1. Memorandum From Secretary of the Treasury Dillon to President Johnson1


  • New Authorization of the Exchange Stabilization Fund

The British Government has decided to sell approximately $300 million of the American stocks which they originally expropriated from their own citizens during the early days of World War II. They are doing this because they wish to have the proceeds in more readily available form should they be needed to bolster their international reserves.

Sales have already commenced and should be completed some time in April or May. Under ordinary circumstances this action would show up as an equivalent increase in the United States balance of payments deficit.

We have, however, been able to work out with the British a special procedure which will avoid this unfortunate contingency. The British will invest the proceeds in securities of agencies of the U.S. Government, for example, the Home Loan Bank. Such securities are treated in our balance of payments statistics as the equivalent of long term investments. In other words, as far as balance of payments statistics go, they are no different from the common stocks which the British own at present.

On the other hand, if the proceeds had gone into U.S. Government bonds, they would have been treated as liabilities by the Department of Commerce and would have increased our payments deficit.

The proceeds of the sales which are being made from day to day in the market will be accumulated and invested in these agency bonds just before the end of each quarter. In order to avoid an impact on our balance of payments in the period between the sale of the common stocks and the investment of the proceeds in government agency bonds, we have arranged with the British to deposit the dollar proceeds in the Exchange Stabilization Fund.2 We will pay them interest on these deposits at the same rate as if they had invested the funds in 90 day Treasury Bills.

The acceptance of deposits in dollars or foreign currencies by the Exchange Stabilization Fund would be a new procedure, and accordingly, Presidential authorization is required under the Gold Reserve Act of 1934. Therefore, I am transmitting herewith a formal request for your approval of the acceptance of foreign government deposits by the Exchange Stabilization Fund either in dollars or in foreign currency.3 If you approve, would you please return the original for the Treasury files.

This operation by the British is extremely confidential, and they are very insistent that there be no leak until after it has been completed, when they intend to make an appropriate announcement which they will coordinate with us. It is also in our own interest that this be kept confidential until properly released in order to avoid rumors that the British are selling because of a possible lack in confidence in the dollar. Only two or three individuals in the Treasury are aware of this transaction and I am not informing anyone outside of the Treasury for the present.

Douglas Dillon
  1. Source: Johnson Library, White House Central Files, Confidential File, FI 9, Monetary Systems. Secret. Dillon transmitted this memorandum to Bill Moyers, the President’s Special Assistant, on February 3 under cover of a memorandum that stressed the importance of confidentiality in this matter: “Any leak from here would go far to destroy the spirit of confidence with which the British Treasury now deals with us and which we find very valuable.”
  2. For provisions of the Exchange [Page 2] Stabilization Fund, see section 10 to the Gold Reserve Act of 1934, P.L. 73–86 (68 Stat. 337).
  3. Not printed.