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. 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 make foreign loans without congressional approval. Appropriation legislation in the 104th 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 105th Congress which would have imposed 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 106th Congress, H.R. 1540 (ESF Transparency and 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.