A History of the Federal Reserve, Volume 2 by Allan H. Meltzer Read Free Book Online Page A

pool.
    35. Discussions in Washington, Basel, and Paris continued to the end. Chairman Martin added that he and Dewey Daane had sat through several meetings with the Treasury. They “had taken pains to make it clear that they could not in any way commit the System to participation in the guaranteed sterling proposal and that such participation would involve a change in the character of the System’s operations to date” (Board Minutes, November 14, 1967, 13).
    36. Martin later explained Schweitzer’s reasoning. First, the $3 billion credit was so large it “would endanger the entire structure of the Fund if anything went wrong” (Board Minutes, November 14, 1967, 21). (How the IMF changed in the 1990s!) Also, the IMF did not believe Britain was a good credit, given its outstanding foreign debt (ibid., 22).
    37. The Board’s attorney, Howard Hackley, told the members that “there was no express authority in the Act for the Federal Reserve to extend credits to foreign banks” (FOMC Minutes, November 14, 1967, 34). However, there was a precedent in the 1925 loan to Britain when it returned to the gold standard. No money had been drawn, however. Hackley concluded that the program for longer-term assistance “would not involve greater legal questions than now existed” (ibid., 35). With this weak assurance, the FOMC voted unanimously to participate in the Treasury’s purchase of covered pounds and increased the ceiling on purchases of forward foreign currencies.

    END OF THE GOLD POOL
    Concerns that devaluation of the pound would increase pressure against the dollar and the gold pool proved correct. In the week following the British devaluation, the gold pool sold $578 million. Demand rose throughout the week, with nearly half the sales on Friday. In all, the pool members had agreed to provide a total of $1.37 billion to the pool. Less than 10 percent remained. For the month of November the pool sold $836 million; the U.S.’s direct share was 60 percent ($495 million), but it could be asked to reimburse other countries desiring to replace the gold they sold (FOMC Minutes, December 12, 1967, 3).
    At a special meeting of the gold pool, in Frankfurt, with France absent, the members voted to continue their support of the pool, prevailing exchange rates, and the $35 gold price (ibid., November 12, 1967, 4–5, footnote 1). 38 Several members showed reluctance, but they agreed (Solomon, 1982, 96). And all countries except France agreed to increase swap lines again, this time by more than $2.5 billion to $7.08 billion. During the year, Norway, Denmark, and Mexico joined the swap network.
    Attitudes started to change. A group of leading academic economists met as consultants to the Treasury in early December 1967. The dominant view was that the United States should not tighten monetary policy for balance of payments reasons, and many opposed additional exchange controls. “They felt a floating dollar . . . would be preferable” (Maisel diary, December 6, 1967, 1). Let other countries decide whether they wished to peg to the dollar or float. The group divided on the role of gold in the proposed system. This position followed the writings of a leading international economist, Gottfried Haberler. As early as 1965, Haberler (1965) urged a policy of “benign neglect.” As head of President Nixon’s task force, he urged the president-elect to ignore the balance of payments.
    38. New York’s report to the FOMC hints at the tension in relations with the British. New York agreed with the West German and Swiss position that the British could have avoided devaluation. “No unacceptable conditions would have been attached. The blunt fact was that the British Government made the decision to devalue on its own accord” (FOMC Minutes, November 27, 1967, 8). Later, pressed by Hugh Galusha (Minneapolis), Bruce MacLaury argued that devaluation was not necessary (ibid., 23). The United States made $500 million available ($100 from the