THE EXCHANGE STABILIZATION FUND OF THE U.S. TREASURY DEPARTMENT: PURPOSE, HISTORY, AND LEGISLATIVE ACTIVITY
CRS Report for Congress
The Exchange Stabilization Fund of the U.S.
Treasury Department:
Purpose, History, and Legislative Activity
Updated September 20, 1999
Arlene Wilson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress
ABSTRACT
In late 1998, as part of an international support package, the United States agreed to provide
contingent financing from the U.S. Treasury Department’s Exchange Stabilization Fund of
$5 billion for Brazil. This report provides a brief history of the ESF (which was established
in 1934) as well as the statutory authority (31 U.S.C. 5302) cited by the Treasury Department
for making loans to foreign governments from the ESF. To provide perspective, the amounts,
loan and repayment dates of all ESF loans to foreign governments since 1980 are given.
Recent legislative actions to limit the amount of ESF loans are summarized. This product,
which supercedes CRS Report 98-583 E, will be updated when legislative activity occurs or
ESF funds are committed or disbursed to foreign governments.
The Exchange Stabilization Fund of the U.S. Treasury
Department:
Purpose, History, and Legislative Activity
Summary
As part of an international support package, the United States agreed, in
November 1998, to provide contingent financing of $5 billion to Brazil. Funds would
come from the Department of the Treasury’s Exchange Stabilization Fund (ESF).
Some congressional concern has been expressed about the ESF’s ability to maketh
foreign loans without congressional approval. Appropriation legislation in the 104
Congress imposed limitations on the use of the ESF (P.L. 104-52, Section 632 and
P.L. 104-208, Section 628), but the limitations expired at the end of fiscal year 1997.
Seven bills were introduced in the 105 Congress which would have imposedth
restrictions on the amount of ESF loans, but did not receive floor action. Amendment
No. 16 (to H.R. 4104) restricting the amount of ESF loans was defeated in a House
vote on July 16, 1998. In the 106 Congress, H.R. 1540 (ESF Transparency andth
Accountability Act), which would impose limitations on ESF loans, was introduced
on April 22, 1999, but has not received floor action.
The Exchange Stabilization Fund was established by Section 20 of the Gold
Reserve Act of January 30, 1934 (48 Stat. 337, 341) to stabilize the exchange value
of the dollar. At that time, the ESF received an appropriation of $2 billion from the
revaluation of U.S. gold holdings. Since then, no money has been appropriated; its
income has come largely from interest on investments and loans, as well as net gains
made in transactions in the foreign exchange market. As of late September 1999, the
ESF had about $30 billion available to lend.
The ESF engages in monetary transactions in which one asset is exchanged for
another, such as foreign currencies for dollars. It is under the control of the Secretary
of the Treasury, subject to approval of the President. The Treasury Department cites
31 U.S.C. Section 5302 as its statutory authority for providing financing to other
countries through the Exchange Stabilization Fund.
One use of the ESF has been to provide resources for intervention in the foreign
exchange market. The ESF also has been used to finance short-term loans to both
developed and developing countries and, since 1980, has provided loans to 18
countries. From 1980 to 1994, Mexico, Brazil and Argentina were by far the largest
borrowers. Since 1995, Mexico has been the only recipient of ESF loans. After the
1994 Mexican peso crisis, ESF loans to Mexico totaled $12 billion, which were repaid
by January 1997.
The argument in favor of restricting the use of the ESF is that the Congress
should have a voice in how billions of dollars are spent. The argument against
restrictions is that the ESF provides the Treasury Department with a much-needed
quick and flexible tool to respond to international financial crises.
Contents
Brief History...................................................1
Income and Resources of the ESF...................................4
ESF Financing from 1980 through March 1999.........................4
Legislative Activity..............................................7
105 Congress..............................................8
Pros and Cons of Limiting the ESF..................................8
List of Tables
Table 1. Exchange Stabilization Fund Financing Agreements, 1980-99.......5
The Exchange Stabilization Fund of the U.S.
Treasury Department:
Purpose, History, and Legislative Activity
As part of an international support package, the United States agreed, in
November 1998, to provide contingent financing of $5 billion to Brazil. Funds1
would come from the Department of the Treasury’s Exchange Stabilization Fund
(ESF). As of late September 1999, no funds have been drawn from the ESF under
this agreement.
Some congressional concern has been expressed about the ESF’s ability to make
foreign loans without congressional approval. Appropriation legislation in the 104th
Congress imposed limitations on the use of the ESF (P.L. 104-52 and P.L. 104-208),
but the limitations expired at the end of fiscal year 1997. Several bills wereth
introduced in the 105 Congress to reimpose restrictions, but none received floor
action. An amendment to H.R. 4104 to reimpose restrictions was defeated in a Houseth
vote on July 16, 1998. In the 106 Congress, H.R. 1540, which would impose
restrictions, was introduced April 22, 1999, but no floor action has occurred.
The ESF engages in monetary transactions in which one asset is exchanged for
another, such as foreign currencies for dollars. It is under the control of the Secretary
of the Treasury, subject to approval of the President. The Fund provides flexibility
to respond quickly to unexpected stresses in international financial markets. The
Treasury Department cites 31 U.S.C. Section 5302 (see box on p. 3) as its statutory
authority for providing financing to other countries through the Exchange
Stabilization Fund.
The purpose of this report is to provide an overview of the past and current roles
of the Exchange Stabilization Fund, the loans provided by the ESF to foreign
countries since 1980, and bills introduced in recent years to limit the ESF.
Brief History
The ESF was established by Section 20 of the Gold Reserve Act of January 30,
similar funds of European countries were having a significant effect on exchange
markets. The purpose of the ESF was to give the United States adequate financial
A discussion of the global financial crisis is beyond the scope of this report. See CRS Report1
RL30012, Global Financial Turmoil: Contagion, Effects, and Policy Responses, by Dick
K. Nanto.
resources to counteract the activities of the European funds. It was established with2
$2 billion appropriated from profits realized from the revaluation of U.S. gold
holdings. The Gold Reserve Act provided temporary authority for the ESF, which
was renewed periodically until it was made permanent in 1945.
The ESF was used actively in the 1930s to manage the dollar’s exchange rate.
After World War II, when the International Monetary Fund (IMF) was established,
the ESF was the source of funds for the U.S. contribution. As provided in the
Bretton Woods Agreement Act of 1945 (59 Stat. 514), $1.8 billion of the ESF’s
capital of $2 billion was used to make a partial payment on the U.S. subscription to
the IMF. The Bretton Woods Agreement Act of 1945 also included permanent3
authority for the ESF.
During the 1960s, the likelihood that the United States would have to withdraw
foreign currencies from the IMF to support the dollar increased. The ESF was
authorized to receive foreign currencies which the United States withdrew from the
IMF. In 1968, when the IMF first issued special drawing rights (SDRs), the ESF was
authorized to receive the SDRs allocated to the United States.
The statutory language reflecting the purpose of the ESF was changed somewhat
in 1976 and 1977. After fixed exchange rates were replaced by a floating exchange
rate system in 1973, the IMF Articles of Agreement were amended to conform to the4
current international monetary system. In the Second Amendment to the Articles of
Agreement of the IMF, which became effective in 1978, countries were no longer
required to maintain fixed par values for their currencies. To conform to the Second
Amendment, the language alluding to “stabilizing the exchange value of the dollar”
was deleted and language referring to “being consistent with U.S. obligations in the
IMF regarding orderly exchange arrangements and a stable system of exchange rates”
was inserted.
One use of the ESF has been to provide resources for intervention in the foreign
exchange market. Since 1962, the Federal Reserve System has also taken an active
role in foreign exchange intervention, and has swap (reciprocal currency)
arrangements with Canada and Mexico totaling $5 billion as of March 31, 1999.5
Generally, U.S. Treasury loans to foreign countries are made under special swap
arrangements negotiated when necessary, while the Federal Reserve has continuing
U.S. Congress. House. Committee on the Budget. Exchange Stabilization Fund. Hearing2thnd
before the Task Force on Tax Expenditures and Off-Budget Agencies, 94 Cong., 2 sess.,
February 18, 1976, p. 3.
Under current law, U.S. participation in an IMF quota increase must be approved by the U.S.3
Congress (22 U.S.C. 286c).
In a fixed exchange rate system, a government agrees to maintain its currency at a specified4
rate, while in a floating exchange rate system, supply and demand in the market determine the
exchange rate.
Treasury and Federal Reserve Foreign Exchange Operations. Federal Reserve Bulletin.5
June 1999, p. 400.
swap arrangements. As of March 31, 1999, the U.S. Treasury had ESF swap6
arrangements in effect of $3 billion with the Bank of Mexico.
31 U.S.C. 5302 Stabilizing exchange rates and arrangements
(a)(1) The Department of the Treasury has a stabilization fund. The fund is available
to carry out this section, section 18 of the Bretton Woods Agreement Act (22 U.S.C. 286e-
3), and section 3 of the Special Drawing Rights Act (22 U.S.C. 286o), and for investing
in obligations of the United States Government those amounts in the fund the Secretary of
the Treasury, with the approval of the President, decides are not required at the time to
carry out this section. Proceeds of sales and investments, earnings, and interest shall be
paid into the fund and are available to carry out this section. However, the fund is not
available to pay administrative expenses.
(2) Subject to approval by the President, the fund is under the exclusive control of
the Secretary, and may not be used in a way that direct control and custody pass from the
President and the Secretary. Decisions of the Secretary are final and may not be reviewed
by another officer or employee of the Government.
(b) Consistent with the obligations of the Government in the International Monetary
Fund on orderly exchange arrangements and a stable system of exchange rates, the
Secretary or an agency designated by the Secretary, with the approval of the President,
may deal in gold, foreign exchange, and other instruments of credit and securities the
Secretary considers necessary. However, a loan or credit to a foreign entity or government
of a foreign country may be made for more than 6 months in any 12-month period only if
the President gives Congress a written statement that unique or emergency circumstances
require the loan or credit be for more than 6 months.
(c)(1) By the 30 day after the end of each month, the Secretary shall give theth
Committee on Banking, Finance and Urban Affairs of the House of Representatives and
the Committee on Banking, Housing and Urban Affairs of the Senate a detailed financial
statement on the stabilization fund showing all agreements made or renewed, all
transactions occurring during the month, and all projected liabilities.
(2) The Secretary shall report each year to the President and the Congress on the
operation of the fund.
(d) A repayment of any part of the first subscription payment of the Government to
the International Monetary Fund, previously paid from the stabilization fund, shall be
deposited in the Treasury as a miscellaneous receipt.
The ESF has also been used to finance short-term loans with both developed and
developing countries. The short-term nature of the financing has been emphasized by
an amendment to the ESF statute requiring the President to notify the Congress if a
Swap arrangements are short-term reciprocal currency agreements between major foreign6
central banks and the U.S. Federal Reserve and the U.S. Department of the Treasury. In
effect, they are lines of credit, up to an agreed upon amount, that either country can draw on
it if needs foreign currencies to intervene in the foreign exchange market, or to make short-
term loans to foreign governments that are experiencing balance of payments problems. See
also CRS Report 95-169 E, The Mexican Peso Devaluation and Swap Arrangements, by
Arlene Wilson.
loan or a credit to a foreign country is made for more than 6 months in any 12-month
period. Most of the ESF swap arrangements were part of a multilateral financing
package, usually in anticipation of, or in support of, an IMF stabilization program, or
together with loans by foreign central banks through the Bank for International
Settlements (BIS).
Income and Resources of the ESF
No funds have been appropriated to the ESF since the initial $2 billion
appropriation in 1934. One source of the ESF’s income is interest on its investments
or loans. The Exchange Stabilization Fund invests part of its funds in U.S. and
foreign securities which pay market interest rates and have a high degree of liquidity
and credit quality. It also receives interest and some fees from loans to foreign
countries. Second, the ESF has both gains and losses from its operations in foreign
exchange markets (except in swap agreements which have no exchange risk). On
balance, over the years, gains have exceeded losses, providing a substantial amount
of income. As of late September 1999, resources available for lending are
approximately $30 billion.
ESF Financing from 1980 through March 1999
Table 1 on pages 5 and 6 provides information on the drawings and repayments
under Exchange Stabilization Fund swap agreements between 1980 and 1999. It is
important to note that the table reflects only ESF financing agreements; financing was
also provided through Federal Reserve swap arrangements over this period.
As shown in Table 1, Mexico, Brazil and Argentina were by far the largest
borrowers from 1980 to 1994. In this period, drawings from the ESF totaled $3.0
billion for Mexico, $2.1 billion for Brazil, and $1.7 billion for Argentina. Importantly,
all drawings were repaid. Except for a $600-million swap agreement with Mexico in
1982, all drawings were repaid within 6 months. In fact, some were of much shorter
duration. Two drawings (Costa Rica and Peru) were repaid the same day. Eleven
other drawings were paid back within one month. Sixteen more were repaid within
Table 1. Exchange Stabilization Fund Financing Agreements, 1980-99
AmountDrew
CountryYearAgreedAmountDate(s)Repaid in
($mil.)($mil.)Full by
Mexico 1982 1,000.0 825.0 8/14/82 8/24/82
Mexico 1982 600.0 600.0 9/82-2/83 8/23/83
Mexico 1986 273.0 273.0 8/86-12/86 2/13/87
Mexico 1988 300.0 300.0 8/1/88 9/15/88
Mexico 1989 425.0 384.1 9/25/89 2/15/90
Mexico 1990 600.0 600.0 3/28/90 7/90
Mexico 1995 20,000.0 250.0 11/11/95 3/14/95
Mexico 250.0 1/13/95 3/14/95
Mexico 1,000.0* 2/2/95 1/29/96
Mexico 3,000.0# 3/14/95 1/16/97
Mexico 3,000.0# 4/19/95 8/5/96
Mexico 2,000.0# 5/19/95 8/5/96
Mexico 2,500.0# 7/5/95 1/16/97
Brazil 1982 500.0 500.0 10/82-11/82 12/28/82
Brazil 1982 280.0 280.0 11/82 2/1/83
Brazil 1982 450.0 450.0 11/82 3/3/83
Brazil 1982 250.0 250.0 12/82 1/83
Brazil 1983 200.0 200.0 2/28/83 3/11/83
Brazil 1983 200.0 200.0 3/3/83 3/11/83
Brazil 1988 250.0 232.5 7/29/88 8/26/88
Argentina 1984 300.0 0.0
Argentina 1984 500.0 500.0 12/28/84 1/15/85
Argentina 1985 150.0 143.0 6/85 9/30/85
Argentina 1987 225.0 225.0 3/9/87 7/15/87
Argentina 1987 200.0 190.0 11/12/87 12/30/87
Argentina 1988 550.0 550.0 2/88-3/88 5/31/88
Argentina 1988 265.0 79.5 11/22/88 2/28/89
Table 1. Exchange Stabilization Fund Financing Agreements, 1980-
AmountDrew
CountryYearAgreedAmountDate(s)Repaid in
($mil.)($mil.)Full by
Jamaica 1984 50.0 10.0 12/29/84 3/2/85
Philippines 1984 45.0 45.0 11/7/84 12/28/84
Ecuador 1986 150.0 75.0 5/16/86 8/14/86
Ecuador 1987 31.0 31.0 12/4/87 1/26/88
Nigeria 1986 37.0 22.2 10/31/86 12/10/86
Yugoslavia 1988 50.0 50.0 6/15/88 9/30/88
Venezuela 1989 450.0 450.0 3/15/89 4/3/89
Venezuela 1990104.025.03/30/904/30/89
Bolivia 1986 100.0 0.0
Bolivia 1989 100.0 100.0 7/89 9/15/89
Bolivia 1989 100.0 75.0 9/22/89 12/29/89
Bolivia 1989 75.0 75.0 12/29/89 1/2/90
Poland 1989 200.0 86.0 12/28/89 2/9/90
Guyana 1990 31.8 31.8 6/20/90 9/90
Honduras 1990 82.3 82.3 6/28/90 11/20/90
Hungary 1990 20.0 20.0 6/90-7/90 9/5/90
Costa Rica199027.527.55/21/905/21/90
Romania 1991 40.0 40.0 3/7/91 3/21/91
Panama 1992 143.0 143.0 1/31/92 3/92
Peru 1993 470.0 470.0 3/18/93 3/18/93
Source: Abstracted by CRS from quarterly articles entitled “Treasury and Federal Reserve Foreign
Exchange Operations” in the Federal Reserve Bulletin.
Note: In the drawings and repayments columns, monthly data were used in some cases in the absence
of specific dates or because more than one drawing was made under one swap agreement. In the case
of Mexico, each of the seven drawings under the 1995 $20,000 million swap agreement is listed
separately because of their large size.
* A 90-day loan which was rolled over three times.
# A medium-term (2 to 5 year) loan.
Since 1995, Mexico has been the only recipient of ESF loans. The 1994
Mexican peso crisis resulted in a $38 billion international support package, of which
the United States agreed to contribute $20 billion, mostly through the ESF. The $20
billion, large in relation to previous ESF swap agreements, also included medium-term
loans and loan guarantees. Although loan guarantees are relatively rare, there are
several precedents. The ESF guaranteed a BIS loan of $500 million to Brazil in 1982
and a BIS loan to Yugoslavia for $75 million in 1983, and provided a guarantee for
an unspecified amount for Macedonia in early 1994.7
As it turned out, ESF loans to Mexico totaled $12 billion, all of which were
made in 1995. Of the $12 billion, $10.5 billion were in medium-term (2 to 5 year)
loans. One of the short-term (90 day) loans was renewed three times. All of the
loans were repaid in a timely way; the medium-term loans were repaid ahead of
schedule. All loans were repaid by January 16, 1997. Loan guarantees were not
used.
Legislative Activity
In the fiscal years ending September 30, 1996 and 1997, appropriation legislation
included some limitations on the size and duration of ESF loans that could be made
without congressional approval. The provisions of P.L. 104-52, Section 632, which
applied to fiscal year 1996, were the same as those of P.L. 104-208, Section 628 for
fiscal year 1997.
The main provisions of both laws were as follows:
!An ESF loan of more than 60 days to a foreign country required the President
to certify to the appropriate congressional committees that there was no
projected cost to the United States and that the U.S. expenditure was
adequately backed by an assured source of repayment.
!An ESF loan to a foreign government greater than $1 billion for more than 180
days required an Act of Congress, with a waiver if the President certified in
writing to the Congress that a financial crisis in a foreign country was a threat
to U.S. interests or to the international financial system. If the Congress,
within 30 days, enacted a joint resolution of disapproval, the certification
would not take effect. To become effective, such a joint resolution requires
the signature of the President or a veto override. Expedited procedures for
such a joint resolution were detailed in both laws.
!ESF loans to Mexico under the assistance package announced by the President
on January 31, 1995 were specifically exempted from the provisions of both
laws.
Treasury and Federal Reserve Foreign Exchange Operations. Federal Reserve Bulletin,7
March 1983, p. 144, and June 1983, p. 407, and Statement by the U.S. Department of the
Treasury, February 1, 1995.
Since the expiration of P.L. 104-208 on September 30, 1997, there have been
no congressionally-mandated restrictions in effect on ESF loans. Seven bills were
introduced in the 105 Congress that would impose restrictions on the amount of ESFth
loans under certain conditions, require money to be transferred from the ESF to8
another fund, or require reports by the Administration on the ESF. None of these
bills received floor action.
On July 16, 1998, House Amendment No. 16 to H.R. 4104 (The Treasury-Postal
Operations Appropriations Bill) was introduced. The text of the Amendment was:
At the end of the bill, insert after the last section (preceding the short
title) the following new section:
SEC. 648. None of the funds made available in this Act may be used
to make any loan or credit in excess of $250,000,000 to a foreign entity or
government of a foreign country through the exchange stabilization fund
under section 5302 of title 31, United States Code.
After a floor discussion House Amendment No. 16 failed by a recorded vote of9
On April 22, 1999, H.R. 1540 (ESF Transparency and Accountability Act) was
introduced. It requires the Secretary of the Treasury to provide specified
congressional committees with a detailed financial statement on the Exchange
Stabilization Fund and to make the Fund’s Annual Report to the President and the
Congress available to the public. H.R. 1540 also prohibits the Secretary of the
Treasury from making any expenditure or loan or more than $1 billion from the Fund
without Congressional approval unless the President certifies that it is necessary to
address a financial crisis. As of September 20, 1999, H.R. 1540 has not received
floor action.
Pros and Cons of Limiting the ESF
The argument in favor of restricting the use of the ESF is that the Congress, and
ultimately the taxpayer, should have a voice in whether and how billions of dollars
are spent. Since appropriations are not required for the ESF, the Congress does not,
under current law, have an opportunity to debate or vote on potential loans to foreign
governments. It is argued that since the Congress openly debates authorizations and
appropriations of far smaller amounts, Congress should have the chance to do so
when ESF funds to foreign governments are committed.
The argument against imposing restrictions is that the ESF provides the U.S.
Treasury Department with a rapid and flexible tool to respond to international
financial crises. In recent years, technological change and large increases in
H.R. 3106, H.R. 3138, H.R. 3573, H.R. 3114, H.R. 3580, S. 1458, and S. 1962. 8
See Congressional Record, July 16, 1998, p. H5698-5719.9
international capital flows mean that crises can spread more rapidly. The Treasury
contends that the availability of the ESF could play a crucial role in stemming
potential crises. There is no evidence to suggest that the ESF has abused its
authority. Previous ESF loans to foreign governments were all repaid in a timely way.
A recent study, which examined the history, legal bases, and financial operations
of the ESF, focused on the basic question: “How can the United States maintain
democratic accountability for executive branch officials engaged in international
financial rescues and at the same time preserve a capacity to respond to financial
crises with speed, flexibility, and effectiveness? The study concluded that, since10
financial markets are imperfect, the United States should maintain the Exchange
Stabilization Fund under the sole authority of the Department of the Treasury.
However, the study also concluded that the Secretary of the Treasury should continue
to manage the ESF conservatively and should increase the transparency of the ESF,
while the Congress should maintain oversight over the Secretary’s administration of
the ESF.
C. Randall Henning. The Exchange Stabilization Fund: Slush Money or War Chest?10
Institute for International Economics, Washington, D.C. May 1999, p. 2-3.