Exchange Stabilization Fund

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The Exchange Stabilization Fund (ESF) is an emergency reserve fund of the United States Treasury Department, normally used for foreign exchange intervention.[1] This arrangement (as opposed to having the central bank intervene directly) allows the US government to influence currency exchange rates without directly affecting domestic money supply.

As of October 2009, the fund held assets worth $105 billion, including $58.1 billion in special drawing rights (SDR) from the International Monetary Fund.[2]


The U.S. Exchange Stabilization Fund was established at the Treasury Department by a provision in the Gold Reserve Act of January 31, 1934. 31 U.S.C. § 5117. It was intended as a response to Britain's Exchange Equalisation Account.[3] 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. The Fund had no statutory authority, however, to engage in other activities that it began to undertake.[citation needed] 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, 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.

It was funded by Franklin D. Roosevelt under the Emergency Banking Act of 1933, with Archie Lochhead serving as its first Director.

The Special Drawing Rights Act of 1968, 22 U.S.C. § 286o, likewise provided that any special drawing rights (SDRs) allocated by the International Monetary Fund 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.[4] 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.[5]


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."[6]

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. This was somewhat controversial at the time, because President Clinton had tried and failed to pass the Mexican Stabilization Act through Congress. 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, which implicitly accepted the use of the ESF, but required reports to Congress every six months on the status of the loans.[7] At the end of the crisis, the U.S. made a $500 million profit on the loans.[8]

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.[9]

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.[10]

See also[edit]


  1. ^ Gertrude Chavez-Dreyfuss (2019-08-07). "U.S. dollar - When will bulls turn to bears?". Reuters. Retrieved 2019-08-07.
  2. ^ Archived 2010-01-20 at the Wayback Machine Retrieved 2008-09-30.
  3. ^ Anna J. Schwartz. "IMF's Origins as a Blueprint for Its Future".
  4. ^ Archived 2008-09-17 at the Wayback Machine Retrieved 2008-09-30.
  5. ^ Archived 2008-09-17 at the Wayback Machine Retrieved 2008-09-30.
  6. ^ Jennifer Huang (September 26, 2008). "What's the Exchange Stabilization Fund? A pile of cash that can be used for whatever". Slate.
  7. ^ Pub. L. 104–6, title IV, Apr. 10, 1995, 109 Stat. 89, 31 U.S.C. § 5302
  8. ^ Alan Greenspan (September 17, 2007). The Age of Turbulence. Penguin Press. p. 159. ISBN 978-1-59420-131-8.
  9. ^ "Treasury Announces Guaranty Program for Money Market Funds". U.S. Department of The Treasury. Archived from the original on 2008-09-21. Retrieved 2008-09-20.
  10. ^ "Coronavirus Aid, Relief, and Economic Security Act".

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