550.S1 Monetary Stabilization/18: Telegram
The Chairman of the American Delegation ( Hull ) to the Acting Secretary of State
35. For Secretary Woodin from Sprague. After continuous negotiation beginning last Saturday between Treasury representatives and the central banks we have finally evolved a plan for limiting fluctuations of exchange during the time that the Conference is endeavoring to lay foundations for ultimate monetary stability. The plan is embodied in two documents:
- (a)
- A general statement which follows: “Declaration by the three
Governments to the Financial Commission.
- 1.
- The informal conversations between representatives of the treasuries and banks of issue of France, Great Britain and the United States of America have been concluded.
- 2.
- These conversations have achieved the following results:
- 3.
- The French Government has confirmed its determination to maintain the free working of the gold standard in France within the framework of its national monetary law.
- 4.
- Both Governments and banks of issue agreed on the necessity for limiting as far as it may be feasible fluctuations in these [those?] of their currencies which are off gold from the beginning of the Conference and during the period when the Conference is endeavoring to lay the ground-work for lasting stability—an endeavor which has the unqualified support of the three Governments.
- 5.
- With the object as defined above in view and without attempting to fix at this time the rates of ultimate stabilization of the currencies off gold the Governments of the three countries have agreed on the necessity of an appropriate financial policy and that they will not in the absence of exceptional and unforeseen circumstances take any measures which will be incompatible with the principle of maintaining or restoring monetary stability.
- 6.
- In connection with the above declaration a temporary agreement for cooperation has been agreed between the three banks of issue.
- 7.
- The Governments and banks of issue have decided to remain in close contact for tha execution of the program laid down above” and
- (2 [b])
- an agreement between the banks of issue which will be relayed to you from the Reserve Bank of New York.
The general statement is designed to make it absolutely clear that the arrangement is limited to the period of the Conference and is designed solely to facilitate the work of the Conference by eliminating [Page 643] if possible wide fluctuations in the three exchanges. The arrangement does not imply any commitments whatever as regards the monetary policy of the government after the adjournment of the [Conference?]. It also contains a provision. The abrogation of the arrangement in the event of extraordinary circumstances not now foreseen. Such a circumstance would be for example a serious reaction of trade and of prices in the United States. In the event that such developments should occur we have the right to do whatever we think is necessary.
You will readily understand that it is reasonable that both Britain and the United States give such an assurance as otherwise the entire facility of the exchanges would be so completely in the air as to make any attempt to lay a foundation for the future foredoomed to failure. I cannot emphasize too strongly that in view of the publicity that has been given to these negotiations a failure now would be most disastrous in its effect upon the work of the Conference. The positive assurance that we give for the time of the Conference is limited to the statement that the Governments will not in the absence of unforeseen circumstances adopt policies calculated seriously to depress the exchange. The British assurance means that they will not use the equalization fund of [or?] any other method to affect the price of sterling while our undertaking would involve our not using the Thomas amendment57 during the period of the Conference, except in exceptional and unforeseen circumstances arising out of our own domestic situation. This, of course, does not forbid reasonable open market operations and it is so understood here. In the case of the French, their assurance means that they undertake to remain on the gold standard during the period of the agreement in exceptional and unforeseen circumstances.
The proposed method of operation by the banks of issue provides that the Bank of England and the Federal Reserve Bank of New York shall in effect maintain rates within a spread of 3 percent in relation to the gold franc. It is furthermore provided that each of these two banks in order to accomplish this will agree, if necessary, to expend up to 3 million ounces of gold equivalent 60 million gold dollars. The agreement will terminate whenever any one of three banks shall have lost 3 million ounces of gold but may be renewed by mutual consent at new or the same rates and for new or the same amounts of gold. The rates in the agreement result in a dollar—sterling middle rate of 4 dollars per pound. This has been done on the ground that it is taking something closely approaching the present status quo. To take a rate very much above or below this point would be introducing through the arrangement a new arbitrary factor into the situation.
The British Government very unwillingly assented to this rate but finally concurred making, however, a reservation permitting them to [Page 644] ask for a downward adjustment of not more than 10 cents at the end of a fortnight of experience in the working of the agreement, even though the 3 million ounces have not been lost by any of the three banks. This does not involve any prejudice on our part and should we not agree to such request for revision the contract would stand on the present rates until terminated by the loss of gold. We are not committed in any way beyond the first amount and the first rate except that we are committed to discuss a renewal if such renewal should be necessary. It is most essential that the mechanism above described should remain secret and it is a condition made by the banks of issue that the amount of gold and the rates must remain secret. A leakage in this respect will release the banks from their undertaking. If you approve on this agreement between the three central banks it would seem reasonable to presume that the Federal Reserve Bank of New York would be acting at the request of and for the account of our Government. It perhaps is unnecessary to add that the arrangement itself requires the approval of the directors of the Reserve Bank of New York and of the Federal Reserve Bank.
After Bonnet had agreed to nominate Governor Cox as Chairman of the Monetary Commission of the Conference, a joint statement of governmental monetary policy was prepared which seems to go beyond the period of the Conference. I wish it to be clearly understood that this statement of policy was not made in connection with the discussions relating to steadying the exchanges during the period of the Conference and is not essential thereto. It is, however, a statement with which I am in entire sympathy and its inclusion has been made by the French a condition for the acceptance of the entire arrangement. [Sprague.]