Business Adventures
Page 40
What had been done—or, rather, was about to be done—in Britain was plenty to flutter the dovecotes of international finance. Since the beginning of the First World War, the bank rate there had never gone higher than seven per cent and had only occasionally gone that high; as for a bank-rate change on a day other than Thursday, the last time that had occurred, ominously enough, was in 1931. Anticipating lively action at the London opening, which would take place at about 5 A.M. New York time, Coombs went to Liberty Street on Sunday afternoon in order to spend the night at the bank and be on hand when the transatlantic doings began. As an overnight companion he had a man who found it advisable to sleep at the bank so often that he habitually kept a packed suitcase in his office—Thomas J. Roche, at that time the senior foreign-exchange officer. Roche welcomed his boss to the sleeping quarters—a row of small, motel-like rooms on the eleventh floor, each equipped with maple furniture, Old New York prints, a telephone, a clock radio, a bathrobe, and a shaving kit—and the two men discussed the weekend’s developments for a while before turning in. Shortly before five in the morning, their radios woke them, and, after a breakfast provided by the night staff, they repaired to the foreign-exchange trading room, on the seventh floor, to man their fluoroscope.
At five-ten, they were on the phone to the Bank of England, getting the news. The bank-rate rise had been announced promptly at the opening of the London markets, to the accompaniment of great excitement; later Coombs was to learn that the Government Broker’s entrance into the Stock Exchange, which is usually the occasion for a certain hush, had this time been greeted with such an uproar that he had had difficulty making his news known. As for the first market reaction of the pound, it was (one commentator said later) like that of a race horse to dope; in the ten minutes following the bank-rate announcement it shot up to $2.7869, far above its Friday closing. A few minutes later, the early-rising New Yorkers were on the phone to the Deutsche Bundesbank, the central bank of West Germany, in Frankfurt, and the Swiss National Bank, in Zurich, sounding out Continental reaction. It was equally good. Then they were back in touch with the Bank of England, where things were looking better and better. The speculators against the pound were on the run, rushing now to cover their short sales, and by the time the first gray light began to show in the windows on Liberty Street, Coombs had heard 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 money from the moon,” a Swiss banker commented, paraphrasing the great 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 to political bickering as usual; in Parliament, Reginald Maudling, the chief economic authority of the out-of-office Conservatives, took the occasion to remark that there wouldn’t have been a crisis in the first place but for the actions of the Labour Government, and Chancellor of the Exchequer Callaghan replied, with deadly politeness, “I must remind the honorable gentleman that he told us [recently] we had inherited his problems.” Everybody was clearly breathing easier. As for the Bank of England, so great was the sudden clamor for pounds that it saw a chance to replenish its depleted supply of dollars, and for a time that afternoon it actually felt confident enough to switch sides in the market, buying dollars with pounds at just below $2.79. In New York, the mood persisted after the London closing. It was with a clear conscience about the pound that the directors of the Federal Reserve Bank of New York could—and, that afternoon, did—carry out their plan to raise their lending rate from three and a half per cent to four per cent. Coombs has since said, “The feeling here on Monday afternoon was: They’ve done it—they’ve pulled through again. There was a general sigh of relief. The sterling crisis seemed to be over.”
It wasn’t, though. “I remember that the situation changed very fast on Tuesday the twenty-fourth,” Hayes has said. That day’s opening found the pound looking firm at $2.7875. Substantial buying orders for pounds were coming in now from Germany, and the day ahead looked satisfactory. So things continued until 6 A.M. in New York—noon on the Continent. It is around then that the various bourses of Europe—including the most important ones, in Paris and Frankfurt—hold the meetings at which they set the day’s rate for each currency, for the purpose of settling transactions in stocks and bonds that involve foreign currency, and these price-fixing sessions are bound to influence the money markets, since they give a clear indication of the most influential Continental sentiment in regard to each currency. The bourse rates set for the pound that day were such as to show a renewed, and pronounced, lack of confidence. At the same time, it appeared subsequently, money dealers everywhere, and particularly in Europe, were having second thoughts about the manner of the bank-rate rise the previous day. At first, taken by surprise, they had reacted enthusiastically, but now, it seemed, they had belatedly decided that the making of the announcement on Monday indicated that Britain was losing its grip. “What would it connote if the British were to play a Cup final on Sunday?” a European banker is said to have asked a colleague. The only possible answer was that it would connote panic in Albion.
The effect of these second thoughts was an astonishingly drastic turnabout in market action. In New York between eight and nine, Coombs, in the trading room, watched with a sinking heart as a tranquil pound market collapsed into a rout. Selling orders 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, by constant intervention, held the pound there. But it was clear that the cost would soon become too high; a few minutes after 9 A.M. New York time, Coombs calculated that Britain was losing reserves at the unprecedented, and unsupportable, rate of a million dollars a minute.
Hayes, arriving at the bank shortly after nine, had hardly sat down at his desk before this unsettling news reached him from the seventh floor. “We’re in for a hurricane,” Coombs told him, and went on to say that the pressure on sterling was now mounting so fast that there was a real likelihood that Britain might be forced either to devalue or to impose a sweeping—and, for many reasons, unacceptable—system of exchange controls before the week was out. Hayes immediately telephoned the governors of the leading European central banks—some of whom, because not all the national markets had yet felt the full weight of the crisis, were startled to hear exactly how grave the situation was—and pleaded with them not to exacerbate the pressure on both the pound and the dollar by raising their own bank rates. (His job was scarcely made easier by the fact that he had to admit that his own bank had just raised its rate.) Then he asked Coombs to come up to his office. The pound, the two men agreed, now had its back to the wall; the British bank-rate rise had obviously failed of its purpose, and at the million-a-minute rate of loss Britain’s well of reserves would be dry in less than five business days. The one hope now lay in amassing, within a matter of hours, or within a day or so at the most, a huge bundle of credit from outside Britain to enable the Bank of England to survive the attack and beat it back. Such rescue bundles had been assembled just a handful of times before—for Canada in 1962, for Italy earlier in 1964, and for Britain in 1961—but this time, it was clear, a much bigger bundle than any of those would be needed. The central-banking world was faced not so much with an opportunity for building a milestone in the short history of international monetary coöperation as with the necessity for doing so.
Two other things were clear—that, in view of the dollar’s troubles, the United States could not hope to rescue the pound unassisted, and that, the dollar’s troubles notwithstanding, the United States, with all its economic might, would have to join the Bank of England in initiating any rescue operation. As a first step, Coombs suggested that the Federal Reserve standby credit to the Bank of England ought to be increased forthwith from five hundred million dollars to seven hundred and fifty million. Unfortunately, fast action
on this proposal was hampered by the fact that, under the Federal Reserve Act, any such move could be made only by decision of a Federal Reserve System committee, whose members were scattered all over the country. Hayes conferred by long-distance telephone (all around the world, wires were now humming with news of the pound’s extremity) with the Washington monetary contingent, Martin, Dillon, and Roosa, none of whom disagreed with Coombs’ view of what had to be done, and as a result of these discussions a call went out from Martin’s office to members of the key committee, called the Open Market Committee, for a meeting by telephone at three o’clock that afternoon. Roosa, at the Treasury, suggested that the United States’ contribution to the kitty could be further increased by arranging for a two-hundred-and-fifty-million-dollar loan from the Export-Import Bank, a Treasury-owned and Treasury-financed institution in Washington. Hayes and Coombs were naturally in favor of this, and Roosa set in motion the bureaucratic machinery to unlock that particular vault—a process that, he warned, would certainly take until evening.
As the early afternoon passed in New York, with the millions of dollars continuing to drain, minute by minute, from Britain’s reserves, Hayes and Coombs, along with their Washington colleagues, were busy planning the next step. If the swap increase and the Export-Import Bank loan should come through, the United States credits would amount to a billion dollars all told; now, in consultation with the beleaguered garrison at the Bank of England, the Federal Reserve Bank men began to believe that, in order to make the operation effective, the other leading central banks—spoken of in central-banking shorthand as “the Continent,” even though they include the Banks of Canada and Japan—would have to be asked to put up additional credits on the order of one and a half billion dollars, or possibly even more. Such a sum would make the Continent, collectively, a bigger contributor to the cause than the United States—a fact that Hayes and Coombs realized might not sit too well with the Continental bankers and their governments.
At three o’clock, the Open Market Committee held its telephone meeting—twelve men sitting at their desks in six cities, from New York to San Francisco. The members heard Coombs’ dry, unemotional voice describing the situation and making his recommendation. They were quickly convinced. In no more than fifteen minutes, they had voted unanimously to increase the swap credit to seven hundred and fifty million dollars, on condition that proportional credit assistance could be obtained from other central banks.
By late afternoon, tentative word had come from Washington that 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 to be virtually in the bag. It remained to tackle the Continent. It was night now in Europe, so nobody there could be tackled; the zero hour, then, was Continental opening time the next day, and the crucial period for the fate of the pound would be the few hours after that. Hayes, after leaving instructions for a bank car to pick him up at his home, in New Canaan, Connecticut, at four o’clock in the morning, took his usual commuting train from Grand Central shortly after five. He has since expressed a certain regret that he proceeded in such a routine way at such a dramatic moment. “I left the bank rather reluctantly,” he says. “In retrospect, I guess I wish I hadn’t. I don’t mean as a practical matter—I was just as useful at home, and, as a matter of fact, I ended up spending most of the evening on the phone with Charlie Coombs, who stayed at the bank—but just because something like that doesn’t happen every day in a banker’s life. I’m a creature of habit, I guess. Besides, it’s something of a tenet of mine to insist on keeping a proper balance between private and professional life.” Although Hayes does not say so, he may have been thinking of something else, too. It can safely be said to be something of a tenet of central-bank presidents or governors not to sleep at their places of business. If word were ever to get out that the methodical Hayes was doing so at a time like this, he may have reasoned, it might well be considered just as much a sign of panic as a British bank-rate rise on a Monday.
Meanwhile, Coombs was making another night of it on Liberty Street; he had gone home the previous night because the worst had momentarily appeared to be over, but now he stayed on after regular work hours with Roche, who hadn’t been home since the previous weekend. Toward midnight, Coombs received confirmation of the Export-Import Bank’s two-hundred-and-fifty-million-dollar credit, which had arrived from Washington during the evening, as promised. So now everything was braced for the morning’s effort. Coombs again installed himself in one of the uninspiring eleventh-floor cubicles, and, after a final marshalling of the facts that would be needed for the job of persuading the Continental bankers, set his clock radio for three-thirty and went to bed. A Federal Reserve man with a literary bent and a romantic temperament was later moved to draw a parallel between the Federal Reserve Bank that night and the British camp on the eve of the Battle of Agincourt in Shakespeare’s version, in which King Henry mused so eloquently on how participation in the coming action would serve to ennoble even the vilest of the troops, and how gentlemen safe in bed at home would later think themselves accursed that they had not been at the battle scene. Coombs, a practical man, had no such high-flown opinion of his situation; even so, as he dozed fitfully, waiting for morning to reach Europe, he was well aware that the events he was taking part in were like nothing that had ever happened in banking before.
II
So that evening, Tuesday, November 24, 1964, Hayes arrived at his home, in New Canaan, Connecticut, at about six-thirty, exactly as usual, having inexorably taken his usual 5:09 from Grand Central. Hayes was a tall, slim, soft-spoken man of fifty-four with keen eyes framed by owlish round spectacles, with a slightly schoolmasterish air and a reputation for unflappability. By so methodically going through familiar motions at such a time, he realized with amusement, he must seem to his colleagues to be living up to his reputation rather spectacularly. At his house, a former caretaker’s cottage of circa 1840 that the Hayeses had bought and remodelled twelve years earlier, he was greeted, as usual, by his wife, a pretty and vivacious woman of Anglo-Italian descent named Vilma but always called Bebba, who loves to travel, has almost no interest in banking, and is the daughter of the late Metropolitan Opera baritone Thomas Chalmers. Since at that time of year it was completely dark when Hayes got home, he decided to forgo a favorite early-evening unwinding activity of his—walking to the top of a grassy slope beside the house which commands a fine view across the Sound to Long Island. Anyway, he was not really in a mood to unwind; instead, he felt keyed up, and decided he might as well stay that way overnight, since the car from the bank was scheduled to call at his door so early the next morning to take him to work.
During dinner, Hayes and his wife discussed subjects like the fact that their son, Tom, who was a senior at Harvard, would be arriving home the following day for his Thanksgiving recess. Afterward, Hayes settled down in an armchair to read for a while. In banking circles, he is thought of as a scholarly, intellectual type, and, indeed, he is scholarly and intellectual in comparison with most bankers; even so, his extra-banking reading tends to be not constant and all-embracing, as his wife’s is, but sporadic, capricious, and intensive—everything about Napoleon for a while, perhaps, then a dry period, then a binge on, say, the Civil War. Just then, he was concentrating on the island of Corfu, where he and Mrs. Hayes were planning to spend some time. But before he had got very far into his latest Corfu book he was called to the telephone. The call was from the bank. There were new developments, which Coombs 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 intimately involved in but would actually join in initiating, was going to be taken by the government banks—or central banks, as they are more commonly called—of the non-Communist world’s leading nations as soon as possible after the next morning’s opening of the London and Continental financial
markets, which would occur between 4 and 5 A.M. New York time. Britain was face to face with bankruptcy, the reasons being that a huge deficit in its international accounts over the previous months had resulted in concomitant losses in the gold and dollar reserves held by the Bank of England; that worldwide fear lest the newly elected Labour Government decide, or be forced, to ease the situation by devaluing the pound from its dollar parity of about $2.80 to some substantially lower figure had caused a flood of selling of pounds by hedgers and speculators in the international money markets; that the Bank of England, fulfilling an international obligation to sustain the pound at a free-market price no lower than $2.78, had been losing millions of dollars a day from its reserves, which now stood at about two billion dollars, their lowest point in many years.
The remaining hope lay in amassing, in a matter of hours before it would be too late, an unheard-of sum in short-term dollar credits to Britain from the central banks of the world’s rich nations. With such credits at its disposal, the Bank of England would presumably be able to buy up pounds so aggressively that the speculative attack could be absorbed, contained, and finally beaten back, giving Britain time to set its economic affairs in order. Just what the sum necessary for rescue should be was an open question, but earlier that day the monetary authorities of the United States and Britain had concluded that it would have to be at least two billion dollars, and perhaps even more. The United States, through the Federal Reserve Bank of New York and the Treasury-owned Export-Import Bank, in Washington, had that day committed itself to one billion; the task that remained was to persuade the other leading central banks—habitually spoken of in the central-banking world as “the Continent,” even though they include the Banks of Canada and Japan—to lend more than a billion in addition.