July 31, 1962 FOMC Minutes

FOMC minutes

of DMs made in the preceding three weeks, were made under the Open Market Committee's Authorization and Guidelines dated February 13, 1962. Turning to the guilder, the total amount of the $50 million swap arrangement with De Nederlandsche Bank has now been used in mopping up dollars accumulated by De Nederlandsche Bank. This has been done in several steps and throughout the period the thought was always present that the Dutch were free to take gold if they felt they were compelled to do so. Actually this was avoided by the Dutch suggesting that another swap arrangement of $50 million be entered into, and as the Dutch did not wish to give any publicity to this further amount, arrangements were made for the U. S. Stabilization Fund to enter into this under taking. A part ($15 million) of the Treasury's arrangement with the Dutch has been used to provide guilders to the Bank of England, which needed them for its repayment to the International Monetary Fund, and thus to take the Bank of England out of the market as soon as possible so that the Treasury could proceed with its operations in the forward guilder market; and $5 million of guilders has been drawn and placed on deposit. It was also believed that a shorter-term swap arrangement was in order because of the possibility in August of a substantial repayment of funds by K.L.M. to United States banks. This morning the guilder stands at 27-3/4 cents, appreciably down from its ceiling. In other operations, I would mention that the $50 million reciprocal swap arrangement with the Bundesbank, approved by the Federal Open Market Committee by telegram, is being made effective on August 2; a press statement will be issued on that day. The arrangement is on a standby basis and drawings may be made at any time on two days' notice, if they should be required. The French have also indicated that their swap arrangement should be on a standby basis and it now seems appropriate to accede to their wishes coincident with establishing the German arrangement on a standby basis. The Dutch, Germans, and French have all wanted their swap arrangements to be on a standby basis, a pattern which is now becoming more widespread, with the Netherlands, Bank for International Settlements, Swiss National Bank, and German arrangements on that basis. We have had discussions with the Banque de France, and subject to Committee approval, will liquidate on August 2 the swap drawing and the arrangement will be put on a standby basis as from that date. Within the past three-week reporting period, the Swiss arrangements with the Swiss National Bank and the franc swap Settlements were established, as you Bank for International know, and half of the $200 million was drawn and used to mop

up dollars acquired by the Swiss National Bank. These arrange ments were approved by the Committee at its last meeting, and subsequently reported to the members and other Presidents. This morning the Swiss franc is quoted at $0.2313, also appreciably below the Swiss intervention point. Now a few words on the London gold market. The demand there increased markedly between July 10 and July 20. The volume of transactions reached record levels and the fixing price went from $35.1138 on July 10 to $35.1434 on July 20. Since that time the turnover has declined very considerably, although it is still at a higher level than earlier this year, and the price has receded, to $25.1121, today. During the period of greatest volume, the Bank of England had to sell more gold than it had accumulated in previous months and it has replaced the greater part of this gold by a purchase of $50 million from the United States in the reporting week ended last Wednesday. Reactivation of the central bank selling consortium has been considered with the central banks but no action has been taken pending further observation of developments in the London gold market. Sterling, like the Continental currencies, was very firm in the period between July 10 and 20, rising from about $2.80-1/2 to $2.80-3/4, but since that time has tended downward, and is now back to $2.80-1/2. The Canadian dollar was very strong during most of the three weeks, advancing from $0.9269 to as high as $0.9277, but has recently eased back to $0.9272. In the process the Bank of Canada has accumulated very large amounts of United States dollars, perhaps in the order of $300 million. At this moment I would request your approval of the revision of the swap arrangement with the Bank of France. The other swap arrangements referred to before have already been approved by the Committee. And I also request ratification of the sales of DM 0.5 million, plus 1 million sold in the previous period and delivered in the three-week period just closed. Following Mr. Sanford's comments there was a discussion during which question was raised with regard to public announcement of swap arrangements on a standby basis, particularly in a case such as the proposed conversion of the swap with the Bank of France to a standby basis. Mr. Sanford's reply brought out that in all of the swap arrange ments entered into thus far the terms of the public announcement had been

the same no matter whether the swap was immediately activated (as, for example, in the case of the British and French swaps) or whether the swap was on a standby basis (as originally was true in the Dutch case). In other words, no distinction was made on that account so far as the press release was concerned. Accordingly, if the French swap or others were converted to a standby basis, it was not contemplated that any public announcement would be made. It was not expected that the mechanics of accounting, at least on the Federal Reserve side, would be such as to elicit any questions. However, if any questions should be asked, it was proposed to answer in terms that a technical change was involved and the swap arrangement continued in force. Mr. Sanford also brought out that presumably a standby swap arrangement would be drawn upon only to spend the proceeds immediately, would wash out from the standpoint of foreign currency so the transactions holdings. When an active swap arrangement was converted to a standby basis, there would of course be an effect on "other assets," but there are large swings in that account for other reasons. In reply to another question, Mr. Sanford confirmed that all of the outstanding swap arrangements were subject to renewal only upon agree ment by the two parties. With one exception, the swap arrangements were One swap (with the Bank of France) had been renewed on a three-month basis. for a three-month period. as to whether an initial swap arrangement In reply to a question with the Netherlands Bank in an amount larger than $50 million would not

appear to have been desirable, Mr. Sanford expressed his understanding that at the time the Netherlands Bank was not inclined to enter into an arrangement in excess of that figure. In the light of subsequent develop ments, it now appeared that an arrangement involving more than $50 million could have been useful, but that was in the nature of hindsight. Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions in foreign currencies during the period July 10 through July 30, 1962, were approved, ratified, and confirmed. Upon motion duly made and seconded, and by unanimous vote, authorization was given for the liquidation of the existing swap arrangement with the Bank of France and its replacement by an arrangement on a standby basis. The meeting then adjourned. Secretary