Exchange Stabilization Fund

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The Exchange Stabilization Fund (ESF) is a branch of the United States Treasury Department which manages a portfolio of domestic and foreign currencies for the purpose foreign exchange intervention. This particular arrangement (as opposed to having the central bank intervene directly) allows the US government to influence the exchange rate without affecting domestic money supply.


The U.S. Exchange Stabilization Fund was established at the Treasury Department by a provision in the Gold Reserve Act of 31 January 1934. 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 in order to stabilize the exchange value of the dollar. The ESF as originally designed was a creature 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, 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.

The selection of countries to which the ESF extended loans was obviously a political decision, made by the Treasury. Harry White’s memorandum supporting loans to various countries included Nationalist China, Mexico, other Latin American countries, and Russia.

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