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fomc-corpus | 1,977 | Gentlemen, this meeting will now come to order, please. There are several items that I thought would be best taken up in executive session. And one of them is the agreement concluded by the central bankers in Basel concerning the establishment of a facility for handling official sterling balances. The agreement has bee... | 135 |
fomc-corpus | 1,977 | The purpose of the agreement--which exists in principle, and its main components remain to be finalized in a few details--is to reduce official sterling balances. These have been a disturbing element due to their volatility. The agreement provides that the BIS [Bank for International Settlements] will finance the Bank ... | 452 |
fomc-corpus | 1,977 | No, not at this point. We want to deal solely with the agreement drawn up at Basel by the central banks. Thank you, Mr. Wallich. Mr. Holmes, you worked hard on this--would you like to add any comment? | 50 |
fomc-corpus | 1,977 | I won't go into any details, but at the Basel meeting preceding the most recent one, a group of experts was set up that met in Paris on December 20 and 22, then again in Basel last Sunday. We started out with why there is disagreement, and ended up in the meeting last Saturday to agree on what we couldn't agree on and ... | 261 |
fomc-corpus | 1,977 | Thank you, Mr. Holmes. The only additional comment that I would make is that the present expectation--and it's an eminently reasonable expectation--is that the BIS will be able to meet any funds that the British may wish to acquire because of a rundown in the sterling balances. All the BIS has to do is enter the market... | 180 |
fomc-corpus | 1,977 | Mr. Chairman, a clarification--our loan would be to the BIS rather than to the Bank of England, in case we're called upon? | 28 |
fomc-corpus | 1,977 | In case we're called upon, well, Henry would you answer that? | 14 |
fomc-corpus | 1,977 | That is correct. However, the BIS is obligated to repay only to the extent that it is being repaid by the Bank of England, except for its own small 4 percent share. | 38 |
fomc-corpus | 1,977 | It doesn't [unintelligible]. | 8 |
fomc-corpus | 1,977 | Yes. | 2 |
fomc-corpus | 1,977 | Which means, in effect, we'd be lending to the Bank of England. | 15 |
fomc-corpus | 1,977 | We would lend at our discount rate? Or our bill rate, or what? What would be the interest rate? | 23 |
fomc-corpus | 1,977 | Well, the first question is how the BIS establishes its rate with respect to the Bank of England. Then we would normally lend at the Treasury bill rate for swaps. If, for some reason, that's inappropriate because it would give the BIS, for instance, too large a margin, I'm sure we could adjust that. | 63 |
fomc-corpus | 1,977 | It would come under our regular swap agreement with the BIS. | 12 |
fomc-corpus | 1,977 | Which is ordinarily at the bill rate? | 8 |
fomc-corpus | 1,977 | At the bill rate. | 5 |
fomc-corpus | 1,977 | But there will be a uniform rate from the BIS to the British. | 14 |
fomc-corpus | 1,977 | Yes. | 2 |
fomc-corpus | 1,977 | The rate may vary over time, depending on three-month-- | 12 |
fomc-corpus | 1,977 | I was thinking about the countries. | 7 |
fomc-corpus | 1,977 | Well, the other countries don't enter into the picture until the BIS has to draw on other countries. And as I said, that is really not at all likely to occur. The BIS will enter the market and will borrow funds, or attract deposits at a certain rate of interest. And the BIS will charge the Bank of England the rate of i... | 96 |
fomc-corpus | 1,977 | I see. | 3 |
fomc-corpus | 1,977 | Any other questions? Well, if there is no other question, would someone be good enough to move ratification of this agreement. | 26 |
fomc-corpus | 1,977 | So moved. | 3 |
fomc-corpus | 1,977 | Motion has been made. Any objection. I hear none, and let us pass now to an internal agreement, that is, a separate agreement that we at the Federal Reserve have with the U.S. Treasury. And that agreement is written out in a letter from Secretary Simon to me, dated January 14, 1977, along with my reply to the Secretary... | 149 |
fomc-corpus | 1,977 | Well, I don't think there's much to add. What we are doing is protecting ourselves as a central bank to make sure that this remains a short-term operation. We have a clear take-out. | 39 |
fomc-corpus | 1,977 | In this regard, you may recall the provision that we had for a take-out under an agreement with the Treasury--back in 1968, was it? Well, there was an obligation assumed by the Treasury in that year. And that undertaking by the Treasury has been subject to interpretation and misinterpretation; there were elements of am... | 81 |
fomc-corpus | 1,977 | There is one aspect of this that I just feel I ought to comment on because as a matter of form it concerns me. In form, we have a take-out here after a year, but since the risk-sharing arrangement in the third indented paragraph here extends beyond a year, in substance we're left with the risks of the credit and, there... | 78 |
fomc-corpus | 1,977 | For half of this. | 5 |
fomc-corpus | 1,977 | For half of it, that's right. For half of it. | 13 |
fomc-corpus | 1,977 | Well, I think that's true, but let's be clear about the risk. The risk is the Bank of England declares itself bankrupt, and I think that risk is a minimal risk. | 36 |
fomc-corpus | 1,977 | No, I think the risk is minimal--I would think the risk existed whether or not they were bankrupt. The loan may not stand for more than a year at the exchange rate--no, there's no exchange rate risk here. | 46 |
fomc-corpus | 1,977 | No exchange rate risk whatever. | 6 |
fomc-corpus | 1,977 | No, that's right. That's right. No, I agree, the risk is very remote. | 19 |
fomc-corpus | 1,977 | There would be a loss on this loan only if the Bank of England goes bankrupt. | 17 |
fomc-corpus | 1,977 | That is correct. | 4 |
fomc-corpus | 1,977 | Or repudiates its debt. | 6 |
fomc-corpus | 1,977 | Correct. | 2 |
fomc-corpus | 1,977 | Or repudiates its debt without going bankrupt. After all, that's been done by Communist countries. | 19 |
fomc-corpus | 1,977 | I think this contingency is extremely remote. I have no doubt at all in my mind about that. But in form, the obligation really is for more than a year. I don't think we can kid it. I mean, I would have wished that the Treasury would have just taken over the thing at the end of the year in view of this very minimal risk... | 90 |
fomc-corpus | 1,977 | The Treasury wanted this paragraph since the agreement otherwise was entirely unconditional. And since I regarded the risk as minimal--and if the Bank of England repudiates its debt, then I think we'll be living in a very different world from any that you or I have known--I saw no reason to quarrel with the Treasury, s... | 81 |
fomc-corpus | 1,977 | Well, the risk is certainly minimal, and I don't want to suggest anything else, but as a precedent for the future and in form, I'm just a little unhappy about that particular aspect of it. I will desist, but I just wanted to record some unhappiness over that aspect of it. | 59 |
fomc-corpus | 1,977 | Well, I'm very glad that you've become--that you've thrown off your old Treasury garments completely, since you no longer even remember that no matter how this last paragraph is written, if there is a loss, well that's going to come out of the U.S. Treasury. | 54 |
fomc-corpus | 1,977 | That is correct, too. Put on my old clothes, and I would have been in the Treasury arguing that we should have taken all this risk after a year. I think it's entirely appropriate that they would have done so. | 45 |
fomc-corpus | 1,977 | Are there any questions about this side agreement with the U.S. Treasury. | 15 |
fomc-corpus | 1,977 | I move ratification, Mr. Chairman. | 9 |
fomc-corpus | 1,977 | A motion has been made to ratify the agreement with the Treasury. Are there any questions or expressions of dissent? I hear none. And now I want to turn to the third item, which is a proposal for a warehousing agreement. And this is described in a letter from the Secretary of the Treasury, dated January 14, and a propo... | 403 |
fomc-corpus | 1,977 | I'm sorry, Mr. Chairman, I've been focusing on a problem which just came up and I didn't follow the discussion. | 24 |
fomc-corpus | 1,977 | Mr. Holmes, I hope you have followed the discussion. Would you like to add-- | 18 |
fomc-corpus | 1,977 | Mr. Chairman, I hope the record will have your comments written in. | 15 |
fomc-corpus | 1,977 | --would you wish to comment on it? | 9 |
fomc-corpus | 1,977 | No, it's quite obvious, Mr. Chairman, if we warehouse foreign exchange for the Treasury, that has a reserve impact. But we have no problems in offsetting that through domestic operations, and obviously this would be small compared to the normal swing in the Treasury balance. I think from the domestic side there is no p... | 85 |
fomc-corpus | 1,977 | May I add something, Mr. Chairman? I think one has to be aware that this is not only an operation that has been performed before and, therefore, is not innovative. [But also,] it is not the kind of operation where the central bank makes a loan to the government, which typically gives concern. It is an operation perform... | 104 |
fomc-corpus | 1,977 | Well, as the first sentence in Mr. Morton's memorandum indicates, System warehousing of foreign currency involves simultaneous spot purchases and forward sales of foreign currency by the System with the U.S. Treasury. | 40 |
fomc-corpus | 1,977 | These at identical rates? Spot purchases and forward sales at identical rates? | 14 |
fomc-corpus | 1,977 | Yes. | 2 |
fomc-corpus | 1,977 | Always at identical rates. | 5 |
fomc-corpus | 1,977 | You involve the foreign currency in this case, though. | 11 |
fomc-corpus | 1,977 | What? | 2 |
fomc-corpus | 1,977 | We [unintelligible] involve the foreign currency in this case. | 15 |
fomc-corpus | 1,977 | Why not? | 3 |
fomc-corpus | 1,977 | It belongs to the BIS. | 6 |
fomc-corpus | 1,977 | No, no it doesn't. | 6 |
fomc-corpus | 1,977 | Forget entirely the-- | 4 |
fomc-corpus | 1,977 | This is not linked to that [unintelligible]. | 12 |
fomc-corpus | 1,977 | This is not linked as such with the Basel agreement. The Treasury may find that the Exchange Stabilization Fund [ESF] is short of money for a great period. | 34 |
fomc-corpus | 1,977 | For other purposes, for any purpose? | 8 |
fomc-corpus | 1,977 | It may arise out of the new Basel agreement or any other purpose. And then the Treasury will turn to the Federal Reserve as its banker for short-term financing. I say "would"--may turn to us. | 42 |
fomc-corpus | 1,977 | It's almost a repurchase agreement. | 7 |
fomc-corpus | 1,977 | Yes, | 2 |
fomc-corpus | 1,977 | It's what it is. | 5 |
fomc-corpus | 1,977 | It's using a different instrument. | 6 |
fomc-corpus | 1,977 | It has the same effect. | 6 |
fomc-corpus | 1,977 | Enlarges the assets by 50%. | 9 |
fomc-corpus | 1,977 | It's not even tied to the sterling as such, although that may be the main asset at a given time in the ESF, but if the ESF has other currencies--any currencies [on which] there is an authorization to purchase can be made the object of the transaction. | 56 |
fomc-corpus | 1,977 | This would require, however, the Committee's authorization for purchase of this specific currency? In other words, it has to be a swap currency? | 29 |
fomc-corpus | 1,977 | Well, it has to be a swap currency for which a swap is authorized. Now, within the limits of the swap authorization, that is a do-able operation. | 33 |
fomc-corpus | 1,977 | It would not be possible for the Portuguese whatever, then? | 12 |
fomc-corpus | 1,977 | No, not without a new authorization. | 8 |
fomc-corpus | 1,977 | It has to be a swap currency? | 8 |
fomc-corpus | 1,977 | Of course. | 3 |
fomc-corpus | 1,977 | The peso as such? | 5 |
fomc-corpus | 1,977 | To come under the law, it has to be a swap transaction, according to our lawyers. And as Mr. Broida points out to me in the projected letter that I would send to the Treasury, that projected letter says, "the Federal Reserve will be prepared, if requested by the Treasury, to warehouse eligible foreign--" | 67 |
fomc-corpus | 1,977 | Eligible. | 2 |
fomc-corpus | 1,977 | Any questions about this warehousing arrangement? | 8 |
fomc-corpus | 1,977 | How is this made known to the public? Is this released? | 13 |
fomc-corpus | 1,977 | This has been considered. We reviewed the 1968 undertaking, and that was disclosed fully to the public. That would be our intention now, subject only to some conversations with the Treasury. If the Treasury has cogent reasons for not disclosing it, we would have to take them into account. Now, I believe, Governor Walli... | 83 |
fomc-corpus | 1,977 | I had a preliminary conversation with Sam Cross. Mr. Yeo is travelling. The view is that as a general principle, they would like to publish. However, they would first like to see the final text, and second they'd like to touch base with the appropriate members of the Congress before that is done. | 62 |
fomc-corpus | 1,977 | Well, I think that's clearly appropriate because the members of the Congress like to know about these things before they read about it in the newspapers. And that presents no difficulty from our viewpoint because--Mr. Broida, am I right in thinking--it has 30 days? | 56 |
fomc-corpus | 1,977 | We have 30 days to publish the explanation in the policy record. We could at any time earlier put the text of the letters on file downstairs, but it need not be done before 30 days. | 41 |
fomc-corpus | 1,977 | We could do that if the Treasury's made its clearing with the congressional--? | 16 |
fomc-corpus | 1,977 | We could do that immediately. | 6 |
fomc-corpus | 1,977 | Any other question about this arrangements? | 7 |
fomc-corpus | 1,977 | Well, my only question is something which we've talked before, and that's the enlargement of the ESF divorced from the Basel agreement. But given the restudy of this, or specific re-analysis in March, then I'll subside. | 46 |
fomc-corpus | 1,977 | Well, I think we ought to be careful about one thing. I spoke about the March date, but if we enter into an agreement today, I think that this agreement ought to be good until March 1978. I don't think we could very well go back to the Treasury--not this March. | 61 |
fomc-corpus | 1,977 | No, I meant March of next year. | 9 |
fomc-corpus | 1,977 | That will be in a written record? | 8 |
fomc-corpus | 1,977 | It should be written-in that, in the normal course of events, as we consider our various directives, we'll take this up, among others. That should be reported to files. | 36 |
fomc-corpus | 1,977 | Would you like a motion? | 6 |
fomc-corpus | 1,977 | Yes. | 2 |
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