Forex: Minimizing the Gold Loss
Another group of measures--- have been employed to minimize the gold loss which are, in one sense, designed to give the United States more time to eliminate its deficit.
For example--- to remove the need for severe restraint and allow the measures outlines above to bear fruit.
These measures were primarily engineered by former Under Secretary of the Treasury Roosa, and may be grouped into three categories.
These categories are 1) raising short-term interest rates to make dollar asset holdings more attractive relative to gold, 2) arrangements for credit facilities to stave off a run on the dollar (or other currency), 3) and measures to neutralize foreign official dollar holdings by turning them into longer-term assets ('Roosa bonds').
The first measure, raising short-term interest rates, has been a part of 'operation twist'.
This has the double effect of tending to reduce U.S. short-term capital outflows, and thus reduce the deficit and to make more attractive foreign short-term investment in the United States, thereby reducing the gold drain which was the original objective.
In 1962, the Federal Reserve sanctioned a rise in the interest rate paid to foreign official institutions on time deposits at commercial banks.
Later, the general rise in short-term interest rates made possible higher return on all foreign-held short-term dollar assets. Thus, to convert dollar holdings to gold would have cost more in lost interest income than before.
This has not entirely inhibited foreign countries from converting dollars to gold, as the 'soundness' of the dollar as declined, the magnitude of conversions by France, Germany, and other countries.
The second group of measures constitutes means of extending credit to deficit countries with weak currencies.
These indications of international cooperation include the 'General Arrangements to Borrow', in which the group of Ten countries grant short-term credits to the IMF which, in turn, lends to a country whose currency is weak, such as the United Kingdom in late 1964 and again in September 1965.
Another device which the United States has employed frequently is 'currency swaps'. This involves the temporary exchange of the currencies of two countries.
The 'weak currency' country (United States) then uses the foreign exchange received in the swap to support its own currency on the foreign exchange received in the swap to support its own currency on the foreign exchange market temporarily, with the idea of repurchasing the foreign exchange for dollars when its own currency regains strength.
The swap can then be reversed. The United States had entered into currency swaps with Canada, France, the United Kingdom, Germany, and other countries on a number of occasions since 1962.
At mid-1965 the total amount available under outstanding 'swap' agreements is in excess of $2 billion. Since 1962, the United States has drawn almost that amount at one time or another, although most of these swaps have been reversed.
The other main approach to financing the deficit is the sale of 'Roosa bonds' to foreign governments. These bonds are intermediate-term U.S. government securities (maturities of between one and two years), and are sold for dollar holdings of foreign official institutions.
Most 'Roosa bonds' are denominated in foreign currencies, thus eliminating any possible loss to holders through U.S. devaluation; but repayment by the United States requires that it earn the foreign exchange necessary to repay the bonds before their maturity.
The sale of these bonds has no effect on the balance of payments, since this only exchanges one type of U.S. liability (short-term) for another ('Roosa bond'). They do, however, neutralize for the term of the bond foreign-held dollars which might have been used to buy gold. Thus, they are merely a device for buying time.
These bonds have been sold to a number of countries, especially Switzerland, Germany, and Italy. Sales of such bonds amounted to $702 million in 1963 and $375 million in 1964.