Thats to supkis for this one...
1961 CONFIDENTIAL REPORT TO FEDERAL RESERVE CHAIRMAN McCHESNEY MARTIN Jr
U. S. Foreign Exchange Operations: Needs and Methods
Introduction
*
The current international position of the United States clearly
demonstrates the advantages that would exist if the United States had at its
disposal the resources and techniques for undertaking foreign exchange
operations as a permanent feature of public policy. The present later.
national financial structure, characterised by convertibility of the major
currencies, relatively free short-term capital markets, and the existence
of large dollar holdings by foreigners (both public and private), has
greatly enhanced the possibility of large recurring movements of capital
out of and into the United States. Such movements of short-term capital,
as the Federal Reserve System has learned from its experience of the
past year, can greatly complicate the execution of an appropriate domestic
monetary policy. Similar problems have been faced by monetary authori-
ties abroad, in both the recent period and in earlier years. Solutions to
problems relating to shifts in capital flows aad their impact on national
balances of payments, together with the relationship of each international
flows to domestic monetary policies are perhaps best approached through
joint action by central banks. It is no accident that individual European
central banks have developed highly sophisticated techniques of operating
in the foreign exchange market, aad have supplemented individual opera-
tions by joiat measures of both a formal and an informal, ad hoc, character.
Monetary authorities ia the United States, on the other hand,
have not, until recently, operated in the foreign exchange market, but have
maintained the stability (and primacy) of the dollar in the international
currency structure by standing ready to buy gold from, and sell it to,
foreign monetary authorities who either need or acquire dollars for exchange
purposes. There can be little question that the interconvertibility of gold
and the dollar at a fixed price will have to remain the keystone of the
international currency structure. At the same time, foreign exchange
dealings by the United States monetary authorities, when judiciously
applied, can serve to reduce capital flows, to dampen speculation, to
minimize potential reserve effects, and hence, to minimize the impact on
the United States gold stock.
*
The basic purpose of such operations would be to maintain confidence
in the dollar. Foreign exchange operations would, of course, not be a
substitute for other appropriate and basic actions to maintain the integrity
of the dollar, but would server as a highly useful and flexible addition to
other monetary and fiscal policy measures. The continuation and expan-
sion of such operations as have recently been executed respecting the
German mark could make the United States an important factor in the
exchange market and thus help to enhance its bargaining position in any
international approach to currency problems. Moreover, the holding of
foreign currencies by the United States might strengthen confidence in
such currencies and add to their usefulness in international trade and pay-
ments and hence contribute to an expansion of the movement of goods and
services among countries.
1. Federal Reserve Operations for Its Own Account
Previous Experience
*
The Federal Reserve Bank of New York has had a number of
accounts abroad, of which three with nominal sums remain at present.
The three accounts are with the Bank of England, the Bank of France
and the Bank of Canada. The reasons for opening the various accounts
differ somewhat but maintenance of the accounts over recent years has
been largely a matter of courtesy.
*
The account with the Bank of England was opened in 1917 and sub-
sequently need for a number of transactions involving exchange operations,
investments and the purchase and earmark of gold. The account at the
Bank of France was opened in 1918 in order that we might establish a
sight account for possible use in transactions for the stabilization of ex-
change rates.
*
The BIS account was opened in 1931 in the sum of$10 million. In
a letter from Mr. Harrison to Chairman Eccles in September 1936 it was
stated that “The deposit was made for the same purpose, essentially,
as the credits which the Federal Reserve Banks extended to foreign
central banks during 1931. It was made in lieu of our having to respond
to requests for assistance on behalf of various smaller European central
banks.” It was then used for the purchases of prime commercial bills
for our account and finally closed in 1946.
*
An account with the Bank of Canada was opened in 1943, almost
entirely as a courtesy measure. Other accounts included those with Iran,
Egypt, and India which were opened in our name in order that the Treasury
would not be identified with certain transactions. These latter accounts
have been closed.
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