MONEY, CREDIT, ANDBANKING LECTURE
From Obscurity to Notoriety:
A Biographyof the Exchange Stabilization Fund
ANNA J. SCHWARTZ
"6. Gold was held as an ESF asset only until 1975. See the discussion in section 2C. below. Note,however, that at IMF gold auctions in 1977, the Treasury purchased gold which it sold to the ESF (Trea-sury AR 1977, p. 158). The official source does not explain why the ESF acquired this gold and how it disposed of it. An entry for gold appears on the ESF balance sheet at the end of the first three quarters of1977 and not thereafter."
"...Balance-of-Payments Concerns. A deterioration in the U.S. balance of payments, as measured by outflows of gold and dollars to countries in surplus, aroused the concern of the Kennedy administration when it took office in January 1961. The lossof gold to foreigners in that month was seen as an expression of a lack of confidencein the administration's commitment to a dollar convertible into gold at a fixed price.The twin goals became to eliminate the balance-of-payments deficit and to checkspeculation against the dollar. To achieve the second goal the Treasury wanted to bein the same position as other countries that influenced the exchange value of theircurrencies. That required resources to buy and sell other currencies or, in officialparlance, sales and purchases of dollars.To that end the ESF began to operate directly in the foreign exchange market. ByJune 1961 it had bought spot $25.4 million sterling, $20.1 million D-marks, and$65 million Swiss francs to counter threats against the dollar.In March 1961, after revaluations of the D-mark and the Dutch guilder, the ESFmade forward sales of D-marks to drive down the forward premium on the mark(discount on the dollar). The Treasury's forward mark commitments were liquidatedby early December; it used marks it had acquired in April 1961 from a German debtrepayment to the United States to settle in part forward contracts that were maturingin the fall of 1961.There were similar forward operations by the Treasury in Swiss francs and Dutchguilders to bring down the premium on these currencies. As a response to the rise inthe exchange value of the Italian lira in 1961 to its upper limit against the dollar, theTreasury took over forward lire contracts from the Italian foreign exchange officeand drew on a $150 million line of credit in lire it obtained by issuing three-monthcertificates of indebtedness to support spot and forward operations in lire. As a re-sult dollar accumulations in Italy were lessened.Even these limited operations strained the resources of the ESF. In June 1961 ithad $200 million capital plus $136 million in net earnings accumulated over itstwenty-seven-year life. Average annual net earnings approximated $5 million, fromincome on gold bullion sales, gold and exchange transactions, and interest on itsgovernment securities portfolio. To finance its foreign exchange purchases of rough-ly $100 million in 1961, the ESF had reduced its account at the Federal ReserveBank of New York by $91 million and sold U.S. government securities. The Treasury's immediate aim was to find ways to supplement ESF foreign cur-rency balances.9 It did so first by persuading the G-10 countries to create a facilitythat would expand the IMF's ability to lend. The IMF held only about $1.5 billion incurrencies other than dollars. The new facility, established in December 1961, wasthe General Arrangements to Borrow (GAB), which provided the IMF with a$6 billion line of credit from central banks in surplus to assist countries in deficit, inparticular, the United States. The U.S. quota in the IMF was nearly $6 billion, so itcould not draw enough to meet its reserve needs; the GAB was intended to serve asa supplementary source of liquidity for the United States. The IMF would sell to theUnited States for dollars foreign convertible currencies borrowed from other countries. These currencies would enable the United States to buy up dollars offered inthe market and to redeem dollars foreign central banks did not want to hold, thusmaintaining U.S. monetary gold reserves.The Treasury next persuaded the Federal Reserve to serve as its partner in ex-change market intervention. So begins the second period of ESF intervention operations.The Federal Reserve as ESF Partner. The Federal Open Market Committee(FOMC) authorized open market transactions in foreign currencies for the accountof the Federal Reserve System on February 13, 1962. Before that date the FederalReserve Bank of New York served as the agent only of the ESF in executing itslimited foreign currency transactions. Since that date it has served both the ESF andthe Federal Reserve System. In support of its decision to engage in intervention op-erations, the FOMC cited "the need to supplement the relatively small resourceswhich the Treasury Stabilization Fund had available and had been using to defendthe dollar from speculative attack in the foreign exchange markets since 1961"(Board AR 1962, p. 11).Since this paper is a study of the ESF, 1 shall refer to the Federal Reserve's opera-tions only in relation to the conduct of the ESF. The first imperative for the FederalReserve, once it determined that it had the legal authority to intervene, was to ac-quire foreign currencies for its future operations. It did so by purchasing from theESF in 1962 dollar equivalents of $32 million in D-marks, and of one-half milliondollars each in Swiss francs, Dutch guilders, and Italian lire to open accounts at thecentral banks that issued these currencies.This initial Federal Reserve purchase of currencies owned by the ESF has beencited as the origin of "warehousing," the euphemism that later came into use to de-scribe the provision of funds to the ESF outside the Congressional appropriationsprocess (Todd 1992, pp. 132-33).10 It was not until 1977, however, that warehous-ing of foreign currencies for the ESF was formally authorized by the Federal Re-serve..."