Foreign-held US Government Securities and Monetary
Policy in the United States
J O S E P H L . L U C I A
T
H E A m e r i c a n d e f i c i t i n t h e balance o f p a y m e n t s o f recent years has h a d its c o u n t e r p a r t i n t h e a c c u m u l a t i o n o f U S g o v e r n m e n t securities i n t h e hands o f f o r e i g n e r s . D o l l a r s earned b y f o r e i g n e r s h a v e been, t o a l a r g e e x t e n t , i n v e s t e d i n U S g o v e r n m e n t securities. I n 1966, f o r e i g n official i n s t i t u t i o n s , m a i n l y f o r e i g n c e n t r a l b a n k s , h e l d 6-316 b i l l i o n d o l l a r s i n U S T r e a s u r y b i l l s ; b y M a y o f 1973 t h i s t o t a l h a d risen t o 35-736 b i l l i o n . M a r k e t a b l e U S g o v e r n m e n t securities ( h e l d m a i n l y b y f o r e i g n c e n t r a l banks) rose i n t h e same p e r i o d f r o m 2-329 b i l l i o n t o m o r e t h a n 7 b i l l i o n d o l l a r s ; n o n - m a r k e t a b l e g o v e r n m e n t securities (bonds a n d notes) increased f r o m 695 m i l l i o n i n 1966 t o 16-012 b i l l i o n i n M a y o f 1973.I n this paper w e a t t e m p t t o s t u d y t h e significance o f these h o l d i n g s o f U S g o v e r n m e n t securities b y f o r e i g n e r s , a n d t h e i r i n f l u e n c e o n d o m e s t i c m o n e t a r y p o l i c y . T h o u g h such an a c c u m u l a t i o n is i m p o r t a n t f o r t h e balance o f p a y m e n t s , o u r focus w i l l be m a i n l y o n h o w these h o l d i n g s i n f l u e n c e m o n e t a r y p o l i c y i n t h e U n i t e d States.
Foreign-held Debt, Bank Reserves and the Money Supply
I n o r d e r t o b e t t e r u n d e r s t a n d t h e significance o f f o r e i g n - h e l d U S g o v e r n m e n t securities f o r m o n e t a r y p o l i c y w e m a y e x a m i n e h o w purchases a n d sales o f g o v e r n m e n t securities influence b a n k reserves a n d t h e m o n e y s u p p l y .
C o n c e n t r a t i n g first o n f o r e i g n c e n t r a l banks as purchasers o f g o v e r n m e n t s , i f w e assume t h e y purchase, say $100 m i l l i o n i n bills f r o m i n d i v i d u a l s a n d t h e y use deposits i n A m e r i c a n c o m m e r c i a l b a n k s , t o t a l deposits w i l l n o t change n o r w i l l b a n k reserves. $100 m i l l i o n are transferred f r o m t h e accounts o f f o r e i g n c e n t r a l banks t o those o f i n d i v i d u a l s w i t h o u t t h e cash p o s i t i o n o f t h e b a n k i n g system c h a n g i n g . O n t h e o t h e r h a n d , i f t h e y b u y securities f r o m b a n k s , d e m a n d deposits
61
d e c l i n e ( b y a g a i n $100 m i l l i o n ) w i t h b a n k assets c h a n g i n g i n c o m p o s i t i o n f r o m securities t o cash. I n t h e f i r s t instance m o n e y h e l d b y t h e p u b l i c w i l l increase as t h e y sell securities t o f o r e i g n c e n t r a l b a n k s ; i n t h e second instance, a reshuffling o f assets b e t w e e n t h e banks a n d f o r e i g n c e n t r a l banks o c c u r w i t h d e m a n d deposits o f f o r e i g n c e n t r a l banks d e c l i n i n g b u t t o t a l b a n k reserves r e m a i n i n g t h e same.
A s s u m i n g , o n t h e o t h e r h a n d , t h a t f o r e i g n c e n t r a l banks use deposits h e l d at t h e Federal Reserve system t o b u y securities, t o t a l b a n k reserves w i l l increase w h e t h e r t h e y b u y these securities f r o m banks o r i n d i v i d u a l s . B u y i n g t h e m f r o m i n d i v i d u a l s w o u l d increase t h e p r i v a t e m o n e y s u p p l y d i r e c t l y w h i l e t h e i r purchase f r o m banks w i l l g i v e t h e banks t h e i n c r e m e n t a l reserves t o s u p p o r t a p o t e n t i a l increase i n t h e m o n e y s u p p l y . T h e use o f deposits at t h e C e n t r a l B a n k is, o f course, a n i n j e c t i o n o f h i g h - p o w e r e d m o n e y .
I f t h e Federal Reserve S y s t e m sells U S g o v e r n m e n t s o u t o f t h e i r p o r t f o l i o a n d f o r e i g n c e n t r a l banks are a g a i n purchasers such a transaction w i l l have t h e necessary i m p a c t o f an e q u i v a l e n t o p e n - m a r k e t o p e r a t i o n b y t h e Federal Reserve n a m e l y t o reduce b o t h deposits a n d t o t a l b a n k reserves. T h i s assumes t h a t deposits i n t h e b a n k i n g system are used; w h e n f o r e i g n c e n t r a l banks reduce t h e i r deposits at t h e Federal Reserve i n o r d e r t o purchase these securities, t h e b a n k i n g system w i l l n o t be i n f l u e n c e d d i r e c t l y b y such transactions.
A purchase o f g o v e r n m e n t securities b y f o r e i g n c e n t r a l banks d i r e c t l y f r o m t h e U S T r e a s u r y results i n a r e d u c t i o n o f f o r e i g n - h e l d deposits a n d an increase i n t h e tax a n d l o a n accounts o f t h e T r e a s u r y i n c o m m e r c i a l banks. T o t a l reserves o f t h e b a n k i n g system w i l l n o t c h a n g e ; t h e p r i v a t e l y h e l d m o n e y s u p p l y m a y g o u p , h o w e v e r , as t h e T r e a s u r y u l t i m a t e l y disburses these funds.
C h a n g i n g o u r assumptions t o sales o f U S g o v e r n m e n t securities b y f o r e i g n c e n t r a l banks, i f p r i v a t e i n d i v i d u a l s b u y t h e m , d e m a n d deposits o w n e d b y A m e r i c a n s i n banks w i l l decline as t h e y are transferred t o t h e a c c o u n t of, say, t h e B a n k o f E n g l a n d b u t t h e t o t a l cash p o s i t i o n o f t h e banks w i l l n o t change. W h e r e purchases are m a d e b y t h e banks a n d t h e banks h a v e excess reserves t h e e n d result w i l l b e a n increase i n t o t a l b a n k d e m a n d deposits; an absence o f excess reserves w o u l d e n t a i l n o increase i n d e m a n d deposits as banks reduce, say, t h e i r loans t o purchase securities f r o m f o r e i g n c e n t r a l banks.
A sale o f f o r e i g n - h e l d securities t o t h e Federal Reserve s y s t e m w o u l d increase t o t a l b a n k reserves i f f o r e i g n c e n t r a l banks increase deposits i n t h e banks. A preference o n t h e i r p a r t f o r deposits i n t h e Federal Reserve precludes a n y increase i n t h e l i q u i d i t y o f t h e banks. I f , h o w e v e r , f o r e i g n c e n t r a l banks at some f u t u r e t i m e sell these deposits, a c c u m u l a t e d at t h e Federal Reserve, t o t h e i r nationals f o r t h e purchase o f A m e r i c a n goods a n d services t o t a l b a n k reserves a n d deposits w i l l increase.
n o change i n t o t a l b a n k reserves a l t h o u g h deposits d o f a l l at least i n i t i a l l y ; i f t h e banks b u y securities a g a i n t h e cash p o s i t i o n o f t h e banks does n o t change a l t h o u g h t h e a m o u n t o f d e m a n d deposits m a y increase i f t h e banks h a v e excess reserves.
A s i n a n y m o d e l , q u a l i f i c a t i o n s m a y b e i n t r o d u c e d . T h o u g h f o r e i g n c e n t r a l banks d o n o t increase t h e t o t a l cash p o s i t i o n o f t h e b a n k i n g s y s t e m b y s e l l i n g securities t o banks o r i n d i v i d u a l s , t h e y m a y change t h e v o l u m e o f excess reserves b y a l t e r i n g t h e c o m p o s i t i o n o f deposits as b e t w e e n d e m a n d a n d t i m e . T h i s f o l l o w s f r o m t h e l o w e r reserve r e q u i r e m e n t a p p l i c a b l e t o t i m e deposits. T h u s a s w i t c h f r o m d e m a n d t o t i m e deposits b y increasing excess reserves also increases t h e p o t e n t i a l f o r an increase i n b a n k c r e d i t a n d m o n e y . A l s o , t h o u g h t h e purchase of, say, treasury bills b y f o r e i g n c e n t r a l banks m a y i n v o l v e n o change i n t h e a v a i l a b i l i t y o f b a n k reserves i t m a y increase t h e y i e l d o n such securities. T h i r d l y , i t is n o t clear t h a t a g i v e n a v a i l a b i l i t y o f l i q u i d i t y i n t h e b a n k i n g s y s t e m is a m a t t e r o f i n d i f f e r e n c e as t o t h e f u n c t i o n i n g o f t h e b a n k i n g system o r t h e r e a c t i o n o f t h e Federal Reserve regardless o f t h e o w n e r s h i p o f such l i q u i d i t y . A n increase i n t h e f o r e i g n o w n e r s h i p o f deposits m a y e l i c i t o n e r e a c t i o n f r o m t h e c e n t r a l b a n k as c o m p a r e d t o a s i t u a t i o n w h e r e deposits are h e l d b y domestics o r m a y e l i c i t q u i t e d i f f e r e n t reactions d e p e n d i n g o n t h e c o n d i t i o n o f t h e balance o f p a y m e n t s .
Implications for Monetary Policy
W h a t e v e r t h e causes o f A m e r i c a n balance o f p a y m e n t s deficits w h i c h l e d t o t h e a c c u m u l a t i o n o f g o v e r n m e n t securities b y f o r e i g n c e n t r a l banks, this s t o c k o f f o r e i g n - h e l d securities has i n f l u e n c e d a n d c e r t a i n l y w i l l c o n t i n u e t o i n f l u e n c e t h e course o f U S m o n e t a r y p o l i c y . T h i s is i n sharp c o n t r a s t t o t h e years w h e n f o r e i g n -h e l d p u b l i c d e b t was a s m a l l percentage o f t -h e t o t a l a n d t -h e m a i n c o n c e r n w a s w i t h t h e b u r d e n o f an e x t e r n a l l y - h e l d d e b t .
I n essence t h e data s h o w an acceleration i n t h e purchases o f treasury bills a n d certificates b y f o r e i g n official i n s t i t u t i o n s i n late 1970 a n d e a r l y 1971. F r o m a p e a k o f 24-7 b i l l i o n i n M a y 1971 official h o l d i n g s o f b i l l s f e l l b y m o r e t h a n 5 b i l l i o n i n t h e n e x t t w o m o n t h s p r e c e d i n g t h e A u g u s t 1971 crisis. D u r i n g A u g u s t , f o r e i g n c e n t r a l banks a g a i n b e g a n t o purchase s h o r t - t e r m treasury securities, w i t h h o l d i n g s g r o w i n g b y a l m o s t e i g h t b i l l i o n d o l l a r s b e t w e e n A u g u s t 1971 a n d M a r c h 1972. T h e t r e n d i n f o r e i g n c e n t r a l b a n k h o l d i n g s o f b i l l s d u r i n g t h e rest o f 1972 w a s d o w n w a r d as t h e y l i q u i d a t e d b i l l s . W i t h t h e i n t e r n a t i o n a l m o n e t a r y crisis o f e a r l y 1973, official h o l d i n g s again rose (cf. c h a r t I ) .
Billions 4 0 o f
Dollars
C H A R T I
US Treasury Bills and Certificates {payable in dollars) owed to official institutions
(1969-1973)
3 0
2 0
10
J a n . 6 9
J a n . J a n . J a n . 7 0 7 1 7 2
T h e a c c u m u l a t i o n o f U S g o v e r n m e n t d e b t b y f o r e i g n c e n t r a l banks a n d t h e i r activities i n securities m a r k e t s resulted i n a m a r k e d increase i n t h e percentage o f f o r e i g n - h e l d U S p u b l i c d e b t ; this r a t i o rose f r o m 3 p e r c e n t i n 1969 t o 22 p e r cent i n 1 9 7 2 .1 T h e dollars used b y f o r e i g n c e n t r a l b a n k s ( a c q u i r e d as a result o f t h e i r i n t e r v e n t i o n i n f o r e i g n e x c h a n g e m a r k e t s ) h e l p e d finance treasury deficits b y a c q u i r i n g securities d i r e c t l y f r o m t h e U S T r e a s u r y . T h e y also w e r e used t o purchase securities d i r e c t l y f r o m i n d i v i d u a l s ; i n 1971 p r i v a t e i n d i v i d u a l s s o l d s o m e $10 b i l l i o n i n securities t o f o r e i g n c e n t r a l b a n k s .2
T h e i m p a c t o f dealings b y f o r e i g n c e n t r a l banks i n t h e g o v e r n m e n t securities m a r k e t was o b v i o u s l y n o t e d b y t h e Federal Reserve system a n d t h e i m p l i c a t i o n s o f t h e i r a c t i v i t y analysed i n t h e d e l i b e r a t i o n s o f the o p e n - m a r k e t c o m m i t t e e . A t the m e e t i n g o f J u n e 29, 1971 i t was n o t e d t h a t s h o r t - t e r m rates w e r e subject t o pressure f r o m actual o r p o t e n t i a l sales o f f o r e i g n c e n t r a l b a n k s .3 A p p r o x i m a t e l y
o n e m o n t h later, b i l l rates w e r e c i t e d as h a v i n g risen p a r t l y as a result o f sales b y f o r e i g n official a c c o u n t s .4
F o l l o w i n g t h e a n n o u n c e m e n t o f t h e N e w E c o n o m i c P o l i c y o n A u g u s t 15, 1971, the influence o f f o r e i g n c e n t r a l b a n k s c o n t i n u e d t o be f e l t i n t e r m s o f h e l p i n g t o reduce b i l l rates. I n t h e m e e t i n g o f O c t o b e r 19, 1971, i t w a s n o t e d t h a t b i l l rates h a d f a l l e n b y s o m e 70 basis p o i n t s since A u g u s t 15 as a result o f f o r e i g n d e m a n d .5
I n t h e N o v e m b e r 16, 1971 m e e t i n g pressure o n b i l l rates was seen as r e s u l t i n g f r o m the r e d u c e d s u p p l y ( o f bills) traceable t o f o r e i g n purchases.6
Q u i t e l o g i c a l l y t h e Federal Reserve expressed c o n c e r n o v e r f o r e i g n official purchases o f b i l l s , t h e d o w n w a r d pressure o n b i l l rates a n d t h e adverse effect such pressure w o u l d h a v e o n t h e balance o f p a y m e n t s . I n t h e J u n e 1 9 - 2 0 , 1 9 7 2 m e e t i n g i t was d e c i d e d t h a t t h e Federal Reserve i n p r o v i d i n g reserves s h o u l d n o t b u y b i l l s ( w h i c h w o u l d r e d u c e yields) a n d t h a t f o r e i g n d e m a n d f o r bills s h o u l d be m e t f r o m t h e system's p o r t f o l i o .7 T o the e x t e n t t h a t such sales m i g h t h a v e undesirable
effects, reserve needs s h o u l d b e m e t b y o t h e r means. T h e n a t u r e o f these means was n o t spelled o u t .
O t h e r instances can be used t o i l l u s t r a t e the significance o n Federal Reserve t h i n k i n g o f f o r e i g n c e n t r a l b a n k activities i n t h e g o v e r n m e n t securities m a r k e t . I n t h e J u l y 18, 1972 m e e t i n g t h e o p e n - m a r k e t c o m m i t t e e saw b i l l rates n o t r i s i n g
1. International Letter, Federal Reserve B a n k o f Chicago, N o v . 9, 1973.
2. T h o u g h the emphasis o f this study is o n f o r e i g n central bank holdings o f U S governments, there w e r e also private, f o r e i g n purchases (and sales) t h o u g h o n a m u c h smaller scale. D u r i n g 1971, f o r example, sales b y foreigners (other than f o r e i g n official institutions) o f l o n g t e r m securities a m o u n t e d t o 79 m i l l i o n ; d u r i n g 1972 they purchased 21 m i l l i o n i n l o n g - t e r m governments. Foreign banks t y p i c a l l y have n o t h e l d m u c h i n U S Treasury bills; between A p r i l and June 1971 they d i d increase purchases b y some 1*5 b i l l i o n . I n the n e x t several m o n t h s they l i q u i d a t e d p r a c t i cally a l l o f their holdings.
3. Annual Report, B o a r d o f Governors 1971, p . 158.
4. Ibid. p . 164.
5. Annual Report, B o a r d o f Governors 1971, p . 186,
6. Ibid. p . 192.
as o t h e r rates p a r t l y i n a n t i c i p a t i o n o f f o r e i g n official purchases. T h e y also c o n fessed t o p r o v i d i n g reserves ( i n t h e p r e v i o u s m o n t h ) i n such a w a y as t o m i n i m i s e f u r t h e r declines i n b i l l rates w h i c h w e r e associated w i t h f o r e i g n official purchases.8
T h o u g h t h e o p e n - m a r k e t c o m m i t t e e d i d refer t o f o r e i g n c e n t r a l b a n k a c t i v i t i e s a n d a v a i l a b i l i t y o f b a n k reserves, m o s t emphasis seems t o h a v e been p l a c e d o n t h e d i r e c t i m p a c t o f f o r e i g n purchases o r sales o n interest rates. F o r e i g n purchases w e r e seen as l o w e r i n g y i e l d s , f o r e i g n sales as r a i s i n g y i e l d s . T o t h e e x t e n t t h a t m a i n t e n a n c e o f b i l l rates at a l e v e l c o m p a t i b l e w i t h e x t e r n a l e q u i l i b r i u m w a s a n o b j e c t i v e o f m o n e t a r y p o l i c y d u r i n g 1971 a n d 1972, d o w n w a r d pressure o n b i l l rates e x e r t e d b y f o r e i g n official purchases w o u l d appear t o h a v e r e d u c e d t h e effectiveness o f m o n e t a r y p o l i c y r e l a t i v e t o t h e a t t a i n m e n t o f t h e i r o b j e c t i v e .9
A l o n g t h e same lines, i f official purchases o f m a r k e t a b l e l o n g - t e r m securities d u r i n g 1972 a n d e a r l y 1973 h e l p e d keep l o n g - t e r m interest rates d o w n , t h i s m a y h a v e been i n c o m p a t i b l e w i t h a p p r o p r i a t e c o n t r a c y c l i c a l m o n e t a r y p o l i c y i n t h a t phase o f t h e business c y c l e . T h a t is t o say, since t h e e c o n o m y n o r m a l l y experiences r i s i n g interest rates i n t h e p r o s p e r i t y phase o f t h e c y c l e , r e s t r a i n i n g t h e rise o f l o n g - r a t e s r e d u c e d t h e i r s t a b i l i s i n g effect.
T h e purchases o f l o n g - t e r m securities b y f o r e i g n c e n t r a l banks d u r i n g late 1971 t h r o u g h 1972 a n d i n t o t h e s p r i n g o f 1973 is seen as r e s t r a i n i n g increases i n interest rates at t h e l o n g e n d o f t h e s t r u c t u r e1 0 a n d t o t h a t e x t e n t r e s t r a i n i n g t h e effectiveness
o f m o n e t a r y p o l i c y . T h i s is n o t t o say t h a t t h e Federal Reserve c o u l d n o t h a v e c o n d u c t e d o p e n - m a r k e t o p e r a t i o n s i n b o n d s so as t o p u t u p w a r d pressure o n rates i f t h e y so desired. O n t h e basis o f p o l i c y statements b y C e n t r a l B a n k i n g a u t h o r i t i e s i t appears, h o w e v e r , t h a t t h e y w e l c o m e d a i d i n r e s t r a i n i n g u p w a r d pressure o n l o n g rates w i t h t h e l a t t e r seen as i n t e r f e r i n g w i t h r e c o v e r y f r o m recession. T h u s A r t h u r B u r n s , t e s t i f y i n g b e f o r e t h e J o i n t E c o n o m i c C o m m i t t e e , s a i d :
I also w a n t to b r i n g to y o u r attention a policy statement that w e issued w h i c h is helping t o nudge interest rates d o w n , particularly i n the case o f the more sticky types o f mortgage and consumer loans.1 1
T h i s a t t i t u d e t o w a r d interest rates, o n t h e p a r t o f t h e Federal Reserve is v u l n e r - , able t o c r i t i c i s m . A l m o s t t w o years after t h e t r o u g h o f t h e 1969-70 business c y c l e reached i n t h e t h i r d q u a r t e r o f 1970, l o n g - t e r m rates o n g o v e r n m e n t b o n d s w e r e s o m e 100 basis p o i n t s l o w e r .1 2 F o r e i g n c e n t r a l b a n k s b y p u r c h a s i n g g o v e r n m e n t
b o n d s c o n t r i b u t e d t o t h e m a i n t e n a n c e o f these a r t i f i c i a l l y l o w rates, w h i c h c o u l d 8. Ibid. p p . 158—160.
9. T h e extent t o w h i c h b i l l rates declined m a y be seen i n the rate o n 3 m o n t h bills for January 1970 o f T 13 per cent, as c o m p a r e d t o 4-44 per cent one year later a n d 3-38 per cent i n M a r c h o f 1971.
10. Federal Reserve Bulletin, June 1973, p . 440.
1 1 . 1 9 7 2 Economic Report of the President, Hearings Before the Joint Economic Committee, Feb. 1972, p-
n o t be j u s t i f i e d o n t h e basis o f experience i n past business c y c l e s1 3 n o r o n t h e basis
o f a n t i - i n f l a t i o n a r y c o n t r a c y c l i c a l m o n e t a r y p o l i c y .
T h e use o f f o r e i g n h e l d f u n d s i n t h e g o v e r n m e n t securities m a r k e t has been seen t o h a v e created p r o b l e m s f o r m o n e t a r y p o l i c y b y causing a p a t t e r n o f rates t h a t d i d n o t c o n t r i b u t e t o t h e efficiency o f m o n e t a r y m a n a g e m e n t . I t m a y b e asked, h o w e v e r , i f t h e existence o f these l a r g e h o l d i n g s o f g o v e r n m e n t securities b y f o r e i g n c e n t r a l banks create o t h e r p o t e n t i a l p r o b l e m s f o r t h e Federal Reserve.
Since t h e Federal Reserve has a t t e m p t e d i n t h e past t o m i n i m i s e i n s t a b i l i t y i n t h e m o n e y m a r k e t , i t w o u l d appear t h a t t h e actions o f f o r e i g n c e n t r a l banks a d d s t i l l a n o t h e r set o f variables t o be r e c k o n e d w i t h b y t h e Federal Reserve. M a n y studies o f C e n t r a l B a n k p o l i c y i n t h e U S emphasise t h a t t h e Federal Reserve c o n d u c t s o p e n - m a r k e t o p e r a t i o n s p r i m a r i l y i n a defensive m a n n e r t o offset those factors t h a t w o u l d t e n d t o p u t pressure o n t h e m o n e y m a r k e t . I n a m o r e c o n c r e t e m a n n e r i f such i t e m s as float, c u r r e n c y i n c i r c u l a t i o n , T r e a s u r y deposits etc, are b e h a v i n g so as t o reduce b a n k reserves t h e Federal Reserve w o u l d b u y g o v e r n m e n t s so as t o s u p p l y reserves t o t h e b a n k i n g s y s t e m .1 4 W i t h f o r e i g n c e n t r a l banks i n
a p o s i t i o n t o , say, sell securities a n d i n effect c o n d u c t o p e n - m a r k e t o p e r a t i o n s o f t h e i r o w n , t h e Federal Reserve m u s t o f necessity take such a c t i o n i n t o a c c o u n t i n d e t e r m i n i n g o v e r a l l reserve a v a i l a b i l i t y . Since a l l o f t h e m a r k e t factors a f f e c t i n g b a n k reserves can o n l y b e estimated w i t h a s i g n i f i c a n t m a r g i n o f e r r o r , t h e activities o f f o r e i g n c e n t r a l banks i n the m o n e y a n d securities m a r k e t v i a b u y i n g o r s e l l i n g securities w o u l d appear t o w i d e n this m a r g i n .1 5
C o n c e i v a b l y t h e task o f t h e Federal Reserve i n r e g u l a t i n g b a n k reserves c o u l d b e m a d e m o r e d i f f i c u l t b y t h e fact t h a t t h e need, say, o f f o r e i g n c e n t r a l b a n k s t o l i q u i d a t e securities m a y n o t c o i n c i d e w i t h t h e needs o f t h e m o n e y m a r k e t f o r l i q u i d i t y . T h e r e is n o , a priori, reason t o suppose t h a t f o r e i g n c e n t r a l b a n k sales o f securities w i l l be consistent w i t h t h e Federal Reserve's p o l i c y o n interest rates o r w i t h t h e desire o f t h e A m e r i c a n C e n t r a l b a n k t o p r o v i d e reserves. A s s u m i n g , l e t us say, t h a t t h e phases o f t h e business c y c l e d o n o t c o i n c i d e as b e t w e e n t h e U S a n d o t h e r e c o n o m i e s t h e n f o r e i g n c e n t r a l banks m a y be selling securities t o h e l p f i n a n c e an e x t e r n a l d e f i c i t at t h e same t i m e t h a t t h e m o n e t a r y a u t h o r i t i e s i n t h e U S are a t t e m p t i n g t o p r e v e n t a rise i n interest rates w h i c h m i g h t a b o r t a r e c o v e r y . I n t e r v e n t i o n i n t h e m a r k e t b y t h e Federal Reserve t o p r e v e n t this rise c o u l d result i n excessive a n d u n d e s i r e d c r e a t i o n o f reserves.
13.111 b o t h the 1954 and 1958 recoveries l o n g - t e r m yields increased. T h u s , one year after the t r o u g h o f A u g u s t 1954, l o n g - t e r m bonds w e r e y i e l d i n g some 47 basis points m o r e . I n A p r i l 1959, the y i e l d o n l o n g - t e r m bonds was 4-01 per cent as c o m p a r e d t o 3-12 per cent one year earlier. A p p r o x i m a t e l y the same relationship h e l d i n the year f o l l o w i n g the February 1961 t r o u g h . Business
Conditions Digest, February, 1973.
14. I n the first h a l f o f 1973 the Federal Reserve b o u g h t some 4*2 b i l l i o n i n bills m a i n l y f r o m f o r e i g n central banks so as t o offset an increase i n treasury balances at the Federal Reserve, w h i c h reduced reserves. Commentary on Credit, S o l o m o n Brothers, J u l y 20, 1973, p . 4.
H o l d i n g s o f treasury securities b y f o r e i g n c e n t r a l banks m a y create o t h e r p r o b l e m s f o r t h e Federal Reserve. I f f o r e i g n e r s shift h o l d i n g s f r o m l o n g - t e r m t o s h o r t - t e r m issues, this w o u l d i n f l u e n c e d e b t m a n a g e m e n t policies w i t h t h e T r e a s u r y h a v i n g t o c o m e m o r e o f t e n t o t h e m a r k e t f o r f i n a n c i n g . A l s o i t w o u l d influence m o n e t a r y p o l i c y i n t e r m s o f h a v i n g t o m a i n t a i n a p o s t u r e o f e v e n - k e e l m o r e o f t e n . T h i s m a y m e a n a p a t t e r n o f o p e n - m a r k e t o p e r a t i o n s m u c h m o r e defensive i n n a t u r e t h a n w o u l d o t h e r w i s e h a v e been t h e case. T h e Federal Reserve c o u l d h a v e a l l o w e d m a r k e t factors a b s o r b i n g reserves t o h a v e t i g h t e n e d t h e m o n e y m a r k e t ; faced, h o w e v e r , w i t h t h e need t o m a i n t a i n e v e n - k e e l m o r e o f t e n , defensive o p e n - m a r k e t o p e r a t i o n s m i g h t be m o r e aggressive i n offsetting forces r e d u c i n g b a n k reserves.
F o r e i g n o p e r a t i o n s i n t h e l o n g - t e r m sector o f t h e g o v e r n m e n t s e c u r i t i e s ' m a r k e t m a y n o t o n l y , as has a l r e a d y been discussed, alter t h e p a t t e r n o f interest rates b u t m a y also f o r c e a change i n t h e modus operandi o f o p e n - m a r k e t o p e r a t i o n s r e l a t i v e t o t h e m a r k e t s i n w h i c h securities are b o u g h t a n d s o l d . T h o u g h t h e Federal Reserve concentrates o p e n - m a r k e t o p e r a t i o n s p r e d o m i n a n t l y i n t h e b i l l m a r k e t (bills o n l y has l o n g been a b a n d o n e d ) a d i s t o r t i o n o f t h e s t r u c t u r e o f rates b y f o r e i g n purchases o f l o n g - t e r m securities m i g h t i n d u c e t h e Federal Reserve t o alter t h e i r o p e r a t i o n s i n f a v o u r o f t h e l o n g - t e r m p a r t o f t h e m a r k e t . I t is n o t clear, h o w e v e r , t h a t increased a c t i v i t y b y t h e Federal Reserve i n t h e m a r k e t f o r l o n g - t e r m securities w o u l d c o n t r i b u t e t o t h e p r o p e r f u n c t i o n i n g a n d efficiency o f t h e m a r k e t f o r g o v e r n m e n t securities.
T h e increased i m p o r t a n c e o f f o r e i g n c e n t r a l banks i n t h e g o v e r n m e n t securities m a r k e t s m a y also create t e c h n i c a l p r o b l e m s f o r t h e Federal Reserve i n m o n e t a r y m a n a g e m e n t . Since o p e n - m a r k e t o p e r a t i o n s are t h e m o s t i m p o r t a n t t o o l o f p o l i c y , b o t h t h e size a n d c o m p o s i t i o n o f t h e Federal Reserve's p o r t f o l i o o f securities are i m p o r t a n t . I f f o r e i g n c e n t r a l banks decide t o sell securities, t h e Federal Reserve faces n o c o n s t r a i n t i n b e i n g able t o b u y t h e m .1 6 T h e a b i l i t y o f t h e
C e n t r a l B a n k t o b u y g o v e r n m e n t securities as a means o f i n j e c t i n g reserves i n t o t h e b a n k i n g system is c o n s t r a i n e d , h o w e v e r , i f f o r e i g n purchases have d e p l e t e d t h e i n v e n t o r i e s o f dealers. T h e r e is s o m e evidence t h a t this has i n d e e d h a p p e n e d .1 7
T h o u g h s o m e o f t h e p r o b l e m s associated w i t h f o r e i g n h o l d i n g s o f g o v e r n m e n t securities h a v e been discussed i t is n o t clear t h a t t h e i r m a n a g e m e n t a l w a y s frustrates m o n e t a r y p o l i c y . T o t h e e x t e n t t h a t f o r e i g n i n v e s t m e n t d u r i n g 1972 o f $4*3 b i l l i o n i n m a r k e t a b l e a n d $3-8 b i l l i o n i n n o n - m a r k e t a b l e issues h e l p e d m e e t i n g m o r e t h a n h a l f o f t h e T r e a s u r y ' s b o r r o w i n g1 8 needs, i t m i g h t h a v e
t h e C e n t r a l B a n k w i t h t h e l a t t e r situations i n v o l v i n g t h e m o n e t i s a t i o n o f such d e b t . T h i s , o f course, neglects t h e interest-rate aspects o f these purchases b y f o r e i g n c e n t r a l banks w h i c h m a y i n d u c e a p a t t e r n o f rates unacceptable t o t h e m o n e t a r y a u t h o r i t i e s .1 9
T h e existence o f such a l a r g e s t o c k o f g o v e r n m e n t securities h e l d b y f o r e i g n -c e n t r a l banks has o t h e r i n t e r e s t i n g aspe-cts f o r m o n e t a r y p o l i -c y . W o u l d t h e p r o b l e m s f o r m o n e t a r y p o l i c y be a n y different i f t h e d o l l a r s earned t h r o u g h o u r balance o f p a y m e n t s deficits h a d been i n v e s t e d i n t h e stock o r c o r p o r a t e b o n d m a r k e t ; Since o n l y a s m a l l p a r t d i d g o i n t o these m a r k e t s , w e can o n l y speculate o n w h a t t h e Fed's r o l e w o u l d b e .2 0 A massive i n f l o w o f these funds i n t o , say, t h e
c o r p o r a t e b o n d m a r k e t w o u l d h a v e h a d t h e i m m e d i a t e i m p a c t o f r e d u c i n g y i e l d s a n d c o n c e i v a b l y a m o r e d i r e c t f a v o u r a b l e i n f l u e n c e o n d o m e s t i c i n v e s t m e n t , w h i c h at least i n 1972 w o u l d h a v e served t o frustrate m o n e t a r y p o l i c y b y n o t e x e r t i n g t h e r e s t r a i n i n g i n f l u e n c e o f h i g h e r interest rates. I f , o n t h e o t h e r h a n d , securities i n the hands o f f o r e i g n e r s are v i e w e d as a p o t e n t i a l source o f i n s t a b i l i t y f o r m o n e y a n d c a p i t a l m a r k e t s , w o u l d t h e p o t e n t i a l i n s t a b i l i t y be lessened i f f o r e i g n c e n t r a l banks h a d b o u g h t c o r p o r a t e r a t h e r t h a n g o v e r n m e n t bonds? A s s u m i n g t h a t f o r e i g n officials w o u l d b r i n g o f f a mass l i q u i d a t i o n , i t is d i f f i c u l t t o see t h e Federal Reserve a b a n d o n i n g t h e m a r k e t a n d a l l o w i n g a f i n a n c i a l p a n i c t o d e v e l o p . G r a n t e d t h a t f o r e i g n c e n t r a l banks c o u l d l i q u i d a t e d e b t , w h e t h e r p r i v a t e o r g o v e r n m e n t a l , t h e r o l e o f t h e C e n t r a l B a n k i n assuring t h e l i q u i d i t y o f t h e b a n k i n g s y s t e m w o u l d n o t appear t o be a n y different. I n d e e d , t h e p o t e n t i a l i n s t a b i l i t y o f g o v e r n m e n t d e b t exists e v e n i f A m e r i c a n s h o l d t h e d e b t , w i t h t h e r o l e o f t h e Federal Reserve as a l e n d e r o f last resort c l e a r l y delineated i n some p e r i o d o f crisis.
I f w e can assume t h a t m o n e t a r y p o l i c y has e v e n a m i n i m a l effect o n t h e w i l l i n g n e s s o f investors t o h o l d o n t o securities b y w a y o f its i m p a c t o n c a p i t a l values can w e also assume t h a t f o r e i g n c e n t r a l banks w i l l be i n f l u e n c e d a n d i n t h e desired d i r e c t i o n ? M o r e specifically a n d w i t h o u t a t t e m p t i n g t o resurrect t h e A v a i l a b i l i t y D o c t r i n e , i f c a p i t a l losses deter p r i v a t e investors f r o m selling g o v e r n m e n t securities w i l l i t h a v e t h e same effect o n f o r e i g n c e n t r a l banks w h o are n o t as p r o f i t - o r i e n t e d ? I f n o t , t h e n some o f t h e effectiveness o f m o n e t a r y p o l i c y t h o u g h m a r g i n a l , m a y be lost.
G i v e n t h e parameters o f t h e s i t u a t i o n w i t h a h u g e balance o f p a y m e n t s d e f i c i t a n d its c o u n t e r p a r t t h e a c c u m u l a t i o n i n t h e f o r m o f g o v e r n m e n t securities, f o r e i g n c e n t r a l banks m i g h t h a v e r e d u c e d t h e p r o b l e m s o f m o n e t a r y m a n a g e m e n t b y
19. T h e Treasury indicates that the overhang o f f o r e i g n - h e l d securities influenced the t i m i n g o f its b o r r o w i n g i n 1972. T o reassure the m a r k e t against any sudden d e m a n d f o r cash i f f o r e i g n central banks l i q u i d a t e d securities, the Treasury advanced its o w n cash b o r r o w i n g i n t o December (rather t h a n N o v e m b e r 1972). 1972 Report of the Secretary of the Treasury, p . 23.
20. N e t purchases o f U S corporate stock b y foreigners a m o u n t e d t o b u t 1-672 b i l l i o n i n 1971 and 3-316 b i l l i o n i n 1972; f o r corporate bonds the figures w e r e -68 b i l l i o n i n 1971 and 1-824 b i l l i o n i n 1972. These w e r e o b v i o u s l y b u t a fraction o f the purchases o f governments. Federal Reserve
a l t e r i n g the p a t t e r n o f t h e i r purchases. Purchases o f T r e a s u r y b o n d s i n 1971 ( i n c o n t r a s t t o t h e substantial i n v e s t m e n t i n bills) w o u l d h a v e r e d u c e d d o w n w a r d pressure o n b i l l rates w i t h its c o n c o m i t a n t destabilising influence o n t h e B a l a n c e o f P a y m e n t s . O n t h e o t h e r h a n d , h e a v y purchases o f bills (rather t h a n b o n d s ) d u r i n g 1972 a n d e a r l y 1973, m e e t i n g w i t h t h e pressure o f e x p a n d i n g e c o n o m i c a c t i v i t y , m i g h t n o t h a v e c o n t r i b u t e d as m u c h t o r e d u c i n g b i l l rates a n d also, n o t i n t e r f e r i n g w i t h t h e stabilising i n f l u e n c e o f r i s i n g l o n g - t e r m interest rates i n t h e p r o s p e r i t y phase o f t h e business c y c l e . W h e t h e r t h e p a t t e r n o f purchases o p t i m a l f r o m t h e v i e w p o i n t o f effective m o n e t a r y p o l i c y w o u l d be consistent w i t h t h e needs o f f o r e i g n official i n s t i t u t i o n s is a m o o t q u e s t i o n .
T h e assurances o f t h e Federal Reserve t h a t f o r e i g n c e n t r a l b a n k h o l d i n g s o f U S g o v e r n m e n t s pose m e r e t r a n s i t o r y p r o b l e m s2 1 i n t e r m s o f t h e m o n e y m a r k e t ,
are n o t b o r n e o u t b y t h e realities o f t h e s i t u a t i o n . F o r o n e , t h e y h a v e a d m i t t e d t h a t f o r e i g n purchases h a v e caused d i s t o r t i o n s i n t h e p a t t e r n o f interest rates especially i n t h e l i g h t o f t h e preference d i s p l a y e d b y f o r e i g n c e n t r a l banks f o r bills. T h i s d i s t o r t i o n has i m p l i c a t i o n s n o t o n l y f o r t h e balance o f p a y m e n t s b u t also f o r t h e attractiveness o f savings a n d l o n g - t e r m i n v e s t m e n t . T h u s , t h e w i d e d i f f e r e n t i a l b e t w e e n s h o r t a n d l o n g rates i n 1971 has been c i t e d as i n c r e a s i n g t h e attractiveness o f t i m e a n d savings accounts, i n t u r n i n f l u e n c i n g s p e n d i n g o n c o n s t r u c t i o n .2 2
S e c o n d l y , t h e r e is a m p l e evidence t h a t t h e Federal Reserve has been i n f l u e n c e d b y t h e actions o f f o r e i g n c e n t r a l banks. Instances h a v e a l r e a d y been g i v e n o f p o l i c y decisions m a d e b y t h e F e d as a n offset t o t h e activities o f f o r e i g n c e n t r a l banks. These i n c l u d e t h e s u p p l y i n g o f reserves b y means o t h e r t h a n t h e purchase o f b i l l s , a n d t h e c o n t r a c t i n g o f repurchase agreements as a means o f s u p p l y i n g reserves t e m p o r a r i l y so as t o be able t o purchase securities f r o m f o r e i g n c e n t r a l banks i n t h e w a k e o f t h e a n t i c i p a t e d r e f l o w o f funds f o l l o w i n g t h e S m i t h s o n i a n a g r e e m e n t .2 3 T h u s . i t does n o t appear reasonable t o v i e w f o r e i g n c e n t r a l b a n k
h o l d i n g s o f U S g o v e r n m e n t securities as a m e r e t r a n s i t o r y p r o b l e m . T h e v e r y a c t i v i t i e s o f t h e Federal Reserve are at v a r i a n c e w i t h this v i e w .
F o r e i g n h o l d i n g s o f U S g o v e r n m e n t securities h a v e been treated as t o t h e i r i m p a c t o n m o n e t a r y p o l i c y . I t is clear, h o w e v e r , t h a t t h e y present p r o b l e m s f o r b o t h d e b t m a n a g e m e n t a n d t h e r e f o r m o f t h e i n t e r n a t i o n a l m o n e t a r y system. F o r d e b t m a n a g e m e n t since so m u c h is i n t h e f o r m o f l i q u i d s h o r t - t e r m securities; f o r i n t e r n a t i o n a l m o n e t a r y r e f o r m since a decrease i n t h e d e m a n d f o r U S g o v e r n m e n t securities m a y c o i n c i d e w i t h a decrease i n t h e d e m a n d f o r d o l l a r s . I f w e can assume t h a t f o r e i g n c e n t r a l banks are responsible e n o u g h t o a v o i d a mass l i q u i d a t i o n o f U S g o v e r n m e n t securities, t h e task o f b o t h t h e Federal Reserve a n d t h e T r e a s u r y w o u l d be eased i n d i r e c t p r o p o r t i o n t o t h e m o v e m e n t o f f o r e i g n h o l d i n g s i n t o l o n g e r - t e r m a n d b e t t e r y e t i n t o n o n - m a r k e t a b l e securities. A subsidy t o f o r e i g n c e n t r a l banks, e i t h e r i n t h e f o r m o f r e d u c e d taxes o n interest i n c o m e
2 1 . 1 9 7 3 Economic Report of the President, Hearings on the Economic Report, p . 4 3 1 . 22. Annual Report, B o a r d o f G o v e r n o r s 1971, p . 44.
o r perhaps h i g h e r interest r a t e s ,2 4 c o u l d b e j u s t i f i e d i f i t c o n t r i b u t e d t o t h e i m
m o b i l i s a t i o n o f such funds. T h i s assumes, o f course, t h a t f o r e i g n c e n t r a l banks see i t as b e i n g i n t h e i r o w n self-interest t o reduce t h e l i q u i d i t y o f t h e i r h o l d i n g s .
E v e n i f such a f r e e z i n g o f f o r e i g n h o l d i n g s o f g o v e r n m e n t s w e r e n o t feasible, t h e task o f m o n e t a r y p o l i c y does n o t seem t o be i n s u r m o u n t a b l e . I t is h a r d l y l i k e l y t h a t t h e A m e r i c a n balance o f p a y m e n t s w i l l s h o w surpluses o f t h e same o r d e r as t h e deficits t h a t l e d t o t h e a c c u m u l a t i o n . A s t h e d o l l a r does s t r e n g t h e n i n w o r l d m a r k e t s , f o r e i g n c e n t r a l banks w i l l be e x p e c t e d t o l i q u i d a t e s o m e o f t h e i r s e c u r i t y h o l d i n g s .2 5 T o t h e e x t e n t t h a t b o t h t h e s t r e n g t h e n i n g a n d l i q u i d a t i o n
are o r d e r l y , t h e y n e e d present n o great p r o b l e m s t o t h e Federal Reserve.
Patterns of Security Holdings among Nations
T h e o v e r a l l a c c u m u l a t i o n o f s e c u r i t y h o l d i n g s b y f o r e i g n c e n t r a l banks hides s i g n i f i c a n t differences a m o n g t h e m i n t h e patterns o f securities h e l d . T h e G e r m a n s h a v e d i s p l a y e d a preference f o r U S T r e a s u r y bills a n d l o n g e r - t e r m n o n - m a r k e t a b l e b o n d s ; t h e i r h o l d i n g s o f m a r k e t a b l e notes a n d b o n d s h a v e been s m a l l . B e t w e e n J a n u a r y o f 1970 a n d 1971 official G e r m a n h o l d i n g s o f treasury bills j u m p e d f r o m 983 m i l l i o n t o 6*869 b i l l i o n ; t h e y h e l d b u t o n e m i l l i o n d o l l a r s i n m a r k e t a b l e b o n d s . D u r i n g t h e first five m o n t h s o f 1971, h o l d i n g s o f bills increased t o 11*585 b i l l i o n ; f r o m t h a t t i m e , h o w e v e r , t h e y l i q u i d a t e d treasury b i l l s as m a y be seen f r o m t h e i r h o l d i n g s o f b u t 4-4 b i l l i o n i n J a n u a r y 1973. W i t h t h e i n f l o w o f d o l l a r s i n t o G e r m a n y d u r i n g t h e w i n t e r o f 1973, t h e D e u t s c h e - B u n d e s b a n k a c c u m u l a t e d s o m e 7-6 b i l l i o n i n bills i n M a r c h a n d A p r i l o f 1973. T h o u g h G e r m a n h o l d i n g s o f bills w e r e d e c l i n i n g t h r o u g h late 1971 a n d d u r i n g 1972, t h e y d i d increase purchases o f special treasury issues o f n o n - m a r k e t a b l e notes a n d b o n d s ; these b o n d s d e n o m i n ated i n dollars j u m p e d f r o m 3-0 b i l l i o n i n M a y o f 1971 t o w e l l o v e r $11 b i l l i o n b y t h e e n d o f 1972. T h e G e r m a n s h a d h e l d n o n - m a r k e t a b l e treasury issues d e n o m i n a t e d i n D - M a r k s t h r o u g h t h e 1960s; at n o t i m e , h o w e v e r , d i d t h e i r h o l d i n g s exceed o n e b i l l i o n d o l l a r s (cf. T a b l e 4).
O f f i c i a l Japanese h o l d i n g s o f treasury bills have also d i s p l a y e d a r i s i n g t r e n d , s i m i l a r t o t h a t o f t h e G e r m a n s , w i t h t h e difference t h a t t h e Japanese d i d n o t l i q u i d a t e bills d u r i n g t h e second h a l f o f 1971 a n d i n t o 1972 as d i d t h e G e r m a n s . T h e i r h o l d i n g s o f b i l l s increased b y s o m e 9-2 b i l l i o n i n 1971. B y t h e e n d o f 1972 there w a s l i t t l e change. D u r i n g the crisis o f e a r l y 1973, h o w e v e r , t h e Japanese d i d sell s o m e 3-8 b i l l i o n o f treasury b i l l s . I n c o n t r a s t t o t h e G e r m a n s , t h e Japanese purchased a l a r g e a m o u n t o f m a r k e t a b l e b o n d s a n d notes; t h e i r h o l d i n g s rose f r o m b u t 61 m i l l i o n i n J a n u a r y 1971 t o 2'0 b i l l i o n i n J a n u a r y 1972 a n d 4*8 b i l l i o n a y e a r later.
24. Senator P r o x m i r e , c h a i r m a n o f the J o i n t E c o n o m i c C o m m i t t e e , has i n q u i r e d as t o the possi b i l i t y o f a m o r a t o r i u m o n taxes payable b y f o r e i g n central banks o n their holdings o f governments.
1973 Economic Report of the President, Hearings Before the Joint Economic Committee, p . 423.
O f t h e m a j o r i n d u s t r i a l n a t i o n s , C a n a d a i n v e s t e d m o r e o n a p r o p o r t i o n a t e basis o f its d o l l a r h o l d i n g s i n n o n - m a r k e t a b l e U S g o v e r n m e n t notes a n d b o n d s . I t increased its h o l d i n g s o f treasury bills d u r i n g 1971 a n d 1972 t h e n l i q u i d a t i n g s o m e $300 m i l l i o n i n late 1972 a n d e a r l y 1973. H o l d i n g s o f m a r k e t a b l e notes a n d b o n d s w e r e also r e d u c e d b y some 100 m i l l i o n d u r i n g 1970 a n d 1971 b u t t h e n rose r a p i d l y i n t h e l a t t e r m o n t h s o f 1972 a n d early 1973. T h e i m p o r t a n c e o f n o n - m a r k e t a b l e securities ( d e n o m i n a t e d i n dollars) m a y be seen i n t h e s o m e 2*6 b i l l i o n h e l d i n 1971 a n d 2-8 b i l l i o n h e l d i n 1972. T h i s w a s greater t h a n t h e i r c o m b i n e d t o t a l o f m a r k e t able issues o f b i l l s , notes a n d b o n d s .
T h e b e h a v i o u r o f t h e U n i t e d K i n g d o m i n t h e m a n a g e m e n t o f U S g o v e r n m e n t securities reflected t h e g r o w t h a n d t h e n decline i n t h e i r official reserves a n d also a m a r k e d preference f o r treasury b i l l s . T h e B r i t i s h official h o l d i n g s o f treasury b i l l s increased t h r o u g h 1971 t i l l A u g u s t o f t h a t year. A f t e r l i q u i d a t i n g s o m e 500 m i l l i o n b e t w e e n A u g u s t a n d S e p t e m b e r 1971, t h e y a g a i n b e g a n b u y i n g bills i n N o v e m b e r w i t h t h e i r h o l d i n g s i n c r e a s i n g t o 6-3 b i l l i o n b y M a r c h 1972. Since t h a t peak, h o w e v e r , official h o l d i n g s d e c l i n e d some 3-0 b i l l i o n b y t h e e n d o f 1972. T h o u g h t h e U n i t e d K i n g d o m d i d b u y 300 m i l l i o n i n b i l l s d u r i n g t h e crisis o f early 1973, t h e i r h o l d i n g s w e r e s t i l l w e l l b e l o w those o f a y e a r earlier. T h e l i q u i d a t i o n o f bills d u r i n g 1972 w a s r e l a t e d t o t h e balance o f p a y m e n t s difficulties o f t h e U n i t e d K i n g d o m d u r i n g this p e r i o d . A s t o h o l d i n g s o f o t h e r securities t h e
T A B L E I : Holdings of Treasury bills by country, 1969-73, at three-month intervals (in millions of dollars)
Germany Japan Canada France UK Italy Switzerland
1969 June 1,166 970 55 72 156 326 37
Sept. 3 » i1 2 1,058 27 116 1 339 180
D e c . 189 1,234 233 99 59 178 234
1970 M a r c h 1,635 1,456 336 232 251 102 191
June 2,825 1,272 229 439 58 325 296
Sept. 4.945 998 350 727 459 367 337
Dec. 6,938 1,676 ' 479 856 170 436 421
1971 M a r c h 8,348 2,757 623 1,202 1,210 i , i 9 5 289
June 6,239 4,743 648 1,662 4,092 1,107 593
Sept. 4.480 9,989 988 2,471 4,555 1,608 2,094
D e c . 5,777 10,548 1,153 2,462 6,295 1,232 2,003 1972 M a r c h 7 . I 4 I 11,095 1,017 2,412 6,373 916 1,824
June 5.991 9,76o 1,325 2,880 5,578 379 1,402
Sept. 5,278 9,620 1,192 3,872 3,397 824 2,237
D e c . 4.735 10,099 855 3,845 2,948 533 1,529
T A B L E 2: Holdings of marketable bonds and notes by country, 1969-73, at three-month intervals (in millions of dollars)
Germany Japan Canada France C7iC Italy Switzerlam
1969 June
—
10 389 6 368—
44 Sept.—
10 389 6 406—
45 Dec.—
61 272 6 407—
42 1970 M a r c h—
62 271 6 350—
46June
—
61 286 6 396—
45 Sept.—
61. 284 6 423—
49 Dec.—
61 192 6 499—
49 1971 M a r c h—
61 188 7 537—
48 June 3 142 174 2 490—
29 Sept. 3 755 175 2 432—
29 Dec. 3 I . 7 I 7 181 2 323—
60 1972 M a r c h 3 2,391 178 2 268—
53June 3 2,901 313 2 264
—
53 Sept. 3 3 . 4 8 i 432 2 293—
45 Dec. 3 4.38o 558 2 327—
45 1973 M a r c h 3 5,421 559 2 276—
44Source: T r e a s u r y Bulletins.
T A B L E 3: Non-marketable US Treasury bonds and notes issued to official institutions, 1969-73, at three-month intervals
In Dollars {Millions) In Foreign Currencies (Millions)
Germany Canada Italy Germany Italy Switzerland
1969 June
—
1,084 140 1,200 226 5 4 i Sept.—
1,084 139 1,200 125 5 4 i Dec.—
1,129 135 1,200 125 5 4 i 1970 M a r c h—
1,429 121 542—
5 4 iJune
—
2,229 32 542—
541Sept.
—
2,289 29 542—
541 Dec.—
2,289 25 542—
541 1971 M a r c h—
2,289 25 542—
541June 3,000 2,289 25 542
—
569U n i t e d K i n g d o m h e l d n o n o n - m a r k e t a b l e securities; h o l d i n g s o f s o m e 546 m i l l i o n i n m a r k e t a b l e s i n J a n u a r y 1971 (270 m i l l i o n b y J a n u a r y 1972) w e r e a s m a l l percentage o f t h e i r h o l d i n g s .
A m o n g o t h e r i n d u s t r i a l n a t i o n s c e r t a i n patterns o f i n v e s t m e n t b y f o r e i g n c e n t r a l banks m a y b e n o t e d . France's interest i n U S g o v e r n m e n t securities has been m a n i f e s t e d a l m o s t c o m p l e t e l y i n t e r m s o f bills. T h e i r i n v e s t m e n t i n b i l l s g r e w f r o m 994 m i l l i o n d o l l a r s i n J a n u a r y 1971 t o 3-3 b i l l i o n i n A u g u s t o f t h a t year. T h e y d i d l i q u i d a t e s o m e 1-3 b i l l i o n i n t h e n e x t t w o m o n t h s , b u t r e s u m e d b u y i n g b i l l s t o w a r d t h e e n d o f 1971. H o l d i n g s increased d u r i n g a l l o f 1972 a n d e a r l y 1973 as official reserves g r e w . France's h o l d i n g s o f m a r k e t a b l e notes a n d b o n d s w e r e a m i n i m a l 2 m i l l i o n d o l l a r s i n 1972; t h e y h e l d n o n o n - m a r k e t a b l e b o n d s .
I t a l y ' s official h o l d i n g s o f treasury bills g r e w d u r i n g 1971 r e a c h i n g a peak o f 1-608 b i l l i o n i n S e p t e m b e r 1971. Since t h e n h o l d i n g s o f b i l l s have d i s p l a y e d a n e g a t i v e t r e n d . T h e y h a v e s h o w n n o interest i n m a r k e t a b l e l o n g - t e r m U S g o v e r n m e n t securities. T h o u g h official h o l d i n g s o f n o n - m a r k e t a b l e b o n d s a n d notes ( d e n o m i n a t e d i n dollars) a m o u n t e d t o o v e r 100 m i l l i o n dollars i n 1969, t h e m a j o r p a r t w a s l i q u i d a t e d b y 1972. A l l o f t h e 125 m i l l i o n i n n o n - m a r k e t a b l e s ( d e n o m i n a t e d i n l i r e ) w e r e l i q u i d a t e d since 1 9 7 0 .2 6
S w i t z e r l a n d d i d purchase substantial a m o u n t s o f treasury bills d u r i n g 1971. I n d e e d t h e i r h o l d i n g s o f b i l l s j u m p e d b y s o m e 1-5 b i l l i o n b e t w e e n J u l y a n d A u g u s t 1971. O v e r t h e n e x t year t h e y t h e n s o l d a b i l l i o n d o l l a r s i n these s h o r t - t e r m securities. T h o u g h t h e y purchased 1*05 b i l l i o n dollars i n bills b e t w e e n J u n e a n d J u l y 1972, t h e i r h o l d i n g s d e c l i n e d d u r i n g t h e rest o f 1972 a n d i n t o e a r l y 1973. A s t o l o n g e r - t e r m securities, Swiss official h o l d i n g s o f m a r k e t a b l e notes a n d b o n d s w e r e v e r y s m a l l . T h e y h e l d , h o w e v e r , 1*2 b i l l i o n i n n o n - m a r k e t a b l e s d u r i n g 1971 a n d 1972. These w e r e d e n o m i n a t e d i n Swiss Francs.
These diverse patterns o f i n v e s t m e n t o f d o l l a r s i n U S g o v e r n m e n t securities m a y be analysed i n t e r m s o f several d i f f e r e n t factors. T h e purchase o f treasury b i l l s o n such a l a r g e scale i n 1971 c a n n o t b e j u s t i f i e d b y interest rate differentials n o r b y t h e desire t o m a x i m i s e interest i n c o m e since b i l l rates d u r i n g a l l o f 1971 w e r e w e l l b e l o w those o n U S g o v e r n m e n t l o n g - t e r m securities. C o n v e r s e l y , t h e a c c u m u l a t i o n o f b o n d s d u r i n g 1972 appears l o g i c a l i f earnings w e r e t h e o v e r r i d i n g c o n s i d e r a t i o n as t h e p o s i t i v e l y s l o p e d p a t t e r n o f yields persisted d u r i n g 1972. S e c o n d l y , t h e o b v i o u s preference f o r treasury bills reflects t h e l i q u i d i t y advantages o f these securities, w h i c h w a s o b t a i n e d at a s i g n i f i c a n t cost i n f o r e g o n e i n c o m e d u r i n g these years. A t h i r d c o n s i d e r a t i o n w o u l d be t h e state o f t h e Balance o f P a y m e n t s o f t h e respective c o u n t r i e s . G r e a t B r i t a i n , f o r e x a m p l e , a c c u m u l a t e d treasury b i l l s d u r i n g 1971 b u t t h e n l i q u i d a t e d a s i g n i f i c a n t p o r t i o n as i t i n c u r r e d an e x t e r n a l d e f i c i t d u r i n g 1972. I t a l y f o l l o w e d a s i m i l a r p a t t e r n o f i n v e s t m e n t a n d l i q u i d a t i o n .
Besides interest rate differentials, l i q u i d i t y a n d balance o f p a y m e n t s considera t i o n s , t w o o t h e r factors appear r e l e v a n t i n e x p l a i n i n g differences a m o n g n a t i o n s
i n s e c u r i t y h o l d i n g s , the desire t o c o - o p e r a t e w i t h A m e r i c a n m o n e t a r y a u t h o r i t i e s2 7
a n d the desire t o p r o t e c t t h e i r assets against t h e loss associated w i t h d e v a l u a t i o n . T h e purchase o f sizeable a m o u n t s o f l o n g - t e r m n o n - m a r k e t a b l e b o n d s b y b o t h t h e G e r m a n s a n d Canadians reflects a s p i r i t o f c o - o p e r a t i o n o n t h e i r p a r t , easing t h e task o f b o t h t h e T r e a s u r y a n d o f t h e Federal Reserve b y a c c e p t i n g assets w i t h less l i q u i d i t y . T h e G e r m a n s a n d Swiss, also, purchased l o n g - t e r m n o n - m a r k e t a b l e securities d e n o m i n a t e d i n t h e i r o w n currencies m o t i v a t e d n o d o u b t b y a desire t o p r o t e c t themselves against losses associated w i t h possible d e v a l u a t i o n o f t h e d o l l a r .
A s s u m i n g t h a t f o r e i g n c e n t r a l banks a t t e m p t t o m a x i m i s e u t i l i t y i n t h e i r h o l d i n g s o f treasury securities, w e m a y t h i n k o f t h e m as e q u a t i n g desired t o actual h o l d i n g s . Since U S T r e a s u r y b i l l s w e r e purchased b y a l l o f the c o u n t r i e s s t u d i e d (whereas some d i d n o t purchase m a r k e t a b l e a n d others n o n - m a r k e t a b l e ) w e w i l l a t t e m p t t o relate desired h o l d i n g s o f bills t o actual h o l d i n g s . D e s i r e d h o l d i n g s o f treasury bills are v i e w e d as b e i n g f u n c t i o n a l l y related t o ( i ) b i l l rates (Rt), w h i c h
reflect o p p o r t u n i t y costs o f i n v e s t i n g i n treasury b i l l s , (2) t h e rates o f i n f l a t i o n measured b y t h e c o n s u m e r p r i c e i n d e x (Pt) as a p r o x y r e f l e c t i n g expectations as
t o t h e general state o f t h e U S e c o n o m y , a n d (3) h o l d i n g s o f t o t a l official reserves ( O , ) as a c o n s t r a i n t o n t h e i r d e m a n d f o r bills. T h u s , desired treasury b i l l h o l d i n g s (by f o r e i g n c e n t r a l banks) are a f u n c t i o n o f b i l l rates, prices a n d official reserves. I f desired are e q u a l t o actual h o l d i n g s , (Bt) t h e n i n e q u i l i b r i u m .
Bt=f(R„P„Ot)
Regressing h o l d i n g s o f b i l l s ( f o r each o f t h e seven countries) o n each o f these three variables, u s i n g m o n t h l y data f o r t h e p e r i o d 1969 t h r o u g h M a r c h 1973 y i e l d e d t h e f o l l o w i n g results. T h e v a r i a b l e m o s t o f t e n r e l a t e d i n a statistically s i g n i f i c a n t m a n n e r t o treasury b i l l h o l d i n g s , is official h o l d i n g s o f reserves. T h e t w o o t h e r variables e x p l a i n e d l i t t l e o f t h e v a r i a t i o n i n f o r e i g n official h o l d i n g s o f b i l l s .
U s i n g first differences o f t h e data, t h e f o l l o w i n g results w e r e o b t a i n e d . F o r G e r m a n y a l m o s t 72 p e r cent o f the v a r i a t i o n i n b i l l s c o u l d be e x p l a i n e d b y changes i n official reserves, w i t h t h e coefficient o f t h e official reserve v a r i a b l e a p p r o x i m a t e l y
0-9. F o r Japan a h i g h e r J R2 was o b t a i n e d (-898) w i t h t h e official reserves v a r i a b l e
statistically s i g n i f i c a n t a n d a p p r o x i m a t i n g o n e .2 8 F o r each o f t h e o t h e r five c o u n t r i e s
t h e R2's w e r e d i s t i n c t l y l o w e r b u t a g a i n t h e official reserves v a r i a b l e w a s statistically
s i g n i f i c a n t a n d l i k e G e r m a n y a n d Japan h a v i n g a p o s i t i v e coefficient i n d i c a t i n g t h a t increases i n reserves w e r e associated w i t h increases i n b i l l h o l d i n g s . E q u a t i o n s f o r each c o u n t r y are g i v e n i n T a b l e 1.
27. T h e G e r m a n C e n t r a l B a n k rationalised its investment policies as n o t c o n t r i b u t i n g t o an increase i n international l i q u i d i t y . Report of the Deutsche Bundesbank, 1971, p . 105. T h e B a n k o f I t a l y sees the purchase o f some 9 b i l l i o n dollars i n m e d i u m a n d l o n g - t e r m securities b y f o r e i g n central banks as r e d u c i n g i n t e r n a t i o n a l l i q u i d i t y . Annual Report, B a n k o f I t a l y 1972, p . 3 1 .
28. W h e n using l o g a r i t h m i c differences, the coefficients f o r the official reserves variable was significant f o r f o u r o f the seven countries, G e r m a n y , Japan, I t a l y and France, w i t h coefficients, respectively, o f 3-64, vS6, 3-63 and 1*94. Thus, the d e m a n d f o r bills f o r each o f t h e m appears t o be elastic.
T A B L E 4: Equations relating holdings of US Treasury bills to prices, bill rates and official reserves, by country, 1969-73
Japan
R2= - 8 o 8
D.W.=2-SS9
G e r m a n y
£ ' = • 7 1 7
D.W. = 1-450
S w i t z e r l a n d
K * = - I 8 I
D.W. = 2 - 3 4 1
Canada
France
i ?2= - i 7 4 6
D.W. = 1-930
\ R2= - 5 0 0
D.W. = 1-789
U n i t e d K i n g d o m
I t a l y
ic»=-44
D.W.=0-987
R2= - 3 6
D.W. = i-Z9
B , = o - o o 8 —0-500?, —0-277R, + I - 0 0 8 O , (•090) (2-64) (1-885) (i6-95)
B , = —0-1480 —0-149?, —0-449R, + - 9 0 8 0 0 , (•537) . (-240) (1-340) (8-88)
B(= o - 0 5 5 5 — 0 - H 0 7 P , —o-o848i?( + 0 - 2 1 1 4 0 ,
(o-557) . (-518) (-693) (2-76)
B,==o-0237 —0-0583?, - 0 - 0 4 3 4 ^ , + 0 - 2 3 4 1 0 , (•772) (-902) (1-15) (2-42)
B , = o - 0 4 7 3 + o - i o 6 4 P , - f - o - i 8 9 f i , + o - 6 o o o O , (0-673) (0-722) (2-18) (5-74)
B , = —0-9474 - f o - i 6 i 5P, + 0 - 2 4 5 ! ? , + 0 - 6 3 7 0 , ( - 0 - 3 5 1 ) (0-578) (1-46) (5-48)
B , = o - 0 3 4 0 — o - i o i 2 P , —0-0225.1?, + 0 - 4 7 4 0 , (•660) ( - 0 - 9 3 4 ) . ( - 0 - 3 3 3 ) (4-22)
Conclusions
-m e n t o f t h e objectives o f p o l i c y . T h e purchases o f b i l l s b y f o r e i g n official i n s t i t u t i o n s i n 1971 a n d o f l o n g - t e r m securities i n 1972 a n d e a r l y 1973 c o n t r i b u t e d s o m e w h a t t o l o w e r rates t h a n those c o m p a t i b l e w i t h t h e a t t a i n m e n t o f e x t e r n a l e q u i l i b r i u m i n 1971 a n d n o n - i n f l a t i o n a r y a g g r e g a t e d e m a n d i n 1972 a n d 1973.
T h e p r o b l e m s posed b y t h e a c c u m u l a t i o n o f g o v e r n m e n t securities relate n o t o n l y t o t h e a b i l i t y o f t h e Federal Reserve t o achieve a desired p a t t e r n o f interest rates b u t also t o m a i n t a i n t h e desired degree o f reserve a v a i l a b i l i t y . W h e t h e r t h i s w i l l p r o v e t o b e a m o r e serious p r o b l e m w i l l b e d e t e r m i n e d b y t h e success i n i m m o b i l i s i n g funds i n t o l o n g e r - t e r m a n d n o n - m a r k e t a b l e securities, a n d b y t h e e x t e n t t o w h i c h t h e d o l l a r i m p r o v e s i n f o r e i g n - e x c h a n g e m a r k e t s . A g r a d u a l s t r e n g t h e n i n g o f t h e d o l l a r l e a d i n g t o a g r a d u a l l i q u i d a t i o n o f securities b y f o r e i g n c e n t r a l banks s h o u l d pose n o serious d a n g e r e i t h e r i n t h e f o r m o f d i s r u p t i o n o f financial m a r k e t s o r a n excessive c r e a t i o n o f l i q u i d i t y b y t h e C e n t r a l B a n k .
