May 29, 1962 FOMC Minutes

FOMC minutes

might best be done through a Federal Reserve-Bank of Canada swap arrangement or through a Canadian drawing on the Monetary Fund. In discussion, it was noted that a Canadian drawing on the Monetary Fund would subject the Canadians to the discipline of the Fund. It was also noted, however, that the Canadians might hesitate to go to the Monetary Fund until after the forthcoming elections and that they had been subjected to a speculative outflow of funds of rather substantial proportions during the past two or three months. Mr. Mitchell raised the question whether, if the endeavor of U. S. foreign exchange transactions was to help build a strong international payments system, it would not seem almost unavoidable, in the interest of consistency, to consider a swap arrangement with the Bank of Canada. Mr. Coombs said he had such a feeling. That was why he had favored the Stabilization Fund arrangement on a $25 or $30 million basis, but that figure apparently was not high enough in the eyes of the Canadians to have any real impact. After Mr. Mitchell had suggested the possibility of negotiating with the Bank of Canada in terms of a swap of $50 or $100 million, Mr. Hayes said he shared the view that, with the Canadian economy so close to that of the United States and the Canadian currency so important to the United States, it would seem somewhat illogical not to include the Canadians in the network of swap arrangements at such time as a favorable basis for such an arrangement could be found.

Mr. Balderston said he also shared that view. He saw virtue in taking the initiative in discussions with the Bank of Canada, so as to be able to suggest limits compatible with the Federal Reserve swap arrangements negotiated or pending with other central banks. Thereupon, the Open Market Committee authorized negotiations with the Bank of Canada looking toward the possibility of a swap arrangement between the Federal Re serve and that Bank. pointed out that on the exchange markets the United Mr. Coombs States dollar had been under considerable pressure in the past few days. to the floor against the Swiss franc, and it was It had been driven weakening against the German mark. Assuming that the German Federal to intervene and buy dollars to check a further decline Bank was prepared the German mark, he hoped that the Open Market of the dollar rate against would concur in the appropriateness of using some of the Federal Committee of German marks to reinforce that operation. It seemed Reserve holdings quite clear that a speculative movement of a reversible type was occurring, of German marks would appear to meet the and use of the System holdings as stated in the Guidelines for System Foreign criteria for intervention Currency Operations. proposed use of Federal Reserve The of German marks in the System holdings by Mr. Coombs, if that manner described desirable to him in the light should seem was noted without objec of developments, tion. earlier discussion concerning a possible With reference to the Bank of Belgium, it was brought out swap arrangement with the National to the Federal Reserve Bank of the continuing authority directive that

New York with respect to System foreign currency operations, originally adopted by the Committee on February 13, 1962, and reaffirmed on March 6, 1962, did not authorize the purchase and sale of Belgian francs. Accordingly, upon motion duly made and seconded, and by unanimous vote, the continuing authority directive to the Federal Reserve Bank of New York with respect to System foreign currency opera tions was approved in the following amended form, effective immediately: The Federal Reserve Bank of New York is authorized and directed to purchase and sell through spot transactions any or all of the following currencies in accordance with the Guidelines on System Foreign Currency Operations issued by the Federal Open Market Committee on February 13, 1962: Pounds sterling French francs German marks Italian lire Netherlands guilders Swiss francs francs Belgian Total foreign currencies held at any one time shall not exceed $500 million. Mr. Mitchell commented that the recent developments in the stock market had led him to wonder whether something might not happen about a substantial drain on the gold supply and cause the to bring under existing law to have to be suspended. reserve requirements specified law was clearly obsolete, having been In his opinion the existing a different set of circumstances than now prevailed. His adopted under question, therefore, was whether there should not be a re-examination law, with a view to the possibility of some change that of the existing

would make it possible for the Federal Reserve System to meet any crisis without having to take emergency action. Chairman Martin noted that this problem had been given consid eration on previous occasions. The Committee might ask its staff to review the procedures involved so that everyone would be familiar with them. Some caution was indicated, because a planning exercise, if under stood to be in process, could lead to comment and speculation. However, he would see no objection to putting down in a paper the facts relating to the procedures provided under the present law. It was agreed that the next meeting of the Federal Open Market Committee would be held on Tuesday, June 19, 1962. The meeting then adjourned. Assistant Secretary