Mr. Brehmer, formerly economist in the Research and Statistics Department and now in the European Department, is a graduate of Kiel University. He was formerly assistant at the Wirtschaftswissenschaftliches Seminar of that university and a member of the staff of the Deutsche Bundesbank. He is the author of Struktur und Funktionsweise des Geldmarktes der Bundesrepublik Deutschland seit 1948 (Tubingen, 1956 and 1964).
This paper represents a modified and enlarged version of the discussion of this subject in E. Brehmer, Struktur und Funktionsweise des Geldmarktes der Bundesrepublik Deutschland seit 1948 (second edition, Tübingen, 1964), pp. 180–90. The views expressed here do not necessarily reflect those of the International Monetary Fund.
On the contrary, if the current account balance should be affected by the slight depreciation of the domestic currency that is implied in the lowering of the forward rate, the result would be an increase (likely to be negligible) in the balance.
See Appendix I (pp. 408–10).
See Appendix II (pp. 410–11).
For a discussion of the various types of foreign exchange speculation, see Appendix I.
At times, however, the objective undoubtedly has been to influence the balance of payments.
For a detailed examination of the techniques employed, see Section III below.
It is relevant to recall that the favorable developments in Germany’s balance of payments and the resulting strength in that country’s foreign exchange position enabled the authorities to withdraw exchange restrictions, to a large extent, even before the end of 1958; in particular, nearly all controls on capital exports were removed in the autumn of 1957. Immediately following the declaration of external convertibility in December 1958, Germany withdrew its remaining restrictions on residents’ and nonresidents’ transactions on current and capital account. On the other hand, in May 1959, it abolished, though only temporarily, all its defenses against capital inflows (e.g., the prohibition of interest payments on nonresidents’ deposits with, and loans to, German commercial banks and the prohibition of the sale of German money market paper to nonresidents). Thus, Germany established complete freedom in its payments relations with foreign countries, while most of the other European countries initially undertook only to introduce by the end of 1958 external convertibility in their current account transactions. The more rapid progress in Germany toward complete freedom in external payments relations first tended to make the country’s external position less stable than that of several other European countries, although the difference between Germany and the other countries in these respects has subsequently been reduced somewhat.
Incidentally, the monetary problems created by the new conditions may arise not only when a current surplus or deficit in the balance of payments is reinforced by a net movement of capital in the same direction, but also when current and capital transactions together leave a large over-all surplus or deficit. Such imbalances are necessarily felt in those economies where the domestic money markets are relatively narrow and the existing offsetting facilities are limited in scope, as in Germany and other continental European countries.
Except from August 24 to November 11, 1960; between these dates the German banks, when lending foreign exchange to German importers, were expected to pass on the benefit of the Bundesbank’s swap premium to the importers in order to induce them to finance their requirements in the domestic financial markets rather than abroad. This was one of the policies adopted by the Bundesbank to ward off undesired inflows of funds during the period of high interest rates in Germany.
The Bank withdrew entirely from its forward exchange dealings only once—for a short interval at the end of October 1959.
Even in the New York forward exchange market, which is one of the most active in the world, deutsche mark transactions play a relatively minor role. It has been pointed out that “sterling is by far the most important currency traded in the New York forward market. There has in recent years been a growing forward market in Canadian dollars in New York, and from time to time there are forward transactions in other currencies, such as the Swiss franc, the French franc, the Dutch guilder, and the deutsche mark. For currencies other than the pound sterling and the Canadian dollar, no broad forward market can be said to exist in New York at the time of this writing .” See Alan R. Holmes, The New York Foreign Exchange Market (New York, 1959), p. 37.
H. Lipfert, Der deutsche Privatdiskontmarkt (Frankfurt am Main, 1959), p. 62.
P. Einzig, A Dynamic Theory of Forward Exchange (London, 1961), pp. 166 and 180. Einzig also points out (p. 182) that in some countries, e.g., the United Kingdom, bankers have to observe officially fixed maximum limits for the funds they can employ for interest arbitrage.
Strictly speaking, this applies to securities maturing within less than one year.
In November 1959, the Bundesbank had established two maturity categories, but thereafter it reintroduced one maturity spread.
See Deutsche Bundesbank, Annual Report, 1962, pp. 16–17.
The actual spot exchange rates and the market expectations of their developments are important factors determining the commercial banks’ decision about seeking forward cover for their investments in foreign currencies. Usually, the commercial banks abstain from seeking forward cover if the following conditions exist simultaneously: (1) the spot rate of the currency concerned is quoted at the lower intervention point of the Bundesbank, (2) the market does not expect a devaluation of the currency concerned, and (3) the forward exchange rate quoted by the Bundesbank or in the open market is not at a premium. When the banks do not expect a change in par value, they may also avoid the cost of forward cover if the difference between the spot rate and the lower support point of the Bundesbank is less than the positive interest rate differential vis-à-vis the foreign center and if, at the same time, the forward discount of the Bundesbank or in the open market would cancel the positive interest rate differential (see P. Einzig, op. cit., p. 73).
To defend its policy of high interest rates, the Bundesbank reintroduced the defenses against capital inflows, which had been abolished in May 1959, and took certain other steps to stem the inflow. See G. S. Dorrance and E. Brehmer, “Controls on Capital Inflow: Recent Experience of Germany and Switzerland,” Staff Papers, Vol. VIII (1960–61), pp. 427–38.
See P. Einzig, op. cit., pp. 94–96 and 219–21.
See Deutsche Bundesbank, Monatsberichte, April 1961, p. 41, and Federal Reserve Bank of New York, Annual Report, 1961, p. 32.
For a thorough discussion of forward exchange speculation, see P. Einzig, op. cit., p. 41 f, and H. Lipfert, Devisenhandel: Devisengeschäfte der Banken, Exporteure und Importeure (Frankfurt am Main, 1958), p. 159 f.
P. Einzig, op. cit., pp. 75 and 355.
See, e.g., P. Einzig, op. cit., p. 144 f, and A. R. Holmes, op. cit., p. 44.
P. Einzig, op. cit., pp. 176–86.