September 8, 1965 FOMC Minutes

FOMC minutes

In reply to a question by Mr. Ellis regarding the period of time for which the proposed guarantee would remain in effect, Mr. Coombs said that no specific termination date would be set at the time of the original transaction. The guarantee would remain in effect as long as the System held the sterling acquired under it or until the arrangement was terminated by mutual agreement of the two parties. He added that such sterling holdings would be distinguished from other holdings by the System. The funds would be invested in a special account at the Bank of England and would earn interest at a rate roughly equal to the rate on 3-month U.S. Treasury bills; currently this would be about 4 per cent. There was no assurance that other central banks participating in the assistance program would do so by the method of acquiring sterling under a guarantee; they might find it more convenient to use some other procedure, such as an extension of credit or a swap arrangement. Chairman Martin commented that some members of the Committee might consider it preferable for the System to participate by enlarging the size of its swap line with the Bank of England rather than by acquiring sterling under a guarantee, if other central banks chose the swap-line route. Mr. Daane observed that in his judgment it would be preferable to follow the guarantee procedure, and thus demarcate the operation

as market intervention. The exchange market developments of the past week clearly indicated the possibilities of making good use of that sort of operation. Moreover, other central banks might be encouraged by the System's example to follow the same procedure rather than the alternative one of a swap arrangement with the Bank of England. Mr. Coombs indicated that he concurred fully in Mr. Daane's observations. He noted that action by the Committee now to authorize acquisition of $200 million of sterling on a covered or guaranteed basis would not preclude a later substitution of an enlarged swap arrangement, if there was reason then to believe the swap route would be preferable. Mr. Robertson commented that the Manager might be authorized to negotiate on either basis, and Chairman Martin observed that such an authorization might be desirable. Mr. Coombs noted that the System's practice of making public announcements of any increases in its swap lines might militate against use of that procedure. There had been some feeling in the discussions that the operation might be more successful if speculators were not sure of the precise amount of assistance being extended to authorized an increase in the Britain. If, however, the Committee he would recommend that line with the Bank of England, System's swap rather than $200 million, so that the the amount be $250 million, would be an even $1 billion. total line with that Bank

In response to a question by Mr. Shepardson, Mr. Coombs said that, whichever procedure was followed the participation in the program of the United States--the System and Treasury combined--would be limited to 40 per cent of the total amount of assistance granted Britain and was not to exceed $400 million. Chairman Martin then commented that the Committee presumably would have no objection to an enlargement of the swap arrangement with the Bank of England. For present purposes, however, it might be desirable to put the question in the form of an amendment of the final paragraph of the continuing authority directive for foreign currency operations, to increase the dollar limit specified there for purchases of sterling on a covered or guaranteed basis to $200 million equivalent, on the understanding from $50 million the authorization would not involve exceeding the that use of limits just mentioned by Mr. Coombs. Thereupon, upon otion duly made and seconded, and by unanimous vote, the final paragraph of the continuing authority directive for foreign currency was amended to read as follows, operations effective immediately, on the understanding of the authorization would not that use exceed the limits described by Mr. Coombs: The Federal Reserve Bank of New York is also authorized and directed to make purchases of sterling on a covered or guaranteed basis in terms of the dollar up to a total of $200 million equivalent. The meeting then adjourned.

Secretary's note: On September 14, 1965, Committee members voted (those outside of Washington by telegram) to authorize use of the authority in a manner that would involve U.S. participation in the program of assistance to Britain in the amount of $400 million, to be shared equally between the System and the U.S. Treasury, rather than the lesser of this sum or 40 per cent cf the total amount of assistance. Votes for this action: Messrs. Martin, Balderston, Daane, Ellis Robertson, Scanlon, Shepardson, Clay, Irons, and Treiber. Votes against this action: None. Abstaining: Mr. Maisel. Mr. Maisel indicated that while he had no objection to this action he had abstained from voting on it because he questioned the procedure followed of submitting it for vote to Committee members individually. In his judgment it would have been preferable to have had the action considered at a meeting of the Committee, to provide an opportunity discussion of any questions that members for full might have had concerning it. Secretary