January 17–18, 1977 FOMC Record of Policy Actions

FOMC minutes

1/17-18/77 -27- The objective of the Basle agreement was to help the United Kingdom achieve an orderly reduction in the reserve currency role of sterling and thus to avoid the kind of disturbances to the international monetary system that had occurred at times in the past as a result of fluctuations in official sterling balances. In general, the agreement provided for the extension of a $3 billion facility to the Bank of England by the BIS, with backing, as necessary, by the other participants, for a period of 2 years--and for a third year if mutually agreed upon by the participants. For the United Kingdom agreed to reduce official sterling its part, balances to working levels over the "drawdown" period. In exchange for official holdings of sterling, it would offer in currencies other than sterling negotiable bonds denominated maturities of 5 to 10 years. The Bank of England and having would be entitled to draw on the credit facility to the extent necessary to finance reductions in official sterling those associated with sales of foreign balances other than currency bonds. Repayments would begin at the end of the be completed within the succeeding "drawdown" period and would 4 years.

1/17-18/77 -28- It was understood that eligibility to draw on the standby credit facility would be conditional on continuing eligibility of the United Kingdom to draw on the $3.9 billion credit recently negotiated with the International Monetary Fund (IMF). The facility could also be suspended if the United Kingdom were not making reasonable efforts to achieve reductions in official sterling balances; the Managing Director of the IMF was being asked to assist in making a determination on this score. With respect to U.S. participation, the Federal Reserve and the Treasury had agreed that if the United States were required to provide financing to the BIS in support of the standby facility, the funds would be provided initially by the Federal Reserve through its existing swap arrangement with the BIS, taking the form of a usual 3-month swap, subject to three renewals. Should such financing be required continuously for more than one year, however, it would subsequently be provided by the Treasury, acting through the Exchange Stabilization Fund (ESF). Risk associated with such financing, whether provided by the Federal Reserve or the ESF, was to be borne equally by the two.

1/17-18/77 -29- Votes for ratification of these agreements: Messrs. Burns, Volcker, Balles, Black, Coldwell, Gardner, Jackson, Kimbrel, Lilly, Partee, Wallich, and Winn. Votes against ratification: None. 3. Agreement to "warehouse" currencies for the Exchange Stabilization Fund At this meeting the Committee agreed to a suggestion by the Treasury that the Federal Reserve undertake to "warehouse" foreign currencies held by the ESF--that is, to make spot purchases of foreign currencies from the ESF and simultaneously to make forward sales of the same currencies to the ESF--if that should prove necessary to enable the ESF to deal with potential liquidity strains. Specifically, the Committee Federal Reserve would be prepared, if agreed that the by the Treasury, to warehouse up to $1-1/2 billion requested currencies, of which half would be for of eligible foreign periods of up to 12 months and half for periods of up to 6 months. In the discussion it was noted that such warehousing operations had proved useful from time to time in the past,

1/17-18/77 occasions when the resources of the ESF had been inadequate on to meet all the demands on them. It was also noted that, while the present agreement to warehouse currencies did not have a specific terminal date, it would be subject to review by the Committee at its organizational meeting each March in connection with the regular review of all outstanding authorizations. The members concurred in an observation that no modifications in the warehousing arrangement were likely to be proposed at the next organizational meeting, which was only 2 months away, but that the Committee could decide to reconsider the arrangement at a subsequent organizational meeting. Votes to approve the warehousing arrangement: Messrs. Burns, Volcker, Balles, Black, Coldwell, Gardner, Jackson, Kimbrel, Lilly, Partee, Wallich, and Winn. Votes to disapprove: None.