FOMC Minutes

A telephone conference meeting of the Federal Open Market

Committee was held on Thursday, June 21, 1962, at 3;30 p.m.

PARTICIPATING:

Mr. Martin, Chairman

Mr. Hayes, Vice Chairman

Mr. Balderston

(Washington)

(New York)

(Washington)

Mr.

Bryan

(Atlanta)

Mr.

Mr.

Mr.

Mr.

Deming

Ellis

Fulton

King

(Minneapolis)

(Boston)

(Cleveland)

(Washington)

Mr. Mills

(

"

)

Mr. Robertson

Mr. Shepardson

(

(

"

"

)

)

Mr.

Mr.

Mr.

Mr.

Mr.

Sherman, Assistant Secretary

Kenyon, Assistant Secretary

Hackley, General Counsel

Furth, Associate Economist

Coombs, Special Manager

System Open Market Account

Mr. Molony, Assistant to the

Board of Governors

EDST.

(Washington)

(

"

)

(

"

)

(

"

)

(New York )

(Washington)

At the meeting of the Federal Open Market Committee on

June 19, 1962, Mr. Coombs had reported on discussions with respect to a

possible U.S. dollar-Canadian dollar swap arrangement between the Federal

Reserve System and the Bank of Canada but had recommended that the matter

be held temporarily in abeyance.

This telephone conference meeting was

called for the purpose of considering such a swap arrangement further in

the light of recent developments.

At the request of the Chairman, Mr. Coombs made a statement in

which he reported that there had been a number of telephone discussions

yesterday and today between the Governor of the Bank of Canada, on the

one side, and representatives of the Federal Reserve, the International

Monetary Fund, the U.S. Treasury, and the Bank of England on the other.

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The Canadian dollar had been under heavy selling pressure, and the

situation appeared to call for both (a) development by the Canadian

Government of a program of corrective measures, and (b) international

financial aid.

June 24,

As to the first point, it was hoped that by Sunday,

the Canadian Government would be prepared to announce a com

prehensive program of remedial steps, including actions in the fiscal

field and in the monetary and credit area.

As to international aid,

there was in prospect a financial assistance package of substantial

proportions that might be announced by the Canadians simultaneously.

Discussions had been going on with the International Monetary Fund

relating to the possibility of a Canadian drawing as one part of this

package.

Although the amount that would be immediately available had

not yet been ascertained,

in part because of the necessity for Fund

representatives to get in touch with their respective governments,

a minimum drawing of $160 million seemed assured and it was hoped that

as much as $300 million would be available promptly.

As another part

of the package of financial aid, the Bank of England had committed

itself to the extent of $100 million.

In addition, the U.S. Export

Import Bank probably would be prepared to put up $350 or $400 million

on a standby basis.

Turning to the role of the Federal Reserve,

that he would recommend a swap arrangement

in

Mr.

Coombs said

the amount of $250 million,

such arrangement to be on generally the same terms as the other swap

arrangements heretofore entered into by the System, with provision for

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forward cover and with an identical interest rate, probably 2 per

cent, on both sides.

The swap would be for a three-month period,

with option of renewal at the agreement of both parties.

In further comments, Mr. Coombs noted that it was possible

that some additional funds might be obtained by the Canadians from

Continental European central banks.

However, if the other items in

the financial package that he had described were firmed up, that

would appear sufficient.

In

Such a package would approximate $1 billion.

combination with the announcement of a program of corrective fiscal

and other measures such as the Canadians were trying to work out, this

should suffice to restore confidence in

the Canadian dollar, with

substantial indirect benefits to the United States.

With respect to the anticipated Export-Import Bank standby

credit,

Mr.

Coombs said it

was understood that the Canadians would

seek to negotiate a long-term loan in

the order of $250 million from

New York banks and insurance companies.

If

that could be accomplished,

an equivalent amount of the standby credit would be eliminated.

Chairman Martin inquired, for purpose of clarification, con

cerning the position of the Federal Reserve if

it

should enter into

the recommended swap arrangement and there should be a breakthrough of

the Canadian dollar.

Mr.

Coombs replied that the Federal Reserve would still

entitled to repayment of 250 million U.S. dollars.

be

There would be no

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possibility of loss except in the event of default on the part of the

Bank of Canada, which would be unthinkable.

Mr.

Mills asked whether it

was anticipated

that Canadian

drawings under the package of financial assistance would be largely

in U.S. dollars.

In reply, Mr.

Coombs said he assumed that any drawings on the

Monetary Fund would be largely in European currencies.

Although the

technical details of the arrangement with the Bank of England apparently

had not yet been ironed out

he supposed that the Bank of England

might switch dollar holdings in

Mr.

New York to the Bank of Canada.

Robertson inquired as to why the International Monetary

Fund was not in a position to go further than $160 million at this

time.

Mr. Coombs replied that the Fund customarily followed certain

procedures, under which the executive directors had an opportunity to

communicate with their respective governments.

However, the Fund was

in a position to act more promptly on a drawing limited to the amount

of gold that the applicant country had paid in to the Fund.

if the Fund could not go to a figure as high as

to permit announcement on Sunday

In any even,

$300 million it time

it was hoped that additional funds

might become available during the following week.

Mr. Robertson then inquired of Mr. Coombs whether his recom

mendation was contingent upon the swap arrangement being a part of a

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larger package of financial assistance from several sources, such as

Mr. Coombs had outlined.

Mr.

Coombs replied that he would not recommend a swap arrange

ment except as part of a larger package of international financial aid,

and unless the Canadian Government was able to put together a program

of corrective measures.

Mr. Shepardson asked about the prospect of such a program

being formulated in view of the indecisive nature of the recent

Canadian elections, to which Mr. Coombs replied that the Governor of

the Bank of Canada had seemed hopeful that

itwould be possible to put

the program together and announce it on Sunday.

After Mr. King indicated that he had no questions, inquiry

was made by Mr.

Balderston with regard to the manner of announcement

o: any Federal Reserve-Bank of Canada swap arrangement.

Mr. Coombs said he assumed that the announcement by the

Canadian Government of the package of financial assistance would include

a breakdown of the several sources of funds.

If such an announcement

was made on Sunday, that would present something of a problem should

the Open Market Committee desire that separate announcement of the

swap arrangement be made simultaneously.

Perhaps, however, someone

representing the Committee could be on duty to confirm the swap arrange

ment in the event of inquiry.

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6/21/62

Mr. Hayes commented that he had been in close consultation

with Mr.

Coombs and with Treasury representatives.

with the Governor of the Bank of Canada today.

had nothing to add to the

He had also talked

While he

facts of the matter,

(Mr.

Hayes)

as stated by Mr. Coombs

he would like to stress the urgency of the situation

not only from

the Canadian point of view but from the standpoint of the United States.

The Federal Reserve System had an opportunity to contribute to a

solution,

in a manner that would involve a minimum of

System. and he considered it highly appropriate

risk to the

that the System have

a part in the program.

In response to a question. Mr. Hayes said he would regard the

s ap arrangement as one for the purpose of helping the United States

as well as Canada.

He felt that a worsening of the Canadian position

could have serious repercussions on the U.S.

dollar.

Mr. Ellis inquired as to which of the sources of funds the

Canadians would be likely to draw on firs,.

and as to the prospective

order of repayment.

Mr. Coombs replied, on the first point, that he assumed the

Canadians might draw first

and by the Bank of England.

on funds made available by the Federal Reserve

As to repayment

he assumed that the Federal

Reserve money would be repaid before the Canadians made repayment of

funds borrowed from sources such as the International Monetary Fund or

the Export-Import

Bank.

The swap arrangement

would be renewable,

of

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course, but only upon agreement by the Federal Reserve.

If the drawing

from the Monetary Fund developed ultimately to be as large as seemed

possible. those funds could be used in part, if necessary, to repay the

Federal Reserve.

This would be similar to the situation in 1961 when

the British borrowed short term from other European central banks and

then made repayment out of the proceeds of a drawing on the Monetary

Fund.

Mr.

Fulton referred to the package Mr.

Coombs had desc ibed and

asked for clarification from the standpoint of the effect on the U.S.

balance of payments.

In reply, Mr. Coombs pointed out tha

the swap arrangement

could

have no balance of payments effect, since the Canadian dollars accruing

to the Federal Reserve would be included as a short-term claim on

foreigners.

to Canada,

If the Bank o, England transferred holdings of U.S. dollars

that would represent merely a shift of liabilities.

However

if the Canadians should draw on Export-Import Bank money or borrow in

New York City, that would have a balance of payments effect,

the extent that the proceeds of any borrowing in

except to

New York City were used

to fund short-term borrowing in the United States.

Mr. Bryan commented that if anything were done, the package of

assistance must be large enough to have a chance of succeeding.

He then

inquired whether the problem appeared to involve clearly a speculative

run on the Canadian dollar or whether it

appeared that the parity of the

Canadian dollar might not be in actuality a viable parity.

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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

States and Britain put up U.S. dollars and Canada paid out such dollars

against a loss of reserves, there was not the risk that the recipients

would wish to convert the dollars into their own currencies or gold.

Mr. Coombs said that this problem had been discussed with the

Bank of England.

Both the Bank of England and the Federal Reserve Bank

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of New York felt

that the major flow from Canada was to the United States

rather than to the United Kingdom or to Europe.

leakage into Europe was not thought to be great.

Therefore, the risk of

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.

If

$300 million was provided by the Fund, presumably no further consid

eration would have to be given to the possibility of participation by

Continental European central banks in the package of assistance to Canada;

if only $160 million was provided, that question might have to be reopened.

Mr.

Deming inuired whether a Fund drawing was likely to be largely

in Continental European currencies, and Mr. Coombs replied in the affirma

tive.

Mr. Deming then inquired how that would help the Canadians if the

flow of funds was principally to the United States.

Mr. Coombs replied

that there would, of course, be a certain volume of regular Canadian

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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

Reserve Bank of New York was authorized and directed to purchase and

sell.

In its amended form, the directive read as follows:

The Federal Reserve Bank of New York is authorized and

directed to purchase and sell through spot transactions any or

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

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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