The Bank of England and Central Bank Co-operation 1970–1994

Abstract

Abstract The modern era of central bank co-operation began in 1961, with the first in a series of bilateral arrangements that were to lead to a large ‘swap’ network of mutual credit lines among major central banks. The purpose of the arrangements, initiated by the US Treasury and taken over the following year by the Federal Reserve Bank of New York, was to defend the dollar, which had come under attack in the foreign exchange markets for the first time since World War II. The swaps made foreign currencies available to the United States to finance intervention in the foreign exchange market. The first was between the New York Fed and the Bank of France; the Fed agreed to pay $50m. into the account of the Bank of France in New York against payment of an equivalent sum (245m. frs.) by the Bank of France to the account of the Fed in Paris. This resulted in an increase in the foreign reserves at the disposal of both countries at the stroke of a pen. Swap credits were later used extensively by other countries, notably Britain. They were very flexible and short term; unless renewed, the swaps were unwound at the end of three months at the same exchange rate, eliminating exchange risk. They survived the move to floating rates. By 1994 the New York Fed had swap facilities totalling $30bn. with fourteen central banks and the Bank for International Settlements.