FOMC Minutes

A meeting of the Federal Open Market Committee was held

on Tuesday, November 24, 1964, at 3:30 p.m , EST.

This was a

telephone conference meeting and each individual was in Washing

ton except as otherwise indicated in parentheses in the following

list of those participating:

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Hayes, Vice Chairman

Balderston

Daane

Hickman

Mills

Robertson

Shepardson

Shuford

Swan

Wayne

(New York)

(Cleveland)

(St. Louis)

(San Francisco)

(Petersburg, Virginia)

Mr.

Mr.

Mr.

Mr.

Mr.

Sherman, Assistant Secretary

Broida, Assistant Secretary

Hackley, General Counsel

Brill, Associate Economist

Stone, Manager, System Open

Market Account

Mr. Coombs, Special Manager,

System Open Market Account

(New York)

(New York)

Mr. Molony, Assistant to the Board

of Governors

Messrs. Katz and Reynolds, Associate

Advisers, Division of International

Finance, Board of Governors

Mr. Furth, Consultant, Board of Governors

Miss Eaton, General Assistant, Office of

the Secretary, Board of Governors

Mr. Sanford, Vice President of the Federal

Reserve Bank of New York

(New York)

11/24/64

On the day preceding this meeting, the Bank of England had

increased its discount rate from 5 to 7 per cent, and the Board of

Governors had taken two actions:

(1) it had approved actions by

the directors of five Federal Reserve Banks increasing the discount

rates of those Banks from 3-1/2 to 4 per cent, effective November 24,

1964, and (2) it had amended the Board's Regulation Q to increase

the maximum rates that member banks were permitted to pay on time

deposits and on savings deposits held for less than one year, also

effective November 24, 1964.

Chairman Martin observed that he had called this meeting in

light of the Board's actions of the preceding day and in view of

.he

continuing pressures on the pound in foreign exchange markets that

might necessitate some further assistance to the United Kingdom.

At the outset, the Chairman said, he wanted to emphasize the need

for everyone participating in these discussions to exercise great

care to protect the confidentiality of the matters to be discussed

and thus avoid contributing to public unrest.

He thought the Syst m

personnel deserved congratulations on the manner in which the actions

of the preceding day had been carried out.

The situation was still

difficult, however, and it was quite possible that the United

Kingdom would need additional assistance in its efforts to defend

the pound.

A specific purpose of this meeting was to consider

whether the Committee would wish to authorize an increase in the

11/24/64

-3-

reciprocal currency arrangement with the Bank of England by $250

million to $750 million.

The Chairman then asked Mr. Coombs to

report the most recent market developments to the Committee and

to make any recommendations for Committee action that he thought

appropriate.

Mr. Coombs reported that both sterling and the dollar had

made a reasonably strong showing on the European exchange markets

during

the morning hours today.

Around noon, European time, however,

the situation swung around sharply as heavy selling pressure on

sterling developed in the continental market centers.

England had made a

firm stand at rates around $2.7860, intervening

both in London and New York, but had

in the process.

The Bank of

Reserve losses

suffered heavy reserve losses

so far

today, Mr. Coombs said,

had

amounted to $213 million, mainly arising out of intervention operations

in London.

So far as

the Federal Reserve Bank of New York and the Bank

of England could tell,

had triggered

rooted

in a

there had been no special event

this speculative attack.

It rather

today which

seemed to be

continued lack of confidence in the ability of the Labor

Government to defend

sterling.

This

suspicion of the British

Government had been greatly aggravated by widespread resentment in

the European business and financial communities over the 15 per

cent surcharge placed on British imports

near the end of October,

11/24/64

-4-

and by widespread rumors of an impending breakdown in political

and

financial cooperation.

As of the moment,

the British had

now fully utilized not only the $500 million of

continental and

Canadian central bank credits, but had also drawn the entire

$500 million available under the Federal Reserve swap line.

Furthermore, Mr. Coombs said, it seemed to be fully

accepted not only in European governmental circles but also in

the exchange markets that the prospective $1 billion drawing by

the British Government on the International Monetary Fund might

be utilized to pay off $1 billion in credits obtained by the

United Kingdom during the past two months.

In effect,

therefore,

the present credit resources of the British Government had now

been exhausted and further intervention to defend

become a charge on the British reserves.

sterling would

The market sensed this

situation.

The British Government, Mr. Coombs continued, thus

the prospect of a

severe depletion of their already limited reserve

availabilities unless

the present crisis of confidence could

As he saw it,

somehow be countered.

alternatives.

First,

there were now two main

the British might decide to devalue sterling.

This would probably precipitate an international financial

of

faced

the first magnitude.

crisis

He would expect to see a major speculative

drive on the London gold market and sooner or later an even more

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11/24/64

dangerous attack on the U.S. dollar.

If the British devaluation

were to trigger devaluations of other currencies, such an attack

on the U.S. dollar might develop swiftly and in a huge volume.

Mr. Coombs thought, therefore, that it was essential to

avoid at all costs recourse to the devaluation alternative and to

try to deal directly with the confidence factor by putting on a

display of international financial cooperation through a new and

very large package of short-term credit to the U.K.

He thought

that the situation was extremely dangerous and that a "now or

never" effort should be made.

In round figures, Mr. Coombs said,

the Committee might think in terms of a total international credit

package of $2 billion over and above the present swap line of $500

million and the short-term European and Canadian Bank credit of

$500 million, both of which would be presumably repaid out of the

British drawing on the IMF.

In building up such a $2 billion package, Mr. Coombs thought,

the U.S. share would probably have to be about $500 million.

He

was hopeful that the Treasury or the Export-Import Bank might be

able to provide $250 million, one-half of the U.S. share.

The

remaining $250 million from the U.S. side should, he believed, be

provided by an increase in the Federal Reserve swap line with the

Bank of England from $500 million to $750 million.

11/24/64

Chairman Martin asked Mr. Hayes if he had any comments,

and Mr. Hayes replied that he would add only that he was fully

in accord with Mr. Coombs' recommendation.

Mr. Hickman asked what the prospects were for obtaining

the $1.5 billion credits from non-U.S. sources called for by the

proposal.

Mr. Coombs replied that since noon, European time,

when the market situation had reversed, he had discussed the

problem with officials of the Bank of Canada, who were now

consulting with their Government.

He thought there was a fair

and perhaps a good chance that the Canadians would put up $150

million.

He also had alerted the German Federal Bank to the

situation, but so far he had not been able to contact any other

central banks.

Mr. Hayes reported that in a conversation with officials

of the Bank of England this morning he had suggested that the U.S.

might be able to help assemble the package of credits.

They had

asked, however, that no steps in this direction be taken until

they had hac an opportunity to decide whether they wanted the

credits.

Chairman Martin said that, in his judgment, the issue

before the Committee now was whether the Federal Reserve was

prepared to increase the reciprocal currency agreement with the

United Kingdom by $250 million if a package of credits such as that

11/24/64

-7

outlined by Mr. Coombs was put together.

The British might decide

not to request such credits, but thac matter, he thought, was

outside the purview of the Committee at present.

He would hope

that the System would adopt a posture of being as helpful as it

could.

Mr. Wayne asked whether his understanding was correct that

the proposed Committee action today would be conditional on the

development of a package of credits such as had been described and

also on a decision by the Bank of England that they needed such

credits.

Chairman Martin replied in the affirmative.

He thought

it would be helpful to authorize an increase in the swap line today

on those two conditions, so that the System would be in a better

position to act,

if

necessary,

over the next several days which

included the Thanksgiving Day holiday in

the U.S.

and a weekend.

Mr. Wayne commented that he felt the Committee should act

with promptness and forcefulness.

Mr. Hackman said his only question was whether the proposed

authorization might not be too limited.

Perhaps the Committee

should authorize an increase of as much as $500 million in the

swap line with the United Kingdom in light of the possibility that

the amounts to be sought from other sources might not all be forth

coming.

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11/24/64

Mr. Mills said he was somewhat concerned that the approach

being taken might reflect some elements of panic on the System's

part.

There had been no discussion of conditions that the Federal

Reserve System might place on a further extension of credit to the

British.

He was not clear as to what assurances the Committee

might have that assistance rendered at this time would plug the

gap and save the situation rather than simply constitute a further

contribution and a further liability assumed by the Federal Reserve.

Mr. Hayes could have been in error ir offering the System's services

in the effort to make up this package.

The continental European

countries might well view such actions as reflecting more than

enlightened self-interest on the System's part; perhaps they would

take them to :.ndicate that the situation posed a problem to the

U.S. and that there was concern about the stability of the dollar.

It seemed to Mr. Mills that it would be better for the British to

make their own arrangements.

Mr. Hayes responded that it was primarily the task of the

Treasury, rather than of the System, to see that the British made

the best possible arrangements and to assure that their program

was successful.

He also emphasized that the System was not taking

any risks under procedures followed for the swap arrangements.

As

to how the package was arranged, he agreed that the other countries

should help.

However, it was conceivable to him that the attitude

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11/24/64

of continental European countries toward the proposed package of

credits would be strengthened if

supported it

fully.

they felt

that the United States

This country clearly had a self-interest in

avoiding a crisis that could involve the dollar.

Mr. Mills said that he was not challenging the suggestion

that the United States should be helpful ir

the present situation.

But he did have doubts about the approach on psychological grounds.

There was no certainty that the proposed package would solve the

problem,

and he was sure that the continental Europeans would not

approach the problem without concern over the means by which it

ultimately would be resolved.

Mr.

Daane said it

was correct.

seemed to him that Mr.

position

In his own thinking he began with the view that Mr.

Coombs had expressed:

that the proposed package of credits was

by far the better of the two alternatives Mr.

and it

Hayes'

was the last resort open at present.

Coombs had outlined,

Secondly,

with respect

to the U.S. share, he agreed that the Committee should demonstrate

its willingness to participate, in the interest of furthering

international financial cooperation.

But he thought it would be

better for the larger share of the total package to come from

sources other than the United States,

particularly since the drain

on sterling had come from countries other than the U.S.

believe it

would be wise for the arrangements

He did not

to have the appear

ance of reflecting primarily Anglo-American cooperation.

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11/24/64

Mr. Hayes agreed.

With respect to Mr. Hickman's comment,

he felt that the Committee should consider increasing the swap

line by $250

illion at present with the realization that the

Special Manager might want to recommend that the Committee

authorize a larger increase if necessary to make up a deficit in

the total package.

Chairman Martin said that he thought Mr. Mills had touched

on a macter of legitimate concern, but one that was a problem

primarily for the United Kingdom and the U.S. Treasury.

In his

opinion $250 million was a reasonable amount by which to increase

the swap line at present.

He added that the negotiations for the

total package would have to take place promptly, and he inquired

whether the Committee was prepared to authorize the recommended

increase.

Thereupon, an increase in the swap

arrangement with the Bank of England to

$750 million, as recommended by Mr. Coombs,

was approved unanimously, subject to the

agreement of the Bank of England and to

the satisfactory development of a package

of credits of the type described by Mr.

Coombs. In taking this action, it was

understood that the aggregate amount of

foreign currencies held under reciprocal

currency arrangements authorized in the

continuing authority directive with

respect to foreign currency operations

was increased by $250 million to $2.350

billion.

11/24/64

-11-

Chairman Martin reiterated that the matters discussed at

this meeting should be considered highly confidential by all con

cerned.

He added that Committee members not in Washington would

be kept informed of developments.

Thereupon the meeting adjourned.

Secretary's Note: Acvice of completion

of the arrangements for assistance to

the United Kingdom was received on

November 25. An amended continuing

authority directive was transmitted to

the Federal Reserve Bank of New York,

and the following anrouncement was

released to the press at approximately

2 p.m. EST:

The Federal Reserve System and the U.S. Treasury today

issued the following statement:

Eleven countries and the United Kingdom today made

arrangements providing $3 billion to pack up Britain's

determination to defend the pound sterling.

Today's funds are in addition to the $1 billion

drawing the United Kingdom will obtain from the International

Monetary Fund at the end of this month under an existing

standby.

Austria, Belgium, Canada, France Germany, Italy, Japan.

The Netherlands, Sweden, Switzerland, and the United States,

joined by the Bank for International Settlements, moved

quickly to mobilize a massive counter attack on speculative

selling of the pound.

The International Monetary Fund drawing, which can have

a maturity up to 3 years, will enable the British to pay off

all outstanding short term credits from central banks,

including the Federal Reserve. The currency swap arrangement

with the Federal Reserve System has been raised by $250 million

to $750 million, and a $250 million credit has been made

available by the U.S. Export-Import Bank.

(These amounts

are included in the total package of $3 billion.)

n

Assistant