the vacation period and as conversions of franc
cent and 3½ percent, respectively, effective April 10.
*See footnote on Chart
Upper and lower intervention limits established in December 1971.
bank notes sold abroad by French tourists swelled. Later in
(The additional 1½ percentage point penalty for banks
August, both the commercial and financial franc rates
making excessive use of central bank credit was, however,
firmed but trading remained orderly.
maintained.) Simultaneously, interest payments on bal-
ances held by commercial banks with the Bank of Italy
ITALIAN LIRA
were discontinued for deposits of more than eight days,
vene on a progressively heavier scale, supplying francs
and were reduced from 1½ percent to 1 percent per an-
atmosphere, the formation of a new Italian coalition gov-
against sterling to an often hectic market. In the circum-
Following the Smithsonian meeting, the Italian authori-
num for deposits of eight days or less. The banks were
ernment failed to allay the market's intense nervousness.
stances, the franc was pulled lower and lower vis-à-vis the
ties established a central rate of $0.00171934 for the lira,
thus induced to place excess funds in the market rather
On June 26 the EC Finance Ministers, meeting in
dollar until it reached $0.19721/2 by the morning of June
representing a 7.48 percent appreciation against the dollar
than with the central bank, and shortly thereafter they cut
Luxembourg in the aftermath of sterling's float, confirmed
22, some 1.4 percent below the ceiling.
that was slightly less than the dollar's devaluation against
both their lending and deposit rates.
their intention to maintain the EC arrangements and, to
With the announcement of the floating of the pound at
gold. At the same time, they revoked the exchange con-
The spot lira rate declined until just before the EC cur-
facilitate Italy's continued adherence to the scheme, per-
the opening on June 23, the franc immediately rebounded
trol regulations introduced as of December 6, whereby
rency arrangements limiting the maximum permissible
mitted Italy to intervene for a three-month period in dol-
to the ceiling. After absorbing a sizable amount of dollars,
the Italian banks had been instructed to refuse conversion
spread between any two EC currencies were put into effect
lars rather than in EC currencies to keep the lira within
the Bank of France, in a joint move with the other EC
of foreign currencies into lire unless the proceeds were
on April 24. At that point the spot rate firmed somewhat,
the EC band. (The EC arrangements normally permit in-
central banks that were still dealing in the foreign
required for normal trade or service transactions or for
fluctuating about 2 percent below the strongest EC cur-
tervention in dollars only when a currency is at its Smith-
exchanges that morning, ceased intervening and the Paris
nonspeculative capital transactions backed by the appro-
rency through the month end. In early May, when the
sonian limits.) In addition, the Italian authorities took
exchange market was closed. When the Bank of France
priate documentation.
Belgian and French francs moved smartly higher, the lira
several other measures in an attempt to tighten control
reopened the exchange market on June 28, the franc
After the Italian exchange market was reopened on
held at the lower end of the band. But no official inter-
over foreign currency movements. They prohibited the
hovered close to the ceiling but the market was relatively
December 21, the spot rate soon settled near its new
vention was required to keep the lira within the band, as
crediting of lira notes to foreign accounts, thereby shutting
quiet and there was little further official intervention. As a
floor. A prolonged period of political uncertainty and the
market arbitrage proved sufficient to do so in the
down the export of capital through bank note conversion.
result of the inflows during June, French reserves rose by
resultant delay in dealing with important social and eco-
absence of strong pressures. As other EC currencies
They authorized the banks to assume net foreign liability
$921 million.
nomic problems generated some capital outflows. At
rose during May, the lira rate was pulled higher and it
positions rather than, as before, requiring balanced posi-
During the first half of July, strong speculative pressure
the same time there were continuing prepayments of foreign
hovered around the central rate until late May. Then,
tions. And, finally, they reopened the door to nonbank
began to build up against the dollar; with the franc rate
loans. Consequently, even though the already large sur-
when formal consultations to form a new government in
borrowings abroad.
hard against its upper limit, the Bank of France had
plus in Italy's balance of payments on current account was
Italy were undertaken, the lira moved up to about 0.4
Fortified with these measures, the Italian authorities
to intervene almost every day, often in large amounts. The
expanding as the pace of domestic economic activity
percent above the central rate.
reopened the exchange market on June 28. The lira
outcome of the EC Finance Ministers' meeting in London
slowed, the spot rate held close to its lower limit through
The accelerating attack on sterling that developed in
opened that day well outside the 2½ percent EC band,
on July 17-18 had a calming effect on the market, however,
the second week in January. Then, with successive waves
mid-June brought with it heavy selling of lire and an
and sizable intervention was required to bring the lira
and in line with the general firming of the dollar in mid-
of speculation pushing many of the other EC currencies
abrupt shift in leads and lags against Italy. By June 22 the
back into the band at around its central rate. Despite this
July the demand for francs eased to the point where
to their ceilings, the lira was pulled upward, eventually
spot rate had been pushed to more than 1 percent below
support, pressure on the lira continued as leads and lags
official support tapered off. Nevertheless, the spot rate
reaching some 1 percent below its central rate where it
the central rate. When the Italian exchange market re-
remained adverse and Italian residents continued to repay
continued to bump up against the ceiling until news of
traded through early March.
mained closed on Friday, June 23, in the wake of the
their foreign borrowings. Consequently, the Italian au-
the Federal Reserve's intervention in defense of the dollar
On March 7 the EC Finance Ministers announced their
floating of the pound, reports circulated widely both in the
thorities had to intervene in support of the lira well into
on July 19 helped reduce pressure on the franc. Even then
agreement in principle to narrow the margin of fluctuation
market and in the Italian press that the lira would be
July. To help offset the cost to official reserves of this
the franc continued firm by comparison with other Conti-
between the Common Market countries' currencies to
devalued or that the Italian authorities were strongly
foreign exchange market intervention, the Italian Ex-
nental currencies, as the French authorities maintained a
21/4 percent. With other EC currencies at or close to their
considering withdrawing from the EC arrangements. In this
change Office required any bank that developed a net for-
228
MONTHLY REVIEW, SEPTEMBER 1972
FEDERAL RESERVE BANK OF NEW YORK
229
eign asset position to use the surplus foreign exchange to
of the control apparatus was dismantled, however, and
to steady the market. On May 23 the Bank of Japan an-
doubled the reserve requirement for free-yen accounts to
repay outstanding dollar swaps with it, while public enter-
certain measures limiting the foreign positions of Japanese
nounced that, as of June 1, the 1.5 percent minimum reserve
50 percent and strengthened the regulations against ad-
prises were encouraged to tap the Euro-dollar market for
banks were retained. Over the next two days a bunching-
requirement against the foreign exchange banks' free-yen
vance payments of Japanese exports. When the Japanese
large amounts. By mid-July, Italian banks were repatriat-
up of export prepayments gave rise to a burst of demand
liabilities to foreigners would be replaced by a 25 percent
market reopened on June 29, the Bank of Japan had to
ing funds on a large scale, state-owned entities were con-
for yen, and the Bank of Japan absorbed a sizable amount
marginal requirement on increases in such liabilities. Also
absorb substantial amounts of dollars through the end of
verting considerable amounts taken up in the international
of dollars, but the market then turned quieter.
that day, the Japanese cabinet gave approval to a multi-
June to hold the spot rate at the ceiling. These inflows and
market, and tourist receipts were starting to build up.
By late January, the exchange markets had become in-
faceted plan to stimulate domestic business activity and,
the continuing basic payments surplus were more than fully
Consequently, pressure on the spot rate subsided, and the
creasingly jittery. Most major foreign currencies began to
at the same time, bring Japan's external accounts into
offset by the various measures taken to push dollars out
lira held just around its central rate through the rest of the
rise sharply against the dollar, reflecting uncertainty over
better balance. The exchange market did not believe these
of reserves. By the end of June the special deposits with
month. Some of the foreign exchange inflows were added
the viability of the Smithsonian agreement and concern
measures would bring any early change in the basic
the banks, which had been increased in several stages,
to official reserves, keeping the total reserve cost of the
over declining interest rates in the United States. The yen,
situation, however, and the spot rate held steady through
amounted to $1.9 billion, and the Bank of Japan's share
Italian support operations in June and July to around
in particular, was in strong demand as the December 18
early June.
in import financing amounted to some $2.3 billion. During
$100 million. This improved atmosphere continued
appreciation was seen by some as insufficient, given the
With the attack on sterling, the entire Smithsonian
the entire second quarter, the Japanese authorities suc-
through August, although the lira eased somewhat along
size of the adjustment needed to bring the Japanese pay-
alignment appeared threatened and the yen was bid sharp-
ceeded in pushing some $1.4 billion out of reserves through
with other European currencies as the dollar strengthened.
ments accounts into balance. Even with the Bank of Japan
ly upward. Following the floating of the pound, the Bank
special operations, bringing about a reduction in reserves of
intervening to slow the advance, the yen almost reached
of Japan closed its exchange market while also announcing
$820 million for the quarter.
JAPANESE YEN
its upper limit by February 24.
a reduction in its discount rate by ½ percentage point, to
In early July, the exchange markets remained in the
In view of this renewed show of strength for the yen,
41/4 percent. Then, in an attempt to isolate the Tokyo
grip of uncertainties over the future of the Smithsonian
For several years prior to 1971, Japan had recorded
the authorities resumed their efforts to encourage the financ-
market from a new round of short-term inflows, the bank
agreement and, with the yen at its ceiling, the Bank
progressively larger balance-of-payments surpluses,
ing of Japanese trade out of Japanese reserves rather than
of Japan was obliged to intervene heavily. Although
marked both by a burgeoning trade surplus and by
with foreign credits and the yen eased. The Ministry of
most European currencies eventually edged away from
increasingly heavy private capital inflows. As foreign
Finance began to make deposits, totaling $200 million in
their dollar ceilings, particularly after the July 17-18 Lon-
exchange reserves mounted, the government had
February and $100 million in March, with the Japanese
don meeting of the EC Finance Ministers and the July 19
moved to impede or offset the inflows of funds by
exchange banks to induce those banks to reduce their bor-
exchange market initiative by the Federal Reserve, the Jap-
Chart VIII
tightening exchange controls, by promoting a shift in the
rowings from United States banks. Deposits with the banks
JAPAN
anese yen remained at its upper limit in Tokyo. De-
financing of Japanese imports from foreign to domestic
to facilitate the provision of export cover had been initiated
MOVEMENTS IN EXCHANGE RATE AND OFFICIAL RESERVES
mand remained heavy as a result of the continuing large
sources, by liberalizing some of the controls on imports
in June 1971, and these new deposits raised the total
Millions of dollars
Percent
4500
export surplus and renewed inflows to the Japanese stock
and on capital outflows, and by depositing some officially
amount transferred out of official reserves to $1.5 billion.
4000
market. The Bank of Japan, therefore, had to take in dol-
held dollars with commercial banks. While these measures
Then, late in March, the Bank of Japan announced that, as
lars almost daily, and sometimes in fairly substantial
3500
had helped to relieve some of the immediate pressure, the
an additional step to curb official reserve growth, it would
amounts, during July and August.
markets became increasingly convinced that the yen was
increase its share of the financing of the country's imports
3000
seriously undervalued. Therefore, when the United States
from 30 percent to 50 percent over the four-month period
2500
CANADIAN DOLLAR
Government suspended convertibility of the dollar in
beginning in April; credits already extended by the cen-
2000
Changes
August 1971, there was a massive rush into yen which
tral bank under this program totaled some $1.3 billion at
in reserves
As other major currencies rose strongly against the
Scale
ultimately forced the Japanese government to float its cur-
that time. Despite these programs, however, Japan's offi-
Exchange rate
1500
changes
United States dollar late last year, there was also occasional
rency later that month. Over the following months, the
cial reserves rose by $1.2 billion during the first quarter,
Scale—
1000
4
upward pressure on the Canadian dollar. Heavy buying
yen rose sharply in the exchange market. But the authori-
exclusive of the 1972 allocation of SDRs.
of Canadian dollars did not develop, however, until the
500
2
ties, concerned that a rapid run-up in the yen rate might
Early in April, the authorities decided to stimulate
conclusion in early December of the Group of Ten meeting
Central
impede the hoped-for recovery in the domestic economy,
some demand for dollars by requiring repayment at matu-
0
rate
in Rome. Thereafter, the Canadian dollar was pushed as
intervened heavily to moderate the advance.
rity of a series of special dollar deposits made the previous
2
high as $1.001/2, and it remained strong until the Smith-
-500
Under the terms of the Smithsonian agreement, the
fall in connection with provision of forward cover for
sonian meeting of the Group of Ten on December 17-18.
-1000
4
central rate for the yen was established at $0.0032463,
small- and medium-sized Japanese enterprises. Since the
The communiqué at the conclusion of the Washington
an effective appreciation of 16.88 percent against the dol-
banks did not have the dollars available, they were forced
-6
meeting noted that "Canada intends temporarily to
lar. The Japanese authorities, in line with actions taken by
to come into the market as buyers of dollars to repay the
-8
maintain a floating exchange rate without interven-
other countries, immediately abolished some of the severe
maturing deposits. Shortly thereafter, Japanese seamen
tion except as required to maintain orderly conditions".
-10
measures imposed earlier to block the inflow of funds.
began a prolonged strike, and subsequent work disruptions
The Canadian dollar immediately rose to nearly
Then, on January 5, with the yen settling near its floor
at the docks and in other industrial sectors curtailed Jap-
12
$1.003/4, but expectations of a further appreciation
and some reflows developing, the government announced
anese exports for some time. As a consequence of these
-14
dissipated rapidly, and the spot rate dropped back
J
A
S
O
N
D
J
F
M
A
M
J
J
A
S
a further relaxation of exchange controls, eliminating
developments, the yen declined over much of April and
1971
1972
to below the $1.00 level in late December. After
among other things the requirement of prior official ap-
remained easy in early May. By mid-May, the yen dropped
See footnote on Chart
easing further early in January, the Canadian dollar settled
Upper and lower intervention limits established in December 1971.
proval for any prepayment of Japanese exports. Not all
to as low as $0.003282, and the Bank of Japan sold dollars
at around $0.991/2 by the middle of that month.
FORD
230
MONTHLY REVIEW, SEPTEMBER 1972
FEDERAL RESERVE BANK OF NEW YORK
231
Chart IX
vincial governments and public utilities borrowed heavily
prevent banks from converting Euro-dollar borrowings into
dollar maturities began to drift lower once again.
CANADA
abroad through bond issues, particularly in May. In ad-
local currencies, and these and other impediments to Euro-
In April, with United States interest rates moving up
MOVEMENTS IN EXCHANGE RATE AND OFFICIAL RESERVES*
dition, domestic credit conditions in Canada continued to
dollar borrowings were reinforced during periods of pres-
and with Euro-dollar rates remaining under pressure, the
Millions of dollars
Percent
12
tighten, and the chartered banks moved aggressively to
sure on the dollar early this year and again following the
differential between the three-month Euro-dollar rate and
10
attract funds. The consequent heavy demand for Canadian
currency crisis in June. As a result of these constraints
that for United States CDs narrowed appreciably. The
Exchange rate
dollars drove the spot rate up by more than 2 cents from
and the decline in interest rates in European domestic loan
spread between the two rates had been in excess of 2
changes
8
Scale—
late April through early June, to about $1.021/4. At that
markets, the demand for Euro-dollars in major European
percent in the middle of January; it fell to less than 1
600
point, the squeeze for balances in Canada became acute,
countries tended to be weak during most of the spring
percent in April. During the remainder of the spring,
400
and the chartered banks, facing heavy loan demand but
4
and summer. However, the contraction of demand from
conditions in the Euro-dollar market were generally more
Changes
in reserves
under pressure not to raise their prime rates above 6 per-
traditional sources was largely offset by a sharp rise of
comfortable. Thus, by early June the Euro-dollar/CD
200
Scale
2
cent, had begun to offer certificates of deposit (CDs) at
IIIIIIIII
IIII
III
borrowings, mostly for distant maturities, by public and
spread had narrowed further to only 40 basis points.
0
<<<<
0
yields of as much as 6½ percent. This naturally drew in
semipublic institutions in developing countries. Much of
The run on sterling, which developed in mid-June, at
-200
-2
still more funds, pushing the Canadian dollar to almost
this expansion of loans to non-European borrowers reflect-
first had little direct impact on the Euro-dollar market.
J
A
S
O
N
D
J
F
M
A
M
J
J
A
S
1971
1972
$1.023/4. The Canadian authorities then moved to forestall
See footnote on Chart
ed the aggressive efforts of major European banks that
As sterling weakened, the central banks of the Euro-
Measured as percentage deviations from the $0.92 ½ official parity established
a further rise in the exchange rate by prevailing upon the
were flush with funds to find new takers for Euro-dollar
pean Community intervened in the market by selling their
in May 1962 The Canadian dollar has been floating since June 1970.
chartered banks to cut back their CD rates, effective June
loans. Eastern European countries also took advantage
own currencies. Several European currencies dropped to
12. Subsequently, other Canadian money market yields
of the ample supply of Euro-dollar loans. These various
levels which the market considered unsustainably low
also dropped back, as loan demand eased up somewhat.
borrowings tended to cushion rate pressures arising from
in dollar terms. As a result, these currencies were
The Canadian dollar began to ease in the exchanges,
the disappearance from the market of some major Euro-
reaching $1.01½ by the end of June. Over the second
dollar borrowers. Nevertheless, for protracted periods,
With the domestic economy expanding rapidly, the Ca-
quarter as a whole, official intervention in a market which
notably during the April-June period, overnight Euro-
nadian current account had slipped into deficit in late 1971
was rising on balance resulted in a substantial net reserve
dollar rates remained substantially below the Federal
and the deficit increased in early 1972. Nevertheless, a
gain of $328 million.
funds rate, providing some of the New York agencies and
step-up in loan demand in Canada put pressure on bank
Trading turned much quieter in July, and the Canadian
branches of foreign banks with opportunities for arbitraging
Chart X
liquidity and in February interest rates began to rise, at-
dollar held fairly steady between $1.01 1/2 and $1.013/4
between the two markets. Some United States banks also
INTEREST RATES IN THE UNITED STATES AND
THE EURO-DOLLAR MARKET
tracting funds from abroad. This influx of short-term capi-
throughout the month. With the onset of seasonal strength,
took advantage of the relatively attractive rates to borrow
Percent
Percent
tal, combined with continuing longer term Canadian bor-
a somewhat firmer tone emerged in August and the spot
overnight Euro-dollars.
10
10
rowings, tended to offset the current-account deficit, and
rate edged slightly higher.
On the supply side, both United States residents and
9
9
the Canadian dollar held relatively steady in the exchanges
non-United States holders of dollars found the market
through late February. At that point, substantial new
8
8
EURO-DOLLAR
increasingly attractive during the early months of the year,
Canadian wheat sales to the Soviet Union were an-
when short-term interest rates in the United States dropped
7
7
nounced, leading to a bullish reaction in the market. The
On the whole, Euro-dollar rates have been relatively
much more sharply than three-month Euro-dollar rates.
Euro-dollars
London market months
spot rate for the Canadian dollar began to advance and,
stable since early 1972, although for brief periods
Supplies from European official sources were held back as
6
6
with rising interest rates in Canada still drawing funds
speculative flurries and exchange market uncertainties
a result of the June 1971 agreement of the central banks
from abroad, the rate soon rose above $1.00 once again.
have exerted upward pressure on the rate level. In sharp
5
5
of the Group of Ten countries not to place additional
Certificates of deposit
As it has done throughout the floating period, the Bank of
contrast to the extremely wide rate fluctuations during the
dollar balances in the market; however, supplies from non-
4
of New York banks
4
Primary market 60.89 days
Canada intervened intermittently on both sides of the
preceding year, the weekly average of daily rates for the
European official sources expanded further, as monetary
3
3
market to moderate fluctuations in the rate and, with the
three-month maturity remained within a relatively narrow
reserves of many countries continued to rise. The relative
Canadian dollar rising on balance, Canadian official
range.
attraction of the market to European commercial banks
Chart XI
reserves rose by $189 million over the first three months of
On the demand side, the market has come increasingly
also increased, as the relaxation of monetary policy by
SELECTED INTEREST RATES IN THE UNITED KINGDOM,
under the influence of a wide variety of administrative
WEST GERMANY, AND CANADA
the year.
several Western European countries during the January-
THREE-MONTH MATURITIES
During the second quarter the Canadian dollar came
restraints imposed by European governments and central
Percent
Percent
April period reinforced a general trend toward lower
10
10
United Kingdom
into strong, persistent demand. On occasion, this demand
banks over the past year. In several countries, access by
interest rates.
local authority deposits
Frank interbank loans
8
8
reflected the general uncertainties which were having such
corporations to the market has been severely curtailed in
Against this background, Euro-dollar interest rates
profound effect on other currency markets. Nevertheless,
order to restrain further accretions to official dollar
tended to move downward in sympathy with United States
6
6
the growing strength of the Canadian dollar throughout
reserves. In Germany, in particular, corporate borrowings
domestic interest rates early in the year. Then, rates began
in the Euro-dollar market were limited by fears of the
4
4
the spring was more clearly traceable to developments in
to rise sharply in a belated response to the turnaround in
Canadian finance paper
Canada's own payments position. Canada's current ac-
impending imposition of compulsory cash deposit require-
United States interest rates in late February. This rise
2
2
J
A
S
O
Z
D
J
F
M
A
M
J
J
A
S
count improved sharply during the second quarter, with a
ments for nonfinancial enterprises, even prior to the actual
proved short-lived, however; when the usual quarter-end
1971
1972
swing of some $400 million away from the exceptional
implementation of the Bardepot on March 1. In addition,
pressures failed to materialize and domestic European
Weekly overages of daily rates
Wednesday data
deficit of the first quarter. Moreover, the Canadian pro-
in many countries various barriers have been erected that
money market rates declined further, rates on all Euro-
232
MONTHLY REVIEW, SEPTEMBER 1972
FEDERAL RESERVE BANK OF NEW YORK
233
bought heavily with dollars. The financing of these
were periodic scrambles for funds to cover short positions.
purchases brought about a new demand for Euro-dollars
When the exchange markets turned calmer after mid-
which, coupled with some midyear demand, pushed rates
July following the resumption of Federal Reserve oper-
up once again. On June 23, the day the British authorities
ations in defense of the dollar, Euro-dollar rates began
yielded to the intense market pressure and allowed the
to edge downward. After a brief squeeze at the
pound to float, the three-month rate rose as high as 6
month end, the market stabilized in early August, with the
percent and seven-day Euro-dollars reached a peak of
three-month rate fluctuating narrowly around 5½ percent
The Business Situation
7 percent. Then, with the passing of the immediate effects
per annum. The tone of the market was nevertheless fairly
of the speculative buying of continental European cur-
firm, as United States short-term rates tended to rise and
rencies and of the midyear pressures, the rates on most
some new demands came into the market. In particular,
On balance, it appears that economic activity is con-
PRODUCTION, ORDERS, AND INVENTORIES
Euro-dollar maturies eased somewhat. However, the Euro-
Italian public corporations resumed their borrowings of
tinuing to expand briskly, although not so fast as the
dollar market remained susceptible to the anxieties of the
Euro-dollars in response to official encouragement, and
exceptionally rapid pace of the second quarter.¹ Retail
According to preliminary data, the Federal Reserve
foreign exchange market, and during the period of heavy
the squeeze for sterling balances in London also tended
sales posted a substantial and broadly based gain in July.
Board's index of industrial production edged up at a 3.2
pressure on the dollar in the exchanges in early July there
to draw funds out of Euro-dollars.
At the same time, personal income surged, but this
percent seasonally adjusted annual rate in July, following
reflected the artificial depression of the June level by losses
a downward revised increase amounting to only a 1.1
connected with the severe flooding in the East that
percent annual rate in the preceding month. While these
accompanied tropical storm Agnes in late June. The storm
gains were considerably smaller than those posted earlier
also apparently caused a decline in inventories at whole-
in the year, it appears likely that this slowdown reflects in
sale and retail outlets in June. In the manufacturing sector,
part the effects of severe flooding in late June rather than
however, inventories advanced sharply in both June and
any pronounced weakening in the economic advance.
July. Industrial production registered only small gains
Along with the release of the July estimate, revised read-
in both of these months, as output was undoubtedly held
ings of industrial production for the months March through
back to some extent by the storm. While employment rose
May were presented. During this period, increases in
strongly in August, the unemployment rate was virtually
output are now estimated to have averaged 11.6 percent
unchanged from the level of June and July, remaining
per annum, about 3 percentage points more than was
significantly below the level that had prevailed since late
previously reported. These latest figures bring growth in
1970.
the industrial production index over the seven months
Recent data confirm that the pace of wage increases has
ended in July to a very rapid 8.7 percent annual rate,
slowed appreciably. For example, over the seven months
in marked contrast to the annual rate of gain of only 1.1
ended in August, average hourly earnings of production
percent in the preceding seven-month period.
and nonsupervisory workers in the private nonfarm econ-
Sharp increases in the production of materials have
omy advanced at a rate significantly slower than that posted
been one of the major elements contributing to the overall
over the past several years. The rise in consumer prices has
expansion in output so far this year. In July, materials
also moderated thus far this year, although there was a
production climbed at a 5.2 percent annual rate, with the
spurt in food prices in July. The advance in prices of
gain distributed among equipment parts, industrial fuel
services and nonfood commodities, however, continued at
and power, and textiles, paper, and chemicals. Over the
a moderate pace by comparison with the experience of re-
first seven months of the year, materials output has risen
cent years.
at a very robust annual rate of 12.3 percent. Similarly,
output of defense and space equipment has increased
substantially thus far in 1972, following a period of
prolonged decline. However, despite recent gains, such
output remains about 27 percent below its peak reached
1 The second-quarter estimate of growth in real gross national
in mid-1968. Consumer goods production was unchanged
product (GNP) has been revised upward from 8.9 percent (sea-
sonally adjusted annual rate) to 9.4 percent-the largest quar-
in July, although output of household goods, after adjust-
terly percentage gain in real GNP since the fourth quarter of
ment for seasonal variations, continued to rise rapidly.
1965 and, except for that quarter, the highest in thirteen years.
Measured in current dollars, revisions in preliminary GNP and its
Business equipment output, which had increased strongly
components were small. The increase in the implicit GNP price
earlier in the year, declined slightly for the second con-
deflator was revised downward to an estimated 1.8 percent annual
secutive month. To a considerable extent the decrease in
rate from the 2.1 percent originally reported. Profits before taxes
in the second quarter advanced $4.9 billion. This was about the
such output in July was probably flood related.
same as the gain of the previous quarter despite the effects of
flooding in June, which the Department of Commerce estimates
New orders placed with manufacturers of durable goods
reduced second-quarter profits by approximately $1.8 billion.
dropped $1 billion, or 2.8 percent, in July following the
234
MONTHLY REVIEW, SEPTEMBER 1972
FEDERAL RESERVE BANK OF NEW YORK
235
billion at an annual rate, less than one half the expansion
Automobile sales accounted for most of the strength in
housing starts have declined irregularly since reaching a
Chart
INVENTORY ACCUMULATION AND INVENTORY-SALES
of the preceding month. While manufacturers' inventories
durables. Sales of new domestic-type automobiles acceler-
peak of 2.7 million units at a seasonally adjusted annual
RATIOS FOR TOTAL BUSINESS
registered a sizable gain in June (and, according to pre-
ated to a seasonally adjusted annual rate of almost 10 mil-
rate in February (see Chart II). During July the number
Billions of dollars
Book value, seasonally adjusted
Billions of dollars
15
CHANGE IN INVENTORIES
15
liminary data, in July as well), retail stocks edged down
lion units in July, the fastest pace since last October when
of housing starts dropped by 100,000 units from the June
Annual rate
and wholesalers cut their holdings in June by more than
demand was stimulated by the price freeze. Sales of im-
reading to an annual rate of 2.2 million units, about 19
10
10
$1.4 billion on an annual rate basis. Inventory spending
ported cars were at a 1.6 million unit annual rate, about
percent below the February level. Moreover, the inventory
may have been held back significantly in that month by the
the same rate that has prevailed on average over the past
of unsold single-family homes in the hands of the nation's
5
5
tropical storm which affected much of the East Coast.
eighteen months.
builders has risen sharply in the last several months,
0
0
The storm probably hampered production of goods that
During the first seven months of this year, total retail
suggesting that a further decline in residential construction
Months sales
Months of sales
1.70
1.70
otherwise might have gone into inventories. Moreover,
sales advanced at an annual rate of 12 percent, 2 percent-
activity may be in the offing. On the other hand, it should
INVENTORY-SALES RATIOS
End quarter
businessmen seem to have promptly written off large
age points above the gain registered in 1971 and 7
be noted that, despite the decline in starts in recent months,
1.65
1.65
quantities of damaged goods from their books, thus direct-
percentage points above the rate of increase posted in
they still remain high by historical standards. For example,
ly erasing some inventories from the total. Business sales
1970. Moreover, thus far in 1972 consumer prices have
July marked the fifteenth consecutive month that starts
1.60
1.60
were also relatively weak in June, falling at an annual
risen at a slower pace than that experienced in the past
have exceeded 2 million units at an annual rate. By
1.55
1.55
rate of $7.7 billion. Over the April-June period as a whole,
several years. Hence, a smaller fraction of the recent gains
comparison, over the decade of the 1960's, housing starts
combined sales in manufacturing and trade advanced at a
in consumer spending has been accounted for by price
averaged 1.4 million units per year and, in early 1970
1.50
1.50
$5.9 billion annual rate, somewhat slower than the
1970
1971
increases. Prospects for further strong gains in consumer
following a period of monetary restraint, the annual rate
1969
1972
Note: Changes are from end of quarter to end of quarter.
expansion of inventories. As a consequence, the inventory-
spending in the months ahead appear to be good, particu-
of starts stood as low as 1.1 million units.
Source: United States Department of Commerce, Bureau of the Census
sales ratio for all businesses reached 1.52 in June, up
larly in light of the increase in social security benefit
While housing starts have moderated in recent months,
marginally from the level attained at the end of the first
payments beginning in October.
shipments of mobile homes have continued near their rec-
quarter but still below the 1.59 ratio prevailing a year
Recent data confirm that the rate of residential con-
ord pace set earlier in the year. In June, the latest month
earlier. The persistently low level of the inventory-sales
struction, which was exceptionally strong earlier in the
for which data are available, shipments on an annual rate
ratio suggests that inventory spending may strengthen
year, has begun to taper off to some extent. Private
basis advanced 32,000 units to 604,000 units. In longer
surge in June. The decline in July, like the previous
further in the months ahead as sales continue to expand.
run perspective, mobile home sales have risen sharply
month's rise, was centered in bookings of defense capital
from 104,000 units in 1960 to an annual rate of 585,000
goods. Excluding such goods, new durables orders posted a
units during the first half of this year, as such homes have
PERSONAL INCOME, RETAIL SALES, AND
moderate gain in July. Orders for nondefense capital goods
RESIDENTIAL CONSTRUCTION
become increasingly popular both for recreation and as
were virtually unchanged, however, after substantial gains
Chart II
permanent residences. Combining mobile home sales and
earlier in the year. Orders for capital goods have a con-
Personal income rose by a substantial $11.3 billion in
PRIVATE HOUSING STARTS AND MOBILE HOME SHIPMENTS
the pace of housing starts, total housing units were ap-
siderable lead time over spending, and hence it appears
July, after dropping by $1.1 billion in the preceding
Seasonally adjusted annual rates
parently being added at close to a 3 million unit annual
Millions of units
Millions of units
that investment spending should continue to expand
month. Both the July spurt and the June decline largely
2.8
2.8
rate in the first half of the year, compared with an average
strongly in the months ahead despite the failure of new
reflected the effects of Hurricane Agnes. Huge capital
2.6
2.6
yearly rate of 1.6 million units during the 1960's.
orders for these goods to rise further in July. Such an
losses-representing damage to residential structures and
2.4
2.4
outcome would be consistent with the results of the latest
proprietors' plant and equipment and inventories-were
EMPLOYMENT, WAGES, AND PRICES
Commerce Department survey of plant and equipment
written off in June, so that rental and proprietors' income
2.2
2.2
spending intentions, which was conducted during July
in that month fell by $6.5 billion. Since this was largely a
2.0
2.0
Nonagricultural payroll employment rose sharply in
Private housing
and August. While expenditures on plant and equipment
once-and-for-all effect, such income rebounded by $7.0
1.8
starts
1.8
August after remaining essentially flat in the two preceding
in the second quarter fell short of projected levels, firms
billion in July. Excluding rental and proprietors' income,
months. According to the Bureau of Labor Statistics sur-
1.6
1.6
were planning sizable increases in their expenditures dur-
personal income increased by $4.3 billion in July, about $1
vey of employers, about 280,000 workers were added to
ing the second half of 1972. For the year as a whole, the
billion below the average monthly gain registered in the
1.4
1.4
nonfarm payrolls on a seasonally adjusted basis, a sub-
survey indicates a substantial gain of 9.7 percent, down
second quarter. Wage and salary disbursements-the
1.2
1.2
stantial 4.6 percent annual rate of increase. The gain was
slightly from the 10.3 percent rise projected in the April-
principal component of personal income-rose by only
1.0
1.0
broadly based although manufacturing employment, which
May survey. By comparison, plant and equipment outlays
$2.4 billion, down from an average monthly advance of
had been depressed in July by the effects of tropical storm
8
.8
edged up by less than 2 percent in 1971.
$4 billion in the April-June period. The small July increase
Agnes, merely recovered to its June 1 level after posting
Mobile home
After a long period of very sluggish growth, total
in wage and salary disbursements resulted largely from a
.6
.6
shipments
substantial gains over the first half of the year. Taking a
business inventories, on a book value basis, advanced at
decline in payroll employment which, in turn, stemmed
4
4
somewhat longer view, nonfarm payroll employment has
a $9.9 billion seasonally adjusted annual rate in the April-
partly from several strikes in the construction industry in
2
2
risen by a rapid 3.3 percent since August 1971. In contrast,
June period, the largest quarterly gain in almost two years
addition to the effects of tropical storm Agnes.
0
0
during the preceding nine-month period beginning Novem-
(see Chart I). Much of this second-quarter strength in
According to an advance estimate, retail sales climbed
1967
1968
1969
1970
1971
1972
ber 1970-the month tentatively identified by the National
inventory spending was concentrated in May. In June,
by a brisk 1.9 percent in July. The rise was broadly based,
Sources: United States Department of Commerce, Bureau of the Census;
Bureau of Economic Research as marking the trough of
Mobile Home Manufacturers Association.
aggregate inventory accumulation came to only $6.4
as sales of durables and nondurables shared in the gain.
the 1969-70 recession-employment advanced at an
236
MONTHLY REVIEW, SEPTEMBER 1972
FEDERAL RESERVE BANK OF NEW YORK
237
declined from 2.9 percent in June to 2.6 percent in August,
Chart III
CHANGES IN AVERAGE HOURLY EARNINGS
its lowest level since mid-1970.
PRIVATE NONFARM ECONOMY
Percent
Percent
The pace of wage increases has slowed appreciably in
per annum
Seasonally adjusted annual rates
per annum
recent months. In August, seasonally adjusted average
14
14
hourly earnings of production and nonsupervisory workers
12
12
in the private nonfarm economy, adjusted for overtime
10
10
hours in manufacturing and for shifts in the composition
of employment among industries, rose at a modest 4.4 per-
8
8
cent annual rate. Since August 1971-the inception of
wage and price controls-earnings have advanced by 5.6
The Money and Bond Markets in August
6
6
percent, substantially below the increases registered in the
4
4
past several years when earnings rose annually at rates
close to 7 percent (see Chart III). Increases in earnings
Short-term interest rates moved higher in August. The
BANK RESERVES AND THE MONEY MARKET
2
2
have varied considerably over the past year. During the
rate on Federal funds rose in response to a somewhat
0
0
wage-price freeze from August to November 1971, earn-
less generous supply of nonborrowed reserves in relation
Conditions in the money market grew somewhat firmer
1969
1970
Dec
70
Aug 71
Aug
71
Nov
71
Jan 72
ings rose very modestly but then spurted at an annual rate
to the demand of member banks for reserves. Other
during August. The average effective Federal funds rate
to
to
to
to
to
Aug
71
Aug 72
Nov 71
Jan
72
Aug 72
of 14 percent in the two succeeding months, largely as a
short-term rates responded in similar fashion and, by the
rose to 4.80 percent, 25 basis points above the July
Note: Changes are adjusted for overtime (manufacturing only) and for
result of a clustering of wage increases that would other-
end of August, rates on most short-term instruments were
average and the highest monthly average rate since No-
interindustry employment shifts
wise have occurred during the months covered by the
¹/₈ to 3/4 percentage point higher than a month earlier.
vember 1971. The upward pressure on the Federal funds
Source: United States Department of Labor, Bureau of Labor Statistics
freeze. Over the seven months following January, the
To some extent, the reversal in the direction of short-term
rate was symptomatic of the less generous supply of non-
increase in earnings has slowed to an annual rate of 4.8
rates was an indirect consequence of the strengthening
borrowed reserves available to member banks in relation
percent.
of the dollar on the foreign exchange markets, which
to their demand for reserves in the wake of the surge in
The consumer price index climbed at a 5.1 percent
sharply diminished foreign official demand for Treasury
deposits during July. Money market conditions typically
annual rate of only 1 percent.
seasonally adjusted annual rate in July, the sharpest
bills. In addition, expectations of increased private de-
firmed toward the end of statement weeks during August,
The most recent survey of households indicates that
increase in five months. Almost two thirds of the July
mands for credit as the economic recovery continues to
as banks which found themselves short of reserves needed
civilian employment also rose sharply in August, advanc-
rise resulted from higher prices of food, which surged
gather momentum helped to raise interest rates. Finally,
to meet their requirements bid up the Federal funds rate.
ing by 290,000 workers on a seasonally adjusted basis-
ahead at an annual rate of more than 7 percent. Meat
market participants looked forward with some apprehen-
As the rate rose well above the 4½ percent Federal Re-
the largest monthly increase in five months. At the same
prices showed the steepest advances, but there were also
sion to the large cash needs of the Federal Government
serve discount rate, banks turned to the discount window
time, the civilian labor force also rose very rapidly by
increases in prices of eggs and fresh fruits and vegetables.
in prospect for the next several months. Underscoring
to satisfy more of their reserve needs. Over the five weeks
390,000 workers. Consequently, the unemployment rate
The large July rise in consumer food prices had been
the potential impact that these demands may have on
ended August 30, such borrowings averaged $372 million,
edged up to 5.6 percent from the 5.5 percent level of June
presaged by recent price developments at the wholesale
the markets, Treasury bill rates rose sharply upon the
up $151 million from the four weeks ended in July. Net
and July. Prior to these three months the rate of unem-
level. Prices of farm products and processed foods and
disclosure by the Treasury of plans to raise $1.8 billion
borrowed reserves averaged $153 million in the five weeks
ployment had hovered near 5.9 percent since late 1970.
feeds, for example, advanced at about a 6 percent annual
by late October in conjunction with a restructuring of
of August (see Table I), compared with $27 million in
While the overall unemployment rate has remained
rate in June and then jumped by over 24 percent per
the monthly bill auctions.
the four preceding weeks.
virtually steady since June, there have been significant
annum in July. Since changes in wholesale prices are often
The bond market resisted until late in the month the
With the less generous provision of nonborrowed re-
changes in its composition. The decline in the rate of
reflected in prices of consumer goods with a lag, it seems
upward pressures on yields emanating from the money
serves being partly offset by increased borrowings at the
unemployment in June was almost entirely accounted for
likely that consumer food prices will continue under
market. Indeed, long-term rates continued to drift down-
discount window, daily average reserves available to sup-
by a drop in joblessness among teen-agers and men and
upward pressure in the near term. In July, prices of non-
ward until after midmonth. Underwriters of corporate
port private nonbank deposits (RPD), seasonally adjusted,
women between twenty and twenty-four years of age. This,
food commodities at the consumer level advanced at a 3.1
and municipal bonds took advantage of the seasonally
increased at an annual rate of about 9 percent in August,
in turn, stemmed partly from a much smaller than seasonal
percent annual rate while prices of services (not season-
light calendar of flotations to price new issues aggressively.
slightly greater than the 8.6 percent rate of growth in
influx of young people into the labor force. Since June,
ally adjusted) rose at an annual rate of 3.7 percent. Both
Many issues failed to sell out quickly, however, and
July. The fact that the sharp deceleration in the growth
jobless rates for young people have risen, particularly the
increases were slightly above those registered over the first
investor resistance to the aggressive pricing in both sectors
rates of the monetary aggregates in August, which is
rate for teen-agers which now stands above its May read-
half of the year.
became more intense as the month progressed. By the end
discussed below, was not reflected in RPD is partly a
ing. Meanwhile, the unemployment rate for persons
In the eleven months since wage and price controls were
of August, long-term bond yields had joined short-term
consequence of the way in which reserve requirements are
twenty-five years of age and older fell significantly in July
first introduced in August 1971, consumer prices as a whole
rates in moving upward. They remained, however, far
assessed. In general, member banks are required to hold
and moved slightly lower in August as well, extending
have risen at an annual rate of 2.9 percent, compared with
below the levels that had prevailed before the initiation of
in each statement week reserves equal to a percentage of
further the gradual downturn evident since the end of last
increases of 6.1 percent in 1969, 5.5 percent in 1970, and
the Economic Stabilization Program on August 15, 1971.
their average deposit liabilities of two weeks previously.
year. Notably, the rate of unemployment for married men
3.8 percent over the January-August 1971 period.
The decline in interest rates that has occurred since then
Hence, the July surge in deposits resulted in higher levels
has reflected both a reduction in the inflation premium
of required reserves in August as well as in July. The rela-
demanded by investors and a moderation of demands
tively rapid growth of RPD recorded for August also
placed on the bond market by borrowers.
stemmed in part from the convention of computing growth
238
MONTHLY REVIEW, SEPTEMBER 1972
FEDERAL RESERVE BANK OF NEW YORK
239
rates on the basis of monthly averages of daily figures.
two weeks of the month, the average level of reserves for
Chartl
THE GOVERNMENT SECURITIES MARKET
Inasmuch as the spurt in deposits in the first two weeks of
the month as a whole was low in relation to the month-end
CHANGES IN MONETARY AND CREDIT AGGREGATES
July was not reflected in required reserves until the last
level. This tended to exaggerate the growth of reserves in
Seasonally adjusted annual rates
Along with other short-term rates, Treasury bill rates
August on a daily average basis.
Percent
Percent
15
15
continued to decline at the beginning of August, but rates
M1
The downward drift of short-term interest rates that
From 12
on the shorter maturities soon reversed direction. The
10
months earlier
10
Table I
had begun in July continued into early August. For
early strength in the bill market reflected the absence of a
FACTORS TENDING TO INCREASE OR DECREASE
example, rates on commercial paper edged lower during
5
5
short-term option in the Treasury's August refunding¹ and
MEMBER BANK RESERVES, AUGUST 1972
the first few days of August, triggering reductions in the
0
From3
0
the expectation that sellers of rights issues would seek bills
In millions of dollars; (+) denotes increase
floating prime commercial loan rates of a few large banks
months earlier
for temporary lodgment of funds. Against this background,
(-) decrease in excess reserves
by 1/4 percentage point to 51/4 percent. Subsequently,
-5
-5
participants bid aggressively for bills in the weekly auction
20
20
however, short-term rates reversed direction and ended
M2
held on July 31. The three-month bills were sold at an
Changes in daily averages-
From 12
week ended
the month generally higher on balance. Increases in
15
From3
months earlier
15
average issuing rate of 3.794 percent, 25 basis points
Factors
Net
commercial paper rates were followed by upward adjust-
months earlier
changes
10
10
below the rate established in the previous week's auction.
Aug.
Aug.
Aug.
Aug.
Aug.
2
9
16
23
30
ments in floating prime rates during the latter half of the
After August 2, as demand for bills generated by the
month. On August 24, a major New York City bank that
5
refunding subsided, rates on issues maturing within six
"Market" factors
does not pursue a floating prime rate policy raised its
Ol
0
Member bank required
months began to edge higher. The upward movement of
reserves
+ 64
106
90
+309
+
22
+ 199
rate ¼ percentage point to 5½ percent. By the end of
20
20
ADJUSTED BANK CREDIT PROXY
rates was spurred by the firming in the Federal funds
Operating transactions
(subtotal)
236
106
+387
+311
+ 217
+
573
the month, most of the other major banks had followed
15
From 12
15
market and by the prospect of sizable Treasury cash
Federal Reserve float
495
+ 106
12
+ 425
510
462
suit. Rates on commercial paper sold through dealers
months earlier
financing in the short-term area of the market in coming
Treasury operations*
+ 75
41
+ 435
+366
+172
+1,007
Gold and foreign account
+ 121
9
8
10
6
+
88
closed generally ¼ percentage point higher over the
10
10
months. The relatively wide spread between rates on bills
Currency outside banks
+164
138
217
444
+ 625
10
month, and bankers' acceptance rates were 1/8 percentage
From
5
5
and rates on other short-term instruments was also con-
months earlier
Other Federal Reserve
liabilities and capital
101
24
+166
24
65
48
point higher.
ducive to rising bill rates. In this atmosphere, bidding was
-
of
0
Total "market" factors
172
212
+297
+ 620
+ 239
+ 772
The general advance in short-term interest rates was
1970
1971
1972
generally cautious in the weekly bill auctions held during
accompanied by a moderation in the growth of the
Note: Data for August 1972 are preliminary estimates
August, and rates climbed at each successive auction. At
M1 Currency plus adjusted demand deposits held by the public.
Direct Federal Reserve
monetary aggregates in August following the large
M2 = M1 plus commercial bank savings and time deposits held by the
the auction held on August 14, the average issuing rate
credit transactions
increases in July. Nevertheless, the growth of these aggre-
public, less negotiable certificates of deposit issued in denominations
for the three-month issue was 3.956 percent (see Table
Open market operations
of $100,000 more.
(subtotal)
+ 88
+ 123
57
329
276
451
gates remained quite substantial over the three-month
Adjusted bank credit proxy Total member bank deposits subject to reserve
II), 16 basis points higher than the rate set two weeks
Outright holdings:
period that ended in August. For example, the narrowly
requirements plus nondeposit sources of funds, such as
earlier.
Treasury securities
8
6
63
191
295
563
borrowings and the proceeds of commercial paper issued by bank holding
Bankers' acceptances
2
+
4
1
+
2
1
+
2
defined money supply (M₁)-adjusted private demand
companies or other affiliates.
On August 18, the Treasury announced the first steps
Federal agency obligations
11
+
83
+ 18
80
10
Sources: Board of Governors of the Federal Reserve System and the
+
deposits plus currency outside banks-increased at a
Federal Reserve Bank of New York
toward restructuring the monthly bill auctions through
Repurchase agreements:
Treasury securities
+ 92
+
42
17
117
+
75
+
75
seasonally adjusted annual rate of 8½ percent over the
the establishment of regular auctions of 52-week bills to
Bankers' acceptances
+ 9
+
7
+
1
17
+
8
+
8
three months ended in August (see Chart I), according to
replace eventually the nine- and twelve-month bills. At
Federal agency obligations
+ 8
7
+
5
-
6
+
17
+
17
Member bank borrowings
+ 191
76
+
94
31
127
+
305
preliminary data that are partly estimated for August. The
the same time, the Treasury announced plans to raise a
Other Federal Reserve
growth of M1 over the six months ended in August was
total of $1.8 billion in the monthly auctions of August,
assetst
+ 56
+ 53
153
442
+ 59
427
also substantial, averaging 8 percent at an annual rate.
September, and October. Accordingly, at the maturity
Total
+335
+ 100
116
800
90
571
Taking a longer perspective, however, the rise in M₁ was
average member bank deposits subject to reserve require-
of the $1.7 billion of monthly bills due August 31, 1972,
Excess reserves
+163
112
+ 181
180
+ 149
+ 201
a more moderate 5½ percent over the year ended in
ments and certain nondeposit liabilities-behaved similarly
the Treasury issued $1.8 billion of bills to mature on
August.
to M₂ in July and August. Over the three months ended in
Tuesday, August 28, 1973 and $500 million of bills to
Daily average levels
Monthly
averages
The growth of the broad money supply (M₂)-defined
August, the proxy rose at an estimated seasonally adjusted
mature on May 31, 1973. The Treasury also intends in
Member bank:
as M₁ plus time deposits at commercial banks other than
annual rate of 8½ percent. During the year ended in
Total reserves, including
large negotiable certificates of deposit (CDs)-also slowed
August, the proxy increased by about 11 percent. In
vault cash
33,139
33,133
33,404
32,915
33,042
33,127$
Required reserves
32,897
33,003
33,093
32,784
32,762
32,908
somewhat in August from the large July increase. The
relative terms, the strongest component in the growth of
Excess reserves
242
130
311
131
280
219:
moderation of M₂ growth was less pronounced than that
the proxy in recent months has been CDs issued in
Borrowings
363
287
381
350
477
3721
Free, or net borrowed (-),
of M1, however, because of a pickup in the growth of
amounts of $100,000 or more. Banks have been bidding
reserves
121
157
70
219
197
153:
consumer-type time and savings deposits following a
actively for such funds, and a number of increases in
Nonborrowed reserves
32,776
32,846
33,023
32,565
32,565
32,7551
Net carry-over, excess or
slowing of the growth of these deposits in July. Over the
offering rates on CDs were posted during August as other
1 For a description of the securities involved, together with the
preliminary results, see this Review (August 1972), page 198. The
deficit (-)§
58
118
92
132
52
90%
three months ended in August, M₂ rose at a seasonally
market rates rose. CDs outstanding at weekly reporting
final results were slightly better than the preliminary results. The
Note: Because of rounding, figures do not necessarily add to totals.
adjusted annual rate of about 10 percent, according to
banks, seasonally adjusted, rose by $3 billion over the
rate of attrition of the publicly held issues maturing August 15
was revised downward to 25.9 percent. The public subscribed for
Includes changes in Treasury currency and cash.
preliminary estimates. The growth of M₂ was about 9½
three months ended in August. Over the twelve months
$3.9 billion of the new notes due February 1976, $3.1 billion of
+ Includes assets denominated in foreign currencies.
percent over the past year.
ended in August, outstanding large CDs expanded by
the new notes due August 1979, and $1.2 billion of the new bonds
# Average for five weeks ended August 30, 1972.
due August 1984. The subscriptions for the bonds included $41
$ Not reflected in data above.
The adjusted bank credit proxy-which consists of daily
$81/2 billion, or 27½ percent.
million of sales to individuals for cash.
240
MONTHLY REVIEW, SEPTEMBER 1972
FEDERAL RESERVE BANK OF NEW YORK
241
Table II
the three-month bills were sold at an average issuing rate
OTHER SECURITIES MARKETS
corporate bonds during August was exemplified by two
AVERAGE ISSUING RATES*
of 4.332 percent. Over the month as a whole, rates on
AT REGULAR TREASURY BILL AUCTIONS
issues rated Aaa. One, an electric utility issue awarded
outstanding bills maturing within six months rose about
In percent
Prices of corporate and municipal bonds continued to
on August 1, was reoffered to yield 7.42 percent. The
50 to 80 basis points, while rates on longer maturities
edge upward in the first half of August. A combination of
other, a forty-year debenture of a Bell Telephone subsid-
Weekly auction dates-August 1972
climbed about 35 to 50 basis points.
light calendars, normal for the summer months, and
iary offered on August 8, was priced to yield 7.375
Maturities
Yields on intermediate-term Treasury securities were
maintenance of syndicate price restrictions held down
percent; this was the lowest yield on a Bell issue since
Aug.
Aug.
Aug.
Aug.
generally steady over the first half of August and then
7
14
21
28
yields on new securities, while investor demand in the
May. Initial reception was cool in both cases. How-
began to edge higher. The upward movement in yields
secondary market reduced returns on older issues. How-
ever, the scarcity of new high-grade securities and the
Three-month
3.928
3.956
4.058
4.332
gained momentum late in the month, as a cautious at-
ever, a price reversal after the middle of the month sig-
successful distribution of some Aa-rated issues offered at
Six-month
4.431
4.464
4.623
4.818
mosphere developed amidst firming money market condi-
naled some investor dissatisfaction with available yields.
the end of July encouraged the offering syndicates to
tions and rising short-term rates generally. Long-term
Monthly auction dates-June-August 1972
This resistance to terms offered became increasingly
hold firm, even though the yields were less favorable than
Treasury bond yields drifted downward until midmonth,
apparent in the last ten days of August.
those obtainable in the secondary market. On August 27,
June
July
Aug.
when the average yield on such issues stood at its lowest
The aggressive pricing associated with new issues of
23
25
24
the underwriters finally released the unsold portion of the
level of 1972. Thereafter, yields on long-term issues rose
Nine-month
4.754
4.731
5.040
irregularly but closed the month narrowly mixed, on
One-year
4.854
4.918
5.1787
balance.
Interest rates on bills are quoted in terms of a 360-day year, with the discounts from
The 10 basis point upward jump in the average yield
par as the return on the face amount of the bills payable at maturity. Bond
yield equivalents, related to the amount actually invested, would be slightly higher.
on long-term Treasury bonds shown in Chart II is a
This was the first auction of a 52-week bill.
statistical artifact resulting from the issuance of the new
63/8 percent bonds of August 1984. The yield series is a
Chart II
SELECTED INTEREST RATES
simple average of yields on Treasury bonds due or callable
June-August 1972
in ten years or more. Consequently, the inclusion of the
Percent
MONEY MARKET RATES
BOND MARKET YIELDS
Percent
9.00
9.00
relatively high-yielding new issue raised the level of the
Yields on new long Aa-rated public utility bonds
Reoffering yield
Mark yield
coming months to repeat the offerings of $1.8 billion of
series. The markedly higher rate required for the Treasury
slightly less-than-one-year bills to mature on Tuesdays at
to issue long-term bonds, compared with the rates on older
8.00
8.00
four-week intervals from August 28, 1973. In late Septem-
outstanding issues, reflects in part the substantial discounts
ber and again in late October 1972, the Treasury plans
from par at which the older bonds trade because of their
to sell $0.5 billion of nine-month bills maturing in June
relatively low coupons. In consequence, a significant part
7.00
Aaa-rated seasoned
7.00
corporate bonds
and July 1973, respectively. These final sales of nine-
of the return on the older issues is in the form of capital
3-month
90. to 119-day prime
month bills will result in equal amounts of maturities of
gains, which for most investors are taxed at preferential
Euro-dollars
commercial paper
3 -year
monthly bills through July 1973. These plans will result
rates. Furthermore, many of the older Treasury bonds are
6.00
Government securities
6.00
in the raising of $0.6 billion of new cash at the end of
accepted at par value in payment of Federal estate taxes.
August and $0.6 billion at the end of each of the next two
This feature, which generates demand for some of these
5.00
20. year tax exempt bonds
months. The Treasury also indicated that it is studying
issues irrespective of their yields to maturity, is no longer
5.00
Long-term
the desirability of having weekly auctions of 52-week bills
offered on newly issued bonds.
Government securities
and of converting its offerings of six-month bills from a
The structure of yields on Treasury securities in the
4.00
4.00
Thursday to a Tuesday maturity to coincide with the
middle of August is depicted in Chart III, together with a
3-month
weekly maturities of such 52-week bills.
comparative yield curve for one year earlier, just prior to
Federal funds
Treasury bills
Bill rates spurted upward in reaction to the Treasury
President Nixon's announcement of the New Economic
3.00
3.00
announcement. Rates on the longer maturity bills, which
Policy. Both curves show a fairly sharp positive slope
until then had been drifting downward since the end of
for yields on near-term maturities with a hump in the
June, joined in the advance. In the first auction under the
intermediate-term area and a decline on longer maturities.
2.00
2.00
7
14
21
28
5
12
19
26
2
9
The most striking difference between the two yield curves
16
23
30
7
14
21
28
5
new program described above, held on August 24, the
12
19
26
2
9
16
23
30
June
July
August
June
362-day bills were sold at an average issuing rate of 5.178
is in their respective levels, which depict the declines in
July
August
percent, 26 basis points above the rate set on one-year
yields throughout the maturity spectrum over the past
Note: Data are shown for business days only.
bills in the July 25 auction and the highest comparable
year. The three-month wage and price freeze from August
MONEY MARKET RATES QUOTED: Bid rates for three-month Euro-dollars in London; offering
immediately after it has been released from syndicate restrictions); daily averages of yields
rates (quoted in terms of rate of discount) on 90-to 119-day prime commercial paper
on seasoned rated corporate bonds; daily averages of yields on long -term Government
rate since September 1971. Rates continued to push
to November 1971 and the subsequent Phase Two controls
quoted by three of the four dealers that report their rates, or the midpoint of the range
securities (bonds due or callable in ten years or more) and on Government securities due in
quoted if no consensus is available; the effective rate on Federal funds (the rate most
three to five years, computed on the basis of closing bid prices; Thursday averages of yields
higher over the remainder of the month, partly reflecting
have helped to reduce the inflation premium in interest
representative of the transactions executed); closing bid rates (quoted in terms of rate of
on twenty seasoned twenty year tax exempt bonds (carrying Moody ratings of Aaa, Aa, A,
discount on newest outstanding three month Treasury bills
firmer day-to-day money rates and Federal Reserve sales
rates. In addition, a decline in the rate of borrowings in
and Baa).
BOND MARKET YIELDS QUOTED: Yields on new Aa-rated public bonds (arrows point from
Sources: Federal Reserve Bank of New York, Board of Governors of the Federal Reserve System,
on behalf of customer accounts and the System Account.
the bond market relative to last year's record pace has
underwriting syndicate reoffering yield on given issue to market yield on the same issue
Moody' Investors Service, and The Bond Buyer.
At the month's final weekly auction, held on August 28,
contributed to the downward shift in the yield curve.
242
MONTHLY REVIEW, SEPTEMBER 1972
FEDERAL RESERVE BANK OF NEW YORK
243
telephone bonds from price restrictions, with a resultant
upward yield adjustment of about 10 basis points.
Chart III
Three new issues of Aa-rated utility bonds were reoffered
YIELDS ON UNITED STATES GOVERNMENT SECURITIES
Percent
Percent
at the end of July to yield slightly more than 7½ percent.
7.60
7.60
In the first half of August, two comparable issues were
7.20
7.20
priced to yield 7.44 percent and 7.40 percent. Reductions
August1 1971
in short-term interest rates, including bank prime lending
6.80
6.80
rates, in late July and early August lent support to the
Publications of the Federal Reserve Bank of New York
6.40
6.40
bond market. However, the reversal of these movements
August 14, 1972
6.00
6.00
late in August prompted accompanying adjustments in the
bond market. Consequently, the final Aa-rated utility issue
Distribution and charge policy: The following selected publications are available from the Public
5.60
5.60
Information Department. Except for periodicals, mailing lists are not maintained for these publications.
of the month was priced to yield 7.50 percent, but the
5.20
5.20
The first 100 copies of the Bank's general publications and the first copy of its special publications
offering was not enthusiastically received by investors.
In addition to its effects on interest rate expectations
4.80
4.80
are free on reasonable requests. Additional copies of general and special publications are free on reasonable
in general, the accelerating economic recovery raised the
requests for educational purposes to certain United States and foreign organizations. United States: schools
4.40
4.40
possibility of a larger volume of new issues on top of the
(including their bookstores), commercial banks, public and other nonprofit libraries, news media, and Fed-
usual seasonal increase in supply during the final quarter.
4.00
4.00
eral Government departments and agencies; foreign: central government departments and agencies, central
Some investors, therefore, preferred to postpone purchases
3.60
3.60
banks, and news media. (Such additional free copies will be sent only to school, business, or government
0
4
6
8
10
12
14
16
18
20
22
until terms improved. The price declines which occurred
addresses.) Other organizations are charged for copies exceeding normal limits on free quantities (prices are
Number of years to maturity
in the secondary market during the last week of August
listed with the publications).
reflected both the reduction in demand and increased sup-
Remittances must accompany requests if charges apply. Delivery is postpaid and takes two to four
weeks. Remittances must be payable on their faces to the Bank in United States dollars collectible at
ply from professional selling and the dissolution of syndi-
cate restraints.
par, that is, without a collection charge.
Prices of tax-exempt securities rose during the first part
of August. The Bond Buyer index of twenty municipal
dealers were willing to accumulate securities in their port-
GENERAL PUBLICATIONS
bond yields fell 10 basis points between August 3 and
folios. Two large issues rated A-1 were quickly taken in
August 17. Over this same period, dealers added only $55
MONEY: MASTER OR SERVANT? (1971) by Thomas O. Waage. 45 pages. A comprehensive discussion
the first ten days of the month. During the last half of
million to the Blue List of advertised inventories. New
of the roles of money, commercial banks, and the Federal Reserve in our economy. Explains what money
August, however, investor interest waned and The Bond
is and how it works in a dynamic economy. (15 cents each if charges apply)
issues sold somewhat more rapidly than was true in the
Buyer index rose 16 basis points to 5.38 percent on
corporate market, despite similarly aggressive pricing, and
August 31.
PERSPECTIVE. Published each January. 9 pages. A nontechnical review of the major domestic and in-
ternational economic developments of the previous year. Sent to all Monthly Review subscribers. (6 cents
each if charges apply)
SPECIAL PUBLICATIONS
ESSAYS IN DOMESTIC AND INTERNATIONAL FINANCE (1969) 86 pages. A collection of nine articles
dealing with a few important past episodes in United States central banking, several facets of the relationship
between financial variables and business activity, and various aspects of domestic and international financial
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THE VELOCITY OF MONEY (1970, second edition) by George Garvy and Martin R. Blyn. 116 pages.
Subscriptions to the MONTHLY REVIEW are available to the public without charge. Additional
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CENTRAL BANK COOPERATION: 1924-31 (1967) by Stephen V. O. Clarke. 234 pages. A documented
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RETURN POSTAGE GUARANTEED
STRICTLY CONFIDENTIAL (FR)
SWAP ARRANGEMENTS BETWEEN THE SYSTEM
AND FOREIGN CENTRAL BANKS
October 11, 1972
Listed below as of October 11, 1972, are the swap arrangements
concluded on behalf of the Federal Reserve System with foreign banks.
Amount of
Agreement
Maturity of
(millions of
latest authorized
Foreign Bank
dollars)
renewal
Austrian National Bank
200
December 1, 1972
National Bank of Belgium
600
December 22, 1972
Bank of Canada
1,000
December 30, 1972
National Bank of Denmark
200
December 1, 1972
Bank of England
2,000
December 1, 1972
Bank of France
1,000
December 28, 1972
German Federal Bank
1,000
December 15, 1972
Bank Of Italy
1,250
December 29, 1972
Bank of Japan
1,000
December 1, 1972
Bank of Mexico
130
December 1, 1972
Netherlands Bank
300
December 29, 1972
Bank of Norway
200
December 1, 1972
Bank of Sweden
250
December 1, 1972
Swiss National Bank
1,000
December 1, 1972
1,600 ( 600)
December 1, 1972
B.I.S.
(1,000)1/
December 1, 1972
Total
11,730
1/ This reciprocal arrangement provides for swaps of dollars against
authorized European currencies other than Swiss francs.
Ass, GERALD FORD
STRICTLY CONFIDENTIAL (FR)
-2-
As of October 11, 1972, drawings on the above arrangements are
outstanding in the amounts indicated below:
Drawings Outstanding on Swaps
Date since
facility has
Initiated
Initiated
been in con-
Arrangements with
by System
by foreign bank
tinuous use
(millions
of dollars
equivalent)
National Bank of Belgium
435
:
June 30, 1970
Swiss National Bank
680
:
May 19, 1971
B.I.S.
635
--
Swiss francs
(600)
August 12, 1971
Belgian francs
( 35)
August 18, 1971
Total
1,750
--
BERALD R. FORD LIBRARY
STRICTLY CONFIDENTIAL (FR)
SWAP ARRANGEMENTS BETWEEN THE SYSTEM
AND FOREIGN CENTRAL BANKS
November 15, 1972
Listed below as of November 15, 1972, are the swap arrangements
concluded on behalf of the Federal Reserve System with foreign banks.
Amount of
Agreement
Maturity of
(millions of
latest authorized
Foreign Bank
dollars)
renewal
Austrian National Bank
200
December 1, 1972
National Bank of Belgium
600
December 22, 1972
Bank of Canada
1,000
December 30, 1972
National Bank of Denmark
200
December 1, 1972
Bank of England
2,000
December 1, 1972
Bank of France
1,000
December 28, 1972
German Federal Bank
1,000
December 15, 1972
Bank Of Italy
1,250
December 29, 1972
Bank of Japan
1,000
December 1, 1972
Bank of Mexico
130
December 1, 1972
Netherlands Bank
300
December 29, 1972
Bank of Norway
200
December 1, 1972
Bank of Sweden
250
December 1, 1972
Swiss National Bank
1,000
December 1, 1972
B.I.S.
1,600 ( 600)
December 1, 1972
(1,000)1/
December 1, 1972
Total
11,730
1/ This reciprocal arrangement provides for swaps of dollars against
authorized European currencies other than Swiss francs.
GERALD ? FORD
STRICTLY CONFIDENTIAL (FR)
-2-
As of November 15,1972, drawings on the above arrangements are
outstanding in the amounts indicated below:
Drawings Outstanding on Swaps
Date since
facility has
Initiated
Initiated
been in con-
Arrangements with
by System
by foreign bank
tinuous use
(millions
of dollars
equivalent)
National Bank of Belgium
415
--
June 30, 1970
Swiss National Bank
600
--
May 19, 1971
B.I.S.
635
--
Swiss francs
(600)
August 12, 1971
Belgian francs
( 35)
August 18, 1971
Total
1,650
--
FORD & GERALD LIBRARY
STRICTLY CONFIDENTIAL (FR)
GERALD FORD
SWAP ARRANGEMENTS BETWEEN THE SYSTEM
AND FOREIGN CENTRAL BANKS
December 13, 1972
Listed below as of December 13, 1972, are the swap arrangements
concluded on behalf of the Federal Reserve System with foreign banks.
Amount of
Agreement
Maturity of
(millions of
latest authorized
Foreign Bank
dollars)
renewal
Austrian National Bank
200
December 3, 1973
National Bank of Belgium
600
December 22, 1972
Bank of Canada
1,000
December 29, 1972
National Bank of Denmark
200
December 3, 1973
Bank of England
2,000
December 3, 1973
Bank of France
1,000
December 28, 1972
German Federal Bank
1,000
December 14, 1973
Bank of Italy
1,250
December 29, 1972
Bank of Japan
1,000
December 3, 1973
Bank of Mexico
130
December 3, 1973
Netherlands Bank
300
December 29, 1972
Bank of Norway
200
December 3, 1973
Bank of Sweden
250
December 3, 1973
Swiss National Bank
1,000
December 3, 1973
B.I.S.
1,600( 600)
December 3, 1973
(1,000)1/
December 3, 1973
Total
11,730
1/ This reciprocal arrangement provides for swaps of dollars against
authorized European currencies other than Swiss francs.
STRICTLY CONFIDENTIAL (FR)
-2-
As of December 13, 1972, drawings on the above arrangements are
outstanding in the amounts indicated below:
Drawings Outstanding on Swaps
Date since
facility has
Initiated
Initiated
been in con-
Arrangements with
by System
by foreign bank
tinuous use
(millions
of dollars
equivalent)
National Bank of Belgium
435
--
June 30, 1970
Swiss National Bank
570
--
May 19, 1971
B.I.S. (Swiss francs)
600
--
August 12, 1971
Total
1,605
--
SERALD 8. FORD