June 21, 1962 FOMC Minutes

FOMC minutes

Mr. Coombs replied that he believed it was a viable parity. He went on to say that with the decline in the rate of the Canadian dollar over the past few months, a significant improvement in the Canadian export position had already been seen. There was every indication from the market that a speculative raid of large proportions had been occurring. Only such a raid could result in reserve losses of the magnitude of those currently being incurred. Mr. Deming asked Mr. Coombs whether he saw any possibility of the swap becoming in effect a long-term loan. Mr. Coombs answered in the negative, adding that it had been his position that the swap involved short-term money. Further, as he had mentioned previously. since the Canadians might ultimately be able to borrow as much as $600 million from the Monetary Fund, that would provide a take-out for the Federal Reserve even on the worst possible assumptions. In reply to a question from Chairman Martin Mr. Coombs con firmed that Canadian reserves were still in excess of $1 billion. In further discussion, Mr. Mills inquired whether, if the United Britain put up U.S. dollars and Canada paid out such dollars States and a loss of reserves, there was not the risk that the recipients against dollars into their own currencies or gold. would wish to convert the said that this problem had been discussed with the Mr. Coombs Bank of England. Both the Bank of England and the Federal Reserve Bank

of New York felt that the major flow from Canada was to the United States rather than to the United Kingdom or to Europe. Therefore, the risk of leakage into Europe was not thought to be great. To cover this contin gency, however, the Bank of England had been asked to observe a certain amount of flexibility in terms of its dollar holdings for at least two weeks, until the picture became clearer. The Reserve Bank would be in daily communication with the Bank of England on the matter. Mr. Hayes stated at this point that he had just received word from the Treasury that the Monetary Fund was willing to go ahead with a $300 million loan to Canada if the Fund received promptly from the Canadian Government the make-up of a Canadian program of fiscal and other corrective measures that the Fund could wire tonight to its constit uent governments. Otherwise, the Fund would agree to a loan of $160 million at this time, with the prospect of an additional amount later. no further consid by the Fund, presumably $300 million was provided If eration would have to be given to the possibility of participation by Continental European central banks in the package of assistance to Canada; million was provided, that question might have to be reopened. if only $160 inuired whether a Fund drawing was likely to be largely Mr. Deming in Continental European currencies, and Mr. Coombs replied in the affirma then inquired how that would help the Canadians if the tive. Mr. Deming principally to the United States. Mr. Coombs replied flow of funds was that there would, of course, be a certain volume of regular Canadian

payments to the European countries. Otherwise, the Canadians presumably would hold the European currencies simply to have them within the Canadian reserve picture and, as necessary, to convert into U.S. dollars. Tech nically, it would be simpler if a Fund drawing were in U.S. dollars, but that would affect other facets of general Fund policy. There being no further questions, Chairman Martin called for a vote on whether to authorize a $250 million swap arrangement with the Bank of Canada pursuant to terms such as the Special Manager had described earlier during this meeting, and subject to the understanding that the swap arrangement would not be entered into except as part of a larger package of financial assistance to Canada from several sources, including the International Monetary Fund. Upon motion duly made and seconded, such authorization was given by unanimous vote. In view of the foregoing action, the continuing authority directive Lo the Federal Reserve Bank of New York with respect to System foreign currency operations was amended, effective immediately, to add the Canadian dollar to the list of foreign currencies that the Federal Bank of New York was authorized and directed to purchase and Reserve sell. In its amended form, the directive read as follows: The Federal Reserve Bank of New York is authorized and to purchase and sell through spot transactions any or directed 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 Belgian francs Canadian dollars Total foreign currencies held at any one time shall not exceed $500 million. The meeting then adjourned. Assistant Secretary