FOMC Minutes

A meeting of the Federal Open Market Committee was held on

Wednesday, September 8, 1965, at 10:45 a.m.

This was a telephone

conference meeting and each individual was in Washington 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

Balderston

Daane

Ellis

Maisel

Robertson

Scanlon

Shepardson

Clay, Alternate for Mr. Galusha

Irons, Alternate for Mr. Bryan

Treiber, Alternate for Mr. Hayes

(Boston)

(Chicago)

(Kansas City)

(Dallas)

(New York)

Mr.

Mr.

Mr.

Mr.

Young, Secretary

Kenyon, Assistant Secretary

Broida, Assistant Secretary

Holmes, Manager, System Open Market

(New York)

Account

Mr. Coombs, Special Manager, System

(New York)

Open Market Account

Chairman Martin commented that this meeting had been called

to consider certain recommendations

of the Special Manager of the

System Open Market Account relating to a proposed program of inter

national assistance to Britain.

He then asked Mr.

Coombs to describe

the nature and status of the discussions that had been in progress

and to make his recommendations.1/

1/

Four sentences have been deleted at this point for one of the reasons

cited in the preface. The deleted material related to opening remarks by

Mr. Coombs in reporting on the program being developed by the British

Government to assist the recovery of sterling, including the provision of

international financial assistance.

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As originally conceived, Mr. Coombs continued, the financial

support program was to be based on market purchases of sterling by

foreign central banks on a guaranteed or covered basis up to a

maximum of 5 per cent of the gold and foreign exchange reserves of

each participating country.

Last week, the British sought to

negotiate such financial assistance with the continental European

countries, but the negotiations bogged down and necessitated the

calling of a special meeting of the BIS group of central banks last

Sunday at Basle.

Mr. Hayes and he had participated on behalf of

the Federal Reserve.

As a result of that meeting, they were hopeful

that it might be possible to put together an international financial

package of approximately $1 billion, of which the U.S. share might

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have to be roughly 40 per cent.

He thought that most of the

European countries would wait for a U.S. commitment of $400 million,

which it was proposed to divide equally between the U.S. Treasury

and the Federal Reserve.

As the members would recall, Mr. Coombs said, at the meeting

of August 10, 1965, the Committee had approved an authorization for

covered purchases of sterling up to a total of $50 million.

He now

recommended an increase in that authorization, none of which was

in use at the moment, to $200 million.

Together with a similar

Treasury authorization of $200 million, tha: would provide a total

of $400 million.

The extent to which those authorizations would

be used would depend on agreement by the European central banks,

plus Canada and Japan, to contribute adequately to the program.

For example, if other central banks failed to provide funds

sufficient to build up a total package of $1 billion, the U.S.

share would be cut back to 40 per cent of the total package.

For the past month, Mr. Coombs remarked, the sterling

exchange markets had shown distinct signs of recovery--the rate

had moved up this morning to $2.7925--and he was persuaded that

concerted intervention to buy sterling could be a major factor

both in hastening further recovery and in averting any setbacks

arising from political or other adverse developments.

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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

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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

Britain.

If, however, the Committee authorized an increase in the

System's swap line with the Bank of England, he would recommend that

the amount be $250 million, rather than $200 million, so that the

total line with that Bank would be an even $1 billion.

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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

from $50 million to $200 million equivalent, on the understanding

that use of the authorization would not involve exceeding the

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

operations was amended to read as follows,

effective immediately, on the understanding

that use of the authorization would not

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.

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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

for full discussion of any questions that members

might have had concerning it.

Secretary