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International Monetary Crisis, 1971 (2)
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International Monetary Crisis, 1971 (2)
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Arthur F. Burns Papers
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Japan
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The original documents are located in Box B65, folder "International Monetary Crisis,
1971 (2)" of the Arthur F. Burns Papers at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald R. Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date May 6, 1971
To Chairman Burns
Subject: 2:45-3:00 Market Report
From Paul Kelty
Domestic Securities Markets
Prices of U. S. Government securities are somewhat higher now
than at their opening levels today, although the market is still very
uncertain. Most issues are now about 2/32 higher to 2/32 lower on the
day. The two when-issue notes are slightly higher than their 11:00 o'clock
levels. The 5's of 8/72 are quoted 99.31--100.02, while the reopened
5-3/4's are at 99.18--.22. Selling pressures in the when-issued notes
have abated relative to yesterday, although investor demand for them
is said to be light. Treasury trust accounts have purchased some $35
million of coupon issues today.
The tone in the bill market is firm, with most issues now
about 1 to 9 basis points lower on the day. The 3-month bill is down
9 basis points to 3.83 per cent bid. Dealers have reported a good
demand for bills today, including a large amount of buying by Japan.
The dealers also anticipate a good reinvestment demand to stem from the
outflow of dollars abroad. Moreover, the market is in a good technical
position.
Federal funds are trading at 4-5/8 and 4-3/4 per cent, with the
quote ranging between 4-1/2 and 4-3/4 per cent. The System has made
$949 million of repurchase agreements, including $882 million against
Governments and $67 million on bankers' acceptances.
GERALD FORD LIBRARY
Chairman Burns
- 2 -
The corporate and municipal bond markets are quiet with relatively
little price change. In the stock market, the Dow-Jones industrial average
was up 1.90 points at 2:00 P.M.
-
FORD is LIBRARY GERALD
CONFIDENTIAL (FR)
May 6, 1971
To:
Chairman Burns
Subject: Foreign Exchange Market -
From: Jan W. Karcz
2:30 Call.
With most European central banks not supporting the dollar, exchange
markets were much quieter today. Euro-dollar rates firmed very sharply as
a scramble for dollars needed to cover last two days' sales developed; the
overnight rate at one point reached 40 per cent.
Most rates varied erratically in response to various statements by
West German officials but on balance changed little from yesterday's close.
At 2:15 the premiums on the official ceiling rates were:
Deutsche Mark
+ 1.49
Swiss Franc
+ 3.50
Guilder
+ 1.04
The only central bank intervention reported was by the Bank of Japan
which took in $330 million; the bank issued a statement that the present yen
parity will be maintained.
At 11:00 the covered arbitrage calculations were:
U.K. local authority
6.48
Canadian bills
2.95
Canadian fin. paper
3.88
3-mo. Euro-$
7.63
U.S. bills
3.86
U.S. fin. paper
4.50
Gross advantage
1.15
Gross advantage
0.91
Gross advantage
0.62
Sterling discount
0.82
C$ premium
1.33
C$ premium
1.33
Net, favor Euro-$
2.97
Net, favor Canada
0.42
Net, favor Canada
0.71
FORD & GERALD LIBRARY
DRAFT-2:PAV:5/6/71
After full review of the recent developments in
international financial markets, Secretary of the Treasury
John B. Connally today again expressed the view of the
United States Government that existing exchange rate
parities would provide an appropriate basis for the re-
opening of exchange markets in various European centers.
Such action in the interest of international monetary
stability will require further close cooperation among
national monetary authorities, particularly in dealing
with the problems posed by large, short-term capital
movements. As in the past, the United States is prepared
to participate fully in such immediate cooperative
action.
FORD is LIBRARY 939870
- 2 -
The current disturbances in the exchange markets also
heavily underscore the urgency of dealing with the out-
standing problems of the international economic system.
Certain of these problems, growing out of the enlargement
of the Eurodollar market and the volatility of short-term
capital flows, have already been the subject of review
by central banking and government officials. We expect
that review to be intensified, with conclusions reached
promptly.
The underlying deficit in the balance of payments --
estimated at some $2-1/2 - $ 3 billion -- must be dealt
with in a forcible manner. Totthat end, the United States
has undertaken a full review of relevant aspects of our
foreign trading, assistance and defense policies.
FORD is LIBRARY CERALD
Secretary Connally, in emphasizing the importance of
- 3 -
dealing with this underlying deficit, noted that the
immediate financing of this underlying deficit is clearly
manageable in the context of the larger interests of
defense of a stable monetary and liberal trading system.
At the present time, as a result of the large flows
of money in search of higher interest returns, and more
recently with speculative motivations, the dollar reserves
of Germany -- and to a lesser extent a few other European
centers -- have reached exceptionally high levels. The
United States Treasury, in present circumstances, is
prepared to assist in the orderly investment of these funds
through special Treasury securities.
These views have been conveyed to the monetary
authorities of other countries directly concerned,
FORD is LIBRARY GERALD
- 4 -
recognizing that decisions as to their exchange rates are
properly a matter for those governments. The United
States contemplates no change in its gold and foreign
exchange policies.
FORD is 076839 LIBRARY
o0o
[c. 5/7/71]
To: Chariman Burns
Re: Market at 12:00
From: C. C. Baker
The bill market has improved in the wake of the Desk's
outright cash purchases of $170 million of bills for System account;
and rates are down 3 to 4 basis points. In coupon issues, the
new when-issued securities are still under pressure but prices are
about as they were earlier. The long end of the outstanding market
has improved about 8/32 in price but the rest of the market is still
unsteady. Federal funds are still trading at 4-7/8%.
The Desk now sees about $625 million of overnight Rp's that
can be done and it is still requesting dealers to round up additional
collateral for further Rp's. Withdrawals of outstanding Rp's now
total about $250 million.
FORD i LIBRARY GERALD
OF
The Department of the TREASURY
NEWS
TELEPHONE W04-2041
DEPARTMENT THE TREASURY THE
WASHINGTON, D.C. 20220
1789
MEMORANDUM TO THE PRESS:
May 7, 1971
In response to further inquiries, Secretary of the
Treasury John B. Connally said today that the Administration
was continuing to carefully follow the speculative
exchange market problem in Europe and remains prepared
to coonerate fully with others to assist in stabilizing
the situation.
The Secretary emphasized the United States contemplates
no change in its own gold and foreign exchange policies.
Secretary Connally again expressed the view of the
United States that maintenance of current parities could
provide a basis for reopening the markets in various
European centers. The Treasury is prenared to assist
those few central banks receiving large amounts of dollars
in recent weeks in the orderly investment of a portion of
these funds through special Treasury securities.
The Secretary pointed out that consistent with
BERALD FORD LIBRARY
orderly economic exnansion, the U. S. was now making
visibly more progress against inflation than its major
trading partners overseas. This is the fundamental basis
for con inued confidence in the dollar at home and abroad.
Monetary authorities of other countries are aware
of these views in reaching their decisions with respect to
exchange rates and other policies.
ono
INTERNATIONAL MONETARY FUND
19th and H Streets N. W., Washington, D.C. 20431
PRESS RELEASE NO. 839
FOR IMMEDIATE RELEASE
May 9, 1971
The Federal Republic of Germany has informed the Fund that in view
of the recent situation in foreign exchange markets, including large
capital movements, for the time being it will not maintain the exchange
rates for its currency within the established margins. The Netherlands
government has informed the Fund that it has found it necessary to take
similar action because of recent movements of foreign exchange and the
action of the German authorities.
The two countries have given assurance that they will continue in
close consultation with the Fund, and will collaborate fully in accordance
with the Articles of Agreement. They have also given assurances to the
Fund with respect to the resumption of the maintenance of the limits
around par, in the interest of the smooth functioning of the international
monetary system.
Belgium has notified the Fund that it is adapting the regulations
concerning its free market for capital transactions with a view to stemming
any large inflows of capital.
The Fund has given consideration to various ways of coping with the
difficulties presently facing its members. In its consultations with
members, and in its continuing work, the Fund will seek to maintain and
strengthen the basic principles of the Bretton Woods system. The recent
disturbances demonstrate the need to improve the international adjustment
process and to bring about a better coordination among members with respect
to their internal and external policies.
-
FORD is LIBRARY 938870
INTERNATIONAL MONETARY FUND
19th and H Streets N. W., Washington, D.C. 20431
PRESS RELEASE NO. 838
FOR IMMEDIATE RELEASE
May 9, 1971
After consultation with the Fund, the Government of Austria has
changed the par value of the Austrian schilling, in accordance with the
Articles of Agreement of the International Monetary Fund, from schillings 26
to schillings 24.75 per US$1 effective May 9, 7:00 p.m., Washington time.
The initial par value of schillings 26 per US$1 was established with
the International Monetary Fund in April 1953 and the present change is
being made under that provision of the Articles of Agreement of the Fund
which entitles a member country after consultation with the Fund to make a
change in the initial par value not exceeding 10 per cent.
Expressed in terms of gold and in terms of the U.S. dollar of the
weight and fineness in effect on July 1, 1944, the new par value of the
Austrian schilling is:
0.035 905 9
gram of fine gold per Austrian schilling;
866.250
Austrian schillings per troy ounce of fine gold;
24.750 O
Austrian schillings per U.S. dollar;
4.040 40
U.S. cents per Austrian schilling.
FORDO is GERALD LIBRARY
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date May 12, 1971
To
Chairman Burns
Subject:
From A. B. Hersey aBlt
Attached is a first progress report, from Mr. Pizer,
on efforts to glean some specific facts about recent speculative
or hedging movements of funds from this country.
TH
FORD is LIBRARY GERALD
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date May 12, 1971
To
Mr. Hersey
Subject: Survey of liquid funds
From Samuel Pizer Sp
held abroad by corporations.
As I understand it, the Treasury (Mr. Schaffner) requested
the OFDI to initiate some inquiries to major corporations to find
out to what extent they had added to their liquid balances abroad
between the end of April and May 7. This was done by telephoning
on May 10 the twenty corporations with the largest allowables for
liquid foreign balances. This was presented to the corporations
as a voluntary inquiry not connected with compliance. A few
were reluctant, but in any case OFDI expects to have replies
from all of them by the end of the week and they will supply us
with the results. The first reaction on the telephone by many
companies was that they had not done anything like this.
We will get a copy of the questions that were asked. In
general the companies were asked if they had increased foreign liquid
balances held either directly or for their account by their subsidiaries
in the first week of May, or whether they had made any prepayments of
debt, and they were asked to break down their holdings as between
dollars and foreign currencies.
In talking to the Treasury about this, I learned that the
Treasury people are also interested in finding out what had happened to
large payments made by petroleum companies to the oil-producing countries
during April. Such payments approached $2 billion, and I said we would
QERALD FORD LIBRARY
Mr. Hersey
-2-
see what could be discovered from the banks about the disposition
of these funds by the countries receiving them. I have given Fred
Klopstock at the New York Reserve Bank the facts the Treasury has on
oil royalty payments in April, and I asked him to look into the
question.
cc: Mr. Solomon
Mr. Gemmill
Mr. Reynolds
FORD is LIBRARY GERALD
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date
May 14, 1971
To Chairman Burns
Subject:
From A. B. Hersey
CUBIT
CONFIDENTIAL (FR)
Attached is another report from Mr. Pizer on attempts to
get more precise information about the outflows that were swelling
the weekly balance of payments deficits through Wednesday the 5th.
We have still to get further reports on the OFDI survey.
F
cc: Mr. R. Solomon
Mr. Holland
FORD is LIBRARY GERALD
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date May 14, 1971.
To
Mr. Hersey
Subject: Flows of funds into
From
Samuel Pizer
Deutsche Marks.
CONFIDENTIAL (FR)
In the last few days the New York Bank (Scott Pardee) at
our request has made some inquiries to try to discover some infor-
mation about the source of funds going into Deutsche marks since
the end of April. The first set of questions related to what the
oil-producing countries might have done with their April tax receipts.
A large part of those receipts are in sterling, and the Bank of England
reports that they saw nothing out of the ordinary in the disposition
of those receipts this year. Ordinarily the countries concerned have
already incurred expenses in anticipation of the receipts so that they
quickly move out of these accounts in any case. The Bank of England
saw nothing different about transactions this year, and did not detect
any extraordinary flows from these accounts into DM.
U.S. banks had very much the same impression, i.e., the
countries do not ordinarily keep more than minimum accounts in the
U.S., and on this occasion seem to be following practices similar
to those followed at this time of the year in other years. In
general, the banks felt that they were not likely to be able to
detect any extraordinary transactions involving conversions of
deposits held in the Euro-dollar market into DM, but they did not seem
to have the impression that the oil countries' funds were taking that
course.
Pardee reports that he and others at the New York Bank have
a feeling from reports of Euro-market activity and from whatever
conversations they have had with banks in the market that there were
large conversions by U.S. corporations of U.S. funds into DM. In
particular the U.S. banks reported picking up a very large amount of
DM on Wednesday morning, having placed overnight orders. This was
done partly for their own account to meet the commitments on earlier
sales of DM to customers and partly directly for the account of
customers.
The New York Bank has also discussed with the Bundesbank
the possible sources of funds going into Germany, but up to now the
Bundesbank reports that they have not been able to develop any useful
information on this subject.
cc: Messrs. R. Solomon, Reynolds, Gemmill, and Bradshaw
GERALD FORD TIBRART
MAY 14 1971
The Honorable William Proxmire
Committee on Banking, Housing and
Urban Affairs
United States Senate
Washington, D. C. 20510
Dear Senator Proxmire:
Your letter of May 3, attaching a reprint of an article by Milton
Friedman, asks for comment on the issue of whether the substantial
rate of growth in money supply over the past few months is related
to "obsolete procedures" in carrying out monetary policy, with too
much emphasis being placed on money market conditions and interest
rates. I would say that the monetary growth experienced is not
the product of a procedural problem, but rather that it reflects
fundamental forces in the economy and has to be evaluated in
relation to these forces.
The recent rapid growth rates in money, both narrowly defined to
include currency and demand deposits (M₁) and more broadly defined
to include also time and savings deposits at commercial banks other
than large CD's (M₂), may be attributed mainly to two conditioning
circumstances. First, particularly with respect to narrowly defined
money, the recent rapid growth has reflected the temporary surge in
demand for cash balances to accommodate enlarged transactions needs
of the public resulting from the post-auto-strike rebound in
economic activity. In the fourth quarter of 1970, because of the
auto strike, the nation's gross national product valued in current
prices rose at less than a 2 per cent annual rate; in the first
quarter of 1971, with production recovering from strike-depressed
levels, GNP rose at about a 13 per cent annual rate. Over the
course of those two quarters, and roughly paralleling the swing in
GNP growth rates, rates of increase in M1 were around 3-1/2 per
cent and 9 per cent, respectively.
While temporary variations in transactions demands for cash in the
economy were central in explaining M1 behavior over the past few
months, it should also be noted that Treasury cash management
practices have been a factor. There was a sizable net transfer of
FORD is LIBRARY GERALD
The Honorable William Proxmire
-2-
funds from the U.S. Government to private sectors late in the first
quarter, indicated by a considerable drop on average in Government
deposits from February to March. As often occurs, such net transfers
led to a temporary enlargement of cash balances in private hands.
Since peaking in early April, the outstanding amount of M1 has
declined on balance, in part reflecting replenishment of the Treasury
cash balance.
The second principal explanation for rapid growth in money pertains
mainly to M2. In the early months of 1971, there was a sharp spurt
in net inflows of time and savings deposits other than large CD's to
banks. For the most part these are consumer-type time and savings
deposits. We believe this spurt was largely the result of one-time
transfers of savings by consumers out of market instruments, on which
yields had dropped sharply during the fall and winter, to time and
savings deposits at banks, whose yields had been maintained. Accord-
ing to preliminary estimates contained in the Board's quarterly flow-
of-funds accounts, households sold or redeemed, net, about $17-1/2
billion of credit market instruments, principally U.S. Government
securities, in the first quarter. In substitution, and reflecting
also a continued high rate of net new personal saving, they added
about $15 billion to their holdings of time and savings deposits at
commercial banks and about $12 billion to deposits at nonbank savings
institutions.
Most recently, net inflows to banks of consumer-type time deposits
have slowed to more moderate proportions as many banks adjusted their
offering rates down and as the amount of savings available for shift-
ing was, in any event, worked off. This has led to a substantial
moderation in the growth rate of M2 following an unusually rapid 18
per cent annual rate of increase over the first quarter as a whole.
To slow down the growth in money--either M, or M₂--over the winter
period of very rapid growth would have required the Federal Reserve
to hold back on the provision of bank reserves. Total reserves of
banks rose at about an 11 per cent annual rate in the first quarter,
which accommodated--at the interest rates prevailing during the
period--the temporary rise in demands for cash and the large shift by
consumers in the forms in which their savings are held. If expansion
in reserves had been at a slower rate, money market conditions would
have been considerably tighter and, more broadly, both short- and
long-term interest rates would have been higher than they were. As
it turned out, the yield on new high-grade corporate bonds reached a
low point in late January and has since risen by over one full per
cent. And in short-term markets, Treasury bill rates were at lows
in mid-March and have since risen, depending on maturity, by 60 to
almost 100 basis points.
GERALD FORD LIBRARY
The Honorable William Proxmire
-3-
During the past several months, then, it has been necessary to weigh
behavior of the monetary aggregates against the behavior of interest
rates, and to assess them both in relation to the prospects for the
strength of economic recovery and in light of the international
position of the dollar. The Federal Reserve has not committed itself
to a single financial indicator or objective in gauging monetary
policy, but seeks instead to relate over-all financial conditions to
the specific economic developments and prospects of the time. In the
period under review, there were specific explanations for behavior of
the aggregates which indicated that the rapid rates of growth would
tend to be self-correcting. Moreover, since the economy was in the
beginning tender stage of recovery, we judged that there was undue
risk that any significant tightening in credit markets--particularly
long-term markets-~might hamper progress toward the expansion in
economic activity and in job opportunities toward which we are all
striving.
I hope these comments will prove useful to you. I recognize that
there can be room for difference in analyses of the appropriateness
of financial developments, even taking account of the economic environ-
ment in which they have occurred. The essential point, however, is
that the recent rapid growth in the aggregates is not a matter of the
procedures used in carrying out open market operations, but must be
viewed in relation to credit market conditions generally, to an
appraisal of what such conditions would have been if efforts had been
made to reduce growth rates under the circumstances of the time, and
to one's assessment of current economic conditions and economic
prospects. I can assure you that we are watching the behavior of the
monetary aggregates carefully, as well as the performance of the money
and capital markets, and that we are prepared to move if that behavior
should appear to threaten the prospects for orderly economic progress.
Sincerely,
(Signed) Arthur F. Burns
Arthur F. Burns
SHA:JCP:cmc
5/13/71
FORD
i
1817
GERALD
ARE
CHART 1
STRICTLY CONFIDENTIAL (FR)
5/14/71
MONEY MARKET CONDITIONS
INTEREST RATES
PER CENT
FED. FUNDS
10
FORD & LIBRARY GERALD
5
9
8
4
7
TREASURY BILLS
3-MONTH
3-MO. BILL
5
6
DISCOUNT RATE
5
4
FEDERAL FUNDS
4
3
28 5 12 19 26 2 9
Apr.
May
June
0
RESERVES
BILLIONS OF DOLLARS
BORROWINGS
2
1
1
.5
MEMBER BANK BORROWINGS
0
0
NET BORR. RES.
1
.5
O+
+
+
0
0
1
.5
28 5 12 19 26 2 9
Apr.
May
June
NET BORROWED RESERVES
Range Specified in
2
Blue Book
1969
1970
1971
CHART 2
5/14/71
SELECTED INTEREST RATES
GERALD R. FORD LIBRANA
BUSINESS BORROWING RATES
PER CENT
10
NEW CORPORATE Aaa
PRIME RATE
8
FINANCE CO. PAPER
6
30-89 DAY
4
0
OTHER LONG-TERM RATES
PER CENT
MORTGAGE YIELD
10
FNMA AUCTION
U.S. GOVT.
10 YR. CONSTANT MATURITY
8
6
MUNICIPAL
BOND BUYER
4
0
1969
1970
1971
CHART 3
STRICTLY CONFIDENTIAL (FR)
5/14/71
SECURITY MARKET DEMANDS
CORPORATE BONDS Public Offerings
BILLIONS OF DOLLARS
CUMULATIVE BORROWING
1970
3
Through April
1971
1970 6.5/Billion
1971 10.6/Billion
2
1
0
MUNICIPAL LONG-TERM BONDS
3
1971
Through April
2
1970 5.7 Billion
1971 8.6 Billion
1970
1
0
FEDERALLY SPONSORED AGENCY Net Borrowing
2
Through April
1970 4.6 Billion
1970
1971 -0.3 Billion
1971
+
0
U.S. TREASURY Net Cash Borrowing
1970
5
Through April
1970 -2.7 Billion
1971 1.5 Billion p
1971
+01
+
0
FORD & LIBRARY GERALD
5
J F M A M J J A S 0 N D
Table 3
CONFIDENTIAL (FR)
SELECTED LONG-TERM INTEREST RATES
MAY 14, 1971
PERCENT
4
5
6
7
Corporate Bonds
U.S. Govt.
FHA Mortgages
Period
Bond Buyer's
FNMA Auction
(10-Yr. Constant
(Secondary Mkt.
1
Moody's Seasoned
Municipal
Yields
New issue Aaa
Maturity)
Yield)
2
Aaa
3
Baa
1970:
High
9.30
8.60
9.47
7.12
8.06
9.29
9.36
Low
7.68
7.48
8.59
5.33
6.29
8.40
8.36
1971:
High
7.93
7.46
8.97
5.96
6.53
--
8.36
Low
6.76
7.06
8.34
5.00
5.42
--
7.43
1970:
July
8.63
8.44
9.40
6.53
7.46
9.11
9.17
Aug.
8.48
8.13
9.44
6.20
7.53
9.07
9.03
Sept.
8.42
8.09
9.39
6.25
7.39
9.01
9.03
Oct.
8.63
8.03
9.33
6.39
7.33
8.97
8.91
Nov.
8.34
8.05
9.29
5.93
6.84
8.90
8.92
Dec.
7.80
7.64
9.12
5.46
6.39
8.40
8.43
1971:
Jan.
7.24
7.36
8.74
5.36
6.24
--
8.16
Feb.
7.28
7.08
8.39
5.23
6.11
--
7.67
Mar.
7.46
7.21
8.46
5.17
5.70
7.32
7.44
Apr.
7.57
7.25
8.45
5.37
5.83
7.37
7.49
Mar.
5
7.79
7.12
8.40
5.37
6.07
7.43
GERALD
12
7.54
7.20
8.47
5.28
5.82
--
19
7.14
7.26
8.50
5.00
5.61
7.45
R.
26
7.08
7.25
8.47
5.03
5.42
--
FORD
Apr.
2
7.15
7.22
8.46
5.15
5.55
7.44
9
7.16
7.23
8.45
5.21
5.61
:
16
7.32
7.24
8.45
5.32
5.77
7.45
LIBRARY
23
7.54
7.24
8.42
5.48
5.98
--
30
7.81
7.30
8.47
5.69
6.03
7.54
May
7
7.88
7.43
8.52-
5.84
6.24
--
14
7.93
7.46
8.57
5.96
6.28P
7.68
6.65%
NOTES: Weekly data for Aaa corporate new issues, Moody's seasoned bonds and 10-year U.S. Government bonds are daily averages. Other
weekly data are single-date figures. FNMA auction yield is the implicit yield in weekly or bi-weekly auction for 6-month forward
commitments on Government underwritten mortgages.
FR 712 C
Table 1
GERALD FORD LIBRARY
SECURITY DEALER POSITIONS AND BANK RESERVES
MAY 14, 1971
MILLIONS OF DOLLARS
U.S. Govt. Security
Other Security
Member Bank Reserve Positions
Dealer Positions
Dealer Positions
Period
1
2
3
4
5
6
Bills
Corporate
Municipal
Borrowings
Net Borrowed
Basic Reserve Deficit
Coupon Issues
Bonds
Bonds
at FRB
Reserves
(7) 8 New York
(8)
38 Other
1970 High
4,259
1,720
369
421
1,681
-1,451
- 3,361
-5,619
Low
1,092
257
0
20
270
68
409
-3,076
1971 High
4,733
2,089
308
394
561
- 380
-4,779
-5,499
Low
*1,559
*1,066
22
96
84
202
-1,740
-3,006
1970 Apr.
3,466
692
102
140
865
- 687
-1,932
-4,628
May
1,428
949
32
119
924
- 765
-1,600
-3,306
June
1,509
562
45
221
907
- 735
-1,537
-3,608
July
2,365
626
45
112
1,317
-1,133
-1,473
-4,053
Aug.
2,630
1,435
90
135
881
- 707
-2,257
-3,957
Sept.
2,903
1,064
107
107
595
- 398
-1,853
-4,151
Oct.
2,724
1,120
98
242
468
- 274
-1,842
-4,282
Nov.
3,013
1,662
61
120
409
- 199
-2,340
-4,703
Dec.
3,739
1,636
221
279
348
- 84
-2,856
-4,713
1971 Jan.
3,555
1,767
82
188
377
- 140
-2,265
-4,485
Feb.
2,829
1,579
160
265
336
- 75
-2,568
-4,227
Mar.
2,972
1,252
110
191
312
- 120
-2,847
-3,927
Apr.
*3,268
*1,336
100
253
152p
24p
-3,752
-4,403
1971
Mar.
3
3,235
1,104
133
266
258
- 88
-2,300
-4,064
10
3,048
1,143
75
160
421
- 339
-3,205
-4,343
17
2,780
1,229
90
112
290
- 25
-2,764
-4,122
24
2,103
1,387
87
186
333
- 265
-2,973
-3,834
31
3,790
1,344
167
230
257
119
-2,566
-3,213
Apr.
7
4,733
1,484
164
360
197
80
-3,556
-4,473
14
3,613
1,252
58
202
150
58
-4,365
-5,499
21
*3,007
*1,261
128
251
84
-
3
-4,714
-4,593
28
*2,306
*1,318
48
197
177p
- 95p
-2,837
-3,491
May
5
*1,743
*1,304
90
125
175p
202p
-2,224p
-3,006p
12
*1,559
*1,066
55p
160p
98p
144p
-3,945p
-3,501p
19
26
NOTES:
Government security dealer trading positions are on a commitment basis. Trading positions, which exclude Treasury bills financed by repurchase
agreements maturing in 16 days or more, are indicators of dealer holdings available for sale over the near-term. Other security dealer positions
are debt issues still in syndicate, excluding trading positions. The basic reserve deficit is excess reserves less borrowing at Federal Reserve
less net Federal funds purchases. Weekly data are daily averages for statement weeks, except for corporate and municipal issues in
syndicate which are Friday figures.
-STRICTLY CONFIDENTIAL
FR 712 A
FORD is LIBRARY GERALD
Table 2
CONFIDENTIAL (FR)
SELECTED SHORT-TERM INTEREST RATES
MAY 14, 1971
PER CENT
1
2
3
4
5
8
30-89 day
Treasury Bills
Dealer
90-day
Federal Agencies
Period
Federal Funds
60-89 day CD's
Finance Co.
Loan Rate
Euro-dollar
Paper
6
7
1-Year
90-day
1-Year
1970 High
9.39
9.98
7.88
10.34
9.00
7.92
7.57
8.75
Low
4.82
5.22
5.50
6.79
5.00
4.79
4.77
5.56
1971 -- High
4.59
5.41
5.38
7.36
5.25
4.87
4.73
5.56
Low
3.29
3.85
3.50
5.04
3.25
3.32
3.53
3.95
1970 Apr.
8.10
8.81
6.50
8.36
7.97
6.51
6.53
7.64
May
7.94
8.53
6.50
8.86
8.03
6.84
7.12
8.26
June
7.60
8.22
6.84
9.39
7.81
6.68
7.07
8.23
July
7.21
7.91
7.85
8.76
7.90
6.45
6.62
7.70
Aug.
6.61
7.28
7.68
8.19
7.69
6.41
6.55
7.58
Sept.
6.29
7.07
7.26
8.03
7.08
6.13
6.39
7.25
Oct.
6.20
6.67
6.63
7.94
6.63
5.91
6.23
6.99
Nov.
5.60
6.16
5.95
7.17
5.81
5.28
5.39
6.25
Dec.
4.90
5.36
5.53
7.25
5.15
4.87
4.84
5.65
1971 Jan.
4.14
4.93
4.85
5.92
4.69
4.44
4.40
5.18
Feb.
3.72
4.23
4.13
5.54
3.85
3.70
3.84
4.47
Mar.
3.71
4.21
3.60
5.11
3.45
3.38
3.60
4.06
Apr.
4.15
4.66
4.19
5.92
4.00
3.86
4.09
4.83
1971 Mar.
3
3.41
3.91
3.75
5.21
3.50
3.37
3.66
4.21
10
3.29
3.86
3.56
5.04
3.25
3.32
3.58
4.02
17
3.93
4.38
3.50
5.06
3.50
3.32
3.53
3.95
24
3.70
4.16
3.50
5.04
3.50
3.37
3.61
4.01
31
4.02
4.58
3.70
5.28
3.50
3.51
3.67
4.16
Apr.
7
3.98
4.53
3.88
5.64
3.88
3.71
3.72
4.32
14
4.20
4.66
4.13
6.08
3.88
3.99
4.08
4.60
21
4.27
4.78
4.25
5.84
4.12
3.84
4.09
4.90
28
4.14
4.68
4.50
6.03
4.12
3.88
4.32
5.04
May
5
4.41
4.94
4.63
6.41
4.38
3.92
4.46
5.27
12
4.59
4.99
4.63
7.36
4.50
3.85
4.49
5.46
19
26
NOTES: Weekly data are daily averages for statement weeks except for CD's and finance company paper which are Wednesday figures. CD rates are median
offering rates posted by New York City banks.
FR 712 B
FR 531
CONFIDENTIAL (FR)
WEEKLY REPORT OF MEMBER BANK BORROWING
(Averages of daily figures, in millions of dollars)
Week ended
4 weeks ended
Year-ago data
4 weeks ended
5-12-71
5-5-71
5-12-71
4-14-71
5-13-70
Total member bank borrowing:
All member banks
98
175
134
235
863
Money market banks
59
81
53
25
484
Other reserve city banks
23
67
65
196
192
Country banks
16
27
16
14
187
Amount presently under
administrative pressure:
All member banks
22
49
57
194
75
Money market banks
-
-
-
-
46
Other reserve city banks
22
46
56
192
18
Country banks
*
3
1
2
11
Amount likely to come under
administrative pressure next
week, if borrowing continues:
All member banks
-
-
*
22
-
-
-
-
Money market banks
-
-
-
-
10
Other reserve city banks
-
-
-
-
-
Country banks
-
-
*
*
12
Amount accounted for by
frequent borrowers:
Indebted in 10-13 of
past 13 weeks:
All member banks
22
79
57
194
22
Money market banks
-
-
-
-
-
Other reserve city banks
22
77
56
192
-
Country banks
*
2
1
2
22
Indebted in 7-9 of past
13 weeks:
All member banks
40
*
11
1
126
-
Money market banks
39
-
10
-
25
Other reserve city banks
-
-
-
-
57
Country banks
1
*
1
1
44
NOTE: Amount of borrowings brought under administrative pressure is dependent on a
variety of circumstances, only one of which is the duration of the borrowings. The
two sets of figures are both included as complementary indicators of the composition
of total member bank borrowing, and neither the aggregate amounts nor necessarily
the individual banks included will completely coincide.
* Less than $500,000.
DIVISION OF FEDERAL RESERVE
BANK OPERATIONS
FORD & LIBRARY GERALD
May 13, 1971
The Department of the REASURY
NEWS
WASHINGTON, D.C. 20220
TELEPHONE W04-2041
DEPARTMENT OF THE TREASURY
THE
1789
FOR RELEASE UPON DELIVERY
May 17, 1971
STATEMENT BY THE HONORABLE JOHN B. CONNALLY
SECRETARY OF THE TREASURY
BEFORE
THE SENATE FINANCE COMMITTEE
SUBCOMMITTEE ON INTERNATIONAL TRADE
MONDAY, MAY 17, 1971, 10:00 A.M.
I congratulate the Senate Finance Committee on
establishing this Subcommittee on International Trade,
and I welcome this opportunity to discuss with you the
broad aspects of our international economic policies.
Mr. Chairman, in March you submitted to the Finance
Committee a very thoughtful report concerning trade
policies in the 1970's. You indicated that we are at
a watershed. You said that in the future we must have
both a change in direction and a change in emphasis in
pursuing our foreign economic policy objectives. And
you also stated that those changes in direction and
emphasis had to be accompanied by a corresponding change
in the means of pursuing our objectives.
(MORE)
GERALD FORD LIBRARY
C-52
глям
2
I agree strongly with all of these conclusions.
And in this prepared statement, I would like to take just
a few minutes to underline that agreement, and to capsule
the type of actions necessary both at home and abroad
if we are to succeed in this important effort.
The road to good international economic relations is
not a one-way street -- no nation, regardless of power
or prestige, can or should "call all the shots" for the
free world community. Nor can we or others, in building
a world order, expect to rely for long on the goodwill
or largess of friends. We need to recognize that lasting
cooperation among nations depends not on friendship in
the personal sense, but on the solid base of national
strength and national interest. By taking a long and
broad view of our interests, and building on the elements
of common needs and aspirations, we can expect strong
allies in our endeavor to maintain a flourishing world
economy.
To play our proper role in the new age to which
you refer, there are things that we must do at home.
Just as important, there are steps that must be taken
by us and by our trading partners in building better
trading relationships abroad.
3
For many years we had the luxury of competing with
economies still recovering from war. We prospered during
this period. Now, circumstances have changed in the
world. We must change to meet these new circumstances.
A generation of ease and affluence enjoyed by labor and
business alike -- a period when our strength was so
apparent that erosion in our competitive position was
almost unnoticed -- is over.
As we enter the 1970's, the relative economic
strength of our major trading partners is abundantly
clear. The European Economic Community is now the world's
largest trading bloc, with large and persistent trade
surpluses. The prospects are that its membership and
economic base will soon be further expanded. Japan has
achieved a truly remarkable rate of growth. It now records
the second highest Gross National Product and among the
largest trade and balance-of-payments surpluses in the
free world.
The simple fact is that in many areas others are
out-producing us, out-thinking us, out-working us, and
out-trading us. Analysis of trends in our balance of
payments underlines this.
GERALD FORD LIBRARY
4
I do not refer just to the statistics for the first
quarter of 1971, to be released today. Those results are
bad. They depict a deficit of over $5 billion on the
official settlements basis for the three months alone.
The liquidity deficit exceeded $3 billion.
Clearly, that level of deficit is not sustainable.
However, we should clearly recognize that the major cause
of these extraordinary dollar outflows is transitory --
interest rates here which are lower than those in Western
Europe. That imbalance will be largely corrected as
economies move back into phase.
What disturbs me more than the first quarter deficit
is the underlying trend in our trade and current account
position. Our trade surplus rose in the first quarter,
but still ran below the rate for 1970 as a whole. More
importantly, it remains far below the levels of the early
1960's, and below the amount we need to achieve an
equilibrium in our balance of payments.
To keep pace in this world economy, our first task
is to attend to our own economy. We must restore the
stable, noninflationary growth that was disrupted by the
domestic financial policies of the late 1960's.
5
We are well on the way down this difficult road.
Our strategies for further containing inflation, while
raising output and reducing unemployment, are working.
In particular, we have begun to restore the base for a
stronger international position; last year, unit labor
costs in the U.S. rose only one-third as much as the
average of our major competitors. This is heartening
evidence of fundamental progress.
But the journey is far from over. We cannot afford
to sit back and count on poor performance abroad. Thus,
the remaining challenge before us at home is plain.
Our domestic economic strategy of balanced and
sustainable recovery will help rebuild our trade surplus --
but only slowly. In addition, we cannot hope to achieve
a full measure of success unless markets are open to us
and unless we are able to compete fairly with our trading
partners abroad.
Indeed we must paint on a larger canvass than trade
alone. We are now at a decisive point in our economic
affairs. The challenge in foreign economic policy for
the 70's involves three elements. First, the necessary
mutual security arrangements for the free world must
GERALD FORD VIBRARY
be maintained in full concert with our allies, with a
fair sharing of the burden. Second, multilateral coopera-
tion must be broadened in the financial and development
assistance areas. Third, the efforts to foster increased
6
competitiveness in our economy must be actively pursued
in the context of fair and liberal trading arrangements.
It is this last area that seriously concerns this
Committee today. I believe we have legitimate complaints
about some of the practices of other nations -- now in a
strong position -- that have the effect of blunting our
competitive effort. Twenty years -- even a decade -- ago,
these practices might have been understandable. I believe
the strength of other nations should now permit new
initiatives to break down these barriers.
I do not want to be misunderstood. I am not pleading
with other nations to reduce barriers and open markets
in return for what the people of the United States have
done for them in helping to recover from the ravages of
World War II. My point is simply that today we are in
a different world -- and there is a common interest in
achieving new and balanced trading relationships.
Mr. Chairman, there is another area -- in addition
to efforts by our Government and by governments abroad --
in which a new approach is necessary. I refer to the
private sector.
7
Bluntly stated, the statesmanlike leadership that
the President of the United States has evidenced in
dealing with this nation's foreign and domestic problems
has not been correspondingly matched in the private
sector. This is a time for the private sector to do
to
everything possible to hold down the rise in labor costs,
to avoid unnecessary increases in interest rates, and
to speed the return to price stability.
It is time for Americans to realize that stronger
efforts have to be made to raise productivity. We find
it too easy to blame the Government when in fact we are
all part of the factors which govern the course of our
economy. Labor and business have a bigger stake, a
larger voice, and a stronger hand in this economy than
Government does. It is now time for them to use that
strength constructively.
Our trading position shows that we will have to
work harder just to maintain our position. This nation --
its industry and its labor -- must help redress the
decline in our competitive position and improve our
economic performance in foreign markets. Government
should help when necessary and appropriate with credit
support, by fair taxation, and by promoting our tech-
nological leadership. This is why the Administration
GERASD 6.4.ORD LIBRARY
8
has strengthened the Export-Import Bank activities.
This is why we will resubmit our proposal for a Domestic
International Sales Corporation, changing tax treatment
of exports in a way to awaken our companies to the op-
portunities abroad. And this is why I am distressed at
the reduction in federal expenditures on research and
development.
Now, I realize that there may be a tendency to think,
or at least hope, that our international financial problems
can be taken care of by some sort of monetary magic.
Nothing could be further from the truth. Money itself
cannot produce, increase efficiency, or open markets
abroad. Our monetary system functions well only as
the economy as a whole functions well. A dollar is
not just a piece of black and green paper with George
Washington on one side and a big ONE on the other.
That little piece of paper represents and reflects the
economic vitality -- or lack of it -- of this country.
When this Administration calls upon businessmen,
labor leaders, and bankers to put their respective shoulders
to the wheel and work together for the common good, we
may run the risk of being described as old-fashioned,
for what I am calling for is a return to the principles
9
of hard work and responsibility -- principles that are
reflected in high and rising levels of productivity.
Productivity, in its broadest sense, is truly "the name
of the game" in the hard competitive world of international
trade. I do not at all mind being called old-fashioned
when the standard of living of the American people --
their personal and economic security -- is at stake.
At the same time, the private sector, from whom I
am calling for renewed effort, has every right to expect
and certainly should receive a more attentive interest
and a more insistent effort in protecting our economic
and financial interests around the world.
oûo
QERALD FORD LIBRARY
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date May 17, 1971
To
Mr. Axilrod
Subject: Immediate Price Effects of
From
Mrs. Smelker ms
Monetary Disturbances this Month
Futures price fluctuations for non-precious metals were not
much affected by the monetary disturbances this month. Copper
futures strengthened temporarily--the increase in prices on May 5
was attributed to monetary developments, but this was followed by a
resumption of declining futures prices. Copper spot prices fluctuated
but in general continued to move down.
Agricultural futures showed little effect, as would be expected.
Wheat, corn and soybeans futures apparently strengthened temporarily
after the Mark was floated, but other factors may also have been
important.
Attachm
Precious metal futures strengthened this month--particularly
gold and platinum.
Attachment.
TORO & LIBRARY
FR 201
Future Ruis of Selected Committes
(1-60)
1471
Monthd
APV
may
my
MAY
may
MAY
MAY
MAY
MAY
MAY
MAY
Commodity maturite
30
3
4
5
6
7
10
11
2
13
14
Chrise
what
/
MAY
158314
HE-8/LLS1
158 1/4
1605/8-1/2
1584-1/2
1581/2-5/8
1587/8-314
1587/4-14
160 5/8
159314-7/8
159112
LIBRARY
July
1513/4-5/8
1501/2
150-1497/8
1503/4-1/2
151112-3/8
15/38-1/2
1501/8-150
150-1501/8
15/1/2
1507/8
149314
Sept
1533/8-1/4
152'/4
151114
1521/8
152718
1531/8
15/1/4-1/8
151114
152 1/2
1517/8
1507/8
FORD
Dee
157 3/4
1561/2
1551/4
156
157114
1571/8
15514-18
1551/4
156112-5/8
155314
154314-70
#
76835
Com
/
may
143118-14
1431/2-5/8
1413/4-142
1427/8-143
144 7/8
1441/4-318
144-1441/8
1443/8-1/2
1457/2-146
1451/25/8
1487/8-149
July
1441/2-3/8
1443/8-112
1427/8-143
143 5/8-74
14434-78
1433/4-7/8
1431/8-1/4
143 118-1/4
1441/8-144
1437/8-34
145-1451/5
Sept
14378-112
14344-318
1415/8
1417/8-144
1427/8-143
1415/8-3/4
141
1401/2
14078-141
1403/4
1415/8
Due
14038-114
13978-34
13171-34
1373/4-5/8
138 1/2 - 14
137-137118
136/4
13578-58
1365/8-1/2
36-136118
137/4-3/8
Saykems
may
292-2921/2
2915/8-38
292118-14
2961/8-1/4
297-2963/4
295-29478
295 5/8
2975/8-1/2
2977/8-298
2968-296
297314
They
2951/8-112
2951/4-7/8
2953/4-7/8
300-2993/4
300'18-3/8
298-29734
29838-12
299 7/4-1/L
30018-14
298-2973/4
2983/4-78
Ang
295314-11-
295-2951/8
2953/8-14
299
299114-3/8
296 3/4
2973/8
2983/4-7/8
2991/8
296 5/8
2975/8-34
sept
2891/4-118
2891/4
2891/8-289
2931/4-3/4
2931/2-34
29/3/4-7/8
4923/4
29338-1/2
294118-14
2421/8
2927/8
NN
2833/8-1/2
28 35/8-3/4
283/12
2871/2-3/4
2891/8-289
2871/8-14
20774-288
2881/4-1/2
28918-318
2873/10-5/8
28814-25533/8
in
Cocoa N.Y.
MAY
24.45
24.00
23.65
23.99
23.79
23.36
23.53
23.20
22.90
33.30
22.88
They
23.34
22.75
22.40
22.70
22.55
22.29
22.47
22.30
22.05
22,45
21.93
Sept
23.85
23.28
22.95
23.24
23.06
22.82
22.97
22,80
22.56
22.90
22.48
Due
24.35
23.75
23.45
23.71
23,60
23.36
23.48
23.30
2300
23.44
22.92
GOLD (London, 3P.M.)
39.70
39.43
39.65
40.10
40.30
39.775
39.84
40.20
40.45
41.20
FR 201
1-971 Fatures Price Movements
(1-60)
Commodity
May 3 to May 14, 4971
Month of
Apr.30
MAY
MAY
MAY
MAY
MAY
MAY
MAY
MAY
how
how
3
Maturity
4
5
6
7
10
11
12
13
14
MERCANTILE Exch.
PALLADIUM
Jane
34.90
33.80
34.50
35.00
35.00
35.00
35.00
35.00
35.00
LISE
35.00
Sept
35.00
34.75
34.75
34.75
34.75
35.00
3475
34.75
34.75
34.75
34.75
PLATINUM
July
102.40
101.50
103.70
106.50
106.90
106.10
105.30
106.50
107.00
109.50
110.90
BRARY
OCT
103.80
103.40
105.90
108.90
108.80
107.90
106.90
107.90
108.50
110.70
111.70
JAN
105.80
105,40
107.60
110.60
110,50
109.50
109.60
109.50
110.00
112.80
113.30
080
APR
107.70
107.00
109.70
112.50
112.10
111.30
111.00
111.00
111.50
114.50
115.50
July
109.50
109.00
110.70
114.00
114.00
113.00
112.00
113.00
113.50
116.00
117.30
GERAL
out
109.50
116.50
116.60
115,00
113.00
115.00
116.00
117.50
119.50
NICKEL
130.00
June
130.00
130.00
-
130.00
130.00
130.00
130.00
130.00
130.00
1
-
VER
MAY
167.80
164.50
167.50
170.10
169.50
169.00
167.70
167.40
168.10
170.70
168.70
June
169.00
156.60
168.50
171.10
170.50
169.90
168.60
168.30
168.40
171.30
169.30
July
170.20
166.70
169.60
172.20
171.60
71.00
169.60
169.30
169.90
172.30
170.30
Bept
172.60
164.00
171.90
174.50
173.90
173.30
171.90
171.60
172.20
174.60
172.60
Dec
176.10
172.40
175.40
178.00
177.40
176.80
175.40
175.10
175.70
178.10
176.10
JAN
177.20
173.40
176.50
179.20
178.60
178.00
176.60
176.30
176.90
179.30
177.30
MAR
179.50
175.80
178.80
181.50
180.90
180.30
178.90
178.60
179.20
181.60
179.60
MAY
181.80
178.10
181.10
18380
183.30
182.70
181.20
181.00
181.60
184.00
182.00
July
184.10
180.40
183.40
186.10
185.60
185.00
183.50
183.30
183.90
183.30
184,40
Sept
187.40
182.70
185.70
188.40
187.90
187.30
185.80
185.60
186.20
188.70
186,70
Copper
MAY
53.40
53.10
51.90
52.30
52.05
52.50
51.60
49.90
50,35
50,00
50.60
July
54.10
53.80
52.60
53,00
52.65
53.05
52.15
50.50
50.90
10.50
51.05
Sept
54,55
54.35
53.20
53.55
53.15
53.55
52.60
50.90
51.35
51.05
51.50
OCT
54,65
54.55
53.30
53,60
53.25
53.65
52.80
50.95
51.40
51.10
51.55
Dec
54.65
54.45
53.30
53.60
53.25
5365
52,60
50.90
51,40
51.15
51.60
JAN
54.65
54.45
53.30
53.60
53.25
53.65
52,60
50.40
51.45
51.20
51.65
MAR
54.60
54.40
53.25
53.55
53.25
5365
52.60
50.90
51.50
51.20
51.61
MAY
54.55
54.35
53.25
53.55
53.25
53.65
52.60
10.40
51,50
51.20
51.65
Time
MAY
164.00
163.00
163.00
164.00
163.25
163.50
162.75
sie'l
163.25
163.50
163.75
SEPT
164.00
163.00
163.00
164.00
163.25
163.50
162.75
163.25
16325
163.50
163.75
LME cyperwiter BID
492.50
480,00
484.50
474.0
482,50
473,00
466.50
457.00
487.00
463.50
46600
SPOT
Forward
497.50
502.50
490.00
494.00
484.0
492.50
483,00
476.00
467.00
473,00
475.00
THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date May 17, 1971.
To
Chairman Burns
Subject: Information Requested at
From
Peter Treadway
May 14, 1971 Board Meeting.
Enclosed are the following:
1. A graph showing the relative performance of selected
stock price indices from January 1968 through April 1971. This graph
gives a broad view of stock price movements over the last three years.
2. A graph showing the relative performance of selected stock
price indices from July 1970 through April 1971. This graph presents
clearly the relative recovery of each index from its average monthly
1970 low.
Note that both graphs plot indices by cumulative per cent
changes over the period specified. We chose this method instead of
plotting actual monthly values on log paper because this achieves
virtually the same result and in this case made the graph easier to read.
3. A chart showing net purchases, gross purchases and gross
sales of U.S. stocks by foreigners. This chart contains the latest
Treasury data available and shows that stock trading volume accounted
for by foreigners had increased substantially through March but that
foreigners in early 1971 had to a small extent become net sellers of
U.S. securities.
FORD & LIBRARY 938170
FR 730
RELATIVE PERFORMANCE OF SELECTED INDICES,
Qumulative
Jan, 1968 through April 1971
Percentage Change
140
NQB (Industrials)
130
120
110
Amex
y
NYSE Composite
100
90
S & P Low Price
Common Stock
80
70
60
50
40
30
20
076839 LIBRARY
1968
1969
1970
1971
LIBRARY
GREATO
Cumulative
RELATIVE PERFORMANCE OF SELECTED INDICES,
Percentage Change
July 1970 through April 1971
160
155
S & P Low Price
Common Stock
150
NQB (Industrial)
145
140
135
NYSE Composite
130
Amex
125
120
115
110
105
100
FR 730
95
1970
1971
FOREIGN PURCHASES & SALES OF U.S. STOCKS
(In $ millions)
STOCKS
Net
Gross
Gross
Purchases
Purchases
Sales
Year: 1968
2,270
13,118
10,848
1969
1,487
12,429
10,942
1970
623
8,927
8,304
1970
January
(43) r
775
818 r
February
(13) r
756 r
768
March
(41)
855 2
895 r
April
4 r
732 r
728 r
May
(200)
628
829
June
63 r
626
563 r
July
52 r
545 r
493 r
August
104
535
432
September
225
829
604
October
158
948
790
November
98
619
521
December
216
1,078
862
1971
January
130
999
869
February
(32)
1138
1170
March/p.
(36)
1072
1108
/p. New York District only, representing 90% of the total.
BERALD FORD LIBRARY
r = revised
BOARD OF governors OF THE FEL AL RESERVE SYSTEM
DATE 5/20
Chairman Burns
TO
FROM ROBERT SOLOMON
The attached memo spells out
the case for having central banks reverse
their Eurodollar placements directly
rather than through the BIS.
RS
Attachment.
GERALD & FORD LIBRARI
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date
May 20, 1971
Mr. Robert Solomon
To
Subject: Use of BIS in shifting foreign
Robert F. Gemmill
From
central bank funds to the United States
CONFIDENTIAL (FR)
If it is desirable to secure withdrawal of foreign central bank
funds from the Euro-dollar market, it would appear possible to accomplish
that result without involving the BIS.
1. Any withdrawal would have to be spread over a considerable
period of time so as not to precipitate a crisis in the Euro-dollar
market -- or boost Euro-dollar rates sufficiently to contribute to a
sizable outflow of U.S. capital in a short period of time.
2. Thus, foreign central bank balances withdrawn from the Euro-
dollar market would be invested in the United States over a period of time;
maturities could be staggered, so that the average time remaining to matu-
rity of the investments in a foreign central bank's portfolio would always
be about half that of the original maturity of the individual investments.
3. At current rates, a foreign central bank could have a port-
folio of 90-day CD's (average maturity 45 days) with an average yield of
5 per cent, or a portfolio of 30-59 day CD's (average maturity 15-30 days)
with an average yield of about 4-1/2 per cent.
The foreign central bank could obtain somewhat greater liquidity
(for any given average maturity of portfolio) if it invested in Treasury
bills rather than CD's, and a somewhat lower yield (3-month bills currently
about 4.4 per cent, and 30-day bills about 4 per cent.)
4. Foreign central banks have reportedly invested funds in
3-month deposits with the BIS at 4-3/4 per cent yield with a 2-day call.
The yields available on U.S. assets come quite close to the yields on
deposits with the BIS, and it should be possible to persuade foreign
central banks that the small yield advantage that individual banks
might obtain on BIS deposits was outweighed by the adverse effects of
the practice in fostering a multiple expansion of reserves.
GERALD FORD LIBRARY
Mr. Robert Solomon
-2-
CONFIDENTIAL (FR)
5. If foreign central banks require greater liquidity on
their dollar holdings in the United States than would be provided by
staggered maturities -- e.g., if the two-day call provision that they
reportedly have on deposits with the BIS is an important element in
their investment decisions -- this could be provided through use of
the Federal Reserve swap network.
6. The BIS itself uses the swap line to obtain liquidity,
and any proposal that involves use of the BIS as an intermediary
therefore implicity (if not explicitly) involves use of the Federal
Reserve swap network as an ultimate source of liquidity. In principle,
it would be preferable to provide liquidity directly to foreign central
banks through the swap, rather than using the swaps to support the BIS
in a profit-making operation. Why not eliminate the middle man?
cc: Hersey, Reynolds, Pizer, Bradshaw
GERALD FORD LIBRARY
[0.8-71?]
Exchange Rate Changes Required to Achieve Balance of Payments Targets
(In billions of SDRs)
Current Account Balance
Trend
Current
Adjustment
Required Exchange
for 1970, Cyclically Ad-
Adjust-
(1) + (2)
Account
Needed to Reach
Rate Change Relative
justed
2/
ment
Target (1970) 3/
Target
to U.S. Dollar
(4) - (3)
(in per cent)
(1)
(2)
(3)
(4)
(5)
(6)
KORD
Belgium-Luxembourg
0.7
0.0
0.7
0.2
-0.5
10.0
France
0.0
-0.2
-0.2
0.3
0.5
7.3
Germany
3.8
0.8
4.6
1.8
-2.8
13.4
Italy
1.1
0.0
1.1
0.8
-0.3
9.4
Netherlands
-0.3
0.2
-0.1
0.2
0.3
7.3
United Kingdom
1.0
-0.2
0.8
0.9
0.1
7.2
Canada
1.1
0.2
1.3
-0,2
-1.5
12.1
Japan
3.3
1.0
4.3
1.6
-2.7
15.0
United States
-1.2
-2.0
-3.2
4.8
8.0
0.0
Other OECD
0.0
0.2
0.2
-0.9
-1.1
9.3
1/ Goods, services, and private remittances. Based on OECD paper CPE/WP3(71)13, Table 2, and data supplied by OECD Secretariat; 1970 current
balance for U.S. lowered by $0.5 billion in accordance with latest, revised U.S. estimates.
2/ Rough projection of change from 1970 to 1972 in column (1) figures in the bsence of exchange rate changes. Figures expressed in 1970 price
3/ Based partly. on OECD estimates of "reasouchly balanced position in 1970" (CPE/WP3(71)13, Table 3), and partly on IMF staff estimates of
"normal" net Clows or pital and id,
4/ Calculated on the basis.lof the IMF staff's mltilateral exchange rate model, Changes measured from parities prevailing before May 30, 1970.
-
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date August 9, 1971
To
Chairman Burns
Subject: Dale Proposal Regarding
Robert Solomon
From
Exchange Rate Realignment.
SECRET
The attached paper written by Bill Dale, sets out a
proposal for achieving a sizable realignment of exchange rates
--aimed at producing a large U.S. surplus--and doing so without
raising the official price of gold. I understand that this paper
has been seen by Secretary Connally and Peter Peterson.
RS
DECLASSIFIED
Attachment.
AUTHORITY Ed. Rs th 11/16/82;
FORD & LIBRARY GERALD
Teasury th. 8/22/06
BY We
NARA, DATE 9/29/09
Attachment A
SECRET
Exchange Rate Realignment and Related Matters
The points made below attempt to lay out some essential elements
of a scenario which would be aimed at accomplishing a major realignment
of exchange rates while still observing certain of the unavoidable con-
straints on possible action by the United States and taking account of
what may be legally and practically feasible in the existing international
monetary system.
A. This approach would concentrate action within a period of two
weeks at the longest (it should, of course, be made as short as feasible)--
the week prior to, and the week of, the IMF Annual Meeting this year. In
the week prior to the weekend when the IMF Governors arrive in Washington,
the United States would discontinue the "free" sale of gold and SDR's
against dollars and would close its exchange markets. Other major coun-
tries would presumably do the same. The aim would be to reopen exchange
markets within two weeks. During the week preceding the Annual Meeting,
the U.S. authorities would seek Congressional action permitting the United
States to initiate and approve a major realignment of exchange rates. The
type of Congressional action to be sought is shown in Attachment 1. The
essence of the approach would be that the President and other officials
delegated by him would be authorized to propose and agree to a combination
of a uniform change in par values and a change in the par value of the
U.S. dollar in such a manner tha t the official U.S. dollar price of gold
would at no time exceed $35 per ounce. This would be sought by an initial
step comprising a uniform appreciation of the currencies of all Fund mem-
bers so that the official U.S. dollar price of gold would be below $35
for an interim period of a few days. The percentage rates of uniform
appreciation corresponding to various gold prices down to $28 per ounce
are shown in Attachment 2. After a uniform appreciation of the appro-
priate magnitude (say, up to 25 per cent) the United States would pro-
pose, and the Fund would agree to, an individual depreciation of the U.S.
dollar back to the point where the official price of gold would be $35.
B. Having obtained the necessary Congressional legislation (which
is formulated in Attachment 1 in general terms so that similar exchange
adjustments could also operate in the future) the United States would
have, beginning with the weekend preceding the Annual Meeting, the var-
ious groups of foreign officials at hand with which international
DECLASSIFIED
SECRET
FORD is LIBRARY GERALD
AUTHORITY Treasury th. 8/22/06
BY
NARA, DATE
SECRET
-A2-
negotiations would be orchestrated. These would include, in addition to
the full IMF Board of Governors itself, the G-10 Deputies, the G-10
Ministers and Governors, the EEC officials and the IMF Board of Directors.
The United States would propose that a uniform appreciation of, say, 25
per cent, up to an official gold price of $28 be approved by the Fund.
This would require approval by the Board of Governors by 85 per cent of
the total weighted voting power. In addition, every member has the right,
under the Articles of Agreement, to "opt out" of a uniform change in par
values simply by notifying the Fund within 72 hours that it does not wish
the par value of its currency so changed. The United States would make
clear in its proposal that not only must the uniform appreciation be
approved by the Board of Governors, but that if more than a very small
number of countries (say, countries not exceeding 5 per cent of the Fund
quotas and excluding any industrial countries) were to "opt out," the
United States would not be prepared to proceed with the second half of
its proposal. After the 72 hours within which countries can "opt out"
had passed following adoption of the uniform appreciation by the Board
of Governors, without more than a very few defections via "opting out,"
the United States would then propose an individual change in the par value
of the dollar constituting a depreciation back to where the dollar price
of gold would be $35. Once this was approved by the Fund and placed in
force, the result would be a major realignment of exchange rates which
could be called either an appreciation of other rates relative to the
dollar or a depreciation of the dollar relative to other currencies,
depending on one's taste and one's national affiliation. One of the
major features of this scenario, however, would be that the "burden of
initiative" would largely fall on and be taken by the United States.
It is clear, of course, that the United States would have to place sub-
stantial pressure on other countries to make them "stand still" for the
exchange rate change contemplated.
C. The broad rati onale for the exchange rate realignment which
would be aimed at by this scenario would be essentially as follows:
1. It should be agreed internationally that for a sustained
period of time--say, five years as a minimum--the United
States and the world should aim for a U.S. official settle-
ments surplus (excluding SDR allocations) in the range of
$2-3 billion per year, abstracting from short-term devi-
ations.
2. This should be aimed at by an immediate major realignment
of exchange rates, and any individual exchange rate changes
proposed by other countries later during the quinquennium
should be judged importantly against this generally-agreed
objective (see point D below). Adding up the "underlying"
SECRET
QERALD FORD SEBRARY
SECRET
-A3-
U.S. deficit (i.e., abstracting from existing cyclical
and random factors in the present deficit) together with
the balance of payments cost of completely liberalizing
?
capital flows and other transactions as well as allowing
for an average surplus of $2.5 billion per year (exclud-
ing SDR allocations), this would probably mean the need
for an annual improvement in our balance of payments on
the order of $6-8 billion. It is this range of figures
at which a realignment of exchange rates should be tar-
geted.
3. The present rate of SDR allocations is undoubtedly too
small. In addition, it is based on the assumption that
net additions to world reserves in the form of U.S. dollars
will be $0.5-1.0 billion, rates which are presently being
greatly exceeded and which are likely to be exceeded for
the whole of the first three-year period. If the figure
of +1.0 billion for reserves created via the U.S. balance
of payments (the top of the range in the assumptions stated
in the Managing Director's proposal) were replaced by -2.5
billion, the present allocation rate of $3.0 billion annually
would have to be boosted to $6.5 billion to produce the same
aggregate results in terms of world reserves as was being
aimed for. In the context of an agreed exchange rate policy
aimed at producing a sustained U.S. official settlements
surplus (excluding SDR allocations) of $2-3 billion per
year, other countries would necessarily be much more vul-
nerable to balance of payments difficulty, and might well
be willing to support a still higher rate of SDR allocation.
Even at an allocation rate of $6.5 billion, however, the
United States would receive around $1.5 billion per year,
so that in this situation our net reserve position would be
improving by around $4 billion per year, or $20 billion over
a five-year period.
4. Our willingness and wish to aim for such a surplus would
represent, by comparison with the situation today, the pro-
vision of substantial additional resources to the rest of
the world-something in the neighborhood of 2/3 to 3/4 of
one per cent of our GNP and roughly half that proportion
of world GNP. For the rest of the world, that would repre-
sent not inconsiderable help in dealing with the inflation
that nearly all of their Governors complained about at
Copenhagen. For us, it would involve somewhat more of an
export-led upturn, and the price changes involved (in the
form of an exchange rate realignment) could assist materi-
ally in resisting domestic protecti anist pressures. It is
FORD
only fair to note, however, that this shift in the use of
GERALD
LIBRARY
SECRET
SECRET
-A4-
resources to the external sector would of course imply
the use of correspondingly smaller volume of resources
domestically within the United States, and this in turn
(both to facilitate the contemplated shift in use of re-
sources and to compensate for its impact on the domestic
len
situation) would imply an additional degree of restraint
in fiscal and monetary policies.
elese
5. We could say that only in connection with such a sustained
period of official settlement surplus would we be willing
to look seriously at a negotiation contemplating putting
the world, including the United States, on a full reserve
asset settlement basis. In other words, we might be willing
to try to work ourselves out of the reserve currency business--
always abstracting from reasonable working balances--but other
countries would have to be prepared to accept the implications
of this in terms of the exchange rate pattern and balance of
payments situations being aimed at.
6. An indirect SDR-aid link, but one of quite substantial quan-
titative importance, would also be involved in this procedure.
The LDC's would receive about one-fourth of any increase in
SDR allocations resulting from the proposed shift in the U.S.
position. If the assumption is made that their absolute re-
serve targets (whether implicit or explicit) would not change,
the additional SDR allocations would, in effect, be the same
as an equivalent amount of completely untied program aid.
If the figures given above have some validity, the additional
SDR allocations to the LDC's could be in the range of some
$950 million per year, an amount of no mean importance when
compared with IDA plans and with the external resources
otherwise available to the LDC's.
D. The initial result of successfully implementing this scenario
would be a large and essentially uniform alteration in the exchange
relationship of the dollar to other currencies. It seems fairly clear
that at least some currencies, and perhaps quite a few (in terms of
numbers of countries) would want to depreciate from the level at which
they had been placed at least part way with the dollar and in a number of
cases all the way. Such subsequent individual exchange rate depreciations
should be dealt with separately in the ensuing period. As a general propo-
sition, the substantive justification for any individual depreciation of
this type should be required to show that the country's balance of pay-
m ents loss from the initial exchange realignment could be expected to
exceed its reserve gain from the increased SDR allocations discussed in
point C above. In this connection, one might wish to accelerate or "front
load" the newly-enlarged SDR allocation process, so as to have the larger
amounts available in dealing with initial capital flows stemming from the
realignment procedure.
SECRET
GERALD FORD LIBRARY
SECRET
-A5-
E. One important and obvious question would be the role of gold in
the new situation. I have examined carefully over quite a period of time
whether there is some procedure--even a quite complex one--by which of-
ficially-held gold could be turned in to the Fund, directly or indirectly
against SDR's. I have not been able to discover any technique available
under the present Articles of Agreement which would accomplish this to
any significant degree; it would require an amendment which would neces-
sarily be time-consuming, at the least, to negotiate and get ratified.
It is difficult to know what would be likely to happen to the market price
for gold after the above scenario had been worked out. The scenario, if
it worked, would have the symbolic virtue of showing that, at least for
an interim period of a few days, the official gold price could be reduced.
Also, and much more important, the anticipated strength of the U.S. bal-
ance of payments position should have a dampening impact on the dollar
gold price in the markets. To the extent this was a very strong effect,
we might find the price falling to or below $35, in which case the present
arrangement with South Africa would operate to bring a lot of South African
gold into the Fund. We would have to examine whether the present South
African arrangement should be terminated or modified, which would be justi-
fiable under the provision of the Fund Decision which states the arrange-
ment "shall be subject to review whenever this is requested because of a
major change in circumstances." (For further information on available
present techniques for dealing with gold, see the attached memorandum.)
F. Point C.5 above mentioned briefly that the United States might
want to be willing to consider, in connection with this scenario, the
negotiation of something resembling a reserve settlement account as a
means of working our way out of the existing situation in which the U.S.
dollar is held in large amounts in the reserves of other countries. We
would want to consider whether deliberately working our way out of the
reserve currency business could be done in such a manner as to leave the
dollar in its vehicle currency role, which there is no doubt is essential,
and will doubtless continue to be essential, for the functioning of the
system. If we concluded that these two roles could in practice be dis-
tinguished, we might well want to engage in a negotiation (which would
probably be protracted and which would require amendment of the Articles
of Agreement) and to so announce at the time our exchange realignment
proposals were unveiled. One form such a proposal might take would be
to create a third account in the Fund, into which countries could deposit
gold and currencies held in their reserves as of a certain (earlier) date,
and against which they would receive SDR's. It would be possible, perhaps,
for the dollars deposited in such a conversion account to be simply left
there in dead storage. The other possibility would be that the United
States would amortize them over a certain agreed period of time with SDR's.
If this were the procedure, the United States would of course have to run
a balance of payments surplus (on official settlements) of the appropriate
size and this would have continuing longer range implications for both
-SECRET
GERALD FORD LIBRARY
SECRET
-A6-
the world's exchange rate pattern and the rate of SDR allocation. Finally,
in order to avoid the tendency for many countries to begin again holding
dollars or other currencies in their official reserves, and thus starting
the whole cycle once again, it seems to me doubtful that mere international
agreement that this should not be done would be likely to get very far as
a practical matter in influencing official behavior. If avoiding foreign
currency holdings in reserves above levels constituting reasonable working
balances on the one hand, or representing the result of swap transactions
on the other, were to be an agreed objective, the best way--and perhaps
the only way-- to do this would be to raise the interest rate on SDR's to
the point where countries would wish to hold SDR's in their reserves in
preference to currencies. This idea would seem to imply that SDR interest
rates would have to be fairly frequently adjusted so as to be competitive
with the relevant interest rates in the appropriate national or inter-
national markets.
G. Other than in those cases where exceptions are expressly men-
tioned above, everything suggested in this note can be accomplished under
existing provisions of national or international law. It is obvious that
the negotiating problems would be of a truly extraordinary degree of dif-
ficulty and complexity; that technical and policy "spinoffs" from the
main propositions briefly put forward above could be major; and that--at
least in the short term--financial markets everywhere would be in an up-
roar. The question is: Can a gradual (or fast) disintegration of the
free world's economic and financial system be evaded by any less ambitious
proposal?
Attachments
SECRET
FORD
GERALD
LIBRARY
SECRET
Attachment 1
Congressional Action
"Pursuant to Section 5(b) of the Bretton Woods Agreements Act,
as amended, the Congress hereby authorizes the President, the United
States Governor of the International Monetary Fund, and such other
officials as may be delegated by them, to make such proposals and to
indicate such agreement or approval on behalf of. the United States
with respect to changes in the par value of the United States dollar
(under Article IV, Section 5 of the Articles of Agreement of the
Fund) and with respect to uniform changes in the par values of the
currencies of all members (under Article IV, Section 7 of the
Articles of Agreement of the Fund), as may be deemed by the Presi-
dent to be in the public interest, provided that at no time shall
the par value of the United States dollar be equivalent to an official
price of gold in excess of 35 United States dollars per fine troy
ounce."
Note: Section 5 of the Bretton Woods Agreements Act states, "Unless
Congress by law authorizes such action, neither the President nor any
person or agency shall on behalf of the United States (b) propose
or agree to any change in the par value of the United States dollar
under Article IV, Section 5, or Article XX, Section 4, of the Articles
of Agreement of the Fund, or approve any general (sic) change in par
values under Article IV, Section 7;
SECRET
R.
FORD
GERALD
LIBRARY
SECRET
Attachment 2
Appreciation-Depreciation Percentages
Percentage Rate of
Percentage Rate of
Uniform Appreciation
Dollar Depreciation
Interim Gold Price
to Reach Indicated
to Move from Indicated
($ per ounce)
Gold Price-
Gold Price back to $352/
34.50
1.45%
1.43%
34.00
2:94%
2.86%
33.50
4.48%
4.29%
33.00
6.06%
5.71%
32.50
7.69%
7.14%
32.00
9.38%
8.57%
31.50
11.11%
10.00%
31.00
12.90%
11.43%
30.50
14.75%
12.86%
30.00
16.67%
14.29%
29.50
18.64%
15.71%
29.00
20.69%
17.14%
28.50
22.81%
18.57%
28.00
25.00%
20.00%
1
This also equals the percentage increase, in U.S. dollar terms,
of the price of an imported item whose price in foreign currency
remains unchanged, after completion of both steps in the proposed
exchange realignment.
This also equals the percentage reduction, in foreign currency
terms, of the price of a U.S. export item whose U.S. dollar
price remains unchanged, after completion of both steps in the
proposed exchange realignment.
SECRET
GERALD R. FORD LIBRARY
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date August 9, 1971
Chairman Burns
To
Subject: Questions on Suspension,
From
Robert Solomon
STRICTLY CONFIDENTIAL (FR)
Ralph Bryant has set down the attached list of questions on
stage-managing a U.S. suspension of gold sales. We shall try to come
up with some answers--or at least some considerations that would help
in formulating answers.
More important than stage management, of course, are the
questions that relate to the substance of the U.S. position in the
lengthy negotiations that would follow a suspension.
R.S
Attachment.
FORD is LIBRARY GERALD
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date August 6, 1971
To
Mr. Robert Solomon
Subject: Stage-Management of a U.S.
From Ralph C. Bryant
Suspension of Gold Sales and Purchases:
A Checklist of Questions
STRICTLY CONFIDENTIAL (FR)
It is possible, as we have known for some time, that a suspension
of gold sales and purchases could come to seem desirable or even inevitable.
As a contribution to our contingency planning, I have been thinking again
about the details of stage-managing such a policy action. The purpose of
this note is to collect together some pertinent questions.
1. What would be the least unfavorable climate in
which to suspend? How far should U.S. reserve assets be drawn
down before such action is taken? (On these questions see our
memorandum dated May 10, 1971 (?) entitled "Timing of a U.S.
Suspension of Gold Sales and Purchases."
2. Should gold purchases be suspended as well as
sales, and should statements about future policy refer to sales
and purchases symmetrically?
3. Should U.S. action and/or statements of intention
differentiate gold and SDR, or should they be treated equivalently?
For example, would we unequivocally suspend SDR sales and purchases?
4. Following suspension, and pending a longer-run
resolution of the crisis, should the United States make any use
of its reserve assets? Would there be any net advantage in the
United States taking an initiative to make a post-suspension
distribution of some of our reserve assets to our "friends?"
(For example, suppose gold requests from Belgium, France, the
Netherlands, and Switzerland had proximately triggered closing
of the window, and that as a sweetener to Germany, Japan, and
Canada we offered to distribute to these "non-panicky" creditors
$1-2 billion of our gold and reserve position in the Fund.) What
criteria could be used to select countries and amounts in such a
distribution? Could we legally draw from the Fund after suspending?
Could we get Fund Board approval? How much would post-suspension
use of our reserve assets weaken or strengthen the incentives
other countries would have to reach a crisis resolution quickly?
DECLASSIFIED
AUTHORITY Fed.Res the 11/16/82; State guildings
FORD & LIBRARY GERALD
BY Wh NARA, DATE 9/29/09
Treasury in. 8/22/06
- 2 -
STRICTLY CONFIDENTIAL (FR)
5. Should a suspension decision be announced publicly
at the time it is taken, or should an attempt be made initially
to keep it confidential? How long would it be in the interest
of hostile countries to keep it confidential that they had found
the gold window closed? A confidential suspension might give
governments a little time to act without the pressure of crisis
headlines -- for example, to meet in Fund or G-10 for the purpose
of agreeing on a schedule for further meetings to bargain out a
crisis resolution. In the period following suspension and before
the public acknowledgment, what line could the Administration
take in replying to pointed press questions? What form should
a public announcement take (e.g., Presidential speech, news
conference, release of official letter to IMF, communique of
Group of Ten)?
6. Following open acknowledgment of suspension, what
educational activities could members of the Administration take
to set the decision in perspective for the general public (and
hence to minimize public pressure for a too-hasty, inappropriate
resolution of the crisis).
7. What would the exact legal situation be with respect
to the IMF Articles of Agreement? With respect to existing U.S.
legislation?
8. Should the U.S. monetary authorities intervene in
the New York exchange market -- either to drive the dollar to an
appropriately large discount vis-a-vis the currencies of strong
surplus currencies, to minimize large daily fluctuations in rates,
or both? Are there any legal restrictions in U.S. legislation
that would prevent us from accumulating a large amount of foreign
currencies?
9. How much of the initiative for convening a con-
ference with other governments should be taken by the United
States? Is our post-suspension bargaining position stronger or
weaker if we sit on our hands and let other countries take the
initiative? Could a policy of temporarily sitting on our hands
be viable in the face of domestic political pressure? Should
the U.S. bargaining position (our preferred longer-run resolution
of the crisis) be made public at the outset, or would there be
advantages in keeping back some of our possible concessions
(e.g., a willingness to reduce the reserve-currency role of the
dollar by participating in a general consolidation of reserve
assets) ?
R.FORD ABRARY
- 3 -
STRICTLY CONFIDENTIAL (FR)
10. What should policy be with regard to post-
suspension use, by the United States or by other governments,
of the Federal Reserve and Treasury swap network? (There is
of course also a very important set of questions about use of
the swap network in the period of time (days or weeks)
immediately prior to suspension action.)
OF is BRARY GIV839
draft
IMP
C. A. Coombs:
8/13/71
BURNS
MEMORANDUM TO CHAIRMAN BYRNES
From: C. A. Coombs
1. Advocates of closing the gold window seem to be
atlerst
overlooking one disastrous consequence of such action.
des
This would be the massive
distruction of international
insxorably
liquidity that would inescoriably follow. The main reason
for such a violent contraction of international liquidity
would be the general expectation of foreign financial offi-
cials of an early increase in the official price of gold
internationally, with or without U.S. concurrence.
2. Quite aside from the freezing of our own gold stock
resulting from closure of the window, the following major
components of international liquidity both here and abroad
would be immediately frozen or immobilized:
(a) SDR's. Most countries would refuse to sell
any of their present holdings of SDR's, which carry a cate-
gorical gold value guarantee, so long as they face the risk
of a major increase in the official gold price, either here
or abroad.
FORD i LIBRARY GERALD
2-
(b) Closure of the gold window would pull out
the cornerstone of the IMF and immediately paralyze any
lending operations by that institution.
(c) The Federal Reserve swap network would be
XXXX
inoperable.
3. The main problem facing foreign countries following
closure of the gold window and a floating rate for the dollar
would be to negotiate a monetary block among themselves
providing reasonable stability in their exchange rates
fis-a-vis one another. Otherwise, trade within the common
Suffer a
Market and with adjoining countries would separate catastrophic
decline. In order to maintain such exchange rate stability
among themselves, they would have to devise some mutually
acceptable system of settling deficits and surpluses in their
trade with one another. Over the past 10 years the Federal
Reserve swap network, the intornational IMF quotas and, more
recently, SDR's, have provided the financing for the bulk of
such payment balances. NN With these sources of liquidity
suddenly destroyed or otherwise immobilized, the Common Common
FORD is LIBRARY 9FRA70
- 3
inconventible,
Market and other foreign countries involved would have to
fall back upon their present holdings of gx gold and dollars.
Clearly, none of the foreign central banks involved are
concerned would be prepared to accept settlement of their trade
still inconveitible
surpluses by taking in more convertINg floating dollars from
their trading partners in deficit. In effect, therefore, the
the Common
only effective means of international settlement among common
Market and other foreign countries concerned would be their
present gold holdings. These gold holdings ***** have risen
but
provide
very substantially over the past decade and are still ^ no where
near adequate to provide international liquidity for the
foreign countries concerned. Moreour, why should they sell
X
C
m
4. Therefore, the common market countries and other
foreign countries concerned would be inescoriably inexurably compelled
to strengthen their reserve positions by jointly taking
the action many of them have long since been asking of us,
529,870.
i.e., to raise the official price of gold from $35 to, $70.
TMXXMXXXXXXCXMX
FORD is LIBRARY GERALD
Fuld among 2 at $35.-
when the Lon dur P Free market
price might be at $ 70.-,
and the March 1968
agreement no lunger valid.
-4-
The United States, having closed the gold window, would have
out
taken itself completely our of such a foreign negotiation
and could do nothing to stop it. We would then be confronted
with a foreign official and effective price of gold looking
of
down at,
say $70
practical
looking at our normal $35 dollar price.
mominal
Just as occurred in during the 1930 S we should have no alternative
official
but to accommodate our official prices to the foreign price.
5. The sequence of events sketched out above would,
inexerably
I think, be inescoriably dictated by the facts of the
situation created by a U.S. closure of the gold window.
individual
On numerous occasions in the past, scare central bank officials
have predicted to me precisely such a sequence of policy
actions abroad.
FORD :- LIBRARY
R.M.P.
August 13, 1971
STRICTLY CONFIDENTIAL (FR)
U.S. Liabilities to Foreign Official Institutions
(Increases; millions of dollars)
Switzer-
United
Total
land
Germany
France
Kingdom
Japan
Other
1970 Year
7,344
254
6,151
808
-444
514
61
1971 Q-1
4,546
110
2,019
354
1,049
1,026
-12
Q-2
5,659
350
707
190
1,628
1,916
1/
868
July2/
2,200
-80
265
725
365
600
325
/
August
2-6
920
418
-342
295
60
373
116
9
750
550
--
45
60
59
36
10
270
155
--
58
--
57
--
11
460
60
--
80
250
60
10
12
1,000
625
39
100
120
65
51
13
950
235
5
320
4/ 170
75
145
Aug. 2-13
4,350
2,043
-298
898
660
689
358
1/ Includes increase of $650 million in liabilities to Bank for International
Settlements.
2/ Partly estimated.
3/ Based on reports of market interventions by foreign central banks.
4/ U.K. figures not final; may be intervening in New York market.
FORD & LIBRARY 938870
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For Safire's notes on Camp David
meeting, August 13-15, 1971
see Name File, Safire, William
SR, 11/83
FORD is LIBRARY GERALD
AND NOT FOR PUBLIC USE
FOR
AGENDA
SM/71/214
Chm Burns
8/18/71 Crit)
August 16, 1971
To:
Members of the Executive Board
From:
The Secretary
Subject: United States - Exchange System
The attached memorandum of the staff containing a proposed
decision concerning the exchange system of the United States will be
taken up at the Executive Board meeting scheduled for 4: 30 p.m., today,
August 16, 1971.
Att: (1)
Other Distribution:
Department Heads
Division Chiefs
FORD & LIBRARY 9ERALD
INTERNATIONAL MONETARY FUND
United States of America - Exchange System
Prepared by the Western Hemisphere Department
(In consultation with the Exchange and Trade Relations Department,
the Legal Department, the Research Department, and
the Treasurer's Department)
Approved by E. Walter Robichek
August 16, 1971
On August 15, 1971, the Managing Director received a letter from the
U.S. Secretary of the Treasury notifying the Fund that, effective as of
that date, the United States no longer, for the settlement of international
transactions, in fact, freely buys and sells gold under the second sentence
of Article IV, Section 4(b). The Secretary stated that his letter of
August 15, 1971 superseded the letter of May 20, 1949, to the Managing
Director from the Secretary of the Treasury and Chairman of the National
Advisory Council on International Monetary and Financial Problems. The
letter of May 20, 1949 had stated that in connection with the obligations
of members of the International Monetary Fund under Article IV, Section 4(b),
of the Articles of Agreement of the Fund, the Government of the United States,
for the settlement of international transactions, in fact was freely buying
and selling gold within the limits prescribed by the Fund under Article IV,
Section 2. The United States authorities have announced that the Secretary
of the Treasury has "strictly limited further use of U.S. international reserve
assets (gold, SDR's, drawings on the IMF, or foreign exchange holdings) to
settlement of outstanding obligations and, in cooperation with the IMF, to
other situations that may arise in which such use can contribute to inter-
national monetary stability and the interests of the United States."
The action described in the letter of the Secretary of the Treasury
places the United States in the same position as other members of the Fund
which, under Article IV, Section 4(b) first sentence, are required to take
appropriate measures in order to ensure that transactions between their
currencies and the currencies of other members take place within their
territories only at rates within the limits prescribed by Article IV, Section 3.
The United States authorities have indicated that they are not taking measures
for this purpose in accordance with Article IV, Section 4(b). However, the
Secretary's letter states that the United States will continue to collaborate
with the Fund to promote exchange stability, to maintain orderly exchange
arrangements with other members, and to avoid competitive exchange alterations,
as required by Article IV, Section 4(a).
The par value of the United States dollar is 15 5/21 grams of gold
9/10 fine (0.888671 gram of fine gold), which is equivalent to US$35 a
fine ounce. This par value of the United States dollar was established with
the Fund on December 18, 1946 at the time of the initial determination of
GERALD FORD LIBRARY
- 2 -
par values and became effective on that date. The United States authorities
have indicated that the official U.S. dollar price of gold has not been
altered by the action referred to. above.
The United States has been experiencing balance of payments difficulties
of varying intensity over a long period of years. The United States has
incurred deficits on an official settlements basis in most years of the
1960s, and in 1970 the deficit on this basis reached a record amount of
$9.8 billion. A further large deficit was registered in the first half of
1971. In the first quarter of the year there was a deficit on official
settlements basis of $4.7 billion ($5.5 billion on a seasonally adjusted
basis). In the second quarter of 1971 it is estimated that the deficit was
even larger (data on the second quarter balance of payments are expected
to become available this week).
Other indicators of the U.S. balance of payments situation have
manifested signs of weakness. The position on current and long-term
capital account (the basic balance) has been in deficit in most years of
the 1960s, and has been consistently in deficit since 1964. These deficits
have persisted notwithstanding the application of restraints on the outflow
of capital that have been applied in various forms since the early 1960s.
In the last few years the basic deficit has been of the order of $3 billion
a year, and there are indications that it may have risen in the first half
of 1971.
There has been a sharp deterioration on trade account this year, and
over the first six months there was a trade deficit of about $400 million,
compared with a surplus of $2.7 billion ($2.1 billion on a balance of pay-
ments basis) in 1970. It appears that there were some special factors
behind the trade performance in the first half of this year, particularly
in the second quarter, but there have been official statements to the effect
that the trade balance may well be in deficit over the whole of 1971, implying
a trade outturn in the second half of this year that was not expected to
differ substantially from that registered in the first half.
Also included in the economic program announced by the United States
authorities are tax and expenditure reductions, a freeze on wages, prices,
and rents for 90 days, and the imposition of a temporary import surcharge,
generally at the rate of 10 per cent on goods which are presently dutiable.
The United States Government has provided a preliminary assessment of the
effects of the aforementioned measures, and the staff will be examining
these measures in the light of developing circumstances.
GERALD FORD LIBRARY
- 3 -
Proposed Decision
In view of the foregoing, the following decision is proposed for the
consideration of the Executive Directors:
1. The United States authorities, in a letter from the Secretary of
the Treasury to the Managing Director, have notified the International Mone-
tary Fund "that, with effect August 15, 1971, the United States no longer,
for the settlement of international transactions, in fact, freely buys and
sells gold under the second sentence of Article IV, Section 4(b). The
United States will continue to collaborate with the Fund to promote exchange
stability, to maintain crderly exchange arrangements with other members, and
to avoid competitive exchange alterations." The United States authorities
have also stated that they are not taking measures in order to ensure that
transactions between their currencies and the currencies of other members
take place within their territory only at rates within the limits prescribed
by Article IV, Section 3.
2. The Fund notes the circumstances which have led the United States
authorities to take the actions described above. The Fund emphasizes the
undertaking of members to collaborate with it to promote exchange stability,
to maintain orderly exchange arrangements with other members, and to avoid
competitive exchange alterations, and therefore welcomes the intention of
the United States authorities to act in accordance with this undertaking.
3. The Fund will remain in close consultation with the authorities of
the United States and of the other members with a view to the prompt achieve-
ment of a viable structure of exchange rates on the basis of parities
established and maintained in accordance with the Articles of Agreement.
The Managing Director will take appropriate initiatives to this end.
GERALD FORD CIBRARIA
DOCUMENT OF INTERNATIONAL MONETARY FUND
AND NOT FOR PUBLIC USE
FOR
AGENDA
EBD/71/202
August 16, 1971
Chm Buins
Crit) 8/18/71
To:
Members of the Executive Board
From:
The Secretary
Subject: United States - Article IV, Section 4(b)
There are attached for the information of Executive
Directors copies of a letter of August 15, 1971 from the Secretary
of the Treasury of the United States, and of a letter, referred
to therein, dated May 20, 1949.
Att: (2)
Other Distribution:
Department Heads
Division Chiefs
FORD is LIBRARY 9ERALD
THE SECRETARY OF THE TREASURY
Washington 20220
August 15, 1971
CARL
Dear Mr. Schweitzer:
This is to notify you that, with effect August 15, 1971, the
United States no longer, for the settlement of international trans-
actions, in fact, freely buys and sells gold under the second
sentence of Article IV, Section 4(b). The United States will con-
tinue to collaborate with the Fund to promote exchange stability,
to maintain orderly exchange arrangements with other members, and
to avoid competitive exchange alterations. This letter supersedes
the letter of May 20, 1949, to the Managing Director from the
Secretary of the Treasury and Chairman of the National Advisory
Council on International Monetary and Financial Problems.
Sincerely yours,
(/s/ John B. Connally)
Secretary of the Treasury
and
Chairman of the National Advisory Council on
International Monetary and Financial Policies
Mr. Pierre-Paul Schweitzer
Managing Director
International Monetary Fund
19th and H Streets, N.W.
Washington, D. C. 20431
GERALD FORD LIBRARY
THE SECRETARY OF THE TREASURY
WASHINGTON
May 20, 1949
My dear Mr. Gutt:
In connection with the obligations of members of the
International Monetary Fund under Article IV, Section 4(b),
of the Articles of Agreement of the Fund, I wish to advise
you that the Government of the United States, for the settle-
ment of international transactions, in fact freely buys and
sells gold within the limits prescribed by the Fund under
Article IV, Section 2. The policy of the United States in this
respect has not been changed since prior to the signing and
entry into force of the Articles of Agreement.
Very Truly yours,
/s/ John W. Snyder
Secretary of the Treasury and
Chairman,
National Advisory Council on
International Monetary and Financial
Problems.
Mr. Camille Gutt
Managing Director
International Monetary Fund
1818 H Street, N.W.
Washington 6, D. C.
LIBRARY GERALD FORD
BOARD OF GOVERNORS
IMP.
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date August 17, 1971
To
Chairman Burns
Subject: Estimates of revaluation
From
Samuel Pizer
effects on U. S. trade.
CONFIDENTIAL (FR)
The attached memorandum is based on work done over the past
several months attempting to evaluate the effects of specified changes
in foreign exchange rates on the U.S. trade balance. Results are pre-
sented in summary form, not spelling out a number of crucial assumptions
detailed in the underlying work, and not attempting to take into account
the full range of international transactions or the further effects of
changing either capital controls or U.S. and foreign quotas and trade
barriers. Nevertheless, it provides a starting point for thinking about
some of the magnitudes and relationship involved in negotiating changes
in exchange rates.
While there may be differences of judgment as to the precise
arithmetic involved, I believe there is substantial staff agreement
that the restoration of equilibrium exchange rates from the U.S. point
of view requires some major changes in the exchange rates of industrial
countries and quite possibly others. Minor changes will only lead to
another crisis fairly soon. Moreover, minor changes will not permit
the removal of direct controls.
SP
Attachment.
FORD i LIBRARY GERALD
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date August 17, 1971
To Chairman Burns (through Mr. Pizer)
Subject: Preliminary appraisal of possible
magnitudes of "acceptable" exchange rate
From
Helen B. Junz U.R.J.
changes as indicated by their effects on
the U.S. trade balance
CONFIDENTIAL (FR)
This memo sets forth some preliminary estimates of the
effect on the U.S. trade balance of certain changes in exchange
rates of major foreign countries. Within this limited framework,
it is possible to draw some tentative conclusion about the
adequacy, or otherwise, of the particular magnitudes of possible
changes.
Taking account of differences in cyclical situations
among industrial countries, it seems that a viable current account
position for the United States this year would have required an
improvement of the order of at least $5 - $6 billion. Assuming,
relatively arbitrarily, that roughly $4 - $5 billion of such
an improvement would have to have come from a higher trade surplus,
certain conclusions can be drawn.
Earlier estimates showed that, after an appropriate
interval of time of something like twelve months or so, the
de facto exchange rate adjustments made before August this year
(i.e., revaluations of 5 per cent each by Germany, Austria and
1/ The initial effect of exchange rate changes is likely to be
perverse because short-run elasticities are likely to be very small
and because imports may be invoiced in foreign currencies. (To
the extent that exports also are invoiced in foreign currencies,
this effect is offset.) The second factor is probably of less
importance in the U.S. than in other cases.
GERALD FORD LIBRARY
CONFIDENTIAL (FR)
To: Chairman Burns
-2-
the Netherlands and by 7 per cent and 3-1/2 per cent, respectively,
by Switzerland and Canada) are likely to improve the U.S. trade
balance by around $3/4 billion annually. The size of the improve-
ment still needed makes it obvious that action by Japan and Canada
alone would be insufficient to bring about anything approaching
an equilibrium rate for the U.S. dollar. It is also clear that
any further moves by European countries will hinge importantly
upon the size of any Japanese adjustment.
A 10 - 15 per cent upward revaluation of the Japanese
yen is tentatively estimated to improve the U.S. trade balance by
$0.9 - $1-1/4 billion. If the Japanese revaluation could tend
towards the upper limit of this range, it might not be inconceiv-
able to achieve a further upward adjustment of the German DM
(over and above the 5 per cent average appreciation of the past
pre-speculation months) of 5 per cent, which in turn might be
accompanied by equal adjustments (i.e., 5 per cent) by the remainder
of the present Common Market countries (whether or not this would
include an additional adjustment for the Netherlands is left open;
the difference would be about $0.1 billion in the U.S. trade
balance). These moves by the EEC countries could bring about an
additional improvement in the U.S. trade balance of around $1-1/2
billion.
Consequently, added to the exchange rate adjustments
between May and August 13, upward revaluations of the currencies
FORD is LIBRARY 938470
To: Chairman Burns
-3-
CONFIDENTIAL (FR)
of the Common Market countries by 5 per cent and of that of Japan
by 15 per cent would improve the U.S. trade balance by $3-1/2
billion. An additional revaluation of the Canadian dollar by
about 3 per cent and smaller upward adjustments by some of the
remaining G-10 countries would bring the total within the postulated
$5 billion or so range. Anything less by these countries would put
a great deal more of the adjustment burden on countries with weaker
payments positions.
The trade balances of most of these countries, especially
those of Japan, Canada and Germany, show a relatively strong under-
lying upward trend. Revaluation effects on their trade balances,
particularly if their major competitors move with them, should be
tolerable.
It should be noted that the assumption of exchange rate
realignment negotiations within the framework of the G-10 is not
meant to preclude upward adjustments by other countries. It is not
at all clear that some of the oil countries as well as Australia,
and possibly some others, could not afford to have their currencies
move up against the U.S. dollar. To the extent that this occurred,
the needed degree of revaluation by others would be diminished.
However, revaluation by oil countries, particularly, would have
greater adverse price effects on the United States than on other
industrial countries.
FORD is 939970 LIBRARY
To: Chairman Burns
-4-
CONFIDENTIAL (FR)
Given the relative weights of the G-10 countries in world
trade, the adjustments postulated above would average out to a 2-1/2
per cent devaluation of the U.S. dollar. Based on U.S. import
weights the devaluation rate would be 5 per cent.
The figures postulated above give some idea of the order
of magnitude of exchange rate changes needed to achieve a $5 -
$6 billion improvement in the U.S. current payments balance. They
cannot indicate whether adjustments of this order are likely to
achieve longer-run equilibrium in the overall U.S. payments position.
This depends upon longer-term goals regarding the optimal structure
of the U.S. balance of payments. In addition, to the extent that
a possible removal of controls on capital and trade flows may
alter current account surplus aims, exchange rate changes may
need to be greater or smaller. To the extent that import surcharges
are expected to be retained, exchange rate changes could be less.
It should be kept in mind that the short-run effect of the
import surcharges depends heavily upon whether the public believes
them to be temporary or not. If they are assumed to be removed when
parities are fixed, their effect depends upon how great people believe
existing disparities to be. For example, if the general belief is
that the Japanese yen is likely to be adjusted by more than 10 per
cent, it is that consideration that will govern the movements in
imports rather than the surcharge. Whenever the market expects the
GERALD FORD LIBRARY
To: Chairman Burns
-5-
CONFIDENTIAL (FR)
foreign exchange rate in question to rise by less than 10 per cent
against the dollar, the surcharge would temporarily cut imports;
whenever the expectation is for a rise by more than 10 per cent,
imports would be temporarily stimulated.
cc: Board Members
Messrs. Holland and Partee
Messrs. Gemmill, Bryant, Sammons, Katz and Mrs. Junz
GERALD LIBRARY ? FORD
August 16, 1971 - 71/110
STRICTLY CONFIDENTIAL (FR)
Statement by the Economic Counsellor
at EBM/71/88, August 16, 1971 (afternoon)
As the Managing Director indicated this morning, we have been giving
attention for some time to the issues involved in the elaboration of a
set of parities that could form the basis for a better balance in inter-
national payments. In this exploration our attention has been focused
primarily on the industrial countries, which have been the area of the
most severe disturbances in international payments in recent years. But
in this context we have also given attention to rate changes that might
be advisable for the primary producing countries.
Logically, this problem can be seen as having two separate aspects.
(1) The determination of exchange rates; and (2) the link between the
pattern of exchange rates and gold, which would be determined by the price
of gold in terms of one of the currencies in the pattern.
The first aspect--that of exchange rates--determines the relative
competitiveness of countries in international transactions and the
relative value of reserves held in various currencies. The second aspect
determines the value of gold, SDRs, and reserve positions in the Fund in
terms of currencies.
While it is logically possible to separate these two aspects, it would
seem more likely that agreement could be reached on both aspects if both
questions were settled at the same time.
The discussion in the remainder of these remarks is addressed to the
question of relative exchange rates only.
A satisfactory new pattern of exchange rates could not be found by
letting all currencies float for a certain period. Quite apart from the
profound uncertainty that such a situation would create, a regime of
many floating currencies cannot even in theory be expected to lead to a
viable system of rates. This is so, inter alis, because the floating
GERRLOR FORD LIBRARY
rates would be too much affected by the extent to which countries
practiced controls on capital movements and intervened in the market,
as well as by anticipations of official actions.
It will be necessary, therefore, to derive a new pattern of exchange
rates on the basis of analysis. The central point is clear, namely, that
it will be necessary to bring about a certain degree of depreciation of
the U.S. dollar vis-a-vis other currencies in order to strengthen the U.S.
basic balance and, in particular, the U.S. current account. In this
connection, it has to be borne in mind, as was already pointed out in the
Annual Report, that the underlying U.S. current account is substantially
DECLASSIFIED
AUTHORITY Fel.Pas.th 11/16/82
the
Tupoury in. 8/22/06
- over -
BY
NARA, DATE 9/29/09
- 2 -
STRICTLY CONFIDENTIAL (FR)
weaker than the $2.5 billion surplus shown in 1970, because that current
account position was the result of a recession in the United States
occurring at the same time that high employment situations prevailed in the
majority of the other industrial countries.
To create a sufficiently large current account surplus in the U.S.
balance of payments will require an adequate average depreciation of the
U.S. dollar against other currencies. In the staff's opinion, a decline
in the value of the U.S. dollar in terms of other currencies on the average
by approximately 10 per cent would be sufficient for this purpose. It
would not be appropriate, however, to adjust the rates of the U.S. dollar
on all currencies by the same percentage. In order to derive the most
suitable pattern of rates, it will be necessary to take into account the
actual payments positions of individual countries (with adjustment for
cyclical factors), the normal payments position to which it may be assumed
that each country is directing its policies, and the extent to which each
country would be affected by changes in the rates of exchange for the
currencies of all other countries.
The calculations involving all these aspects are necessarily quite
complex. Our preliminary findings suggest that the new pattern of rates
for the main industrial countries (other than the United States) would
involve an increase in the rate of the currency of every one of these
countries in terms of the dollar. However, there is a clear distinction
between at least two groups of industrial countries. For one of these groups
the relative appreciation in terms of the dollar should be less than the
approximate average of 10 per cent. For the other group--the strong surplus
countries--an appreciation somewhat in excess of 10 per cent would appear
appropriate. These measurements take their starting point from the
parities prevailing before May 30, 1970.
FORD
It may also be useful at this stage to make certain related
suggestions applicable to certain other Fund members.
GERALD
LIBRARY
1. It may be expected that countries with very close economic
relations with the United States, in the sense that a large proportion
of their trade and invisibles are with the United States, would want to
keep their exchange rate on the U.S. dollar unchanged.
2. It may similarly be expected that many countries with close economic
relations with the United Kingdom and France would want to keep their rates
on sterling and the French franc respectively unchanged.
3. Countries that are at present in payments difficulties, wherever
situated or whatever reserve center they might be most closely linked to,
might use this opportunity to lower the value of their currencies compared
to the average of other currencies. For some countries a sufficient average
depreciation might be achieved by keeping the rate on the U.S. dollar;
for other countries it might be advisable to depreciate beyond this point.
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
August 17, 1971
TO: Board of Governors
FROM: Samuel Pizer
STRICTLY CONFIDENTIAL (FR)
The attached statement prepared by Mr. Polak at the
IMF was supplied to us by Mr. Dale. I believe it is interesting
and important as a reflection of the thinking of the Fund's staff
on the extent of the exchange rate adjustment that might be
necessary. Of course, it needs to be kept STRICTLY CONFIDENTIAL.
SN
Attachment.
CC: Messrs. Holland and Partee
Officers in the Division of International
Finance
GERALD FORD LIBRARY