Exchange Stabilization Fund
Encyclopedia
The Exchange Stabilization Fund (ESF) is an emergency reserve fund of the United States Treasury Department, normally used for foreign exchange intervention. This arrangement (as opposed to having the central bank
intervene directly) allows the US government to influence currency exchange rates without affecting domestic money supply
.
As of October 2009, the fund held assets worth $105 billion, including $58.1 billion in Special Drawing Rights
(SDR) from the International Monetary Fund
.
of January 31, 1934. . It was intended as a response to Britain's Exchange Equalisation Account
. The fund began operations in April 1934, financed by $2 billion of the $2.8 billion paper profit the government realized from raising the price of gold to $35 an ounce from $20.67. The act authorized the ESF to use its capital to deal in gold and foreign exchange to stabilize the exchange value of the dollar. The ESF as originally designed was part of the executive branch not subject to legislative oversight.
The Gold Reserve Act authorized the ESF to use such assets as were not needed for exchange market stabilization to deal in government securities. The Fund had no statutory authority, however, to engage in other activities that it began to undertake. The principal such extraneous activity it devoted itself to was lending dollars to politically favored governments.
In 1938–40, the director of the Division of Monetary Research, Harry Dexter White
, worked on a proposal for loans to Latin America and participated in plans for an Inter-American Bank, which did not materialize. The plan for an Inter-American Bank, however, inspired White's first draft of the subsequent plans for the International Monetary Fund
and the World Bank
that White prepared in 1941 at Secretary of the U.S. Treasury Henry Morgenthau
's direction.
It was funded by Franklin D. Roosevelt under the Emergency Banking Act
of 1933.
The Special Drawing Rights Act of 1968, , likewise provided that any Special Drawing Rights (SDRs) allocated by the International Monetary Fund
or otherwise acquired by the United States are resources of the ESF. In accordance with the Act, SDRs can be "monetized" (i.e., converted into dollars) by having the Secretary of the Treasury issue Special Drawing Rights Certificates (SDRCs) to the Federal Reserve System. The amount of SDRCs are limited to the dollar value of the ESF's SDR holdings. The dollar proceeds of such monetizations are assets of the ESF, and the SDRCs are a counterpart liability of the ESF. Treasury has a written understanding with the Fed that the SDRCs will be redeemed when ESF dollar holdings appear to be in excess of foreseeable requirements. Treasury does not pay interest on SDRCs.
The U.S. government used the fund to provide $20 billion in currency swaps and loan guarantees to Mexico following the 1994 economic crisis in Mexico
. This was somewhat controversial at the time, because President Clinton
had tried and failed to pass the Mexican Stabilization Act through Congress. Use of the ESF circumvented the need for approval of the legislative branch. In response, Congress passed and President Clinton signed the Mexican Debt Disclosure Act of 1995, which implicitly accepted the use of the ESF, but required reports to Congress every six months on the status of the loans. At the end of the crisis, the U.S. made a $500 million profit on the loans.
On September 19, 2008, U.S. Treasury Department announced that up to $50 billion in the ESF would temporarily be made available to guarantee deposits in certain money market funds
.
Central bank
A central bank, reserve bank, or monetary authority is a public institution that usually issues the currency, regulates the money supply, and controls the interest rates in a country. Central banks often also oversee the commercial banking system of their respective countries...
intervene directly) allows the US government to influence currency exchange rates without affecting domestic money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...
.
As of October 2009, the fund held assets worth $105 billion, including $58.1 billion in Special Drawing Rights
Special Drawing Rights
Special Drawing Rights are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund . Not a currency, SDRs instead represent a claim to currency held by IMF member countries for which they may be exchanged...
(SDR) from the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
.
Background
The U.S. Exchange Stabilization Fund was established at the Treasury Department by a provision in the Gold Reserve ActGold Reserve Act
The United States Gold Reserve Act of January 30, 1934 required that all gold and gold certificates held by the Federal Reserve be surrendered and vested in the sole title of the United States Department of the Treasury....
of January 31, 1934. . It was intended as a response to Britain's Exchange Equalisation Account
Exchange Equalisation Account
The Exchange Equalisation Account is the fund of Her Majesty's Treasury in the UK holding the country's reserves of foreign currencies, gold, and Special Drawing Rights...
. The fund began operations in April 1934, financed by $2 billion of the $2.8 billion paper profit the government realized from raising the price of gold to $35 an ounce from $20.67. The act authorized the ESF to use its capital to deal in gold and foreign exchange to stabilize the exchange value of the dollar. The ESF as originally designed was part of the executive branch not subject to legislative oversight.
The Gold Reserve Act authorized the ESF to use such assets as were not needed for exchange market stabilization to deal in government securities. The Fund had no statutory authority, however, to engage in other activities that it began to undertake. The principal such extraneous activity it devoted itself to was lending dollars to politically favored governments.
In 1938–40, the director of the Division of Monetary Research, Harry Dexter White
Harry Dexter White
Harry Dexter White was an American economist, and senior U.S. Treasury department official, participating in the Bretton Woods conference...
, worked on a proposal for loans to Latin America and participated in plans for an Inter-American Bank, which did not materialize. The plan for an Inter-American Bank, however, inspired White's first draft of the subsequent plans for the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
and the World Bank
World Bank
The World Bank is an international financial institution that provides loans to developing countries for capital programmes.The World Bank's official goal is the reduction of poverty...
that White prepared in 1941 at Secretary of the U.S. Treasury Henry Morgenthau
Henry Morgenthau, Jr.
Henry Morgenthau, Jr. was the U.S. Secretary of the Treasury during the administration of Franklin D. Roosevelt. He played a major role in designing and financing the New Deal...
's direction.
It was funded by Franklin D. Roosevelt under the Emergency Banking Act
Emergency Banking Act
The Emergency Banking Act was an act of the United States Congress spearheaded by President Franklin D. Roosevelt during the Great Depression. It was passed on March 9, 1933...
of 1933.
The Special Drawing Rights Act of 1968, , likewise provided that any Special Drawing Rights (SDRs) allocated by the International Monetary Fund
International Monetary Fund
The International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
or otherwise acquired by the United States are resources of the ESF. In accordance with the Act, SDRs can be "monetized" (i.e., converted into dollars) by having the Secretary of the Treasury issue Special Drawing Rights Certificates (SDRCs) to the Federal Reserve System. The amount of SDRCs are limited to the dollar value of the ESF's SDR holdings. The dollar proceeds of such monetizations are assets of the ESF, and the SDRCs are a counterpart liability of the ESF. Treasury has a written understanding with the Fed that the SDRCs will be redeemed when ESF dollar holdings appear to be in excess of foreseeable requirements. Treasury does not pay interest on SDRCs.
Uses
A change in the law, in 1970, allows the Secretary of the Treasury, with the approval of the President, to use money in the ESF to "deal in gold, foreign exchange, and other instruments of credit and securities."The U.S. government used the fund to provide $20 billion in currency swaps and loan guarantees to Mexico following the 1994 economic crisis in Mexico
1994 economic crisis in Mexico
The 1994 Economic Crisis in Mexico, widely known as the Mexican peso crisis, was caused by the sudden devaluation of the Mexican peso in December 1994....
. This was somewhat controversial at the time, because President Clinton
Bill Clinton
William Jefferson "Bill" Clinton is an American politician who served as the 42nd President of the United States from 1993 to 2001. Inaugurated at age 46, he was the third-youngest president. He took office at the end of the Cold War, and was the first president of the baby boomer generation...
had tried and failed to pass the Mexican Stabilization Act through Congress. Use of the ESF circumvented the need for approval of the legislative branch. In response, Congress passed and President Clinton signed the Mexican Debt Disclosure Act of 1995, which implicitly accepted the use of the ESF, but required reports to Congress every six months on the status of the loans. At the end of the crisis, the U.S. made a $500 million profit on the loans.
On September 19, 2008, U.S. Treasury Department announced that up to $50 billion in the ESF would temporarily be made available to guarantee deposits in certain money market funds
Money fund
A money market fund is an open-ended mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are widely regarded as being as safe as bank deposits yet providing a higher yield...
.