February 13, 1962 FOMC Minutes

FOMC minutes

one time should not exceed $00 million would be adequate. In reply, Mr. Coombs said he would assume that the $500 million limitation would be adequate for some time to come, particularly considering the shifts that might take place between holdings of various currencies. There followed some further discussion of this point in light of the amounts of individual currencies that might be held at any one time. Reference also was made to a letter that would be sent by the Board of Governors to the Federal Reserve Banks concerning the manner and timing of publication of total System holdings of foreign currencies. Reference then was made to the draft document that had been distributed under date of February 6, 1962, concerning the scope and character of initial foreign currency operations of the System, as agreed upon by Treasury-Federal Open Market Committee representatives, This document, reviewed earlier during this meeting by Mr. Young, had been distributed to the Committee in company with a memorandum presenting a program for coordinated Treasury and System operations proposed short-term in foreign currencies that would be consistent with the understanding set forth in the first paper. After discussion, during which Mr. Mitchell commented that he would like the record to show that the early stages of the Federal Reserve program, as set forth in the draft documents, involved questions of relations with the Treasury concerning which he had some reservations, the memorandum on the scope and character of initial System foreign currency

operations was accepted as the basis of understanding concerning an initial program of System foreign currency operations. The document read as follows: SCOPE AND CHARACTER OF INITIAL FOREIGN CURRENCY OPERATIONS OF THE SYSTEM I. The System would acquire in the market or directly from foreign central banks small amounts of authorized foreign currencies whenever pressure on the dollar relaxes and the rate of one of these currencies falls from recent high levels. Holdings thus acquired would constitute a modest inventory to be used for sales in the market if market pressures or instability clearly warranted. Initially then, the System would enter the market only as an occasional buyer; barring unusual market conditions, the System would aim to defer any program of currency sales until minimum balances had been accumulated. II. In order to facilitate the early stages of the Federal Reserve program, the Secretary of the Treasury would stand ready to sell to the Federal Reserve modest amounts of German marks ;7 million equivalent), Swiss francs, Netherlands (approximately guilders, and Italian lire (approximately $1 million equivalent of each) at market rates of exchange on the day of the sale. Reserve already has accounts with the Bank of The Federal England and the Bank of France. These currency take-overs from would permit the System to open accounts at once the Treasury with four of the other central banks, to establish appropriate procedures for transactions through them, and to be bookkeeping familiar with procedures and techniques for administering come and investing the accounts. would continue to conduct foreign currency III. The Treasury operations under existing agreements with Germany, Switzerland, the Netherlands, and Italy. The System, however, would stand prepared to purchase currencies of these countries from the either outright or under mutually satisfactory resale Treasury, that exchange market developments obliged agreement, in the event to exhaust available resources. The Treasury and the the Fund would consult before either entered into any agreements System banks or governments regarding possible with foreign central foreign currency operations.

IV. With a view to being in immediate position to meet any unusual demands for foreign currencies, the System would stand ready, within agreed limits: (a) to enter into reciprocal currency transactions with designated foreign central banks, especially the Bank of England and the Bank of France; (b) to supplement any arrangement that the Swiss National Bank might make with the IMF or the Treasury; (c) to purchase from the Treasury part or all of Foreign currency amounts acquired under Treasury credit arrangements with major European central banks or governments already negotiated or, after consultation with the System, to be negotiated; and (d) to purchase from the Treasury part or all of foreign currency amounts that may be drawn from the Inter national Monetary Fund. V. Since the System's foreign currency operations are to be on an experimental and trial basis, the Treasury and the Federal Reserve agree that a specific understanding as to a division of operations between them can be delayed until experience has made clear the way in which such a delineation can be most effectively achieved. Initially, there need only be arrangements for the exchange of Information about currency operations, channels for communication, and procedures for continuing consultations. regular VI. The National Advisory Council will be informed of the general plan for System foreign currency operations on an experi mental and trial basis. with respect to the accompanying document A question was raised containing a proposal for a short-term program of coordinated Treasury and System operations in foreign currencies, and in the ensuing Martin made the comment that it might be well not to discussion Chairman specific at this time than to proceed on the basis attempt to be more System operations in foreign currencies would be generally that initial

along the lines discussed at this meeting, and within the scope of the understanding contained in the document that had been accepted by the Committee. It was agreed that the next meeting of the Federal Open Market Committee would be held on Tuesday, March 6, 1962. The meeting then adjourned. Secretary