Exchange Stabilization Fund Research Articles

International monetary hierarchy through emergency US-dollar liquidity: A key currency approach

The notion that the international monetary system is hierarchical has become increasingly common, but the nature, causes, and shape of international monetary hierarchy remain vague. In this article, we develop a monetary theory of international hierarchy based on the “key currency” approach. We perceive the international monetary system as a world-spanning payment system that is inherently hierarchical because it needs central nodes for clearing and settlement. The centrality of the US-Dollar (USD) as global key currency places the US at the apex and makes the Federal Reserve (Fed) the system’s hierarchically highest institution. Other monetary jurisdictions are pushed into peripheral positions and rely on both using and creating USD-denominated credit money instruments “offshore.” Based on this approach, we explain international monetary hierarchy through different mechanisms to supply emergency USD liquidity from the Fed to non-US central banks. Currently, there are three different public mechanisms for non-US central banks to access the Fed’s balance sheet and attain emergency USD liquidity. The first-layer periphery may receive emergency USD liquidity via the Fed’s central bank swap lines. The second-layer periphery can make use of the Fed’s new repo facility for Foreign and International Monetary Authorities to access emergency USD liquidity. The residual mechanism for the third-layer periphery to access emergency USD liquidity is the Special Drawing Rights system, administered by the International Monetary Fund, in which the Exchange Stabilization Fund acts as gatekeeper for the Fed.

The balance sheet of the exchange stabilization fund, 1934-2019

Abstract. In this paper, the author explores the balance sheet of the Exchange Stabilization Fund (ESF) over its first 85 years as a lens though which to analyze the fund. An accompanying spreadsheet workbook provides data from the annual balance sheet of the ESF since the fund’s inception in 1934. These data are available in electronic form for the first time, which will be of interest to those wishing to do quantitative analyses of its role in U.S. monetary policy. Keywords. Exchange Stabilization Fund (ESF), Balance sheet, Assets, Liabilities, Gold, Foreign exchange intervention. JEL. E52, E59, N12 .

Restructuring and Forgiveness in Financial Crises A: The Mexican Peso Crisis of 1994-1995

Following a year in which repeated political turmoil sapped investor confidence in Mexico, putting pressure on the peso and draining the country’s foreign exchange reserves, on December 22, 1994 the Mexican government sparked a financial crisis by unexpectedly abandoning its policy of anchoring the peso to the US dollar and instead allowing it to float freely. The resulting collapse of the peso left Mexico with $40 billion to $50 billion in external debt (much of it dollar-indexed) coming due in the near term and almost no foreign exchange reserves. Faced with the prospect that Mexico would either default on its obligations or impose exchange controls (with either scenario being seen by many as likely to result in contagion), officials from both the US and abroad scrambled to craft a response to what had been dubbed “the first financial crisis of the twenty-first century” because of its origins in an emerging market economy within globalized financial markets. On January 31, 1995, an assistance package comprised primarily of funds from the US and the IMF was announced. Backed by $20 billion from the US Treasury’s Exchange Stabilization Fund (ESF) and a $17.8 billion stand-by arrangement from the IMF, Mexico met its immediate obligations, restructured short-term debt into longer-term debt and implemented a strict economic reform plan. While the country experienced significant economic hardship in the immediate aftermath of the crisis, by 1996-1997 the economy had rebounded and by 2000 Mexico had paid back all outstanding obligations under the assistance package.

Book Reviews

Jeffry Frieden of Harvard University reviews “Strained Relations: US Foreign-Exchange Operations and Monetary Policy in the Twentieth Century”, by Michael D. Bordo, Owen F. Humpage, and Anna J. Schwartz. The Econlit abstract of this book begins: “Explores the evolution of US policy regarding currency market intervention and the interaction of currency market policy with monetary policy, and explores this evolution by drawing on foreign exchange transactions conducted through the Federal Reserve Bank of New York between 1962 and 1995. Considers how changing economic and institutional circumstances and political and bureaucratic factors affected foreign exchange policy. Discusses the evolution of US foreign exchange market intervention—thesis, theory, and institutions; exchange market policy in the United States—precedents and antecedents; introducing the Exchange Stabilization Fund, 1934-61; US intervention during the Bretton Woods era, 1962-73; US intervention and the early dollar float, 1973-81; US foreign exchange market intervention during the Volcker-Greenspan era, 1981-97; lessons from the evolution of US monetary and intervention policies; and foreign exchange market operations in the twenty-first century.” Bordo is a Board of Governors Professor of Economics at Rutgers University. Humpage is a senior economic advisor in the Research Department of the Federal Reserve Bank of Cleveland. The late Schwartz was a research associate of the National Bureau of Economic Research.

Legal, Political, and Institutional Constraints on the Financial Crisis Policy Response

As the financial crisis manifested itself and peaked in 2007 and 2008, the response of US policymakers and regulators was shaped in important ways by legal and political constraints. Policymakers lacked certain legal authorities that would have been useful for addressing the crisis, notably to use public capital to stabilize the banking sector or to deal with the failure of large financial firms such as insurance companies and investment banks that were outside the scope of bank regulators' authority to resolve deposit-taking commercial banks. Legal constraints were keenly felt at the US Department of the Treasury, where I served as a senior official from December 2006 to January 2009. Treasury had virtually no emergency economic authority at the onset of the crisis in 2007, with the exception of the Treasury's Exchange Stabilization Fund, which was intended for use in exchange rate interventions. As the systemic risks of the financial crisis became apparent, the initial policy response largely fell to the Federal Reserve, which had the authority to act under emergency circumstances. There will inevitably be another financial crisis, and the response will be shaped by both the lessons learned from recent history and the statutory and political changes in the wake of the crisis. The paper thus concludes by discussing changes in constraints since the crisis, with a focus on two developments: 1) the political reality that there will not in the near future be another wide-ranging grant of fiscal authority as was given with the Troubled Asset Relief Program, and 2) the new legal authorities provided in the Wall Street Reform and Consumer Protection Act of 2010, commonly known as the Dodd–Frank law.

The historical origins of US exchange market intervention policy

AbstractThis paper examines the historical precedents of US exchange market intervention. Before 1934 we describe operations by the Second Bank of the United States, the US Treasury and the Federal Reserve. We then examine the operations of the Exchange Stabilization Fund, created in 1934 as a Treasury Department agency. Our study, based on unique, unpublished sources, analyses ESF dealings with the Banque de France and the Bank of England before and after the Tripartite Agreement of 1936. Finally, using unique data we discuss US efforts from 1961 through 1972 to defend the dollar's parity under the Bretton Woods System. Copyright © 2007 John Wiley & Sons, Ltd.

The Exchange Stabilization Fund: How It Works

The increased turmoil in international financial markets, starting with the Asian crises of 1997, has led to calls for financial assistance from the wealthier nations. In December 1997, the United States announced a $5 billion commitment toward an international package of financial assistance for South Korea. Two months earlier the United States pledged $3 billion for assistance to Indonesia. In both instances, the Exchange Stabilization Fund (ESF) was to be involved.

The Exchange Stabilization Fund: How It Works

The increased turmoil in international financial markets, starting with the Asian crises of 1997, has led to calls for financial assistance from the wealthier nations. In December 1997, the United States announced a $5 billion commitment toward an international package of financial assistance for South Korea. Two months earlier the United States pledged $3 billion for assistance to Indonesia. In both instances, the Exchange Stabilization Fund (ESF) was to be involved.

From Obscurity to Notoriety: A Biography of the Exchange Stabilization Fund

The U.S. Treasury's $20 billion loan to Mexico in January 1995 from the Exchange Stabilization Fund (ESF) brought to public notice the fund that had functioned in obscurity since its authorization by the Gold Reserve Act of January 31, 1934. The design of the ESF, as set forth in the statute, contributed to its obscurity. Its stated mission was to stabilize the exchange value of the dollar, but it has also assumed a role that had no mandate, that of lender to favored countries. ESF's intervention activities and the Federal Reserve's warehousing of ESF foreign currency assets are questionable. A statistical profile of the ESF accounts for the growth of its working balance from $200 million in 1934 to $42.6 billion in assets in 1995.

US FOREIGN EXCHANGE MARKET INTERVENTION SINCE 1962

AbstractThe Federal Reserve has intervened in foreign exchange markets since 1962 as a partner of the Treasury's Exchange Stabilization Fund. Departing from its scripted passive role under the Bretton Woods system, the US defense of the dollar under pegged exchange rates may not appear unreasonable. Why the practice continues under a floating rate system is harder to understand. By accumulating large foreign currency balances since 1987, the US has made intervention easier. Holding larger balances does not help the authorities know what exchange rates ought to be. The US for a few years in the 1980s refrained from intervening. It can happen again if its authorities acknowledge that intervening is an exercise in futility.

The Foreign Exchange Operations Fund for Laos: An Interesting Experiment in Monetary Stabilization

Research Article| March 01 1966 The Foreign Exchange Operations Fund for Laos: An Interesting Experiment in Monetary Stabilization Clark Joel Clark Joel Search for other works by this author on: This Site PubMed Google Scholar Far Eastern Survey (1937) 6 (3): 134–149. https://doi.org/10.2307/2642218 Views Icon Views Article contents Figures & tables Video Audio Supplementary Data Peer Review Share Icon Share Facebook Twitter LinkedIn MailTo Tools Icon Tools Get Permissions Cite Icon Cite Search Site Citation Clark Joel; The Foreign Exchange Operations Fund for Laos: An Interesting Experiment in Monetary Stabilization. Far Eastern Survey 3 February 1937; 6 (3): 134–149. doi: https://doi.org/10.2307/2642218 Download citation file: Ris (Zotero) Reference Manager EasyBib Bookends Mendeley Papers EndNote RefWorks BibTex toolbar search Search Dropdown Menu toolbar search search input Search input auto suggest filter your search All ContentAsian Survey Search This content is only available via PDF. Article PDF first page preview Close Modal You do not currently have access to this content.

Operations of the American Exchange Stabilization Fund

Operations of the American Exchange Stabilization Fund