Chapter 12 In Defense of Sterling

THE FEDERAL RESERVE BANK of New York stands on the blockbounded by Liberty, Nassau, and William Streets and MaidenLane, on the slope of one of the few noticeable hillocksremaining in the bulldozed, skyscraper-flattened earth ofdowntown Manhattan. Its entrance faces Liberty, and its mienis dignified and grim. Its arched ground-floor windows, designedin imitation of those of the Pitti and Riccardi Palaces inFlorence, are protected by iron grilles made of bars as thick asa boy’s wrist, and above them are rows of small rectangularwindows set in a blufflike fourteen-story wall of sandstone andlimestone, the blocks of which once varied in color from brownthrough gray to blue, but which soot has reduced to acommon gray; the fa?ade’s austerity is relieved only at the levelof the twelfth floor, by a Florentine loggia. Two giant ironlanterns—near-replicas of lanterns that adorn the Strozzi Palacein Florence—flank the main entrance, but they seem to bethere less to please or illuminate the entrant than to intimidatehim. Nor is the building’s interior much more cheery orhospitable; the ground floor features cavernous groin vaultingand high ironwork partitions in intricate geometric, floral, andanimal designs, and it is guarded by hordes of bank securitymen, whose dark-blue uniforms make them look much likepolicemen.
Huge and dour as it is, the Federal Reserve Bank, as abuilding, arouses varied feelings in its beholders. To admirers ofthe debonair new Chase Manhattan Bank across Liberty Street,which is notable for huge windows, bright-colored tiled walls,and stylish Abstract Expressionist paintings, it is an epitome ofnineteenth-century heavy-footedness in bank architecture, eventhough it was actually completed in 1924. To an awestruckwriter for the magazine Architecture in 1927, it seemed “asinviolable as the Rock of Gibraltar and no less inspiring ofone’s reverent obeisance,” and possessed of “a quality which,for lack of a better word, I can best describe as ‘epic’” To themothers of young girls who work in it as secretaries or pages,it looks like a particularly sinister sort of prison. Bank robbersare apparently equally respectful of its inviolability; there hasnever been the slightest hint of an attempt on it. To theMunicipal Art Society of New York, which now rates it as afull-fledged landmark, it was until 1967 only a second-classlandmark, being assigned to Category II, “Structures of GreatLocal or Regional Importance Which Should Be Preserved,”
rather than Category I, “Structures of National ImportanceWhich Should Be Preserved at All Costs.” On the other hand,it has one indisputable edge on the Pitti, Riccardi, and StrozziPalaces: It is bigger than any of them. In fact, it is a biggerFlorentine palace than has ever stood in Florence.
The Federal Reserve Bank of New York is set apart from theother banks of Wall Street in purpose and function as well asin appearance. As by far the largest and most important of thetwelve regional Federal Reserve Banks—which, together with theFederal Reserve Board in Washington and the sixty-twohundred commercial banks that are members, make up theFederal Reserve System—it is the chief operating arm of theUnited States’ central-banking institution. Most other countrieshave only one central bank—the Bank of England, the Bank ofFrance, and so on—rather than a network of such banks, butthe central banks of all countries have the same dual purpose:
to keep the national currency in a healthy state by regulatingits supply, partly through the degree of ease or difficulty withwhich it may be borrowed, and, when necessary, to defend itsvalue in relation to that of other national currencies. Toaccomplish the first objective, the New York bank co?perateswith its parent board and its eleven brother banks inperiodically adjusting a number of monetary throttles, of whichthe most visible (although not necessarily the most important) isthe rate of interest at which it lends money to other banks. Asto the second objective, by virtue of tradition and of itssituation in the nation’s and the world’s greatest financial center,the Federal Reserve Bank of New York is the sole agent of theFederal Reserve System and of the United States Treasury indealings with other countries. Thus, on its shoulders falls thechief responsibility for operations in defense of the dollar. Thoseresponsibilities were weighing heavily during the great monetarycrisis of 1968—and, indeed, since the defense of the dollarsometimes involves the defense of other currencies as well, overthe preceding three and a half years.
Charged as it is with acting in the national interest—in facthaving no other purpose—the Federal Reserve Bank of NewYork, together with its brother banks, obviously is an arm ofgovernment. Yet it has a foot in the free-enterprise camp; inwhat some might call characteristic American fashion, it standssquarely astride the chalk line between government andbusiness. Although it functions as a government agency, itsstock is privately owned by the member banks throughout thecountry, to which it pays annual dividends limited by law to sixper cent per year. Although its top officers take a federal oath,they are not appointed by the President of the United States,or even by the Federal Reserve Board, but are elected by thebank’s own board of directors, and their salaries are paid notout of the federal till but out of the bank’s own income. Yetthat income—though, happily, always forthcoming—is entirelyincidental to the bank’s purpose, and if it rises above expensesand dividends the excess is automatically paid into the UnitedStates Treasury. A bank that considers profits incidental isscarcely the norm in Wall Street, and this attitude puts FederalReserve Bank men in a uniquely advantageous social position.
Because their bank is a bank, after all, and a privately owned,profitable one at that, they can’t be dismissed as meregovernment bureaucrats; conversely, having their gaze fixedsteadily above the mire of cupidity entitles them to be calledthe intellectuals, if not actually the aristocrats, of Wall Streetbanking.
Under them lies gold—still the bedrock on which all moneynominally rests, though in recent times a bedrock that hasbeen shuddering ominously under the force of variousmonetary earthquakes. As of March, 1968, more than thirteenthousand tons of the stuff, worth more than thirteen billiondollars and amounting to more than a quarter of all themonetary gold in the free world, reposed on actual bedrockseventy-six feet below the Liberty Street level and fifty belowsea level, in a vault that would be inundated if a system ofsump pumps did not divert a stream that originally wanderedthrough Maiden Lane. The famous nineteenth-century Britisheconomist Walter Bagehot once told a friend that when hisspirits were low it used to cheer him to go down to his bankand “dabble my hand in a heap of sovereigns.” Although it is,to say the least, a stimulating experience to go down and lookat the gold in the Federal Reserve Bank vault, which is in theform not of sovereigns but of dully gleaming bars about thesize and shape of building bricks, not even the best-accreditedvisitor is allowed to dabble his hands in it; for one thing, thebars weigh about twenty-eight pounds each and are thereforeill-adapted to dabbling, and, for another, none of the goldbelongs to either the Federal Reserve Bank or the UnitedStates. All United States gold is kept at Fort Knox, at the NewYork Assay Office, or at the various mints; the gold depositedat the Federal Reserve Bank belongs to some seventy othercountries—the largest depositors being European—which find itconvenient to store a good part of their gold reserves there.
Originally, most of them put gold there for safekeeping duringthe Second World War. After the war, the Europeannations—with the exception of France—not only left it in NewYork but greatly increased its quantity as their economiesrecovered.
Nor does the gold represent anything like all the foreigndeposits at Liberty Street; investments of various sorts broughtthe March ’68 total to more than twenty-eight billion. As abanker for most of the central banks of the non-Communistworld, and as the central bank representing the world’s leadingcurrency, the Federal Reserve Bank of New York is theundisputed chief citadel of world currency. By virtue of thisposition, it is afforded a kind of fluoroscopic vision of theinsides of international finance, enabling it to detect at a glancean incipiently diseased currency here, a faltering economy there.
If, for example, Great Britain is running a deficit in her foreigndealings, this instantly shows up in the Federal Reserve Bank’sbooks in the form of a decline in the Bank of England’sbalance. In the fall of 1964, precisely such a decline wasoccurring, and it marked the beginning of a long, gallant,intermittently hair-raising, and ultimately losing struggle by anumber of countries and their central banks, led by the UnitedStates and the Federal Reserve, to safeguard the existing orderof world finance by preserving the integrity of the poundsterling. One trouble with imposing buildings is that they have atendency to belittle the people and activities they enclose, andmost of the time it is reasonably accurate to think of theFederal Reserve Bank as a place where often bored peoplepush around workaday slips of paper quite similar to thosepushed around in other banks. But since 1964 some of theevents there, if they have scarcely been capable of inspiringreverent obeisance, have had a certain epic quality.
EARLY in 1964, it began to be clear that Britain, which forseveral years had maintained an approximate equilibrium in herinternational balance of payments—that is, the amount of moneyshe had annually sent outside her borders had been aboutequal to the amount she had taken in—was running asubstantial deficit. Far from being the result of domesticdepression in Britain, this situation was the result ofoverexuberant domestic expansion; business was booming, andnewly affluent Britons were ordering bales and bales of costlygoods from abroad without increasing the exports of Britishgoods on anything like the same scale. In short, Britain wasliving beyond her means. A substantial balance-of-paymentsdeficit is a worry to a relatively self-sufficient country like theUnited States (indeed, the United States was having that veryworry at that very time, and it would for years to come), butto a trading nation like Britain, about a quarter of whose entireeconomy is dependent on foreign trade, it constitutes a gravedanger.
The situation was cause for growing concern at the FederalReserve Bank, and the focal point of the concern was theoffice, on the tenth floor, of Charles A. Coombs, the bank’svice-president in charge of foreign operations. All summer long,the fluoroscope showed a sick and worsening pound sterling.
From the research section of the foreign department, Coombsdaily got reports that a torrent of money was leaving Britain.
From underground, word rose that the pile of gold bars in thelocker assigned to Britain was shrinking appreciably—notthrough any foul play in the vault but because so many of thebars were being transferred to other lockers in settlement ofBritain’s international debts. From the foreign-exchange tradingdesk, on the seventh floor, the news almost every afternoonwas that the open-market quotations on the pound in terms ofdollars had sunk again that day. During July and August, asthe quotation dropped from $2.79 to $2.7890, and then to$2.7875, the situation was regarded on Liberty Street as soserious that Coombs, who would normally handleforeign-exchange matters himself, only making routine reports tothose higher up, was constantly conferring about it with hisboss, the Federal Reserve Bank’s president, a tall, cool,soft-spoken man named Alfred Hayes.
Mystifyingly complex though it may appear, what actuallyhappens in international financial dealings is essentially whathappens in private domestic transactions. The money worries ofa nation, like those of a family, are the consequence of havingtoo much money go out and not enough come in. The foreignsellers of goods to Britain cannot spend the pounds they arepaid in their own countries, and therefore they convert theminto their own currencies; this they do by selling the pounds inthe foreign-exchange markets, just as if they were sellingsecurities on a stock exchange. The market price of the poundfluctuates in response to supply and demand, and so do theprices of all other currencies—all, that is, except the dollar, thesun in the planetary system of currencies, inasmuch as theUnited States has, since 1934, stood pledged to exchange goldin any quantity for dollars at the pleasure of any nation at thefixed price of thirty-five dollars per ounce.
Under the pressure of selling, the price of the pound goesdown. But its fluctuations are severely restricted. The influenceof market forces cannot be allowed to lower or raise the pricemore than a couple of cents below or above the pound’s parvalue; if such wild swings should occur unchecked, bankers andbusinessmen everywhere who traded with Britain would findthemselves involuntarily engaged in a kind of roulette game,and would be inclined to stop trading with Britain. Accordingly,under international monetary rules agreed upon at BrettonWoods, New Hampshire, in 1944, and elaborated at variousother places at later times, the pound in 1964, nominally valuedat $2.80, was allowed to fluctuate only between $2.78 and$2.82, and the enforcer of this abridgment of the law of supplyand demand was the Bank of England. On a day when thingswere going smoothly, the pound might be quoted on theexchange markets at, say, $2.7990, a rise of $.0015 from theprevious day’s closing. (Fifteen-hundredths of a cent doesn’tsound like much, but on a round million dollars, which isgenerally the basic unit in international monetary dealings, itamounts to fifteen hundred dollars.) When that happened, theBank of England needed to do nothing. If, however, the poundwas strong in the markets and rose to $2.82 (something itshowed absolutely no tendency to do in 1964), the Bank ofEngland was pledged to—and would have been very happyto—accept gold or dollars in exchange for pounds at that price,thereby preventing a further increase in the price and at thesame time increasing its own reserve of gold and dollars, whichserve as the pound’s backing. If, on the other hand (and thiswas a more realistic hypothesis), the pound was weak andsank to $2.78, the Bank of England’s sworn duty was tointervene in the market and buy with gold or dollars allpounds offered for sale at that price, however deeply this mighthave cut into its own reserves. Thus, the central bank of aspendthrift country, like the father of a spendthrift family, iseventually forced to pay the bills out of capital. But in times ofserious currency weakness the central bank loses even more ofits reserves than this would suggest, because of the vagaries ofmarket psychology. Prudent importers and exporters seeking toprotect their capital and profits reduce to a minimum the sumthey hold in pounds and the length of time they hold it.
Currency speculators, whose noses have been trained to sniffout weakness, pounce on a falling pound and make enormousshort sales, in the expectation of turning a profit on a furtherdrop, and the Bank of England must absorb the speculativesales along with the straightforward ones.
The ultimate consequence of unchecked currency weakness issomething that may be incomparably more disastrous in itseffects than family bankruptcy. This is devaluation, anddevaluation of a key world currency like the pound is therecurrent nightmare of all central bankers, whether in London,New York, Frankfurt, Zurich, or Tokyo. If at any time thedrain on Britain’s reserves became so great that the Bank ofEngland was unable, or unwilling, to fulfill its obligation tomaintain the pound at $2.78, the necessary result would bedevaluation. That is, the $2.78-to-$2.82 limitation would beabruptly abrogated; by simple government decree the par valueof the pound would be reduced to some lower figure, and anew set of limits established around the new parity. The heartof the danger was the possibility that what followed might bechaos not confined to Britain. Devaluation, as the most heroicand most dangerous of remedies for a sick currency, is rightlyfeared. By making the devaluing country’s goods cheaper toothers, it boosts exports, and thus reduces or eliminates adeficit in international accounts, but at the same time it makesboth imports and domestic goods more expensive at home, andthus reduces the country’s standard of living. It is radicalsurgery, curing a disease at the expense of some of thepatient’s strength and well-being—and, in many cases, some ofhis pride and prestige as well. Worst of all, if the devaluedcurrency is one that, like the pound, is widely used ininternational dealings, the disease—or, more precisely, thecure—is likely to prove contagious. To nations holding largeamounts of that particular currency in their reserve vaults, theeffects of the devaluation is the same as if the vaults had beenburglarized. Such nations and others, finding themselves at anunacceptable trading disadvantage as a result of the devaluation,may have to resort to competitive devaluation of their owncurrencies. A downward spiral develops: Rumors of furtherdevaluations are constantly in the wind; the loss of confidencein other people’s money leads to a disinclination to do businessacross national borders; and international trade, upon whichdepend the food and shelter of hundreds of millions of peoplearound the world, tends to decline. Just such a disasterfollowed the classic devaluation of all time, the departure of thepound from the old gold standard in 1931—an event that is stillgenerally considered a major cause of the worldwide Depressionof the thirties.
The process works similarly in respect to the currencies of allthe hundred-odd countries that are members of theInternational Monetary Fund, an organization that originated atBretton Woods. For any country, a favorable balance ofpayments means an accumulation of dollars, either directly orindirectly, which are freely convertible into gold, in the country’scentral bank; if the demand for its currency is great enough,the country may revalue it upward—the reverse of adevaluation—as both Germany and the Netherlands did in 1961.
Conversely, an unfavorable balance of payments starts thesequence of events that may end in forced devaluation. Thedegree of disruption of world trade that devaluation of acurrency causes depends on that currency’s internationalimportance. (A large devaluation of the Indian rupee in June,1966, although it was a serious matter to India, created scarcelya ripple in the international markets.) And—to round out thisbrief outline of the rules of an intricate game of whicheverybody everywhere is an inadvertent player—even the lordlydollar is far from immune to the effects of an unfavorablebalance of payments or of speculation. Because of the dollar’spledged relation to gold, it serves as the standard for all othercurrencies, so its price does, not fluctuate in the markets.
However, it can suffer weakness of a less visible but equallyominous sort. When the United States sends out substantiallymore money (whether payment for imports, foreign aid,investments, loans, tourist expenses, or military costs) than ittakes in, the recipients freely buy their own currencies with thenewly acquired dollars, thereby raising the dollar prices of theirown currencies; the rise in price enables their central banks totake in still more dollars, which they can sell back to theUnited States for gold. Thus, when the dollar is weak theUnited States loses gold. France alone—a country with a strongcurrency and no particular official love of the dollar—requiredthirty million dollars or more in United States gold regularlyevery month for several years prior to the autumn of 1966,and between 1958, when the United States began running aserious deficit in its international accounts, and the middle ofMarch 1968, our gold reserve was halved—from twenty-twobillion eight hundred million to eleven billion four hundredmillion dollars. If the reserve ever dropped to an unacceptablylow level, the United States would be forced to break its wordand lower the gold value of the dollar, or even to stop sellinggold entirely. Either action would in effect be a devaluation—theone devaluation, because of the dollar’s preeminent position,that would be more disruptive to world monetary order than adevaluation of the pound.
HAYES and Coombs, neither of whom is old enough to haveexperienced the events of 1931 at first hand as a banker butboth of whom are such diligent and sensitive students ofinternational banking that they might as well have done so,found that as the hot days of 1964 dragged on they hadoccasion to be in almost daily contact by transatlantic telephonewith their Bank of England counterparts—the Earl of Cromer,governor of the bank at that time, and Roy A. O. Bridge, thegovernor’s adviser on foreign exchange. It became clear tothem from these conversations and from other sources that theimbalance in Britain’s international accounts was far from thewhole trouble. A crisis of confidence in the soundness of thepound was developing, and the main cause of it seemed to bethe election that Britain’s Conservative Government was facingon October 15th. The one thing that international financialmarkets hate and fear above all others is uncertainty. Anyelection represents uncertainty, so the pound always has thejitters just before Britons go to the polls, but to the peoplewho deal in currencies this election looked particularly menacing,because of their estimate of the character of the LabourGovernment that might come into power. The conservativefinanciers of London, not to mention those of ContinentalEurope, looked with almost irrational suspicion on HaroldWilson, the Labour choice for Prime Minister; further, some ofMr. Wilson’s economic advisers had explicitly extolled the virtuesof devaluation of the pound in their earlier theoretical writings;and, finally, there was an all too pat analogy to be drawn fromthe fact that the last previous term of the British Labour Partyin power had been conspicuously marked, in 1949, by adevaluation of sterling from the rate of $4.03 to $2.80.
In these circumstances, almost all the dealers in the worldmoney markets, whether they were ordinary internationalbusinessmen or out-and-out currency speculators, were anxiousto get rid of pounds—at least until after the election. Like allspeculative attacks, this one fed on itself. Each small drop inthe pound’s price resulted in further loss of confidence, anddown, down went the pound in the international markets—anoddly diffused sort of exchange, which does not operate in anycentral building but, rather, is conducted by telephone and cablebetween the trading desks of banks in the world’s major cities.
Simultaneously, down, down went British reserves, as the Bankof England struggled to support the pound. Early in September,Hayes went to Tokyo for the annual meeting of the membersof the International Monetary Fund. In the corridors of thebuilding where participants in the Fund met, he heard oneEuropean central banker after another express misgivings aboutthe state of the British economy and the outlook for the Britishcurrency. Why didn’t the British government take steps athome to check its outlay and to improve the balance ofpayments, they asked each other. Why didn’t it raise the Bankof England’s lending rate—the so-called bank rate—from itscurrent five per cent, since this move would have the effect ofraising British interest rates all up and down the line, andwould thus serve the double purpose of damping downdomestic inflation and attracting investment dollars to Londonfrom other financial centers, with the result that sterling wouldgain a sounder footing?
Doubtless the Continental bankers also put such questions tothe Bank of England men in Tokyo; in any event, the Bank ofEngland men and their counterparts in the British Exchequerhad not failed to put the questions to themselves. But theproposed measures would certainly be unpopular with theBritish electorate, as unmistakable harbingers of austerity, andthe Conservative Government, like many governments before it,appeared to be paralyzed by fear of the imminent election. Soit did nothing. In a strictly monetary way, however, Britain didtake defensive measures during September. The Bank ofEngland had for several years had a standing agreement withthe Federal Reserve that either institution could borrow fivehundred million dollars from the other, over a short term, atany time, with virtually no formalities; now the Bank of Englandaccepted this standby loan and made arrangements tosupplement it with another five hundred million dollars inshort-term credit from various European central banks and theBank of Canada. This total of a billion dollars, together withBritain’s last-ditch reserves in gold and dollars, amounting toabout two billion six hundred million, constituted a sizable storeof ammunition. If the speculative assault on the pound shouldcontinue or intensify, answering fire would come from the Bankof England in the form of dollar investments in sterling madeon the battlefield of the free market, and presumably theattackers would be put to rout.
As might have been expected, the assault did intensify afterLabour came out the victor in the October election. The newBritish government realized at the outset that it was faced witha grave crisis, and that immediate and drastic action was inorder. It has since been said that summary devaluation of thepound was seriously considered by the newly elected PrimeMinister and his advisers on finance—George Brown, Secretaryof State for Economic Affairs, and James Callaghan, Chancellorof the Exchequer. The idea was rejected, though, and themeasures they actually took, in October and early November,were a fifteen-percent emergency surcharge on British imports(in effect, a blanket raising of tariffs), an increased fuel tax, andstiff new capital-gains and corporation taxes. These weredeflationary, currency-strengthening measures, to be sure, butthe world markets were not reassured. The specific nature ofthe new taxes seems to have disconcerted, and even enraged,many financiers, in and out of Britain, particularly in view ofthe fact that under the new budget British governmentspending on welfare benefits was actually to be increased,rather than cut back, as deflationary policy would normallyrequire. One way and another, then, the sellers—or bears, inmarket jargon—continued to be in charge of the market for thepound in the weeks after the election, and the Bank ofEngland was kept busy potting away at them with preciousshells from its borrowed-billion-dollar arsenal. By the end ofOctober, nearly half the billion was gone, and the bears werestill inexorably advancing on the pound, a hundredth of a centat a time.
Hayes, Coombs, and their foreign-department colleagues onLiberty Street, watching with mounting anxiety, were as galledas the British by the fact that a central bank defending itscurrency against attack can have only the vaguest idea ofwhere the attack is coming from. Speculation is inherent inforeign trade, and by its nature is almost impossible to isolate,identify, or even define. There are degrees of speculation; theword itself, like “selfishness” or “greed,” denotes a judgment,and yet every exchange of currencies might be called aspeculation in favor of the currency being acquired and againstthe one being disposed of. At one end of the scale areperfectly legitimate business transactions that have specificspeculative effects. A British importer ordering Americanmerchandise may legitimately pay up in pounds in advance ofdelivery; if he does, he is speculating against the pound. AnAmerican importer who has contracted to pay for British goodsat a price set in pounds may legitimately insist that hispurchase of the pounds he needs to settle his debt be deferredfor a certain period; he, too, is speculating against the pound.
(The staggering importance to Britain of these commoncommercial operations, which are called “leads” and “lags,”
respectively, is shown by the fact that if in normal times theworld’s buyers of British goods were all to withhold theirpayments for as short a period as two and a half months theBank of England’s gold and dollar reserves would vanish.) Atthe other end of the scale is the dealer in money who borrowspounds and then converts the loan into dollars. Such a dealer,instead of merely protecting his business interests, is engagingin an out-and-out speculative move called a short sale; hopingto buy back the pounds he owes more cheaply later on, he issimply trying to make a profit on the decrease in value heanticipates—and, what with the low commissions prevailing inthe international money market, the maneuver provides one ofthe world’s most attractive forms of high-stakes gambling.
Gambling of this sort, although in fact it probably contributedfar less to the sterling crisis than the self-protective measurestaken by nervous importers and exporters, was being widelyblamed for all the pound’s troubles of October and November,1964. Particularly in the British Parliament, there were angryreferences to speculative activity by “the gnomes ofZurich”—Zurich being singled out because Switzerland, whosebanking laws rigidly protect the anonymity of depositors, is theblind pig of international banking, and consequently muchcurrency speculation, originating in many parts of the world, isfunnelled through Zurich. Besides low commissions andanonymity, currency speculation has another attraction. Thanksto time differentials and good telephone service, the worldmoney market, unlike stock exchanges, race tracks, andgambling casinos, practically never closes. London opens anhour after the Continent (or did until February 1968, whenBritain adopted Continental time), New York five (now six)hours after that, San Francisco three hours after that, andthen Tokyo gets under way about the time San Franciscocloses. Only a need for sleep or a lack of money need halt theoperations of a really hopelessly addicted plunger anywhere.
“It was not the gnomes of Zurich who were beating downthe pound,” a leading Zurich banker subsequentlymaintained—stopping short of claiming that there were nognomes there. Nonetheless, organized short selling—what traderscall a bear raid—was certainly in progress, and the defenders ofthe pound in London and their sympathizers in New Yorkwould have given plenty to catch a glimpse of the invisibleenemy.
IT was in this atmosphere, then, that on the weekend beginningNovember 7th the leading central bankers of the world heldtheir regular monthly gathering in Basel, Switzerland. Theoccasion for such gatherings, which have been held regularlysince the nineteen-thirties except during the Second World War,is the monthly meeting of the board of directors of the Bankfor International Settlements, which was established in Basel in1930 primarily as a clearing house for the handling ofreparations payments arising out of the First World War buthas come to serve as an agency of international monetaryco?peration and, incidentally, a kind of central bankers’ club. Assuch, it is considerably more limited in resources and restrictedas to membership than the International Monetary Fund, but,like other exclusive clubs, it is often the scene of greatdecisions. Represented on its board of directors are Britain,France, West Germany, Italy, Belgium, the Netherlands, Sweden,and Switzerland—in short, the economic powers of WesternEurope—while the United States is a regular monthly guestwhose presence is counted on, and Canada and Japan are lessfrequent visitors. The Federal Reserve is almost alwaysrepresented by Coombs, and sometimes by Hayes and otherNew York officers as well.
In the nature of things, the interests of the different centralbanks conflict; their faces are set against each other almost asif they were players in a poker game. Even so, in view of thefact that international troubles with money at their root havealmost as long a history as similarly caused troubles betweenindividuals, the most surprising thing about internationalmonetary co?peration is that it is so new. Through all the agesprior to the First World War, it cannot be said to have existedat all. In the nineteen-twenties, it existed chiefly through closepersonal ties between individual central bankers, oftenmaintained in spite of the indifference of their governments. Onan official level, it got off to a halting start through theFinancial Committee of the League of Nations, which wassupposed to encourage joint action to prevent monetarycatastrophes. The sterling collapse of 1931 and its grim sequelwere ample proof of the committee’s failure. But better dayswere ahead. The 1944 international financial conference atBretton Woods—out of which emerged not only theInternational Monetary Fund but also the whole structure ofpostwar monetary rules designed to help establish and maintainfixed exchange rates, as well as the World Bank, designed toease the flow of money from rich countries to poor orwar-devastated ones—stands as a milestone in economicco?peration comparable to the formation of the United Nationsin political affairs. To cite just one of the conference’s fruits, acredit of more than a billion dollars extended to Britain by theInternational Monetary Fund during the Suez affair in 1956prevented a major international financial crisis then.
In subsequent years, economic changes, like other changes,tended to come more and more quickly; after 1958, monetarycrises began springing up virtually overnight, and theInternational Monetary Fund, which is hindered by slow-movingmachinery, sometimes proved inadequate to meet such crisesalone. Again the new spirit of co?peration rose to the occasion,this time with the richest of nations, the United States, takingthe lead. Starting in 1961, the Federal Reserve Bank, with theapproval of the Federal Reserve Board and the Treasury inWashington, joined the other leading central banks in setting upa system of ever-ready revolving credits, which soon came tobe called the “swap network.” The purpose of the network wasto complement the International Monetary Fund’s longer-termcredit facilities by giving central banks instant access to fundsthey might need for a short period in order to move fast andvigorously in defense of their currencies. Its effectiveness wasnot long in being put to the test. Between its initiation in 1961and the autumn of 1964, the swap network had played amajor part in the triumphant defense against sudden andviolent speculative attacks on at least three currencies: thepound, late in 1961; the Canadian dollar, in June, 1961; andthe Italian lira, in March, 1964. By the autumn of 1964, theswap agreements (“L’accord de swap” to the French, “dieSwap-Verpflichtungen” to the Germans) had come to be thevery cornerstone of international monetary co?peration. Indeed,the five hundred million American dollars that the Bank ofEngland was finding it necessary to draw on at the verymoment the bank’s top officers were heading for Basel thatNovember weekend represented part of the swap network,greatly expanded from its comparatively modest beginnings.
As for the Bank for International Settlements, in its capacityas a banking institution it was a relatively minor cog in all thismachinery, but in its capacity as a club it had over the yearscome to play a far from unimportant role. Its monthly boardmeetings served (and still serve) as a chance for the centralbankers to talk in an informal atmosphere—to exchange gossip,views, and hunches such as could not comfortably be indulgedin either by mail or over the international telephone circuits.
Basel, a medieval Rhenish city that is dominated by the spiresof its twelfth-century Gothic cathedral and has long been athriving center of the chemical industry, was originally chosenas the site of the Bank for International Settlements because itwas a nodal point for European railways. Now that mostinternational bankers habitually travel by plane, that asset hasbecome a liability, for there is no long-distance air service toBasel; delegates must deplane at Zurich and continue by trainor car. On the other hand, Basel has several first-raterestaurants, and it may be that in the view of the central-bankdelegates this advantage outweighs the travel inconvenience, forcentral banking—or at least European central banking—has afirmly established association with good living. A governor of theNational Bank of Belgium once remarked to a visitor, without asmile, that he considered one of his duties to be that of leavingthe institution’s wine cellar better than he had found it. Aluncheon guest at the Bank of France is generally toldapologetically, “In the tradition of the bank, we serve onlysimple fare,” but what follows is a repast during which theconstant discussion of vintages makes any discussion of bankingawkward, if not impossible, and at which the tradition ofsimplicity is honored, apparently, by the serving of only onewine before the cognac. The table of the Bank of Italy isequally elegant (some say the best in Rome), and itssurroundings are enhanced by the priceless Renaissancepaintings, acquired as defaulted security on bad loans over theyears, that hang on the walls. As for the Federal Reserve Bankof New York, alcohol in any form is hardly ever served there,banking is habitually discussed at meals, and the mistress of thekitchen appears almost pathetically grateful whenever one of theofficers makes any sort of comment, even a critical one, on thefare. But then Liberty Street isn’t Europe.
In these democratic times, central banking in Europe isthought of as the last stronghold of the aristocratic bankingtradition, in which wit, grace, and culture coexist easily withcommercial astuteness, and even ruthlessness. The Europeancounterparts of the security guards on Liberty Street are apt tobe attendants in morning coats. Until less than a generationago, formality of address between central bankers was the rule.
Some think that the first to break it were the British, duringthe Second World War, when, it is alleged, a secret order wentout that British government and military authorities were toaddress their American counterparts by their first names; inany event, first names are frequently exchanged betweenEuropean and American central bankers now, and one reasonfor this, unquestionably, is the postwar rise in influence of thedollar. (Another reason is that, in the emerging era ofco?peration, the central bankers see more of each other thanthey used to—not just in Basel but in Washington, Paris, andBrussels, at regular meetings of perhaps half a dozen specialbanking committees of various international organizations. Thesame handful of top bankers parades so regularly through thehotel lobbies of those cities that one of them thinks they mustgive the impression of being hundreds strong, like the spearcarriers who cross the stage again and again in the triumphalscene of “Aida.”) And language, like the manner of its use, hastended to follow economic power. European central bankershave always used French (“bad French,” some say) in talkingwith each other, but during the long period in which the poundwas the world’s leading currency English came to be the firstlanguage of central banking at large, and under the rule of thedollar it continues to be. It is spoken fluently and willingly byall the top officers of every central bank except the Bank ofFrance, and even the Bank of France officers are forced tokeep translators at hand, in consideration of the seemingintractable inability or unwillingness of most Britons andAmericans to become competent in any language but their own.
(Lord Cromer, flouting tradition, speaks French with completeauthority.)At Basel, good food and convenience come before splendor;many of the delegates favor an outwardly humble restaurant inthe main railroad station, and the Bank for InternationalSettlements itself is modestly situated between a tea shop and ahairdressing establishment. On that November weekend in 1964,Vice-President Coombs was the only representative of theFederal Reserve System on hand, and, indeed, he was to bethe key banking representative of the United States through theearly and middle phases of the crisis that was then mounting.
In an abstracted way, Coombs ate and drank heartily with theothers—true to his institution’s traditions, he is less than agourmet—but his real interest was in getting the sense of themeeting and the private feelings of its participants. He was theperfect man for this task, inasmuch as he has theunquestioning trust and respect of all his foreign colleagues. Theother leading central bankers habitually call him by his firstname—less, it seems, in deference to changed custom than outof deep affection and admiration. They also use it in speakingof him among themselves; the name “Charliecoombs” (runtogether thus out of long habituation) is a word to conjurewith in central-banking circles. Charliecoombs, they will tell you,is the kind of New Englander (he is from Newton,Massachusetts) who, although his clipped speech and drymanner make him seem a bit cool and detached, is reallywarm and intuitive. Charliecoombs, although a Harvard graduate(Class of 1940), is the kind of unpretentious gray-haired manwith half-rimmed spectacles and a precise manner whom youmight easily take for a standard American small-town bankpresident, rather than a master of one of the world’s mostcomplex skills. It is generally conceded that if any one manwas the genius behind the swap network, the man was theNew England swapper Charliecoombs.
At Basel, there was, as usual, a series of formal sessions, eachwith its agenda, but there was also, as usual, much informalpalaver in rump sessions held in hotel rooms and offices andat a formal Sunday-night dinner at which there was no agendabut instead a free discussion of what Coombs has sincereferred to as “the hottest topic of the moment.” There couldbe no question about what that was; it was the condition ofthe pound—and, indeed, Coombs had heard little discussion ofanything else all weekend. “It was clear to me from what Iheard that confidence in sterling was deteriorating,” he has said.
Two questions were on most of the bankers’ minds. One waswhether the Bank of England proposed to take some of thepressure off the pound by raising its lending rate. Bank ofEngland men were present, but getting an answer was not asimple matter of asking them their intentions; even if they hadbeen willing to say, they would not have been able to, becausethe Bank of England is not empowered to change its ratewithout the approval—which in practice often comes closer tomeaning the instruction—of the British government, and electedgovernments have a natural dislike for measures that makemoney tight. The other question was whether Britain hadenough gold and dollars to throw into the breach if thespeculative assault should continue. Apart from what was left ofthe billion dollars from the expanded swap network and whatremained of its drawing rights on the International MonetaryFund, Britain had only its official reserves, which had droppedin the previous week to something under two and a half billiondollars—their lowest point in several years. Worse than that wasthe frightful rate at which the reserves were dwindling away;on a single bad day during the previous week, according to theguesses of experts, they had dropped by eighty-seven milliondollars. A month of days like that and they would be gone.
Even so, Coombs has said, nobody at Basel that weekenddreamed that the pressure on sterling could become as intenseas it actually did become later in the month. He returned toNew York worried but resolute. It was not to New York,however, that the main scene of the battle for sterling shiftedafter the Basel meeting; it was to London. The big immediatequestion was whether or not Britain would raise its bank ratethat week, and the day the answer would be known wasThursday, November 12th. In the matter of the bank rate, asin so many other things, the British customarily follow a ritual.
If there is to be a change, at noon on Thursday—then andthen only—a sign appears in the ground-floor lobby of theBank of England announcing the new rate, and, simultaneously,a functionary called the Government Broker, decked out in apink coat and top hat, hurries down Throgmorton Street to theLondon Stock Exchange and ceremonially announces the newrate from a rostrum. Noon on Thursday the twelfth passedwith no change; evidently the Labour Government was havingas much trouble deciding on a bank-rate rise after the electionas the Conservatives had had before. The speculators, whereverthey were, reacted to such pusillanimity as one man. On Fridaythe thirteenth, the pound, which had been moderately buoyantall week precisely because speculators had been anticipating abank-rate rise, underwent a fearful battering, which sent itdown to a closing price of $2.7829—barely more than aquarter of a cent above the official minimum—and the Bank ofEngland, intervening frequently to hold it even at that level, losttwenty-eight million dollars more from its reserves. Next day,the financial commentator of the London Times, under thebyline Our City Editor, let himself go. “The pound,” he wrote,“is not looking as firm as might be hoped.”
THE following week saw the pattern repeated, but inexaggerated form. On Monday, Prime Minister Wilson, taking aleaf out of Winston Churchill’s book, tried rhetoric as a weapon.
Speaking at a pomp-and-circumstance banquet at the Guildhallin the City of London before an audience that included, amongmany other dignitaries, the Archbishop of Canterbury, the LordChancellor, the Lord President of the Council, the Lord PrivySeal, the Lord Mayor of London, and their wives, Wilsonringingly proclaimed “not only our faith but our determinationto keep sterling strong and to see it riding high,” and assertedthat the Government would not hesitate to take whatever stepsmight become necessary to accomplish this purpose. Whileelaborately avoiding the dread word “devaluation,” just as allother British officials had avoided it all summer, Wilson soughtto make it unmistakable that the Government now consideredsuch a move out of the question. To emphasize this point, heincluded a warning to speculators: “If anyone at home orabroad doubts the firmness of [our] resolve, let them beprepared to pay the price for their lack of faith in Britain.”
Perhaps the speculators were daunted by this verbal volley, orperhaps they were again moved to let up in their assault onthe pound by the prospect of a bank-rate rise on Thursday; inany case, on Tuesday and Wednesday the pound, though ithardly rode high in the marketplace, managed to ride a littleless low than it had on the previous Friday, and to do sowithout the help of the Bank of England.
By Thursday, according to subsequent reports, a sharp privatedispute had erupted between the Bank of England and theBritish government on the bank-rate question—Lord Cromerarguing, for the bank, that a rise of at least one per cent, andperhaps two per cent, was absolutely essential, and Wilson,Brown, and Callaghan still demurring. The upshot was nobank-rate rise on Thursday, and the effect of the inaction wasa swift intensification of the crisis. Friday the twentieth was ablack day in the City of London. The Stock Exchange, itsinvestors moving in time with sterling, had a terrible session.
The Bank of England had by now resolved to establish itslast-line trench on the pound at $2.7825—a quarter of a centabove the bottom limit. The pound opened on Friday atprecisely that level and remained there all day, firmly pinneddown by the speculators’ hail of offers to sell; meanwhile, thebank met all offers at $2.7825 and, in doing so, used up moreof Britain’s reserves. Now the offers were coming so fast thatlittle attempt was made to disguise their places of origin; it wasevident that they were coming from everywhere—chiefly fromthe financial centers of Europe, but also from New York, andeven from London itself. Rumors of imminent devaluation weresweeping the bourses of the Continent. And in London itself anominous sign of cracking morale appeared: devaluation wasnow being mentioned openly even there. The Swedisheconomist and sociologist Gunnar Myrdal, in a luncheon speechin London on Thursday, had suggested that a slight devaluationmight now be the only possible solution to Britain’s problems;once this exogenous comment had broken the ice, Britons alsobegan using the dread word, and, in the next morning’s Times, Our City Editor himself was to say, in the tone of acommander preparing the garrison for possible surrender,“Indiscriminate gossip about devaluation of the pound can doharm. But it would be even worse to regard use of that wordas taboo.”
When nightfall at last brought the pound and its defenders aweekend breather, the Bank of England had a chance toassess its situation. What it found was anything but reassuring.
All but a fraction of the billion dollars it had arranged toborrow in September under the expanded swap agreementshad gone into the battle. The right that remained to it ofdrawing on the International Monetary Fund was virtuallyworthless, since the transaction would take weeks to complete,and matters turned on days and hours. What the bank stillhad—and all that it had—was the British reserves, which hadgone down by fifty-six million dollars that day and now stoodat around two billion. More than one commentator has sincesuggested that this sum could in a way be likened to the fewsquadrons of fighter planes to which the same dogged nationhad been reduced twenty-four years earlier at the worst pointin the Battle of Britain.
THE analogy is extravagant, and yet, in the light of what thepound means, and has meant, to the British, it is notirrelevant. In a materialistic age, the pound has almost thesymbolic importance that was once accorded to the Crown; thestate of sterling almost is the state of Britain. The pound is theoldest of modern currencies. The term “pound sterling” isbelieved to have originated well before the Norman Conquest,when the Saxon kings issued silver pennies—called “sterlings” or“starlings” because they sometimes had stars inscribed onthem—of which two hundred and forty equalled one pound ofpure silver. (The shilling, representing twelve sterlings, orone-twentieth of a pound, did not appear on the scene untilafter the Conquest.) Thus, sizable payments in Britain havebeen reckoned in pounds from its beginnings. The pound,however, was by no means an unassailably sound currencyduring its first few centuries, chiefly because of the early kings’
unfortunate habit of relieving their chronic financialembarrassment by debasing the coinage. By melting down aquantity of sterlings, adding to the brew some base metal andno more silver, and then minting new coins, an irresponsibleking could magically convert a hundred pounds into, say, ahundred and ten, just like that. Queen Elizabeth I put a stopto the practice when, in a carefully planned surprise move in1561, she recalled from circulation all the debased coins issuedby her predecessors. The result, combined with the growth ofBritish trade, was a rapid and spectacular rise in the prestigeof the pound, and less than a century after Elizabeth’s coupthe word “sterling” had assumed the adjectival meaning that itstill has—“thoroughly excellent, capable of standing every test.”
By the end of the seventeenth century, when the Bank ofEngland was founded to handle the government’s finances,paper money was beginning to be trusted for general use, andit had come to be backed by gold as well as silver. As timewent on, the monetary prestige of gold rose steadily in relationto that of silver (in the modern world silver has no standing asa monetary reserve metal, and only in some half-dozencountries does it now serve as the principal metal in subsidiarycoinage), but it was not until 1816 that Britain adopted a goldstandard—that is, pledged itself to redeem paper currency withgold coins or bars at any time. The gold sovereign, worth onepound, which came to symbolize stability, affluence, and evenjoy to more Victorians than Bagehot, made its first appearancein 1817.
Prosperity begat emulation. Seeing how Britain flourished, andbelieving the gold standard to be at least partly responsible,other nations adopted it one after another: Germany in 1871;Sweden, Norway, and Denmark in 1873; France, Belgium,Switzerland, Italy, and Greece in 1874; the Netherlands in 1875;and the United States in 1879. The results were disappointing;hardly any of the newcomers found themselves immediatelygetting rich, and Britain, which in retrospect appears to haveflourished as much in spite of the gold standard as because ofit, continued to be the undisputed monarch of world trade. Inthe half century preceding the First World War, London wasthe middleman in international finance, and the pound was itsquasi-official medium. As David Lloyd George was later to writenostalgically, prior to 1914 “the crackle of a bill onLondon”—that is, of a bill of credit in pounds sterling bearingthe signature of a London bank—“was as good as the ring ofgold in any port throughout the civilized world.” The war endedthis idyll by disrupting the delicate balance of forces that hadmade it possible and by bringing to the fore a challenger tothe pound’s supremacy—the United States dollar. In 1914,Britain, hard pressed to finance its fighting forces, adoptedmeasures to discourage demands for gold, thereby abandoningthe gold standard in everything but name; meanwhile, the valueof a pound in dollars sank from $4.86 to a 1920 low of$3.20. In an effort to recoup its lost glory, Britain resumed afull gold standard in 1925, tying the pound to gold at a ratethat restored its old $4.86 relation to the dollar. The cost ofthis gallant overvaluation, however, was chronic depression athome, not to mention the political eclipse for some fifteen yearsof the Chancellor of the Exchequer who ordered it, WinstonChurchill.
The general collapse of currencies during the nineteen-thirtiesactually began not in London but on the Continent, when, inthe summer of 1931, a sudden run on the leading bank ofAustria, the Creditanstalt, resulted in its failure. The dominoprinciple of bank failures—if such a thing can be said toexist—then came into play. German losses arising from thisrelatively minor disaster resulted in a banking crisis in Germany,and then, because huge quantities of British funds were nowfrozen in bankrupt institutions on the Continent, the paniccrossed the English Channel and invaded the home of theimperial pound itself. Demands for gold in exchange for poundsquickly became too heavy for the Bank of England to meet,even with the help of loans from France and the United States.
Britain was faced with the bleak alternatives of setting analmost usurious bank rate—between eight and ten per cent—inorder to hold funds in London and check the gold outflow, orabandoning the gold standard; the first choice, which wouldhave further depressed the domestic economy, in which therewere now more than two and a half million unemployed, wasconsidered unconscionable, and accordingly, on September 21,1931, the Bank of England announced suspension of itsresponsibility to sell gold.
The move hit the financial world like a thunderbolt. So greatwas the prestige of the pound in 1931 that John MaynardKeynes, the already famous British economist, could say, notwholly in irony, that sterling hadn’t left gold, gold had leftsterling. In either case, the mooring of the old system wasgone, and chaos was the result. Within a few weeks, all thecountries on the vast portion of the globe then under Britishpolitical or economic domination had left the gold standard,most of the other leading currencies had either left gold orbeen drastically devalued in relation to it, and in the freemarket the value of the pound in terms of dollars had droppedfrom $4.86 to around $3.50. Then the dollar itself—thepotential new mooring—came loose. In 1933, the United States,compelled by the worst depression in its history, abandoned thegold standard. A year later, it resumed it in a modified formcalled the gold-exchange standard, under which gold coinagewas ended and the Federal Reserve was pledged to sell gold inbar form to other central banks but to no one else—and to sellit at a drastic devaluation of forty-one per cent from the oldprice. The United States devaluation restored the pound to itsold dollar parity, but Britain found it small comfort to be tiedsecurely to a mooring that was now shaky itself. Even so, overthe next five years, while beggar-my-neighbor came to be therule in international finance, the pound did not lose much moreground in relation to other currencies, and when the SecondWorld War broke out, the British government boldly pegged itat $4.03 and imposed controls to keep it there in defiance ofthe free market. There, for a decade, it remained—but onlyofficially. In the free market of neutral Switzerland, it fluctuatedall through the war in reflection of Britain’s military fortunes,sinking at the darkest moments to as low as $2.
In the postwar era, the pound has been almost continuouslyin trouble. The new rules of the game of international financethat were agreed upon at Bretton Woods recognized that theold gold standard had been far too rigid and the virtual paperstandard of the nineteen-thirties far too unstable; a compromiseaccordingly emerged, under which the dollar—the new king ofcurrencies—remained tied to gold under the gold-exchangestandard, and the pound, along with the other leadingcurrencies, became tied not to gold but to the dollar, at ratesfixed within stated limits. Indeed, the postwar era was virtuallyushered in by a devaluation of the pound that was about asdrastic in amount as that of 1931, though far less so in itsconsequences. The pound, like most European currencies, hademerged from Bretton Woods flagrantly overvalued in relationto the shattered economy it represented, and had been keptthat way only by government-imposed controls. In the autumnof 1949, therefore, after a year and a half of devaluationrumors, burgeoning black markets in sterling, and gold lossesthat had reduced the British reserves to a dangerously lowlevel, the pound was devalued from $4.03 to $2.80. With theisolated exceptions of the United States dollar and the Swissfranc, every important non-Communist currency almost instantlyfollowed the pound’s example, but this time no drying up oftrade, or other chaos, ensued, because the 1949 devaluations,unlike those of 1931 and the years following, were not theuncontrolled attempts of countries riddled by depression to gaina competitive advantage at any cost but merely representedrecognition by the war-devastated countries that they hadrecovered to the point where they could survive relatively freeinternational competition without artificial props. In fact, worldtrade, instead of drying up, picked up sharply. But even at thenew, more rational evaluation the pound continued its career ofhairbreadth escapes. Sterling crises of varying magnitudes wereweathered in 1952, 1955, 1957, and 1961. In its unsentimentaland tactless way, the pound—just as by its gyrations in thepast it had accurately charted Britain’s rise and fall as thegreatest of world powers—now, with its nagging recurrentweakness, seemed to be hinting that even such retrenchmentas the British had undertaken in 1949 was not enough to suittheir reduced circumstances.
And in November, 1964, these hints, with their humiliatingimplications, were not lost on the British people. The emotionalterms in which many of them were thinking about the poundwere well illustrated by an exchange that took place in thatcelebrated forum the letters column of the Times when thecrisis was at its height. A reader named I. M. D. Little wrotedeploring all the breast-beating about the pound and particularlythe uneasy whispering about devaluation—a matter that hedeclared to be an economic rather than a moral issue. Quickas a flash came a reply from a C. S. Hadfield, among others.
Was there ever a clearer sign of soulless times, Hadfielddemanded, than Little’s letter? Devaluation not a moral issue?
“Repudiation—for that is what devaluation is, neither more norless—has become respectable!” Hadfield groaned, in theunmistakable tone, as old in Britain as the pound itself, of theoutraged patriot.
IN the ten days following the Basel meeting, the first concern ofthe men at the Federal Reserve Bank of New York was notthe pound but the dollar. The American balance-of-paymentsdeficit had now crept up to the alarming rate of almost sixbillion dollars a year, and it was becoming clear that a rise inthe British bank rate, if it should be unmatched by Americanaction, might merely shift some of the speculative attack fromthe pound to the dollar. Hayes and Coombs and theWashington monetary authorities—William McChesney Martin,chairman of the Federal Reserve Board, Secretary of theTreasury Douglas Dillon, and Under-Secretary of the TreasuryRobert Roosa—came to agree that if the British should raisetheir rate the Federal Reserve would be compelled, inself-defense, to competitively raise its rate above the currentlevel of three and a half per cent. Hayes had numeroustelephone conversations on this delicate point with his Londoncounterpart, Lord Cromer. A deep-dyed aristocrat—a godson ofKing George V and a grandson of Sir Evelyn Baring, later thefirst Earl of Cromer (who, as the British agent in Egypt, wasChinese Gordon’s nemesis in 1884–85)—Lord Cromer was alsoa banker of universally acknowledged brilliance and, atforty-three, the youngest man, as far as anyone couldremember, ever to direct the fortunes of the Bank of England;he and Hayes, in the course of their frequent meetings at Baseland elsewhere, had become warm friends.
During the afternoon of Friday the twentieth, at any rate, theFederal Reserve Bank had a chance to show its goodintentions by doing some front-line fighting for the pound. Thebreather provided by the London closing proved to be illusory;five o’clock in London was only noon in New York, andinsatiable speculators were able to go on selling pounds forseveral more hours in the New York market, with the resultthat the trading room of the Federal Reserve Bank temporarilyreplaced that of the Bank of England as the command post forthe defense. Using as their ammunition British dollars—or, moreprecisely, United States dollars lent to Britain under the swapagreements—the Federal Reserve’s traders staunchly held thepound at or above $2.7825, at ever-increasing cost, of course,to the British reserves. Mercifully, after the New York closingthe battle did not follow the sun to San Francisco and onaround the world to Tokyo. Evidently, the attackers had hadtheir fill, at least for the time being.
What followed was one of those strange modern weekends inwhich weighty matters are discussed and weighty decisionstaken among men who are ostensibly sitting around relaxing invarious parts of the world. Wilson, Brown, and Callaghan wereat Chequers, the Prime Minister’s country estate, taking part ina conference that had originally been scheduled to cover thesubject of national-defense policy. Lord Cromer was at hiscountry place in Westerham, Kent. Martin, Dillon, and Roosawere at their offices or their homes, in and aroundWashington. Coombs was at his home, in Green Village, NewJersey, and Hayes was visiting friends of his elsewhere in NewJersey. At Chequers, Wilson and his two financial ministers,leaving the military brass to confer about defense policy witheach other, adjourned to an upstairs gallery to tackle thesterling crisis; in order to bring Lord Cromer into theirdeliberations, they kept a telephone circuit open to him in Kent,using a scrambler system when they talked on it, so as toavoid interception of their words by their unseen enemies thespeculators. Sometime on Saturday, the British reached theirdecision. Not only would they raise the bank rate, and raise ittwo per cent above its current level—to seven per cent—but, indefiance of custom, they would do so the first thing Mondaymorning, rather than wait for another Thursday to roll around.
For one thing, they reasoned, to postpone action until Thursdaywould mean three and a half more business days during whichthe deadly drain of British reserves would almost certainlycontinue and might well accelerate; for another, the sheer shockof the deliberate violation of custom would serve to dramatizethe government’s determination. The decision, once taken, wascommunicated by British intermediaries in Washington to theAmerican monetary officials there, and relayed to Hayes andCoombs in New Jersey. Those two, knowing that theagreed-upon plan for a concomitant rise in the New York bankrate would now have to be put into effect as quickly aspossible, got to work on the telephone lining up aMonday-afternoon meeting of the Federal Reserve Bank’s boardof directors, without whose initiative the rate could not bechanged. Hayes, a man who sets great store by politeness, hassince said, with considerable chagrin, that he fears he was thedespair of his hostess that weekend; not only was he on thetelephone most of the time but he was prevented by thecircumstances from giving the slightest explanation of hisunseemly behavior.
What had been done—or, rather, was about to be done—inBritain was plenty to flutter the dovecotes of internationalfinance. Since the beginning of the First World War, the bankrate there had never gone higher than seven per cent and hadonly occasionally gone that high; as for a bank-rate change ona day other than Thursday, the last time that had occurred,ominously enough, was in 1931. Anticipating lively action at theLondon opening, which would take place at about 5 A.M. NewYork time, Coombs went to Liberty Street on Sunday afternoonin order to spend the night at the bank and be on handwhen the transatlantic doings began. As an overnightcompanion he had a man who found it advisable to sleep atthe bank so often that he habitually kept a packed suitcase inhis office—Thomas J. Roche, at that time the seniorforeign-exchange officer. Roche welcomed his boss to thesleeping quarters—a row of small, motel-like rooms on theeleventh floor, each equipped with maple furniture, Old NewYork prints, a telephone, a clock radio, a bathrobe, and ashaving kit—and the two men discussed the weekend’sdevelopments for a while before turning in. Shortly before fivein the morning, their radios woke them, and, after a breakfastprovided by the night staff, they repaired to theforeign-exchange trading room, on the seventh floor, to mantheir fluoroscope.
At five-ten, they were on the phone to the Bank of England,getting the news. The bank-rate rise had been announcedpromptly at the opening of the London markets, to theaccompaniment of great excitement; later Coombs was to learnthat the Government Broker’s entrance into the StockExchange, which is usually the occasion for a certain hush, hadthis time been greeted with such an uproar that he had haddifficulty making his news known. As for the first marketreaction of the pound, it was (one commentator said later) likethat of a race horse to dope; in the ten minutes following thebank-rate announcement it shot up to $2.7869, far above itsFriday closing. A few minutes later, the early-rising NewYorkers were on the phone to the Deutsche Bundesbank, thecentral bank of West Germany, in Frankfurt, and the SwissNational Bank, in Zurich, sounding out Continental reaction. Itwas equally good. Then they were back in touch with the Bankof England, where things were looking better and better. Thespeculators against the pound were on the run, rushing now tocover their short sales, and by the time the first gray lightbegan to show in the windows on Liberty Street, Coombs hadheard that the pound was being quoted in London at$2.79—its best price since July, when the crisis started.
It went on that way all day. “Seven per cent will drag moneyfrom the moon,” a Swiss banker commented, paraphrasing thegreat Bagehot, who had said, in his earthbound, Victorian way,“Seven per cent will pull gold out of the ground.” In London,the sense of security was so strong that it allowed a return topolitical bickering as usual; in Parliament, Reginald Maudling, thechief economic authority of the out-of-office Conservatives, tookthe occasion to remark that there wouldn’t have been a crisisin the first place but for the actions of the Labour Government,and Chancellor of the Exchequer Callaghan replied, with deadlypoliteness, “I must remind the honorable gentleman that he toldus [recently] we had inherited his problems.” Everybody wasclearly breathing easier. As for the Bank of England, so greatwas the sudden clamor for pounds that it saw a chance toreplenish its depleted supply of dollars, and for a time thatafternoon it actually felt confident enough to switch sides in themarket, buying dollars with pounds at just below $2.79. In NewYork, the mood persisted after the London closing. It was witha clear conscience about the pound that the directors of theFederal Reserve Bank of New York could—and, that afternoon,did—carry out their plan to raise their lending rate from threeand a half per cent to four per cent. Coombs has since said,“The feeling here on Monday afternoon was: They’ve doneit—they’ve pulled through again. There was a general sigh ofrelief. The sterling crisis seemed to be over.”
It wasn’t, though. “I remember that the situation changed veryfast on Tuesday the twenty-fourth,” Hayes has said. That day’sopening found the pound looking firm at $2.7875. Substantialbuying orders for pounds were coming in now from Germany,and the day ahead looked satisfactory. So things continued until6 A.M. in New York—noon on the Continent. It is around thenthat the various bourses of Europe—including the mostimportant ones, in Paris and Frankfurt—hold the meetings atwhich they set the day’s rate for each currency, for thepurpose of settling transactions in stocks and bonds that involveforeign currency, and these price-fixing sessions are bound toinfluence the money markets, since they give a clear indicationof the most influential Continental sentiment in regard to eachcurrency. The bourse rates set for the pound that day weresuch as to show a renewed, and pronounced, lack ofconfidence. At the same time, it appeared subsequently, moneydealers everywhere, and particularly in Europe, were havingsecond thoughts about the manner of the bank-rate rise theprevious day. At first, taken by surprise, they had reactedenthusiastically, but now, it seemed, they had belatedly decidedthat the making of the announcement on Monday indicatedthat Britain was losing its grip. “What would it connote if theBritish were to play a Cup final on Sunday?” a Europeanbanker is said to have asked a colleague. The only possibleanswer was that it would connote panic in Albion.
The effect of these second thoughts was an astonishinglydrastic turnabout in market action. In New York between eightand nine, Coombs, in the trading room, watched with a sinkingheart as a tranquil pound market collapsed into a rout. Sellingorders in unheard-of quantities were coming from everywhere.
The Bank of England, with the courage of desperation,advanced its last-line trench from $2.7825 to $2.7860, and, byconstant intervention, held the pound there. But it was clearthat the cost would soon become too high; a few minutes after9 A.M. New York time, Coombs calculated that Britain waslosing reserves at the unprecedented, and unsupportable, rate ofa million dollars a minute.
Hayes, arriving at the bank shortly after nine, had hardly satdown at his desk before this unsettling news reached him fromthe seventh floor. “We’re in for a hurricane,” Coombs told him,and went on to say that the pressure on sterling was nowmounting so fast that there was a real likelihood that Britainmight be forced either to devalue or to impose asweeping—and, for many reasons, unacceptable—system ofexchange controls before the week was out. Hayes immediatelytelephoned the governors of the leading European centralbanks—some of whom, because not all the national marketshad yet felt the full weight of the crisis, were startled to hearexactly how grave the situation was—and pleaded with themnot to exacerbate the pressure on both the pound and thedollar by raising their own bank rates. (His job was scarcelymade easier by the fact that he had to admit that his ownbank had just raised its rate.) Then he asked Coombs tocome up to his office. The pound, the two men agreed, nowhad its back to the wall; the British bank-rate rise hadobviously failed of its purpose, and at the million-a-minute rateof loss Britain’s well of reserves would be dry in less than fivebusiness days. The one hope now lay in amassing, within amatter of hours, or within a day or so at the most, a hugebundle of credit from outside Britain to enable the Bank ofEngland to survive the attack and beat it back. Such rescuebundles had been assembled just a handful of times before—forCanada in 1962, for Italy earlier in 1964, and for Britain in1961—but this time, it was clear, a much bigger bundle thanany of those would be needed. The central-banking world wasfaced not so much with an opportunity for building a milestonein the short history of international monetary co?peration aswith the necessity for doing so.
Two other things were clear—that, in view of the dollar’stroubles, the United States could not hope to rescue the poundunassisted, and that, the dollar’s troubles notwithstanding, theUnited States, with all its economic might, would have to jointhe Bank of England in initiating any rescue operation. As afirst step, Coombs suggested that the Federal Reserve standbycredit to the Bank of England ought to be increased forthwithfrom five hundred million dollars to seven hundred and fiftymillion. Unfortunately, fast action on this proposal washampered by the fact that, under the Federal Reserve Act, anysuch move could be made only by decision of a FederalReserve System committee, whose members were scattered allover the country. Hayes conferred by long-distance telephone(all around the world, wires were now humming with news ofthe pound’s extremity) with the Washington monetarycontingent, Martin, Dillon, and Roosa, none of whom disagreedwith Coombs’ view of what had to be done, and as a result ofthese discussions a call went out from Martin’s office tomembers of the key committee, called the Open MarketCommittee, for a meeting by telephone at three o’clock thatafternoon. Roosa, at the Treasury, suggested that the UnitedStates’ contribution to the kitty could be further increased byarranging for a two-hundred-and-fifty-million-dollar loan fromthe Export-Import Bank, a Treasury-owned andTreasury-financed institution in Washington. Hayes and Coombswere naturally in favor of this, and Roosa set in motion thebureaucratic machinery to unlock that particular vault—a processthat, he warned, would certainly take until evening.
As the early afternoon passed in New York, with the millionsof dollars continuing to drain, minute by minute, from Britain’sreserves, Hayes and Coombs, along with their Washingtoncolleagues, were busy planning the next step. If the swapincrease and the Export-Import Bank loan should comethrough, the United States credits would amount to a billiondollars all told; now, in consultation with the beleagueredgarrison at the Bank of England, the Federal Reserve Bankmen began to believe that, in order to make the operationeffective, the other leading central banks—spoken of incentral-banking shorthand as “the Continent,” even though theyinclude the Banks of Canada and Japan—would have to beasked to put up additional credits on the order of one and ahalf billion dollars, or possibly even more. Such a sum wouldmake the Continent, collectively, a bigger contributor to thecause than the United States—a fact that Hayes and Coombsrealized might not sit too well with the Continental bankers andtheir governments.
At three o’clock, the Open Market Committee held itstelephone meeting—twelve men sitting at their desks in six cities,from New York to San Francisco. The members heardCoombs’ dry, unemotional voice describing the situation andmaking his recommendation. They were quickly convinced. Inno more than fifteen minutes, they had voted unanimously toincrease the swap credit to seven hundred and fifty milliondollars, on condition that proportional credit assistance could beobtained from other central banks.
By late afternoon, tentative word had come from Washingtonthat prospects for the Export-Import Bank loan looked good,and that more definite word could be expected before midnight.
So the one billion dollars in United States credits appeared tobe virtually in the bag. It remained to tackle the Continent. Itwas night now in Europe, so nobody there could be tackled;the zero hour, then, was Continental opening time the nextday, and the crucial period for the fate of the pound would bethe few hours after that. Hayes, after leaving instructions for abank car to pick him up at his home, in New Canaan,Connecticut, at four o’clock in the morning, took his usualcommuting train from Grand Central shortly after five. He hassince expressed a certain regret that he proceeded in such aroutine way at such a dramatic moment. “I left the bankrather reluctantly,” he says. “In retrospect, I guess I wish Ihadn’t. I don’t mean as a practical matter—I was just as usefulat home, and, as a matter of fact, I ended up spending mostof the evening on the phone with Charlie Coombs, who stayedat the bank—but just because something like that doesn’thappen every day in a banker’s life. I’m a creature of habit, Iguess. Besides, it’s something of a tenet of mine to insist onkeeping a proper balance between private and professional life.”
Although Hayes does not say so, he may have been thinkingof something else, too. It can safely be said to be something ofa tenet of central-bank presidents or governors not to sleep attheir places of business. If word were ever to get out that themethodical Hayes was doing so at a time like this, he mayhave reasoned, it might well be considered just as much a signof panic as a British bank-rate rise on a Monday.
Meanwhile, Coombs was making another night of it on LibertyStreet; he had gone home the previous night because theworst had momentarily appeared to be over, but now hestayed on after regular work hours with Roche, who hadn’tbeen home since the previous weekend. Toward midnight,Coombs received confirmation of the Export-Import Bank’stwo-hundred-and-fifty-million-dollar credit, which had arrivedfrom Washington during the evening, as promised. So noweverything was braced for the morning’s effort. Coombs againinstalled himself in one of the uninspiring eleventh-floor cubicles,and, after a final marshalling of the facts that would be neededfor the job of persuading the Continental bankers, set his clockradio for three-thirty and went to bed. A Federal Reserve manwith a literary bent and a romantic temperament was latermoved to draw a parallel between the Federal Reserve Bankthat night and the British camp on the eve of the Battle ofAgincourt in Shakespeare’s version, in which King Henry musedso eloquently on how participation in the coming action wouldserve to ennoble even the vilest of the troops, and howgentlemen safe in bed at home would later think themselvesaccursed that they had not been at the battle scene. Coombs,a practical man, had no such high-flown opinion of hissituation; even so, as he dozed fitfully, waiting for morning toreach Europe, he was well aware that the events he was takingpart in were like nothing that had ever happened in bankingbefore.
IISo that evening, Tuesday, November 24, 1964, Hayes arrived athis home, in New Canaan, Connecticut, at about six-thirty,exactly as usual, having inexorably taken his usual 5:09 fromGrand Central. Hayes was a tall, slim, soft-spoken man offifty-four with keen eyes framed by owlish round spectacles,with a slightly schoolmasterish air and a reputation forunflappability. By so methodically going through familiar motionsat such a time, he realized with amusement, he must seem tohis colleagues to be living up to his reputation ratherspectacularly. At his house, a former caretaker’s cottage of circa1840 that the Hayeses had bought and remodelled twelve yearsearlier, he was greeted, as usual, by his wife, a pretty andvivacious woman of Anglo-Italian descent named Vilma butalways called Bebba, who loves to travel, has almost no interestin banking, and is the daughter of the late Metropolitan Operabaritone Thomas Chalmers. Since at that time of year it wascompletely dark when Hayes got home, he decided to forgo afavorite early-evening unwinding activity of his—walking to thetop of a grassy slope beside the house which commands a fineview across the Sound to Long Island. Anyway, he was notreally in a mood to unwind; instead, he felt keyed up, anddecided he might as well stay that way overnight, since the carfrom the bank was scheduled to call at his door so early thenext morning to take him to work.
During dinner, Hayes and his wife discussed subjects like thefact that their son, Tom, who was a senior at Harvard, wouldbe arriving home the following day for his Thanksgiving recess.
Afterward, Hayes settled down in an armchair to read for awhile. In banking circles, he is thought of as a scholarly,intellectual type, and, indeed, he is scholarly and intellectual incomparison with most bankers; even so, his extra-bankingreading tends to be not constant and all-embracing, as hiswife’s is, but sporadic, capricious, and intensive—everythingabout Napoleon for a while, perhaps, then a dry period, then abinge on, say, the Civil War. Just then, he was concentratingon the island of Corfu, where he and Mrs. Hayes wereplanning to spend some time. But before he had got very farinto his latest Corfu book he was called to the telephone. Thecall was from the bank. There were new developments, whichCoombs thought President Hayes ought to be kept abreast of.
To recapitulate in brief: drastic action to save the pound,which the Federal Reserve Bank not only would be intimatelyinvolved in but would actually join in initiating, was going to betaken by the government banks—or central banks, as they aremore commonly called—of the non-Communist world’s leadingnations as soon as possible after the next morning’s opening ofthe London and Continental financial markets, which wouldoccur between 4 and 5 A.M. New York time. Britain was faceto face with bankruptcy, the reasons being that a huge deficitin its international accounts over the previous months hadresulted in concomitant losses in the gold and dollar reservesheld by the Bank of England; that worldwide fear lest thenewly elected Labour Government decide, or be forced, to easethe situation by devaluing the pound from its dollar parity ofabout $2.80 to some substantially lower figure had caused aflood of selling of pounds by hedgers and speculators in theinternational money markets; that the Bank of England, fulfillingan international obligation to sustain the pound at a free-marketprice no lower than $2.78, had been losing millions of dollars aday from its reserves, which now stood at about two billiondollars, their lowest point in many years.
The remaining hope lay in amassing, in a matter of hoursbefore it would be too late, an unheard-of sum in short-termdollar credits to Britain from the central banks of the world’srich nations. With such credits at its disposal, the Bank ofEngland would presumably be able to buy up pounds soaggressively that the speculative attack could be absorbed,contained, and finally beaten back, giving Britain time to set itseconomic affairs in order. Just what the sum necessary forrescue should be was an open question, but earlier that daythe monetary authorities of the United States and Britain hadconcluded that it would have to be at least two billion dollars,and perhaps even more. The United States, through theFederal Reserve Bank of New York and the Treasury-ownedExport-Import Bank, in Washington, had that day committeditself to one billion; the task that remained was to persuade theother leading central banks—habitually spoken of in thecentral-banking world as “the Continent,” even though theyinclude the Banks of Canada and Japan—to lend more than abillion in addition.
Nothing of the kind had ever been asked of the Continentbefore, through the swap network or any other way. InSeptember, 1964, the Continent had come through with itsbiggest collective emergency credit so far—half a billion dollarsto the Bank of England for use in defending the pound,already embattled then. Now, with this half-billion loan stilloutstanding and the pound in far worse straits, the Continentwas about to be called upon for more than twice thatsum—perhaps five times that sum. Obviously, the spirit ofco?peration, if not the quality of mercy, was about to bestrained. So Hayes’ musings that evening may well have run.
With such portentous matters churning around in his head,Hayes found it hard to keep his mind on Corfu. Besides, theprospect of the bank car’s arrival at four o’clock made him feelthat he should go to bed early. As he prepared to do so, Mrs.
Hayes commented that since he would have to get up in themiddle of the night, she supposed she ought to feel sorry forhim but since he was obviously looking forward with keenanticipation to whatever it was that would get him up at thathour, she envied him instead.
DOWN on Liberty Street, Coombs slept fitfully until he wasawakened by the clock radio in his room at about three-thirtyNew York time—that is to say, eight-thirty London time andnine-thirty farther east on the European Continent. A series offoreign-exchange crises involving Europe had so accustomedhim to the time differential that he was inclined to think interms of the European day, referring casually to 8 A.M. in NewYork as “lunchtime,” and 9 A.M. as “midafternoon.” So whenhe got up it was, in his terms, “morning,” despite the starsthat were shining over Liberty Street. Coombs got dressed,went to his office, on the tenth floor, where he had somebreakfast provided by the bank’s regular night kitchen staff,and began placing telephone calls to the various leading centralbanks of the non-Communist world. All the calls were putthrough by one telephone operator, who handles the FederalReserve Bank’s switchboard during off hours, and all of themwere eligible for a special government-emergency priority thatthe bank’s officers are entitled to claim, but on this occasion itdid not have to be used, because at four-fifteen, when Coombsbegan his telephoning, the transatlantic circuits were almostentirely clear.
The calls were made essentially to lay the groundwork forwhat was to come. The morning news from the Bank ofEngland, obtained in one of the first calls from Liberty Street,was that conditions were unchanged from the previous day: thespeculative attack on the pound was continuing unabated, andthe Bank of England was sustaining the pound’s price at$2.7860 by throwing still more of its reserves on the market.
Coombs had reason to believe that when the New Yorkforeign-exchange market opened, some five hours later, vastadditional quantities of pounds would be thrown on the marketon this side of the Atlantic, and more British dollars and goldwould have to be spent. He conveyed this alarming intelligenceto his counterparts at such institutions as the DeutscheBundesbank, in Frankfurt; the Banque de France, in Paris; theBanca d’Italia, in Rome; and the Bank of Japan, in Tokyo. (Inthe last case, the officers had to be reached at their homes, forthe fourteen-hour time difference made it already past 6 P.M. inthe Orient.) Then, coming to the crux of the matter, Coombsinformed the representatives of the various banks that theywere soon to be asked, in behalf of the Bank of England, fora loan far bigger than any they had ever been asked forbefore. “Without going into specific figures, I tried to make thepoint that it was a crisis of the first magnitude, which many ofthem still didn’t realize,” Coombs has said. An officer of theBundesbank, who knew as much about the extent of the crisisas anyone outside London, Washington, and New York, hassaid that in Frankfurt they were “mentally prepared”—or“braced” might be a better word—for the huge touch that wasabout to be put on them, but that right up to the time ofCoombs’ call they had been hoping the speculative attack onthe pound would subside of its own accord, and even after thecall they had no idea how much they might be asked for. Inany event, as soon as Coombs was off the wire theBundesbank’s governor called a board of managers’ meeting,and, as things turned out, the meeting was to remain insession all day long.
Still, all this was preparatory. Actual requests, in specificamounts, had to be made by the head of one central bank ofthe head of another. At the time Coombs was making hissoftening-up calls, the head of the Federal Reserve Bank was inthe bank’s limousine, somewhere between New Canaan andLiberty Street, and the bank’s limousine, in flagrantnonconformity with the James Bond style of high-levelinternational dealings, was not equipped with a telephone.
HAYES, the man being awaited, had been president of theFederal Reserve Bank of New York for a little over eight years,having been chosen for the job, to his own and almosteveryone else’s bewilderment, not from some position ofcomparable eminence or from the Federal Reserve’s own ranksbut from among the swarming legions of New Yorkcommercial-bank vice-presidents. Unorthodox as the appointmentseemed at the time, in retrospect it seems providential. A studyof Hayes’ early life and youthful career gives the impressionthat everything was somehow intended to prepare him fordealing with this sort of international monetary crisis, just asthe life of a writer or a painter sometimes seems to haveconsisted primarily of preparation for the execution of a singlework of art. If Divine Providence, or perhaps its financialdepartment, when the huge sterling crisis was imminent, hadneeded an assessment of Hayes’ qualifications for coping withthis task and had hired the celestial equivalent of an executiverecruiter to report on him, the dossier might have readsomething like this:
“Born in Ithaca, New York, on July 4, 1910; grew up mostlyin New York City. Father a professor of Constitutional law atCornell, later a Manhattan investment counsellor; mother aformer schoolteacher, enthusiastic suffragette, settlement-houseworker, and political liberal. Both parents birdwatchers. Familyatmosphere intellectual, freethinking, and public-spirited. Attendedprivate schools in New York City and Massachusetts and wasusually his school’s top-ranking student. Then went to Harvard(freshman year only) and Yale (three years: mathematicsmajor, Phi Beta Kappa in junior year, ineffectual oar on classcrew, graduated 1930 as top B.A. of class). Studied at NewCollege, Oxford, as Rhodes Scholar 1931–33; there became firmAnglophile, and wrote thesis on ‘Federal Reserve Policy and theWorking of the Gold Standard in the Years 1923–30,’ althoughhe had no thought of ever joining the Federal Reserve. Wishesnow he had the thesis, in case it contains blinding youthfulilluminations, but neither he nor New College can find it.
Entered New York commercial banking in 1933, and roseslowly but steadily (1938 annual salary twenty-seven hundreddollars). Attained title (albeit feeble title) of assistant secretary atNew York Trust Company in 1942; after a Navy stint, in 1947became an assistant vice-president and two years later head ofNew York Trust’s foreign department despite total lack ofprevious experience in foreign banking. Apparently learned fast;astounded his colleagues and superiors, and gained reputationamong them as foreign-exchange wizard by predicting preciseamount of 1949 pound devaluation ($4.03 to $2.80) a fewweeks before it occurred.
“Was appointed president of Federal Reserve Bank of NewYork in 1956, to his utter astonishment and that of New Yorkbanking community, most of which had never heard of thisrather shy man. Reacted calmly by taking his family on atwo-month vacation in Europe. The consensus now is thatFederal Reserve Bank’s directors had almost implausibleprescience, or luck, in picking a foreign-exchange expert justwhen the dollar was weakening and international monetaryco?peration becoming crucially important. Is liked by Europeancentral bankers, who call him Al (which often comes outsounding more like All). Earns seventy-five thousand dollars ayear, making him the second-highest-paid federal official afterthe President of the United States, Federal Reserve Banksalaries being intended to be more or less competitive inbanking terms rather than in government-employee terms. Isvery tall and very thin. Tries to observe regular commutinghours and keep his private life sacrosanct, as a matter ofprinciple; considers regular evening work at an office‘outrageous.’ Complains that his son has a low opinion ofbusiness; attributes this to ‘reverse snobbery’—but even thenremains calm.
“Conclusion: this is the very man for the job of representingthe United States’ central bank in a sterling crisis.”
And, indeed, Hayes readily fits the picture of a perfectlyplanned and perfectly tooled piece of machinery to perform acertain complex task, but there are other sides to him, and hischaracter contains as many paradoxes as the next man’s.
Although hardly anyone in banking ever tries to describe Hayeswithout using the words “scholarly” and “intellectual,” Hayestends to think of himself as an indifferent scholar andintellectual but an effective man of action, and on the latterscore the events of November 25, 1964, seem to bear him out.
Although in some ways he is the complete banker—inconformity with H. G. Wells’ notion of such a banker, heseems to “take money for granted as a terrier takes rats,” andto be devoid of philosophical curiosity about it—he has adistinctly unbankerlike philosophical curiosity about almosteverything else. And although casual acquaintances sometimespronounce him dull, his close friends speak of a rare capacityfor enjoyment and an inner serenity that seem to make himimmune to the tensions and distractions that fragment the livesof so many of his contemporaries. Doubtless the inner serenitywas put to a severe test as Hayes rode in the bank cartoward Liberty Street. When he arrived at his desk at aboutfive-thirty, Hayes’ first act was to punch Coombs’ button on hisinteroffice phone and get the foreign-department chief’s latestappraisal of the situation. He learned that, as he had expected,the Bank of England’s sickening dollar drain was continuingunabated. Worse than that, though; Coombs said his contactswith local bankers who were also on emergency early-morningvigil (men in the foreign departments of the huge commercialbanks like the Chase Manhattan and the First National City)indicated that overnight there had accumulated a fantastic pileof orders to unload pounds on the New York market as soonas it opened. The Bank of England, already almost inundated,could expect a new tidal wave from New York to hit in fourhours. The need for haste thus became even more urgent.
Hayes and Coombs agreed that the project of putting togetheran international package of credits to Britain should beannounced as soon as possible after the New Yorkopening—perhaps as early as ten o’clock. So that the bankwould have a single center for all its foreign communications,Hayes decided to forsake his own office—a spacious one withpanelled walls and comfortable chairs grouped around afireplace—and let Coombs’ quarters, down the hall, which weremuch smaller and more austere but more efficiently arranged,serve as the command post. Once there, he picked up one ofthree telephones and asked the operator to get him LordCromer, at the Bank of England. When the connection wasmade, the two men—the key figures in the proposed rescueoperation—reviewed their plans a final time, checking the sumsthey had tentatively decided to ask of each central bank andagreeing on who would call whom first.
In the eyes of some people, Hayes and Lord Cromer makean oddly assorted pair. Besides being a deep-dyed aristocrat,George Rowland Stanley Baring, third Earl of Cromer, is adeep-dyed banker. A scion of the famous London merchantbank of Baring Brothers, the third Earl and godson of amonarch went to Eton and Trinity College, Cambridge, andspent twelve years as a managing director of his family’s bankand then two years—from 1959 to 1961—as Britain’s economicminister and chief representative of his country’s Treasury inWashington. If Hayes had acquired his mastery of the arcanaof international banking by patient study, Lord Cromer, who isno scholar, acquired his by heredity, instinct, or osmosis. IfHayes, despite his unusual physical stature, could easily beoverlooked in a crowd, Lord Cromer, who is of average heightbut debonair and dashing, would cut a figure anywhere. IfHayes is inclined to be a bit hesitant about casual intimacies,Lord Cromer is known for his hearty manner, andhas—doubtless unintentionally—both flattered and obscurelydisappointed many American bankers who have been awed byhis title by quickly encouraging them to call him Rowley.
“Rowley is very self-confident and decisive,” an Americanbanker has said. “He’s never afraid to barge in, because he’sconvinced of the reasonableness of his own position. But thenhe’s a reasonable man. He’s the kind of man who in a crisiswould be able to grab the telephone and do something aboutit.” This banker confesses that until November 25, 1964, hehad not thought Hayes was that kind of man.
Beginning at about six o’clock that morning, Hayes did grabthe phone, right along with Lord Cromer. One after another,the leading central bankers of the world—among them PresidentKarl Blessing, of the Deutsche Bundesbank; Dr. Guido Carli, ofthe Bank of Italy; Governor Jacques Brunet, of the Bank ofFrance; Dr. Walter Schwegler, of the Swiss National Bank; andGovernor Per ?sbrink, of the Swedish Riksbank—picked uptheir phones and discovered, some of them with considerablesurprise, the degree of gravity that the sterling crisis hadreached in the past day, the fact that the United States hadcommitted itself to a short-term loan of one billion dollars, andthat they were being asked to dig deep into their own nations’
reserves to help tide sterling over. Some first heard all thisfrom Hayes, some from Lord Cromer; in either case, theyheard it not from a casual or official acquaintance but from afellow-member of that esoteric fraternity the Basel club. Hayes,whose position as representative of the one country that hadalready pledged a huge sum cast him almost automatically asthe leader of the operation, was careful to make it clear ineach of his calls that his part in the proceedings was to putthe weight of the Federal Reserve behind a request thatformally came from the Bank of England. “The pound’ssituation is critical, and I understand the Bank of England isrequesting a credit line of two hundred and fifty million dollarsfrom you,” he would say, in his calm way, to one Continentalcentral-bank governor or another. “I’m sure you understandthat this is a situation where we all have to stand together.”
(He and Coombs always spoke English, of course. Despite thefact that he had recently been taking French refresher lessons,and that at Yale he made one of the most impressive academicrecords in memory, Hayes doggedly remained a dub atlanguages and still did not trust himself to carry on animportant business conversation in anything but English.) Inthose cases in which he was on particularly close terms withhis Continental counterpart, he spoke more informally, using acentral-bankers’ jargon in which the conventional numerical unitis a million dollars. Hayes would say smoothly in such cases,“Do you think you can come in for, say, a hundred and fifty?”
Regardless of the degree of formality of the approach Hayesmade, the first response, he says, was generally cageyness, notunmixed with shock. “Is it really as bad as all that, Al? Wewere still hoping that the pound would recover on its own” isthe kind of thing he recalls having heard several times. WhenHayes assured them that it was indeed as bad as all that, andthat the pound would certainly not recover on its own, theusual response was something like “We’ll have to see what wecan do and then call you back.” Some of the Continentalcentral bankers have said that what impressed them mostabout Hayes’ first call was not so much what he said as whenhe said it. Realizing that it was still well before dawn in NewYork, and knowing Hayes’ addiction to what are commonlythought of as bankers’ hours, these Europeans perceived thatthings must be grave the moment they heard his voice. Assoon as Hayes had broken the ice at each Continental bank,Coombs would take over and get down to details with hiscounterparts.
The first round of calls left Hayes, Lord Cromer, and theirassociates on Liberty and Threadneedle Streets relatively hopeful.
Not one bank had given them a flat no—not even, to theirdelight, the Bank of France, although French policy had alreadybegun moving sharply away from co?peration with Britain andthe United States in monetary matters, among others.
Furthermore, several governors had surprised them bysuggesting that their countries’ subscriptions to the loan mightactually be bigger than those suggested. With thisencouragement, Hayes and Lord Cromer decided to raise theirsights. They had originally been aiming for credits of two and ahalf billion dollars; now, on reconsideration, they saw that therewas a chance for three billion. “We decided to up the ante alittle here and there,” Hayes says. “There was no way ofknowing precisely what sum would be the least that would dothe job of turning the tide. We knew we would be relying to alarge extent on the psychological effect of ourannouncement—assuming we would be able to make theannouncement. Three seemed to us a good, round figure.”
But difficulties lay ahead, and the biggest difficulty, it becameclear as the return calls from the various banks began to comein, was to get the thing done quickly. The hardest point toconvey, Hayes and Coombs found, was that each passingminute meant a further loss of a million dollars or more to theBritish reserves, and that if normal channels were followed theloans would unquestionably come too late to avert devaluationof the pound. Some of the central banks were required by lawto consult their governments before making a commitment andsome were not, but even those that were not insisted on doingso, as a courtesy; this took time, especially since more thanone Finance Minister, unaware that he was being sought toapprove an enormous loan on an instant’s notice, with littleevidence of the necessity for it beyond the assurance of LordCromer and Hayes, was temporarily unavailable. (One happenedto be engaged in debate in his country’s parliament.) And evenin cases where the Finance Minister was at hand, he wassometimes reluctant to act in such a shotgun way.
Governments move more deliberately in money matters thancentral bankers do. Some of the Finance Ministers said, ineffect, that upon proper submission of a balance sheet of theBank of England, along with a formal written application for theemergency credit, they would gladly consider the matter.
Furthermore, some of the central banks themselves showed amaddening inclination to stand on ceremony. Theforeign-exchange chief of one bank is said to have replied tothe request by saying, “Well, isn’t this convenient! We happento have a board meeting scheduled for tomorrow. We’ll takethe matter up then, and afterward we’ll get in touch with you.”
The reply of Coombs, who happened to be the man on thewire in New York, is not recorded in substance, but its manneris reported to have been uncharacteristically vehement. EvenHayes’ celebrated imperturbability was shaken a time or two, orso those who were present have said; his tone remained ascalm and even as ever, but its volume rose far above theusual level.
The problems that the Continental central banks faced inmeeting the challenge are well exemplified by the situation atthe richest and most powerful of them, the DeutscheBundesbank. Its board of managers was already sitting inemergency session as a result of Coombs’ early call whenanother New York call—this one from Hayes to PresidentBlessing—gave the Bundesbank its first indication of exactly howmuch it was being asked to put up. The amounts the variouscentral banks were asked for that morning have never beenmade public, but, on the basis of what has become known, itis reasonable to assume that the Bundesbank was asked forhalf a billion dollars—the highest quota of the lot, and certainlythe largest sum that any central bank other than the FederalReserve had ever been called upon to supply to another on afew hours’ notice. Hard on the heels of Hayes’ call conveyingthis jarring information, Blessing heard from Lord Cromer, inLondon, who confirmed everything that Hayes had said aboutthe seriousness of the crisis and repeated the request. Wincinga bit, perhaps, the Bundesbank managers agreed in principlethat the thing had to be done. But right there their problemsbegan. Proper procedure must be adhered to, Blessing and hisaides decided. Before taking any action, they must consult withtheir economic partners in the European Common Market andthe Bank for International Settlements, and the key man to beconsulted, since he was then serving as president of the Bankfor International Settlements, was Dr. Marius W. Holtrop,governor of the Bank of the Netherlands, which, of course, wasalso being asked to contribute. A rush person-to-person callwas put through from Frankfurt to Amsterdam. Dr. Holtrop,the Bundesbank managers were informed, wasn’t inAmsterdam; by chance, he had taken a train that morning toThe Hague to meet his country’s Finance Minister forconsultation on other matters. For the Bank of the Netherlandsto make any such important commitment without theknowledge of its governor was out of the question, and,similarly, the Bank of Belgium, a nation whose monetary policiesare linked inextricably with the Netherlands’, was reluctant toact until Amsterdam had given its O.K. So for an hour ormore, as millions of dollars continued to drain out of the Bankof England and the world monetary order stood in jeopardy,the whole rescue operation was hung up while Dr. Holtrop,crossing the Dutch lowlands by train, or perhaps already inThe Hague and tied up in a traffic jam, could not be found.
ALL this, of course, meant agonizing frustration in New York.
As morning began here at last, Hayes’ and Coombs’ campaigngot a boost from Washington. The leading governmentmonetary authorities—Martin at the Federal Reserve Board,Dillon and Roosa at the Treasury—had all been intimatelyinvolved in the previous day’s planning for the rescue, and ofcourse part of the planning had been the decision to let theNew York bank, as the Federal Reserve System’s and theTreasury’s normal operating arm in international monetarydealings, serve as campaign headquarters. So the members ofthe Washington contingent had slept at home and come totheir offices at the normal hour. Now, having learned fromHayes of the difficulties that were developing, Martin, Dillon,and Roosa pitched in with transatlantic calls of their own toemphasize the extent of America’s concern over the matter. Butno number of calls from anywhere could hold back theclock—or, for that matter, find Dr. Holtrop—and Hayes andCoombs finally had to abandon their idea of having a creditbundle ready in time for an announcement to the world at ornear 10 A.M. in New York. And there were other reasons, too,for a fading of the early hopes. As the New York marketsopened, the extent of the alarm that had spread around thefinancial world overnight was only too clearly revealed. Thebank’s foreign-exchange trading desk, on the seventh floor,reported that the assault on the pound at the New Yorkopening had been fully as terrifying as they had expected, andthat the atmosphere in the local exchange market had reacheda state not far from panic. From the bank’s securitiesdepartment came an alarming report that the market forUnited States government bonds was coming under the heaviestpressure in years, reflecting an ominous lack of confidence inthe dollar on the part of bond traders. This intelligence servedas a grim reminder to Hayes and Coombs of something theyknew already—that a fall of the pound in relation to the dollarcould quite possibly be followed, in a kind of chain reaction, bya forced devaluation of the dollar in relation to gold, whichmight cause monetary chaos everywhere. If Hayes and Coombshad been permitting themselves any moments of idle reverie inwhich to picture themselves simply as good Samaritans, thiswas just the news to bring them back to reality. And thenword arrived that the wild tales flying around Wall Streetshowed signs of crystallizing into a single tale, demoralizinglycredible because it was so specific. The British government, itwas being said, would announce a sterling devaluation ataround noon New York time. Here was something that couldbe authoritatively refuted, at least in respect to timing, sinceBritain would obviously not devalue while the credit negotiationswere under way. Torn between the desire to quell a destructiverumor and the need to keep the negotiations secret until theywere concluded, Hayes compromised. He had one of hisassociates call a few key Wall Street bankers and traders tosay, as emphatically as possible, that the latest devaluationrumor was, to his firm knowledge, false. “Can you be morespecific?” the associate was asked, and he replied, becausethere was nothing else he could reply, “No, I can’t.”
This unsupported word was something, but it was notenough; the foreign-exchange and bond markets were onlymomentarily reassured. There were times that morning, Hayesand Coombs now admit, when they put down their telephones,looked at each other across the table in Coombs’ office, andwordlessly exchanged the thought: It isn’t going to be done intime. But—in the best tradition of melodrama, which sometimesseems to survive stubbornly in nature at a time when it isdead in art—just when things looked darkest, good news beganto arrive. Dr. Holtrop had been tracked down in a restaurantin The Hague, where he was having lunch with theNetherlands’ Minister of Finance, Dr. J. W. Witteveen;moreover, Dr. Holtrop had endorsed the rescue operation, andas for the matter of consulting his government, that was noproblem, since the responsible representative of his governmentwas sitting across the table from him. The chief obstacle wasthus overcome, and after Dr. Holtrop had been reached thedifficulties began narrowing down to annoyances like thenecessity for continually apologizing to the Japanese for routingthem out of bed as midnight arrived and passed in Tokyo. Thetide had turned. Before noon in New York, Hayes andCoombs, and Lord Cromer and his deputies in London as well,knew that they had agreement in principle from ten Continentalcentral banks—those in West Germany, Italy, France, theNetherlands, Belgium, Switzerland, Canada, Sweden, Austria, andJapan—and also from the Bank for International Settlements.
There remained the wait while each central bank wentthrough the painfully slow process of completing whateverformalities were required to make its action legal and proper.
The epitome of orderliness, the Bundesbank, could not act untilit had obtained ratification from the members of its board ofdirectors, most of whom were in provincial outposts scatteredaround Germany. The two leading Bundesbank deputies dividedup the job of calling the absent directors and persuading themto go along—a job that was made more delicate by the factthat the absent directors were being asked to approvesomething that, in effect, the bank’s home office had alreadyundertaken to do. At midafternoon by Continental time, whilethe two deputies were busy at this exercise in doubletalk,Frankfurt got a new call from London. It was Lord Cromer,no doubt sounding as exasperated as his situation permitted,and what he had to say was that the rate of British reserveloss had become so rapid that the pound could not surviveanother day. Formalities notwithstanding, it was a case of nowor never. (The Bank of England’s reserve loss that day hasnever been announced. The Economist later passed along aguess that it may have run to five hundred million dollars, orabout a quarter of all that remained in Britain’s reservecoffers.) After Lord Cromer’s call, the Bundesbank deputiestempered their tact with brevity; they got unanimous approvalfrom the directors, and shortly after five o’clock Frankfurt timethey were ready to tell Lord Cromer and Hayes that theBundesbank was in for the requested half-billion dollars.
Other central banks were coming in, or were already in.
Canada and Italy put up two hundred million dollars each, anddoubtless were glad to do it, inasmuch as their own currencieshad been the beneficiaries of much smaller but otherwisesimilar international bailout operations in 1962 and earlier in1964, respectively. If a subsequent report in the London Timesis to be accepted, France, Belgium, and the Netherlands, noone of which ever announced the amount of its participation,each contributed two hundred million dollars, too. Switzerland isknown to have come through with a hundred and sixty milliondollars and Sweden with a hundred million dollars, whileAustria, Japan, and the Bank for International Settlementsrounded out the bundle with still undisclosed amounts. Bylunchtime in New York, it was all over but the shouting, andthe last part of the task was to make the shouting as effectiveas possible to give it the fastest and most forcible impact onthe market.
The task brought to the fore another Federal Reserve Bankman, its vice-president in charge of public information, ThomasOlaf Waage. Waage (his name rhymes with “saga”) had beenpresent and active in Coombs’ office almost all morning,constantly on the phone as liaison man with Washington. Aborn-and-bred New Yorker, the son of a Norwegian-born localtug pilot and fishing-boat captain, Waage is a man of broadand unfeigned outside interests—among them opera,Shakespeare, Trollope, and his ancestral heritage, sailing—andone consuming passion, which is striving to convey not only thefacts but also the drama, suspense, and excitement of centralbanking to a skeptical and often glassy-eyed public. In short, abanker who is a hopeless romantic. So now he was overjoyedwhen Hayes assigned to him the job of preparing a newsrelease that would inform the world, as emphatically as possible,about the rescue operation. While Hayes and Coombs struggledto tie up the loose ends of their package, Waage was busyco?rdinating timing with his counterparts at the Federal ReserveBoard and the Treasury Department in Washington, whichwould share in the issuing of the American announcement, andat the Bank of England, which, Hayes and Lord Cromer hadagreed, would issue a simultaneous announcement of its own.
“Two o’clock in the afternoon New York time was the hour weagreed upon for the announcements, when it began to look asif we’d have something to announce by that time,” Waagerecalls. “That was too late to catch the Continental and Londonmarkets that day, of course, but it left the whole afternoonahead until the New York markets closed, at around five, andif the sterling market could be dramatically reversed here beforeclosing time, chances were the recovery would continue on theContinent and in London next day, when the Americanmarkets would be closed for Thanksgiving. As for the amountof the combined credit we were planning to announce, it stillstood at three billion dollars. But I remember that a last-minutesnag of a particularly embarrassing sort developed. Very late inthe game, when we thought the whole package was in hand,Charlie Coombs and I counted up what had been pledged, justto make sure, and we got only two billion eight hundred andfifty million. Apparently, we’d mislaid a hundred and fifty milliondollars somewhere. That’s just what we’d done—we’dmiscalculated. So it was all right.”
The package was assembled in time to meet the newschedule, and statements from the Federal Reserve, theTreasury, and the Bank of England duly went out to the newsmedia simultaneously, at 2 P.M. in New York and 7 P.M. inLondon. As a result of Waage’s influence, the American version,though it fell somewhat short of the mood of, say, the lastscene of “Die Meistersinger,” was nevertheless exceptionallystirring as bank utterances go, speaking with a certain subduedflamboyance of the unprecedented nature of the sum involvedand of how the central banks had “moved quickly to mobilizea massive counterattack on speculative selling of the pound.”
The London release had a different kind of distinction,achieving something of the quintessential Britishness that seemsto be reserved for moments of high crisis. It read simply, “TheBank of England have made arrangements under which$3,000M. are made available for the support of sterling.”
APPARENTLY, the secrecy of the operation had been successfullypreserved and the announcement struck the New Yorkforeign-exchange market all of a heap, because the reaction wasas swift and as electric as anyone could have wished.
Speculators against the pound decided instantly and with nohesitation that their game was up. Immediately after theannouncement, the Federal Reserve Bank put in a bid forpounds at $2.7868—a figure slightly above the level at whichthe pound had been forcibly maintained all day by the Bank ofEngland. So great was the rush of speculators to get free oftheir speculative positions by buying pounds that the FederalReserve Bank found very few pounds for sale at that price.
Around two-fifteen, there were a strange and heartening fewminutes in which no sterling was available in New York at anyprice. Pounds were eventually offered for sale again at a higherprice, and were immediately gobbled up, and thus the pricewent on climbing all afternoon, to a closing of just above $2.79.
Triumph! The pound was out of immediate danger; the thinghad worked. Tributes to the success of the operation began topour in from everywhere. Even the magisterial Economist wasto declare shortly, “Whatever other networks break down, itseems, the central bankers [have an] astonishing capacity forinstant results. And if theirs is not the most desirable possiblemechanism, geared always to short-term support of the statusquo, it happens to be the only working one.”
So, with the pound riding reasonably high again, the FederalReserve Bank shut up for Thanksgiving, and the bankers wenthome. Coombs recalls having drunk a Martini unaccustomedlyfast. Hayes, home in New Canaan, found that his son, Tom,had arrived from Harvard. Both his wife and his son noticedthat he seemed to be in an unusual state of excitement, andwhen they asked about it he replied that he had just beenthrough the most completely satisfying day of his entire workingcareer. Pressed for details, he gave them a condensed andsimplified account of the rescue operation, keeping constantly inmind the fact that his audience consisted of a wife who had nointerest in banking and a son who had a low opinion ofbusiness. The reaction he got when his recital was concludedwas of a sort that might warm the heart of a Waage, or ofany earnest explicator of banking derring-do to theunsympathetic layman. “It was a little confusing at first,” Mrs.
Hayes has said, “but before you were finished you had us onthe edge of our chairs.”
Waage, home in Douglaston, told his wife of the day’s eventsin his characteristic way. “It was St. Crispin’s Day,” heexclaimed as he burst through his doorway, “and I was withHarry!”
IIIHAVING first become interested in the pound and its perils atthe time of the 1964 crisis, I found myself hooked by thesubject. Through the subsequent three and a half years, Ifollowed its ups and downs in the American and British press,and at intervals went down to the Federal Reserve Bank torenew my acquaintance with its officers and see what additionalenlightenment I could garner. The whole experience was aresounding vindication of Waage’s thesis that central bankingcan be suspenseful.
The pound wouldn’t stay saved. A month after the big 1964crisis, the speculators resumed their assaults, and by the end ofthat year the Bank of England had used up more than half abillion of its new three-billion-dollar credit. Nor did the comingof the new year bring surcease. In 1965, after a relativelybuoyant January, the pound came under pressure again inFebruary. The November credit had been for a term of threemonths; now, as the term ran out, the nations that had madeit decided to extend it for another three months, so that Britainwould have more time to put its economy in order. But late inMarch the British economy was still shaky, the pound wasback below $2.79, and the Bank of England was back in themarket. In April, Britain announced a tougher budget, and arally followed, but the rally proved to be short-lived. By earlysummer, the Bank of England had drawn, and committed tothe battle against the speculators, more than a third of thewhole three billion. Heartened, the speculators pressed theirattack. Late in June, high British officials, let it be known thatthey now considered the sterling crisis over, but they werewhistling in the dark; in July the pound sank again, despitefurther belt-tightening in the British domestic economy. By theend of July, the world foreign-exchange market had becomeconvinced that a new crisis was shaping up. By late August,the crisis had arrived, and in some ways it was a moredangerous one than that of the previous November. Thetrouble was the market seemed to believe that the centralbanks were tired of pouring money into the battle and wouldnow let sterling fall, regardless of the consequences. About thattime, I telephoned a leading local foreign-exchange man I knowto ask him what he thought of the situation, and he replied,“To my knowledge, the New York market is one hundred percent convinced that devaluation of sterling is coming thisfall—and I don’t mean ninety-five per cent, I mean onehundred per cent.” Then, on September 11th, I read in thepapers that the same group of central banks, this time with theexception of France, had come through with another last-minuterescue package, the amount not being announced at thetime—it was subsequently reported to have been around onebillion—and over the next few days I watched the market priceof the pound rise, little by little, until by the end of the monthit was above $2.80 for the first time in sixteen months.
The central banks had done it again, and somewhat later Iwent down to the Federal Reserve Bank to learn the details. Itwas Coombs I saw, and I found him in a sanguine andextraordinarily talkative mood. “This year’s operation wasentirely different from last year’s,” he told me. “It was anaggressive move on our part, rather than a last-ditch-defensiveone. You see, early this September we came to the conclusionthat the pound was grossly oversold—that is, the amount ofspeculation against it was way out of proportion to what wasjustified by the economic facts. Actually, during the first eightmonths of the year, British exports had risen more than fiveper cent over the corresponding period in 1964, and Britain’s1964 balance-of-payments deficit seemed likely to be cut in halfin 1965. Very promising economic progress, and the bearishspeculators seemed not to have taken account of it. They hadgone right on selling the pound short, on the basis of technicalmarket factors. They were the ones who were in an exposedposition now. We decided the time was ripe for an officialcounterattack.”
The counterattack, Coombs went on to explain, was plotted inleisurely fashion this time—not on the telephone but face toface, over the weekend of September 5th in Basel. The FederalReserve Bank was represented by Coombs, as usual, and alsoby Hayes, who cut short his long-planned vacation on Corfu tobe there. The coup was planned with military precision. It wasdecided not to announce the amount of the credit package thistime, in order to further confuse and disconcert the enemy, thespeculators. The place chosen for the launching was the tradingroom of the Federal Reserve Bank, and the hour chosen was9 A.M. New York time—early enough for London and theContinent to be still conducting business—on September 10th. Atzero hour, the Bank of England fired a preliminary salvo byannouncing that new central-bank arrangements would shortlyenable “appropriate action” to be taken in the exchangemarkets. After allowing fifteen minutes for the import of thisdemurely menacing message to sink in, the Federal ReserveBank struck. Using, with British concurrence, the new bundle ofinternational credit as its ammunition, it simultaneously placedwith all the major banks operating in the New York exchangemarket bids for sterling totalling nearly thirty million dollars, atthe then prevailing rate of $2.7918. Under this pressure, themarket immediately moved upward, and the Federal ReserveBank pursued the movement, raising its bid price step by step.
At $2.7934, the bank temporarily ceased operations—partly tosee what the market would do on its own, partly just toconfuse things. The market held steady, showing that at thatlevel there were now as many independent buyers of sterlingas there were sellers, and that the bears—speculators—werelosing their nerve. But the bank was far from satisfied;returning vigorously to the market, it bid the price on up to$2.7945 in the course of the day. And then the snowball beganto roll by itself—with the results I had read about in mynewspapers. “It was a successful bear squeeze,” Coombs toldme with a certain grim relish, which was easy to sympathizewith; I found myself musing that for a banker to rout hisopponents, to smite them hip and thigh and drive them tocover, and not for personal or institutional profit but, rather, forthe public good, must be a source of rare, unalloyedsatisfaction.
I later learned from another banker just how painfully thebears had been squeezed. Margins of credit on currencyspeculation being what they are—for example, to commit amillion dollars against the pound a speculator might need toput up only thirty or forty thousand dollars in cash—mostdealers had made commitments running into the tens ofmillions. When a dealer’s commitment was ten million pounds,or twenty-eight million dollars, each change of one-hundredth ofa cent in the price of the pound meant a change of athousand dollars in the value of his account. Between the$2.7918 on September 10th, then, and the $2.8010 that thepound reached on September 29th, such a dealer on the shortside of the pound would have lost ninety-two thousanddollars—enough, one might suppose, to make him think twicebefore selling sterling short again.
An extended period of calm followed. The air of impendingcrisis that had hung over the exchanges during most of thepreceding year disappeared, and for more than six months theworld sterling market was sunnier than it had been at anytime in recent years. “The battle for the pound sterling is nowended,” high British officials (anonymous, and wisely so)announced in November, on the first anniversary of the 1964rescue. Now, the officials said, “we’re fighting the battle for theeconomy.” Apparently, they were winning that battle, too,because when Britain’s balance-of-payments position for 1965was finally calculated, it showed that the deficit had been notmerely halved, according to predictions, but more than halved.
And meanwhile the pound’s strength enabled the Bank ofEngland not merely to pay off all its short-term debts to othercentral banks but also to accumulate in the open market, inexchange for its newly desirable pounds, more than a billionfresh dollars to add to its precious reserves. Thus, betweenSeptember, 1965, and March, 1966, those reserves rose fromtwo billion six hundred million dollars to three billion sixhundred million—a fairly safe figure. And then the poundbreezed nicely through a national election campaign—as always,a stormy time for the currency. When I saw Coombs in thespring of 1966, he seemed as cocky and blasé about sterling asan old-time New York Yankee rooter about his team.
I had all but concluded that following the fortunes of thepound was no longer any fun when a new crisis exploded. Aseamen’s strike contributed to a recurrence of Britain’s tradedeficit, and in early June of 1966 the quotation was back below$2.79 and the Bank of England was reported to be back inthe market spending its reserves on the defense. On June 13th,with something of the insouciance of veteran firemen respondingto a routine call, back came the central banks with a newbundle of short-term credits. But these helped only temporarily,and toward the end of July, in an effort to get at the root ofthe pound’s troubles by curing the deficit once and for all,Prime Minister Wilson imposed on the British people the moststringent set of economic restraints ever applied in his countryin peacetime—high taxes, a merciless squeeze on credit, a freezeon wages and prices, a cut in government welfare spending,and a limit of a hundred and forty dollars on the annualamount that each Briton could spend on travel abroad. TheFederal Reserve, Coombs told me later, helped by moving intothe sterling market immediately after the British announcementof the austerity program, and the pound reacted satisfactorily tothis prodding. In September, for good measure, the FederalReserve increased its swap line with the Bank of England fromseven hundred and fifty million to one billion three hundredand fifty million dollars. I saw Waage in September, and hespoke warmly of all the dollars that the Bank of England wasagain accumulating. “Sterling crises have become a bore,” theEconomist remarked at about this time, with the mostreassuring sort of British phlegm.
Calm again—and again for just a little more than six months.
In April of 1967, Britain was free of short-term debt and hadample reserves. But within a month or so came the first of aseries of heartbreaking setbacks. Two consequences of the briefArab-Israeli war—a huge flow of Arab funds out of sterling intoother currencies, and the closing of the Suez Canal, one ofBritain’s main trade arteries—brought on a new crisis almostovernight. In June, the Bank of England (under new leadershipnow, for in 1966 Lord Cromer had been succeeded asgovernor by Sir Leslie O’Brien) had to draw heavily on itsswap line with the Federal Reserve, and in July the Britishgovernment found itself forced to renew the painful economicrestraints of the previous year; even so, in September thepound slipped down to $2.7830, its lowest point since the 1964crisis. I called my foreign-exchange expert to ask why the Bankof England—which in November, 1964, had set its last-linetrench at $2.7860, and which, according to its latest statement,now had on hand reserves amounting to more than two and ahalf billion dollars—was letting the price slide so dangerouslynear the absolute bottom (short of devaluation) of $2.78. “Well,the situation isn’t quite as desperate as the figure suggests,” hereplied. “The speculative pressure so far isn’t anything like asstrong as it was in 1964. And the fundamental economicposition this year—up to now, at least—is much better. Despitethe Middle East war, the austerity program has taken hold. Forthe first eight months of 1967, Britain’s international paymentshave been nearly in balance. The Bank of England is evidentlyhoping that this period of weakness of the pound will passwithout its intervention.”
At about that time, however, I became aware of a disturbingportent in the air—the apparent abandonment by the British oftheir long-standing taboo against bandying about the word“devaluation.” Like other taboos, this one seemed to have beenbased on a combination of practical logic (talk about devaluationcould easily start a speculative stampede and thereby bring iton) and superstition. But now I found devaluation being freelyand frequently discussed in the British press, and, in severalrespected journals, actually advocated. Nor was that all. PrimeMinister Wilson, it is true, continued to follow a careful patharound the word, even in the very act of pledging, as he didover and over, that his government would abstain from thedeed; there would be “no change in existing policy” as to“overseas monetary matters,” he said, delicately, on oneoccasion. On July 24th, though, Chancellor of the ExchequerJames Callaghan spoke openly in the House of Commonsabout devaluation, complaining that advocacy of it as a nationalpolicy had become fashionable, declaring that such a policywould represent a breach of faith with other nations and theirpeople and also pledging that his government would neverresort to it. His sentiments were familiar and reassuring; hisstraightforward expression of them was just the opposite. In thedarkest days of 1964, no one had said “devaluation” inParliament.
All through the autumn, I had a feeling that Britain was beingovertaken by a fiendish concatenation of cruel mischances,some specifically damaging to the pound and others merelycrushing to British morale. The previous spring, oil from awrecked, and wretched, tanker had defiled the beaches ofCornwall; now an epidemic was destroying tens, and ultimatelyhundreds, of thousands of head of cattle. The economicstraitjacket that Britain had worn for more than a year hadswelled unemployment to the highest level in years and madethe Labour Government the most unpopular government in thepostwar era. (Six months later, in a poll sponsored by theSunday Times, Britons would vote Wilson the fourth mostvillainous man of the century, after Hitler, de Gaulle, and Stalin,in that order.) A dock strike in London and Liverpool thatbegan in mid-September and was to drag on for more thantwo months decreased still further the already hobbled exporttrade, and put an abrupt end to Britain’s remaining hope ofending the year with its international accounts in balance. Earlyin November, 1967, the pound stood at $2.7822, its lowestpoint in a decade. And then things went downhill fast. On theevening of Monday the thirteenth, Wilson took the occasion ofhis annual appearance at the Lord Mayor of London’sbanquet—the very platform he had used for his fierycommitment to the defense of sterling in the crisis three yearsearlier—to implore the country and the world to disregard, asdistorted by temporary factors, his nation’s latest foreign-tradestatistics, which would be released the next day. On Tuesdaythe fourteenth, Britain’s foreign-trade figures, duly released,showed an October deficit of over a hundred millionpounds—the worst ever reported. The Cabinet met at lunch onThursday the sixteenth, and that afternoon, in the House ofCommons, Chancellor Callaghan, upon being asked to confirmor deny rumors of an enormous new central-bank credit thatwould be contingent upon still further unemployment-breedingausterity measures, replied with heat, and with what was latercalled a lack of discretion, “The Government will take whatdecisions are appropriate in the light of our understanding ofthe needs of the British economy, and no one else’s. And that,at this stage, does not include the creation of any additionalunemployment.”
With one accord, the exchange markets decided that thedecision to devalue had been taken and that Callaghan hadinadvertently let the cat out of the bag. Friday the seventeenthwas the wildest day in the history of the exchange markets,and the blackest in the thousand-year history of sterling. Inholding it at $2.7825—the price decided on this time as thelast-line trench—the Bank of England spent a quantity ofreserve dollars that it may never see fit to reveal; Wall Streetcommercial bankers who have reason to know have estimatedthe amount at somewhere around a billion dollars, which wouldmean a continuous, day-long reserve drain of over two millionper minute. Doubtless the British reserves dropped below thetwo-billion-dollar mark, and perhaps far below it. Late on aSaturday—November 18th—full of confused alarms, Britainannounced its capitulation. I heard about it from Waage, whotelephoned me that afternoon at five-thirty New York time. “Asof an hour ago, the pound was devalued to two dollars andforty cents, and the British bank rate went to eight per cent,”
he said. His voice was shaking a little.
ON Saturday night, bearing in mind that scarcely anything but amajor war upsets world financial arrangements more thandevaluation of a major currency, I went down to the capital ofworld finance, Wall Street, to look around. A nasty wind waswhipping papers through empty streets, and there was theusual rather intimidating off-hours stillness in that part-time city.
There was something unusual, though: the presence of rows oflighted windows in the otherwise dark buildings—for the mostpart, one lighted row per building. Some of the rows I couldidentify as the foreign departments of the big banks. The heavydoors of the banks were locked and barred; foreign-departmentmen evidently ring to gain entrance on weekends, or useinvisible side or rear entrances. Turning up my coat collar, Iheaded up Nassau Street toward Liberty to take a look at theFederal Reserve Bank. I found it lighted not in a single linebut—more hospitably, somehow—in an irregular pattern over itsentire Florentine fa?ade, yet it, too, presented to the street aformidably closed front door. As I looked at it, a gust of windbrought an incongruous burst of organ music—perhaps fromTrinity Church, a few blocks away—and I realized that in tenor fifteen minutes I hadn’t seen anyone. The scene seemed tome to epitomize one of the two faces of central banking—thecold and hostile face, suggesting men in arrogant secrecymaking decisions that affect all the rest of us but that we canneither influence nor even comprehend, rather than the morecongenial face of elegant and learned men of affairs beneficentlysaving faltering currencies over their truffles and wine at Basel.
This was not the night for the latter face.
On Sunday afternoon, Waage held a press conference in aroom on the tenth floor of the bank, and I attended it, alongwith a dozen other reporters, mostly regulars on the FederalReserve beat. Waage discoursed generally on the devaluation,parrying questions he didn’t want to answer, sometimes byreplying to them, like the teacher he once was, with questionsof his own. It was still far too early, he said, to tell how greatthe danger was that the devaluation might lead to “another1931.” Almost any prediction, he said, would be a matter oftrying to outguess millions of people and thousands of banksaround the world. The next few days would tell the story.
Waage seemed stimulated rather than depressed; his attitudewas clearly one of apprehension but also of resolution. On theway out, I asked him whether he had been up all night. “No,last evening I went to ‘The Birthday Party,’ and I must sayPinter’s world makes more sense than mine does, these days,”
he replied.
The outlines of what had happened Thursday and Fridaybegan to emerge during the next few days. Most of therumors that had been abroad turned out to have been moreor less true. Britain had been negotiating for another hugecredit to forestall devaluation—a credit of the order ofmagnitude of the three-billion-dollar 1964 package, with theUnited States again planning to provide the largest share.
Whether Britain had devalued from choice or necessityremained debatable. Wilson, in explaining the devaluation to hispeople in a television address, said that “it would have beenpossible to ride out this present tide of foreign speculationagainst the pound by borrowing from central banks andgovernments,” but that such action this time would have been“irresponsible,” because “our creditors abroad might well insiston guarantees about this or that aspect of our nationalpolicies”; he did not say explicitly that they had done so. Inany event, the British Cabinet had—with what grim reluctancemay be imagined—decided in principle on devaluation as earlyas the previous weekend, and then determined the exactamount of the devaluation at its Thursday-noon meeting. Atthat time, the Cabinet had also resolved to help insure theeffectiveness of the devaluation by imposing new austeritymeasures on the nation, among them higher corporate taxes, acutback in defense spending, and the highest bank rate in fiftyyears. As for the two-day delay in putting the devaluation intoeffect, which had been so costly to British reserves, officialsnow explained that the time had been necessary forconferences with the other leading monetary powers. Suchconferences were required by international monetary rulesbefore a devaluation, and, besides, Britain had urgently neededassurances from its leading competitors in world trade that theydid not plan to vitiate the effect of the British devaluation withmatching devaluations of their own. Some light was now shed,too, on the sources of the panic selling of pounds on Friday.
By no means all of it had been wanton speculation by thosefamous—although invisible and perhaps nonexistent—gnomes ofZurich. On the contrary, much of it had been a form ofself-protection, called hedging, by large international corporations,many of them American, that made short sales of sterlingequivalent to what they were due to be paid in sterling weeksor months later. The evidence of this was supplied by thecorporations themselves, some of them being quick to assuretheir stockholders that through their foresight they hadcontrived to lose little or nothing on the devaluation.
International Telephone & Telegraph, for example, announcedon Sunday that the devaluation would not affect its 1967earnings, because “management anticipated the possibility ofdevaluation for some time.” International Harvester and TexasInstruments reported that they had protected themselves bymaking what amounted to short sales of sterling. The SingerCompany said it might even have accidentally made a profit onthe deal. Other American companies let it be known that theyhad come out all right, but declined to elaborate, on theground that if they revealed the methods they had used theymight be accused of taking advantage of Britain in its extremity.
“Let’s just say we were smart” was the way a spokesman forone company put it. And perhaps that, if lacking in grace andelegance, was fair enough. In the jungle of internationalbusiness, hedging on a weak foreign currency is considered awholly legitimate use of claws for self-defense. Selling short forspeculative purposes enjoys less respectability, and it isinteresting to note that the ranks of those who speculatedagainst sterling on Friday, and talked about it afterward,included some who were far from Zurich. A group ofprofessional men in Youngstown, Ohio—veteran stock-marketplayers, but never before international currencyplungers—decided on Friday that sterling was about to bedevalued, and sold short seventy thousand pounds, netting aprofit of almost twenty-five thousand dollars over the weekend.
The pounds sold had, of course, ultimately been bought withdollars by the Bank of England, thus adding a minuscule dropto Britain’s reserve loss. Reading about the little coup in theWall Street Journal, to which the group’s broker hadreported it, presumably with pride, I hoped the apprenticegnomes of Youngstown had at least grasped the implications ofwhat they were doing.
So much for Sunday and moral speculation. On Monday, thefinancial world, or most of it, went back to work, and thedevaluation began to be put to its test. The test consisted oftwo questions. Question One: Would the devaluation accomplishits purpose for Britain—that is, stimulate exports and reduceimports sufficiently to cure the international deficit and put anend to speculation against the pound? Question Two: Would it,as in 1931, be followed by a string of competitive devaluationsof other currencies, leading ultimately to a devaluation of thedollar in relation to gold, worldwide monetary chaos, andperhaps a world depression? I watched the answers beginningto take shape.
On Monday, the banks and exchanges in London remainedfirmly closed, by government order, and all but a few traderselsewhere avoided taking positions in sterling in the Bank ofEngland’s absence from the market, so the answer to thequestion of the pound’s strength or weakness at its newvaluation was postponed; On Threadneedle and ThrogmortonStreets, crowds of brokers, jobbers, and clerks milled aroundand talked excitedly—but made no trades—in a city where theunion Jack was flying from all flagstaffs because it happened tobe the Queen’s wedding anniversary. The New York stockmarket opened sharply lower, then recovered. (There was noreally rational explanation for the initial drop; securities menpointed out that devaluation just generally sounds depressing.)By nightfall on Monday, it had been announced that elevenother currencies—those of Spain, Denmark, Israel, Hong Kong,Malta, Guyana, Malawi, Jamaica, Fiji, Bermuda, andIreland—were also being devalued. That wasn’t so bad, becausethe disruptive effect of a currency devaluation is in directproportion to the importance of that currency in world trade,and none of those currencies were of great importance. Themost ominous move was Denmark’s, because Denmark mighteasily be followed by its close economic allies Norway, Sweden,and the Netherlands, and that would be pretty serious. Egypt,which was an instant loser of thirty-eight million dollars onpounds held in its reserves at the time of devaluation, heldfirm, and so did Kuwait, which lost eighteen million.
On Tuesday, the markets everywhere were going full blast.
The Bank of England, back in business, set the new tradinglimits of the pound at a floor of $2.38 and a ceiling of $2.42,whereupon the pound went straight to the ceiling, like a balloonslipped from a child’s hand, and stayed there all day; indeed,for obscure reasons inapplicable to balloons, it spent much ofthe day slightly above the ceiling. Now, instead of paying dollarsfor pounds, the Bank of England was supplying pounds fordollars, and thereby beginning the process of rebuilding itsreserves. I called Waage to share what I thought would be hisjubilation, but found him taking it all calmly. The pound’sstrength, he said, was “technical”—that is, it was caused by theprevious week’s short sellers’ buying pounds back to cash intheir profits—and the first objective test of the new poundwould not come until Friday. Seven more small governmentsannounced devaluations during the day. In Malaysia, which haddevalued its old sterling-backed pound but not its new dollar,based on gold, and which continued to keep both currencies incirculation, the injustice of the situation led to riots, and overthe next two weeks more than twenty-seven people were killedin them—the first casualties of devaluation. Apart from thispainful reminder that the counters in the engrossing game ofinternational finance are people’s livelihoods, and even theirlives, so far so good.
But on Wednesday the twenty-second a less localized portentof trouble appeared. The speculative attack that had so longbattered and at last crushed the pound now turned, aseveryone had feared it might, on the dollar. As the one nationthat is committed to sell gold in any quantity to the centralbank of any other nation at the fixed price of thirty-five dollarsan ounce, the United States is the keystone of the worldmonetary arch, and the gold in its Treasury—which on thatWednesday amounted to not quite thirteen billion dollars’
worth—is the foundation. Federal Reserve Board ChairmanMartin had said repeatedly that the United States would underany condition continue to sell it on demand, if necessary downto the last bar. Despite this pledge, and despite PresidentJohnson’s reiteration of it immediately after Britain’s devaluation,speculators now began buying gold with dollars in hugequantities, expressing the same sort of skepticism toward officialassurances that was shown at about the same time by NewYorkers who took to accumulating and hoarding subway tokens.
Gold was suddenly in unusual demand in Paris, Zurich, andother financial centers, and most particularly in London, theworld’s leading gold market, where people immediately began totalk about the London Gold Rush. The day’s orders for gold,which some authorities estimated at over fifty million dollars’
worth, seemed to come in from everywhere—except,presumably, from citizens of the United States or Britain, whoare forbidden by law to buy or own monetary gold. And whowas to sell the stuff to these invisible multitudes so suddenlyrepossessed by the age-old lust for it? Not the United StatesTreasury, which, through the Federal Reserve, sold gold only tocentral banks, and not other central banks, which did notpromise to sell it at all. To fill this vacuum, still anotherco?perative international group, the London gold pool, had beenestablished in 1961. Provided by its members—the United States,Britain, Italy, the Netherlands, Switzerland, West Germany,Belgium, and, originally, France—with gold ingots in quantitiesthat might dazzle a Croesus (fifty-nine per cent of the totalcoming from the United States), the pool was intended to quellmoney panics by supplying gold to non-governmental buyers inany quantity demanded, at a price effectively the same as theFederal Reserve’s, and thereby to protect the stability of thedollar and the system.
And that is what the pool did on Wednesday. Thursday,though, was much worse, with the gold-buying frenzy in bothParis and London breaking even the records set during theCuban missile crisis of 1962, and many people, high British andAmerican officials among them, became convinced of somethingthey had suspected from the first—that the gold rush was partof a plot by General de Gaulle and France to humble first thepound and now the dollar. The evidence, to be sure, was allcircumstantial, but it was persuasive. De Gaulle and hisMinisters had long been on record as wishing to relegate thepound and the dollar to international roles far smaller thantheir current ones. A suspicious amount of the gold buying,even in London, was traceable to France. On Monday evening,thirty-six hours before the start of the gold rush, France’sgovernment had let slip, through a press leak, that it intendedto withdraw from the gold pool (according to subsequentinformation, France hadn’t contributed anything to the poolsince the previous June anyhow), and the French governmentwas also accused of having had a hand in spreading falserumors that Belgium and Italy were about to withdraw, too.
And now it was coming out, bit by bit, that in the days justbefore the devaluation France had been by far the mostreluctant nation to join in another credit package to rescuesterling, and that, for good measure, France had withheld untilthe very last minute its assurance that it would maintain itsown exchange rate if Britain devalued. All in all, there was agood case for the allegation that de Gaulle & Co. had beenplaying a mischievous part, and, whether it was true or not, Icouldn’t help feeling that the accusations against them wereadding a good deal of spice to the devaluation crisis—spice thatwould become more piquant a few months later, when thefranc would be in dire straits, and the United States forced bycircumstances to come to its aid.
ON Friday, in London, the pound spent the whole day tight upagainst its ceiling, and thus came through its first reallysignificant post-devaluation test with colors flying. Only a fewsmall governments had announced devaluations since Monday,and it was now evident that Norway, Sweden, and theNetherlands were going to hold firm. But on the dollar frontthings looked worse than ever. Friday’s gold buying in Londonand Paris had far exceeded the previous day’s record, andestimates were that gold sales in all markets over the precedingthree days added up to something not far under thebillion-dollar mark; there was near pandemonium all day inJohannesburg as speculators scrambled to get their hands onshares in gold-mining companies; and all over Europe peoplewere trading in dollars not only for gold but for othercurrencies as well. If the dollar was hardly in the position thatthe pound had occupied a week earlier, at least there wereuncomfortable parallels. Subsequently, it was reported that inthe first days after devaluation the Federal Reserve, soaccustomed to lending support to other currencies, had beenforced to borrow various foreign currencies, amounting toalmost two billion dollars’ worth, in order to defend its own.
Late Friday, having attended a conference at which Waagewas in an unaccustomed mood of nervous jocularity that mademe nervous, too, I left the Federal Reserve Bank half believingthat devaluation of the dollar was going to be announced overthe weekend. Nothing of the sort happened; on the contrary,the worst was temporarily over. On Sunday, it was announcedthat central-bank representatives of the gold-pool countries,Hayes and Coombs among them, had met in Frankfurt andformally agreed to continue maintaining the dollar at its presentgold-exchange rate with their combined resources. This seemedto remove any doubt that the dollar was backed not only bythe United States’ thirteen-billion-dollar gold hoard but also bythe additional fourteen billion dollars’ worth of gold in thecoffers of Belgium, Britain, Italy, the Netherland, Switzerland,and West Germany. The speculators were apparently impressed.
On Monday, gold buying was much lower in London andZurich, continuing at a record pace only in Paris—and this inspite of a sulphurous press audience granted that day by deGaulle himself, who, along with bemusing opinions on variousother matters, hazarded the view that the trend of events wastoward the decline of the dollar’s international importance. OnTuesday, gold sales dropped sharply everywhere, even in Paris.
“A good day today,” Waage told me on the phone thatafternoon. “A better day tomorrow, we hope.” On Wednesday,the gold markets were back to normal, but, as a result of theweek’s doings, the Treasury had lost some four hundred andfifty tons of gold—almost half a billion dollars’ worth—in fulfillingits obligations to the gold pool and meeting the demands offoreign central banks.
Ten days after devaluation, everything was quiet. But it wasonly a trough between succeeding shock waves. FromDecember 8th to 18th, there came a new spell of wildspeculation against the dollar, leaching another four hundredtons or so of gold out of the pool; this, like the previous wave,was eventually calmed by reiterations on the part of the UnitedStates and its gold-pool partners of their determination tomaintain the status quo. By the end of the year, the Treasuryhad lost almost a billion dollars’ worth of gold since Britain’sdevaluation, reducing its gold stock to below thetwelve-billion-dollar mark for the first time since 1937. PresidentJohnson’s balance-of-payments program, announced January1st, 1968 and based chiefly on restrictions on American banklending and industrial investments abroad, helped keepspeculation down for two months. But the gold rush was notto be quelled so simply. All pledges notwithstanding, it hadpowerful economic and psychological forces behind it. In alarger sense, it was an expression of an age-old tendency todistrust all paper currencies in times of crisis, but morespecifically it was the long-feared sequel to sterling devaluation,and—perhaps most specifically of all—it was a vote of noconfidence in the determination of the United States to keep itseconomic affairs in order, with particular reference to a level ofcivilian consumption beyond the dreams of avarice at a timewhen ever-increasing billions were being sent abroad to supporta war with no end in sight. The money in which the worldwas supposed to be putting its trust looked to the goldspeculators like that of the most reckless and improvidentspendthrift.
When they returned to the attack, on February29th—choosing that day for no assignable reason except that asingle United States senator, Jacob Javits, had just remarked,with either deadly seriousness or casual indiscretion, that hethought his country might do well to suspend temporarily allgold payments to foreign countries—it was with such ferocitythat the situation quickly got out of hand. On March 1st, thegold pool dispensed an estimated forty to fifty tons in London(as against three or four tons on a normal day); on March5th and 6th, forty tons per day; on March 8th, overseventy-five tons; and on March 13th, a total that could not beaccurately estimated but ran well over one hundred tons.
Meanwhile, the pound, which could not possibly escape afurther devaluation if the dollar were to be devalued in relationto gold, slipped below its par of $2.40 for the first time. Stillanother reiteration of the now-familiar pledges, this time fromthe central-bankers’ club at Basel on March 10th, seemed tohave no effect at all. The market was in the classic state ofchaos, distrustful of every public assurance and at the mercy ofevery passing rumor. A leading Swiss banker grimly called thesituation “the most dangerous since 1931.” A member of theBasel club, tempering desperation with charity, said that thegold speculators apparently didn’t realize their actions wereimperilling the world’s money. The New York Times, in aneditorial, said, “It is quite clear that the international paymentssystem … is eroding.”
On Thursday, March 14th, panic was added to chaos. Londongold dealers, in describing the day’s action, used the un-Britishwords “stampede,” “catastrophe,” and “nightmare.” The exactvolume of gold sold that day was unannounced, asusual—probably it could not have been precisely counted, in anycase—but everyone agreed that it had been an all-time record;most estimates put the total at around two hundred tons, ortwo hundred and twenty million dollars’ worth, while the WallStreet Journal put it twice that high. If the former estimatewas right, during the trading day the United States Treasuryhad paid out through its share of the gold pool alone onemillion dollars in gold every three minutes and forty-twoseconds; if the Journal figure was right (as a subsequentTreasury announcement made it appear to be), a million everyone minute and fifty-one seconds. Clearly, this wouldn’t do.
Like Britain in 1964, at this rate the United States would havea bare cupboard in a matter of days. That afternoon, theFederal Reserve System raised its discount rate from four anda half to five per cent—a defensive measure so timid andinadequate that one New York banker compared it to apopgun, and the Federal Reserve Bank of New York, as theSystem’s foreign-exchange arm, was moved to protest byrefusing to go along with the token raise. Late in the day inNew York, and toward midnight in London, the United Statesasked Britain to keep the gold market closed the next day,Friday, to prevent further catastrophe and clear the way to theweekend, when face-to-face international consultations could beheld. The bewildered American public, largely unaware of thegold pool’s existence, probably first sensed the general shape ofthings when it learned on Friday morning that Queen ElizabethII had met with her Ministers on the crisis between midnightand 1 A.M.
On Friday, a day of nervous waiting, the London marketswere closed, and so were foreign-exchange desks nearlyeverywhere else, but gold shot up to a big premium in theParis market—a sort of black market, from the Americanstandpoint—and in New York sterling, unsupported by thefirmly locked Bank of England, briefly fell below its officialbottom price of $2.38 before rallying. Over the weekend, thecentral bankers of the gold-pool nations (the United States,Britain, West Germany, Switzerland, Italy, the Netherlands, andBelgium, with France still conspicuously missing and, indeed,uninvited this time) met in Washington, with Coombsparticipating for the Federal Reserve along with ChairmanMartin. After two full days of rigidly secret discussions, whilethe world of money waited with bated breath, they announcedtheir decisions late on Sunday afternoon. Thethirty-five-dollar-an-ounce official monetary price of gold wouldbe kept for use in all dealings among central banks; the goldpool would be disbanded, and the central banks would supplyno more gold to the London market, where privately tradedgold would be allowed to find its own price; sanctions would betaken against any central bank seeking to profit from the pricedifferential between the central-bank price and the free-marketprice; and the London gold market would remain closed for acouple of weeks, until the dust settled. During the first fewmarket days under the new arrangements, the pound ralliedstrongly, and the free-market price of gold settled at betweentwo and five dollars above the central-bank price—a differentialconsiderably smaller than many had expected.
The crisis had passed, or that crisis had. The dollar hadescaped devaluation, and the international monetary mechanismwas intact. Nor was the solution a particularly radical one; afterall, gold had been on a two-price basis in 1960, before thegold pool had been formed. But the solution was a temporary,stopgap one, and the curtain was not down on the drama yet.
Like Hamlet’s ghost, the pound, which had started the action,was offstage now. The principal actors onstage as summerapproached were the Federal Reserve and the United StatesTreasury, doing what they could in a technical way to keepthings on an even keel; the Congress, complacent withprosperity, preoccupied with coming elections, and thereforeresistant to higher taxes and other uncomfortable retrenchingmeasures (on the very afternoon of the London panic, theSenate Finance Committee had voted down an income-taxsurcharge); and, finally, the President, calling for “a program ofnational austerity” to defend the dollar, yet at the same timecarrying on at ever-increasing expense the Vietnam war, whichhad become as menacing to the health of America’s money as,in the view of many, it was to that of America’s soul.
Ultimately, it appeared, the nation had just three possibleeconomic courses: to somehow end the Vietnam war, root ofthe payments problem and therefore heart of the matter; toadopt a full wartime economy, with sky-high taxes, wage andprice controls, and perhaps rationing; or to face forceddevaluation of the dollar and perhaps a depression-breedingworld monetary mess.
Looking beyond the Vietnam war and its incredibly broadworldwide monetary implications, the central bankers went onplugging away. Two weeks after the stopgap solution of thedollar crisis, those of the ten most powerful industrial countriesmet in Stockholm and agreed, with only France dissenting, onthe gradual creation of a new international monetary unit tosupplement gold as the bedrock underlying all currencies. It willconsist (if action follows on resolution) of special drawing rightson the International Monetary Fund, available to nations inproportion to their existing reserve holdings. In bankers’ jargonthe rights will be called S.D.R.’s; in popular jargon they were atonce called paper gold. The success of the plan in achieving itsends—averting dollar devaluation, overcoming the worldshortage of monetary gold, and thus postponing indefinitely thethreatened mess—will depend on whether or not men andnations can somehow at last, in a triumph of reason, achievewhat they have failed to achieve in almost four centuries ofpaper money: that is, to overcome one of the oldest and leastrational of human traits, the lust for the look and feel of golditself, and come to give truly equal value to a pledge written ona piece of paper. The answer to that question will come in thelast act, and the outlook for a happy ending is not bright.
AS the last act was beginning to unfold—after the sterlingdevaluation but before the gold panic—I went down to LibertyStreet and saw Coombs and Hayes. I found Coombs lookingbone-tired but not sounding disheartened about three yearsspent largely in a losing cause. “I don’t see the fight for thepound as all having been in vain,” he said. “We gained thosethree years, and during that time the British put through a lotof internal measures to strengthen themselves. If they’d beenforced to devalue in 1964, there’s a good chance thatwage-and-price inflation would have eaten up any benefit theyderived and put them back in the same old box. Also, overthose three years there have been further gains in internationalmonetary co?peration. Goodness knows what would havehappened to the whole system with devaluation in 1964.
Without that three-year international effort—that rearguardaction, you might say—sterling might have collapsed in muchgreater disorder, with far more damaging repercussions thanwe’ve seen even now. Remember that, after all, our effort andthe effort of the other central-banks wasn’t to hold up sterlingfor its own sake. It was to hold it up for the sake ofpreserving the system. And the system has survived.”
Hayes, on the surface, seemed exactly as he had when I lastsaw him, a year and a half earlier—as placid and unruffled asif he had been spending all that time studying up on Corfu. Iasked him whether he was still living up to his principle ofkeeping bankers’ hours, and he replied, smiling very slightly,that the principle had long since yielded to expediency—that, asa time consumer, the 1967 sterling crisis had made the 1964crisis seem like child’s play, and that the subsequent dollarcrisis was turning out to be more of the same. A side benefitof the whole three-and-a-half-year affair, he said, was that itsfrequently excruciating melodrama had contributed something toMrs. Hayes’ interest in banking, and even something, if not somuch, to the position of business in Tom’s scale of values.
When Hayes spoke of the devaluation, however, I saw thathis placidity was a mask. “Oh, I was disappointed, all right,” hesaid quietly. “After all, we worked like the devil to prevent it.
And we nearly did. In my opinion, Britain could have gotenough assistance from abroad to hold the rate. It could havebeen done without France. Britain chose to devalue. I thinkthere’s a good chance that the devaluation will eventually be asuccess. And the gain for international co?peration is beyondquestion. Charlie Coombs and I could feel that at Frankfurt inNovember, at the gold-pool meeting—a sense everyone therehad that now is the time to lock arms. But still …” Hayespaused, and when he spoke again his voice was full of suchquiet force that I saw the devaluation through his eyes—not asjust a severe professional reverse but as an ideal lost and anidol fallen. He said, “That day in November, here at the bank,when a courier brought me the top-secret British documentinforming us of the decision to devalue, I felt physically sick.
Sterling would not be the same. It would never again commandthe same amount of faith around the world.”

The End