1 1 (April 10, 2020)

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                                                                                             Updated April 10, 2020

Treasury's Exchange Stabilization Fund and COVID-19


As part of the U.S. government's economic response to the
Coronavirus Disease 2019 (COVID-19), the Coronavirus
Aid, Relief, and Economic Security Act (CARES Act; H.R.
748/P.L. 116-136), was signed into law on March 27, 2020.
It appropriates $500 billion to the U.S. Department of
Treasury's Exchange Stabilization Fund (ESF) to support
loans, loan guarantees, and investments for businesses
affected by COVID-19. In addition, the act temporarily
permits the use of the ESF to guarantee money markets, as
occurred in the 2008 financial crisis. ESF assets have
already been pledged in 2020 to backstop several
emergency lending facilities created by the Federal Reserve
(Fed) in response to COVID-19.

The original purpose of the ESF was to give the United
States adequate financial resources to stabilize the value of
the dollar by buying and selling foreign currencies and
gold. In the exigencies of the 2008 financial crisis, the ESF
was used differently as Treasury sought a source of
unfettered money to quickly stop a run on money markets
that threatened further financial instability. Although
legislation subsequently forbid Treasury from using the
ESF for this purpose in the future, the ESF is being looked
to today as a tool to address financial unrest.


The ESF was established by Section 10(a) of the Gold
Reserve Act of January 30, 1934 (31 U.S.C. 5302) to
stabilize the exchange value of the dollar. Similar funds of
European countries were heavily intervening in foreign
exchange markets at that time, engaging in competitive
currency devaluations. The ESF was established with $2
billion appropriated from profits realized from the Gold
Reserve Act's revaluation of U.S. gold holdings from
$20.67 per troy ounce to $35.

During the 1930s, the ESF was actively used to manage the
foreign exchange rate of the U.S. dollar. 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 (31 U.S.C.  5302), $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 permanent authority
for the ESF.

In 1973, with the demise of the post-World War II gold
standard, where the dollar was pegged to gold and other
countries' currencies were pegged to the dollar, the explicit
purpose of stabilizing the exchange value of the dollar was
stricken from the ESF's statute, and its purpose was
expanded. 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. As a consequence
of this change, the Secretary of the Treasury (with the
approval of the President) has almost unlimited authority to
deal in gold, foreign exchange, and other instruments of
credit and securities. Decisions of the Treasury Secretary
are final and may not be reviewed by another government
official. Nevertheless, Treasury is required to provide
monthly reporting on the ESF's operations to Congress.
ESF loans are not open-ended. When Congress expanded
the scope of the ESF's authority in 1978, it added a
restriction that ESF loans could not exceed six months
unless the President notified Congress that unique or
exigent circumstances were present. Such notifications
were provided regarding ESF credit exposure to Mexico in
1982 and in 1995 and to Brazil in 1998.

  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 ... with the approval of the President
  may deal in gold, foreign exchange, and other
  instruments of credit and securities... - 31 U.S. Code
  5302. Stabilizing exchange rates and arrangements

In addition to its initial capitalization ($2 billion), Congress
allowed the ESF to remain outside annual appropriations
and imposed no overall size limit. Instead, the ESF retains
all of the earnings from its operations. The main limitation
on the ESF's ability to intervene to impact the value of the
dollar is the amount of dollar-denominated assets in its
portfolio, which are $22.67 billion as of February 2020. To
secure more dollars for foreign exchange operations,
Treasury could (1) seek an additional appropriation from
Congress; (2) monetize its holdings of IMF special drawing
rights (SDR, an international reserve asset), valued at $50
billion, by temporarily selling them to the Fed; or (3)
engage in a currency swap arrangement called
warehousing-in which the ESF sells foreign currency to
the Fed and agrees to repurchase it at a later date, during
which the Fed credits dollar reserves to the ESF for the
duration of the swap. The limit on warehousing is $5
billion, but this limit was temporarily raised to $10 billion
in 1989 and $20 billion in 1995. The last use of the
warehousing arrangement was from 1988 to 1992.


The ESF's primary use until 2008 was to finance short-term
loans to foreign countries facing a financial crisis, including
Brazil and Mexico, primarily in Latin America and the
Caribbean. The ESF has also been used to provide bridge
loans to foreign countries while they were negotiating
longer-term IMF financing.


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