The Exchange Stabilization Fund (ESF) is an emergency reserve fund of the

United States Treasury Department The Department of the Treasury (USDT) is the national treasury and finance department of the federal government of the United States, where it serves as an executive department. The department oversees the Bureau of Engraving and Printing and ...

, normally used for foreign exchange intervention. This arrangement (as opposed to having the

central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a central b ...

intervene directly) allows the US government to influence currency exchange rates without directly affecting domestic

money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circul ...

. As of October 2009, the fund held assets worth $105 billion, including $58.1 billion in

special drawing rights Special drawing rights (SDRs, code ) are supplementary foreign exchange reserve assets defined and maintained by the International Monetary Fund (IMF). SDRs are units of account for the IMF, and not a currency ''per se''. They represent a claim ...

(SDR) from the

International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...

Background

The U.S. Exchange Stabilization Fund was established at the Treasury Department by a provision in the

Gold 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. It also prohibited the Tr ...

of January 31, 1934. . It was intended as a response to Britain's

Exchange Equalisation Account The Exchange Equalisation Account (EEA) is a fund of His Majesty's Treasury in the United Kingdom. It holds the country's the special drawing rights (SDR) held at the International Monetary Fund as well as reserves of foreign currencies and gold. I ...

. 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 A country's gross government debt (also called public debt, or sovereign debt) is the financial liabilities of the government sector. Changes in government debt over time reflect primarily borrowing due to past government deficits. A deficit oc ...

. 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 (October 29, 1892 – August 16, 1948) was a senior U.S. Treasury department official. Working closely with the Secretary of the Treasury Henry Morgenthau Jr., he helped set American financial policy toward the Allies of World ...

, 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

and the

World Bank The World Bank is an international financial institution that provides loans and grants to the governments of low- and middle-income countries for the purpose of pursuing capital projects. The World Bank is the collective name for the Inte ...

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 __NOTOC__ The Emergency Banking Act (EBA) (the official title of which was the Emergency Banking Relief Act), Public Law 73-1, 48 Stat. 1 (March 9, 1933), was an act passed by the United States Congress in March 1933 in an attempt to stabilize t ...

of 1933, with Archie Lochhead serving as its first Director. The Special Drawing Rights Act of 1968, , likewise provided that any special drawing rights (SDRs) allocated by the

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 The Mexican peso crisis was a currency crisis sparked by the Mexican government's sudden devaluation of the peso against the U.S. dollar in December 1994, which became one of the first international financial crises ignited by capital flight ...

. This was somewhat controversial at the time, because

President Clinton William Jefferson Clinton ( né Blythe III; born August 19, 1946) is an American politician who served as the 42nd president of the United States from 1993 to 2001. He previously served as governor of Arkansas from 1979 to 1981 and again ...

had tried and failed to pass the Mexican Stabilization Act through

Congress A congress is a formal meeting of the representatives of different countries, constituent states, organizations, trade unions, political parties, or other groups. The term originated in Late Middle English to denote an encounter (meeting of ...

. 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 The Mexican Debt Disclosure Act is a law of the United States formulating congressional oversight and monetary policy, through reports of the US president and the US treasury, to support the strength of the 1995 peso currency of Mexico; all result ...

, 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. On March 25, 2020, Congress temporarily authorized the treasury to use the ESF to stabilize money market mutual funds in response to the

COVID-19 pandemic The COVID-19 pandemic, also known as the coronavirus pandemic, is an ongoing global pandemic of coronavirus disease 2019 (COVID-19) caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). The novel virus was first identi ...

References

External links

The ESF WebsiteHistory of ESF
{{US Treasury agencies United States Department of the Treasury United States economic policy Gold standard Subprime mortgage crisis 1934 establishments in Washington, D.C.

Background

Uses

See also

References

External links