by John Brooks
Hayes, Coombs, and their foreign-department colleagues on Liberty Street, watching with mounting anxiety, were as galled as the British by the fact that a central bank defending its currency against attack can have only the vaguest idea of where the attack is coming from. Speculation is inherent in foreign trade, and by its nature is almost impossible to isolate, identify, or even define. There are degrees of speculation; the word itself, like “selfishness” or “greed,” denotes a judgment, and yet every exchange of currencies might be called a speculation in favor of the currency being acquired and against the one being disposed of. At one end of the scale are perfectly legitimate business transactions that have specific speculative effects. A British importer ordering American merchandise may legitimately pay up in pounds in advance of delivery; if he does, he is speculating against the pound. An American importer who has contracted to pay for British goods at a price set in pounds may legitimately insist that his purchase of the pounds he needs to settle his debt be deferred for a certain period; he, too, is speculating against the pound. (The staggering importance to Britain of these common commercial operations, which are called “leads” and “lags,” respectively, is shown by the fact that if in normal times the world’s buyers of British goods were all to withhold their payments for as short a period as two and a half months the Bank of England’s gold and dollar reserves would vanish.) At the other end of the scale is the dealer in money who borrows pounds and then converts the loan into dollars. Such a dealer, instead of merely protecting his business interests, is engaging in an out-and-out speculative move called a short sale; hoping to buy back the pounds he owes more cheaply later on, he is simply trying to make a profit on the decrease in value he anticipates—and, what with the low commissions prevailing in the international money market, the maneuver provides one of the world’s most attractive forms of high-stakes gambling.
Gambling of this sort, although in fact it probably contributed far less to the sterling crisis than the self-protective measures taken by nervous importers and exporters, was being widely blamed for all the pound’s troubles of October and November, 1964. Particularly in the British Parliament, there were angry references to speculative activity by “the gnomes of Zurich”—Zurich being singled out because Switzerland, whose banking laws rigidly protect the anonymity of depositors, is the blind pig of international banking, and consequently much currency speculation, originating in many parts of the world, is funnelled through Zurich. Besides low commissions and anonymity, currency speculation has another attraction. Thanks to time differentials and good telephone service, the world money market, unlike stock exchanges, race tracks, and gambling casinos, practically never closes. London opens an hour after the Continent (or did until February 1968, when Britain adopted Continental time), New York five (now six) hours after that, San Francisco three hours after that, and then Tokyo gets under way about the time San Francisco closes. Only a need for sleep or a lack of money need halt the operations of a really hopelessly addicted plunger anywhere.
“It was not the gnomes of Zurich who were beating down the pound,” a leading Zurich banker subsequently maintained—stopping short of claiming that there were no gnomes there. Nonetheless, organized short selling—what traders call a bear raid—was certainly in progress, and the defenders of the pound in London and their sympathizers in New York would have given plenty to catch a glimpse of the invisible enemy.
IT was in this atmosphere, then, that on the weekend beginning November 7th the leading central bankers of the world held their regular monthly gathering in Basel, Switzerland. The occasion for such gatherings, which have been held regularly since the nineteen-thirties except during the Second World War, is the monthly meeting of the board of directors of the Bank for International Settlements, which was established in Basel in 1930 primarily as a clearing house for the handling of reparations payments arising out of the First World War but has come to serve as an agency of international monetary coöperation and, incidentally, a kind of central bankers’ club. As such, it is considerably more limited in resources and restricted as to membership than the International Monetary Fund, but, like other exclusive clubs, it is often the scene of great decisions. Represented on its board of directors are Britain, France, West Germany, Italy, Belgium, the Netherlands, Sweden, and Switzerland—in short, the economic powers of Western Europe—while the United States is a regular monthly guest whose presence is counted on, and Canada and Japan are less frequent visitors. The Federal Reserve is almost always represented by Coombs, and sometimes by Hayes and other New York officers as well.
In the nature of things, the interests of the different central banks conflict; their faces are set against each other almost as if they were players in a poker game. Even so, in view of the fact that international troubles with money at their root have almost as long a history as similarly caused troubles between individuals, the most surprising thing about international monetary coöperation is that it is so new. Through all the ages prior to the First World War, it cannot be said to have existed at all. In the nineteen-twenties, it existed chiefly through close personal ties between individual central bankers, often maintained in spite of the indifference of their governments. On an official level, it got off to a halting start through the Financial Committee of the League of Nations, which was supposed to encourage joint action to prevent monetary catastrophes. The sterling collapse of 1931 and its grim sequel were ample proof of the committee’s failure. But better days were ahead. The 1944 international financial conference at Bretton Woods—out of which emerged not only the International Monetary Fund but also the whole structure of postwar monetary rules designed to help establish and maintain fixed exchange rates, as well as the World Bank, designed to ease the flow of money from rich countries to poor or war-devastated ones—stands as a milestone in economic coöperation comparable to the formation of the United Nations in political affairs. To cite just one of the conference’s fruits, a credit of more than a billion dollars extended to Britain by the International Monetary Fund during the Suez affair in 1956 prevented a major international financial crisis then.
In subsequent years, economic changes, like other changes, tended to come more and more quickly; after 1958, monetary crises began springing up virtually overnight, and the International Monetary Fund, which is hindered by slow-moving machinery, sometimes proved inadequate to meet such crises alone. Again the new spirit of coöperation rose to the occasion, this time with the richest of nations, the United States, taking the lead. Starting in 1961, the Federal Reserve Bank, with the approval of the Federal Reserve Board and the Treasury in Washington, joined the other leading central banks in setting up a system of ever-ready revolving credits, which soon came to be called the “swap network.” The purpose of the network was to complement the International Monetary Fund’s longer-term credit facilities by giving central banks instant access to funds they might need for a short period in order to move fast and vigorously in defense of their currencies. Its effectiveness was not long in being put to the test. Between its initiation in 1961 and the autumn of 1964, the swap network had played a major part in the triumphant defense against sudden and violent speculative attacks on at least three currencies: the pound, late in 1961; the Canadian dollar, in June, 1961; and the Italian lira, in March, 1964. By the autumn of 1964, the swap agreements (“L’accord de swap” to the French, “die Swap-Verpflichtungen” to the Germans) had come to be the very cornerstone of international monetary coöperation. Indeed, the five hundred million American dollars that the Bank of England was finding it necessary to draw on at the very moment the bank’s top officers were heading for Basel that November weekend represented part of the swap network, greatly expanded from its comparatively modest beginnings.
As for the Bank for International Settlements, in its capacity as a banking institution it was a relatively minor cog in all this machinery, but in its capacity as a club it had over the years come to play a far from unimportant role. Its mont
hly board meetings served (and still serve) as a chance for the central bankers to talk in an informal atmosphere—to exchange gossip, views, and hunches such as could not comfortably be indulged in either by mail or over the international telephone circuits. Basel, a medieval Rhenish city that is dominated by the spires of its twelfth-century Gothic cathedral and has long been a thriving center of the chemical industry, was originally chosen as the site of the Bank for International Settlements because it was a nodal point for European railways. Now that most international bankers habitually travel by plane, that asset has become a liability, for there is no long-distance air service to Basel; delegates must deplane at Zurich and continue by train or car. On the other hand, Basel has several first-rate restaurants, and it may be that in the view of the central-bank delegates this advantage outweighs the travel inconvenience, for central banking—or at least European central banking—has a firmly established association with good living. A governor of the National Bank of Belgium once remarked to a visitor, without a smile, that he considered one of his duties to be that of leaving the institution’s wine cellar better than he had found it. A luncheon guest at the Bank of France is generally told apologetically, “In the tradition of the bank, we serve only simple fare,” but what follows is a repast during which the constant discussion of vintages makes any discussion of banking awkward, if not impossible, and at which the tradition of simplicity is honored, apparently, by the serving of only one wine before the cognac. The table of the Bank of Italy is equally elegant (some say the best in Rome), and its surroundings are enhanced by the priceless Renaissance paintings, acquired as defaulted security on bad loans over the years, that hang on the walls. As for the Federal Reserve Bank of New York, alcohol in any form is hardly ever served there, banking is habitually discussed at meals, and the mistress of the kitchen appears almost pathetically grateful whenever one of the officers makes any sort of comment, even a critical one, on the fare. But then Liberty Street isn’t Europe.
In these democratic times, central banking in Europe is thought of as the last stronghold of the aristocratic banking tradition, in which wit, grace, and culture coexist easily with commercial astuteness, and even ruthlessness. The European counterparts of the security guards on Liberty Street are apt to be attendants in morning coats. Until less than a generation ago, formality of address between central bankers was the rule. Some think that the first to break it were the British, during the Second World War, when, it is alleged, a secret order went out that British government and military authorities were to address their American counterparts by their first names; in any event, first names are frequently exchanged between European and American central bankers now, and one reason for this, unquestionably, is the postwar rise in influence of the dollar. (Another reason is that, in the emerging era of coöperation, the central bankers see more of each other than they used to—not just in Basel but in Washington, Paris, and Brussels, at regular meetings of perhaps half a dozen special banking committees of various international organizations. The same handful of top bankers parades so regularly through the hotel lobbies of those cities that one of them thinks they must give the impression of being hundreds strong, like the spear carriers who cross the stage again and again in the triumphal scene of “Aida.”) And language, like the manner of its use, has tended to follow economic power. European central bankers have always used French (“bad French,” some say) in talking with each other, but during the long period in which the pound was the world’s leading currency English came to be the first language of central banking at large, and under the rule of the dollar it continues to be. It is spoken fluently and willingly by all the top officers of every central bank except the Bank of France, and even the Bank of France officers are forced to keep translators at hand, in consideration of the seeming intractable inability or unwillingness of most Britons and Americans to become competent in any language but their own. (Lord Cromer, flouting tradition, speaks French with complete authority.)
At Basel, good food and convenience come before splendor; many of the delegates favor an outwardly humble restaurant in the main railroad station, and the Bank for International Settlements itself is modestly situated between a tea shop and a hairdressing establishment. On that November weekend in 1964, Vice-President Coombs was the only representative of the Federal Reserve System on hand, and, indeed, he was to be the key banking representative of the United States through the early and middle phases of the crisis that was then mounting. In an abstracted way, Coombs ate and drank heartily with the others—true to his institution’s traditions, he is less than a gourmet—but his real interest was in getting the sense of the meeting and the private feelings of its participants. He was the perfect man for this task, inasmuch as he has the unquestioning trust and respect of all his foreign colleagues. The other leading central bankers habitually call him by his first name—less, it seems, in deference to changed custom than out of deep affection and admiration. They also use it in speaking of him among themselves; the name “Charliecoombs” (run together thus out of long habituation) is a word to conjure with 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 dry manner make him seem a bit cool and detached, is really warm and intuitive. Charliecoombs, although a Harvard graduate (Class of 1940), is the kind of unpretentious gray-haired man with half-rimmed spectacles and a precise manner whom you might easily take for a standard American small-town bank president, rather than a master of one of the world’s most complex skills. It is generally conceded that if any one man was the genius behind the swap network, the man was the New England swapper Charliecoombs.
At Basel, there was, as usual, a series of formal sessions, each with its agenda, but there was also, as usual, much informal palaver in rump sessions held in hotel rooms and offices and at a formal Sunday-night dinner at which there was no agenda but instead a free discussion of what Coombs has since referred to as “the hottest topic of the moment.” There could be no question about what that was; it was the condition of the pound—and, indeed, Coombs had heard little discussion of anything else all weekend. “It was clear to me from what I heard that confidence in sterling was deteriorating,” he has said. Two questions were on most of the bankers’ minds. One was whether the Bank of England proposed to take some of the pressure off the pound by raising its lending rate. Bank of England men were present, but getting an answer was not a simple matter of asking them their intentions; even if they had been willing to say, they would not have been able to, because the Bank of England is not empowered to change its rate without the approval—which in practice often comes closer to meaning the instruction—of the British government, and elected governments have a natural dislike for measures that make money tight. The other question was whether Britain had enough gold and dollars to throw into the breach if the speculative assault should continue. Apart from what was left of the billion dollars from the expanded swap network and what remained of its drawing rights on the International Monetary Fund, Britain had only its official reserves, which had dropped in the previous week to something under two and a half billion dollars—their lowest point in several years. Worse than that was the frightful rate at which the reserves were dwindling away; on a single bad day during the previous week, according to the guesses of experts, they had dropped by eighty-seven million dollars. A month of days like that and they would be gone.
Even so, Coombs has said, nobody at Basel that weekend dreamed that the pressure on sterling could become as intense as it actually did become later in the month. He returned to New York worried but resolute. It was not to New York, however, that the main scene of the battle for sterling shifted after the Basel meeting; it was to London. The big immediate question was whether or not Britain would raise its bank rate that week, and the day the answer would be known was Thursday, November 12th. In the matter of the bank rate, as in so many other things, the British customarily follow a
ritual. If there is to be a change, at noon on Thursday—then and then only—a sign appears in the ground-floor lobby of the Bank of England announcing the new rate, and, simultaneously, a functionary called the Government Broker, decked out in a pink coat and top hat, hurries down Throgmorton Street to the London Stock Exchange and ceremonially announces the new rate from a rostrum. Noon on Thursday the twelfth passed with no change; evidently the Labour Government was having as much trouble deciding on a bank-rate rise after the election as the Conservatives had had before. The speculators, wherever they were, reacted to such pusillanimity as one man. On Friday the thirteenth, the pound, which had been moderately buoyant all week precisely because speculators had been anticipating a bank-rate rise, underwent a fearful battering, which sent it down to a closing price of $2.7829—barely more than a quarter of a cent above the official minimum—and the Bank of England, intervening frequently to hold it even at that level, lost twenty-eight million dollars more from its reserves. Next day, the financial commentator of the London Times, under the byline 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 in exaggerated form. On Monday, Prime Minister Wilson, taking a leaf out of Winston Churchill’s book, tried rhetoric as a weapon. Speaking at a pomp-and-circumstance banquet at the Guildhall in the City of London before an audience that included, among many other dignitaries, the Archbishop of Canterbury, the Lord Chancellor, the Lord President of the Council, the Lord Privy Seal, the Lord Mayor of London, and their wives, Wilson ringingly proclaimed “not only our faith but our determination to keep sterling strong and to see it riding high,” and asserted that the Government would not hesitate to take whatever steps might become necessary to accomplish this purpose. While elaborately avoiding the dread word “devaluation,” just as all other British officials had avoided it all summer, Wilson sought to make it unmistakable that the Government now considered such a move out of the question. To emphasize this point, he included a warning to speculators: “If anyone at home or abroad doubts the firmness of [our] resolve, let them be prepared to pay the price for their lack of faith in Britain.” Perhaps the speculators were daunted by this verbal volley, or perhaps they were again moved to let up in their assault on the pound by the prospect of a bank-rate rise on Thursday; in any case, on Tuesday and Wednesday the pound, though it hardly rode high in the marketplace, managed to ride a little less low than it had on the previous Friday, and to do so without the help of the Bank of England.
