by John Brooks
The problems that the Continental central banks faced in meeting the challenge are well exemplified by the situation at the richest and most powerful of them, the Deutsche Bundesbank. Its board of managers was already sitting in emergency session as a result of Coombs’ early call when another New York call—this one from Hayes to President Blessing—gave the Bundesbank its first indication of exactly how much it was being asked to put up. The amounts the various central banks were asked for that morning have never been made public, but, on the basis of what has become known, it is reasonable to assume that the Bundesbank was asked for half a billion dollars—the highest quota of the lot, and certainly the largest sum that any central bank other than the Federal Reserve had ever been called upon to supply to another on a few hours’ notice. Hard on the heels of Hayes’ call conveying this jarring information, Blessing heard from Lord Cromer, in London, who confirmed everything that Hayes had said about the seriousness of the crisis and repeated the request. Wincing a bit, perhaps, the Bundesbank managers agreed in principle that the thing had to be done. But right there their problems began. Proper procedure must be adhered to, Blessing and his aides decided. Before taking any action, they must consult with their economic partners in the European Common Market and the Bank for International Settlements, and the key man to be consulted, since he was then serving as president of the Bank for International Settlements, was Dr. Marius W. Holtrop, governor of the Bank of the Netherlands, which, of course, was also being asked to contribute. A rush person-to-person call was put through from Frankfurt to Amsterdam. Dr. Holtrop, the Bundesbank managers were informed, wasn’t in Amsterdam; by chance, he had taken a train that morning to The Hague to meet his country’s Finance Minister for consultation on other matters. For the Bank of the Netherlands to make any such important commitment without the knowledge of its governor was out of the question, and, similarly, the Bank of Belgium, a nation whose monetary policies are linked inextricably with the Netherlands’, was reluctant to act until Amsterdam had given its O.K. So for an hour or more, as millions of dollars continued to drain out of the Bank of 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 in The 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’ campaign got a boost from Washington. The leading government monetary authorities—Martin at the Federal Reserve Board, Dillon and Roosa at the Treasury—had all been intimately involved in the previous day’s planning for the rescue, and of course part of the planning had been the decision to let the New York bank, as the Federal Reserve System’s and the Treasury’s normal operating arm in international monetary dealings, serve as campaign headquarters. So the members of the Washington contingent had slept at home and come to their offices at the normal hour. Now, having learned from Hayes of the difficulties that were developing, Martin, Dillon, and Roosa pitched in with transatlantic calls of their own to emphasize the extent of America’s concern over the matter. But no number of calls from anywhere could hold back the clock—or, for that matter, find Dr. Holtrop—and Hayes and Coombs finally had to abandon their idea of having a credit bundle ready in time for an announcement to the world at or near 10 A.M. in New York. And there were other reasons, too, for a fading of the early hopes. As the New York markets opened, the extent of the alarm that had spread around the financial world overnight was only too clearly revealed. The bank’s foreign-exchange trading desk, on the seventh floor, reported that the assault on the pound at the New York opening had been fully as terrifying as they had expected, and that the atmosphere in the local exchange market had reached a state not far from panic. From the bank’s securities department came an alarming report that the market for United States government bonds was coming under the heaviest pressure in years, reflecting an ominous lack of confidence in the dollar on the part of bond traders. This intelligence served as a grim reminder to Hayes and Coombs of something they knew already—that a fall of the pound in relation to the dollar could quite possibly be followed, in a kind of chain reaction, by a forced devaluation of the dollar in relation to gold, which might cause monetary chaos everywhere. If Hayes and Coombs had been permitting themselves any moments of idle reverie in which to picture themselves simply as good Samaritans, this was just the news to bring them back to reality. And then word arrived that the wild tales flying around Wall Street showed signs of crystallizing into a single tale, demoralizingly credible because it was so specific. The British government, it was being said, would announce a sterling devaluation at around noon New York time. Here was something that could be authoritatively refuted, at least in respect to timing, since Britain would obviously not devalue while the credit negotiations were under way. Torn between the desire to quell a destructive rumor and the need to keep the negotiations secret until they were concluded, Hayes compromised. He had one of his associates call a few key Wall Street bankers and traders to say, as emphatically as possible, that the latest devaluation rumor was, to his firm knowledge, false. “Can you be more specific?” the associate was asked, and he replied, because there was nothing else he could reply, “No, I can’t.”
This unsupported word was something, but it was not enough; the foreign-exchange and bond markets were only momentarily reassured. There were times that morning, Hayes and Coombs now admit, when they put down their telephones, looked at each other across the table in Coombs’ office, and wordlessly exchanged the thought: It isn’t going to be done in time. But—in the best tradition of melodrama, which sometimes seems to survive stubbornly in nature at a time when it is dead in art—just when things looked darkest, good news began to arrive. Dr. Holtrop had been tracked down in a restaurant in The Hague, where he was having lunch with the Netherlands’ Minister of Finance, Dr. J. W. Witteveen; moreover, Dr. Holtrop had endorsed the rescue operation, and as for the matter of consulting his government, that was no problem, since the responsible representative of his government was sitting across the table from him. The chief obstacle was thus overcome, and after Dr. Holtrop had been reached the difficulties began narrowing down to annoyances like the necessity for continually apologizing to the Japanese for routing them out of bed as midnight arrived and passed in Tokyo. The tide had turned. Before noon in New York, Hayes and Coombs, and Lord Cromer and his deputies in London as well, knew that they had agreement in principle from ten Continental central banks—those in West Germany, Italy, France, the Netherlands, Belgium, Switzerland, Canada, Sweden, Austria, and Japan—and also from the Bank for International Settlements.
There remained the wait while each central bank went through the painfully slow process of completing whatever formalities were required to make its action legal and proper. The epitome of orderliness, the Bundesbank, could not act until it had obtained ratification from the members of its board of directors, most of whom were in provincial outposts scattered around Germany. The two leading Bundesbank deputies divided up the job of calling the absent directors and persuading them to go along—a job that was made more delicate by the fact that the absent directors were being asked to approve something that, in effect, the bank’s home office had already undertaken to do. At midafternoon by Continental time, while the 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 reserve loss had become so rapid that the pound could not survive another day. Formalities notwithstanding, it was a case of now or never. (The Bank of England’s reserve loss that day has never been announced. The Economist later passed along a guess that it may have run to five hundred million dollars, or about a quarter of all that remained in Britain’s reserve coffers.) After Lord Cromer’s call, the Bundesbank deputies tempered their tact with brevity; they got unanimous approval from the dire
ctors, and shortly after five o’clock Frankfurt time they were ready to tell Lord Cromer and Hayes that the Bundesbank 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, and doubtless were glad to do it, inasmuch as their own currencies had been the beneficiaries of much smaller but otherwise similar international bailout operations in 1962 and earlier in 1964, respectively. If a subsequent report in the London Times is to be accepted, France, Belgium, and the Netherlands, no one of which ever announced the amount of its participation, each contributed two hundred million dollars, too. Switzerland is known to have come through with a hundred and sixty million dollars and Sweden with a hundred million dollars, while Austria, Japan, and the Bank for International Settlements rounded out the bundle with still undisclosed amounts. By lunchtime in New York, it was all over but the shouting, and the last part of the task was to make the shouting as effective as possible to give it the fastest and most forcible impact on the market.
The task brought to the fore another Federal Reserve Bank man, its vice-president in charge of public information, Thomas Olaf Waage. Waage (his name rhymes with “saga”) had been present and active in Coombs’ office almost all morning, constantly on the phone as liaison man with Washington. A born-and-bred New Yorker, the son of a Norwegian-born local tug pilot and fishing-boat captain, Waage is a man of broad and unfeigned outside interests—among them opera, Shakespeare, Trollope, and his ancestral heritage, sailing—and one consuming passion, which is striving to convey not only the facts but also the drama, suspense, and excitement of central banking to a skeptical and often glassy-eyed public. In short, a banker who is a hopeless romantic. So now he was overjoyed when Hayes assigned to him the job of preparing a news release that would inform the world, as emphatically as possible, about the rescue operation. While Hayes and Coombs struggled to tie up the loose ends of their package, Waage was busy coördinating timing with his counterparts at the Federal Reserve Board and the Treasury Department in Washington, which would share in the issuing of the American announcement, and at the Bank of England, which, Hayes and Lord Cromer had agreed, would issue a simultaneous announcement of its own. “Two o’clock in the afternoon New York time was the hour we agreed upon for the announcements, when it began to look as if we’d have something to announce by that time,” Waage recalls. “That was too late to catch the Continental and London markets that day, of course, but it left the whole afternoon ahead until the New York markets closed, at around five, and if the sterling market could be dramatically reversed here before closing time, chances were the recovery would continue on the Continent and in London next day, when the American markets would be closed for Thanksgiving. As for the amount of the combined credit we were planning to announce, it still stood at three billion dollars. But I remember that a last-minute snag of a particularly embarrassing sort developed. Very late in the game, when we thought the whole package was in hand, Charlie Coombs and I counted up what had been pledged, just to make sure, and we got only two billion eight hundred and fifty million. Apparently, we’d mislaid a hundred and fifty million dollars somewhere. That’s just what we’d done—we’d miscalculated. So it was all right.”
The package was assembled in time to meet the new schedule, and statements from the Federal Reserve, the Treasury, and the Bank of England duly went out to the news media simultaneously, at 2 P.M. in New York and 7 P.M. in London. As a result of Waage’s influence, the American version, though it fell somewhat short of the mood of, say, the last scene of “Die Meistersinger,” was nevertheless exceptionally stirring as bank utterances go, speaking with a certain subdued flamboyance of the unprecedented nature of the sum involved and of how the central banks had “moved quickly to mobilize a massive counterattack on speculative selling of the pound.” The London release had a different kind of distinction, achieving something of the quintessential Britishness that seems to be reserved for moments of high crisis. It read simply, “The Bank 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 successfully preserved and the announcement struck the New York foreign-exchange market all of a heap, because the reaction was as swift and as electric as anyone could have wished. Speculators against the pound decided instantly and with no hesitation that their game was up. Immediately after the announcement, the Federal Reserve Bank put in a bid for pounds at $2.7868—a figure slightly above the level at which the pound had been forcibly maintained all day by the Bank of England. So great was the rush of speculators to get free of their speculative positions by buying pounds that the Federal Reserve Bank found very few pounds for sale at that price. Around two-fifteen, there were a strange and heartening few minutes in which no sterling was available in New York at any price. Pounds were eventually offered for sale again at a higher price, and were immediately gobbled up, and thus the price went on climbing all afternoon, to a closing of just above $2.79.
Triumph! The pound was out of immediate danger; the thing had worked. Tributes to the success of the operation began to pour in from everywhere. Even the magisterial Economist was to declare shortly, “Whatever other networks break down, it seems, the central bankers [have an] astonishing capacity for instant results. And if theirs is not the most desirable possible mechanism, geared always to short-term support of the status quo, it happens to be the only working one.”
So, with the pound riding reasonably high again, the Federal Reserve Bank shut up for Thanksgiving, and the bankers went home. Coombs recalls having drunk a Martini unaccustomedly fast. Hayes, home in New Canaan, found that his son, Tom, had arrived from Harvard. Both his wife and his son noticed that he seemed to be in an unusual state of excitement, and when they asked about it he replied that he had just been through the most completely satisfying day of his entire working career. Pressed for details, he gave them a condensed and simplified account of the rescue operation, keeping constantly in mind the fact that his audience consisted of a wife who had no interest in banking and a son who had a low opinion of business. The reaction he got when his recital was concluded was of a sort that might warm the heart of a Waage, or of any earnest explicator of banking derring-do to the unsympathetic layman. “It was a little confusing at first,” Mrs. Hayes has said, “but before you were finished you had us on the edge of our chairs.”
Waage, home in Douglaston, told his wife of the day’s events in his characteristic way. “It was St. Crispin’s Day,” he exclaimed as he burst through his doorway, “and I was with Harry!”
III
HAVING first become interested in the pound and its perils at the time of the 1964 crisis, I found myself hooked by the subject. Through the subsequent three and a half years, I followed its ups and downs in the American and British press, and at intervals went down to the Federal Reserve Bank to renew my acquaintance with its officers and see what additional enlightenment I could garner. The whole experience was a resounding vindication of Waage’s thesis that central banking can be suspenseful.
The pound wouldn’t stay saved. A month after the big 1964 crisis, the speculators resumed their assaults, and by the end of that year the Bank of England had used up more than half a billion of its new three-billion-dollar credit. Nor did the coming of the new year bring surcease. In 1965, after a relatively buoyant January, the pound came under pressure again in February. The November credit had been for a term of three months; now, as the term ran out, the nations that had made it decided to extend it for another three months, so that Britain would have more time to put its economy in order. But late in March the British economy was still shaky, the pound was back below $2.79, and the Bank of England was back in the market. In April, Britain announced a tougher budget, and a rally followed, but the rally proved to be short-lived. By early summer, the Bank of England had drawn, and committed to the battle against the speculators, more than a
third of the whole three billion. Heartened, the speculators pressed their attack. Late in June, high British officials, let it be known that they now considered the sterling crisis over, but they were whistling in the dark; in July the pound sank again, despite further belt-tightening in the British domestic economy. By the end of July, the world foreign-exchange market had become convinced that a new crisis was shaping up. By late August, the crisis had arrived, and in some ways it was a more dangerous one than that of the previous November. The trouble was the market seemed to believe that the central banks were tired of pouring money into the battle and would now let sterling fall, regardless of the consequences. About that time, I telephoned a leading local foreign-exchange man I know to ask him what he thought of the situation, and he replied, “To my knowledge, the New York market is one hundred per cent convinced that devaluation of sterling is coming this fall—and I don’t mean ninety-five per cent, I mean one hundred per cent.” Then, on September 11th, I read in the papers that the same group of central banks, this time with the exception of France, had come through with another last-minute rescue package, the amount not being announced at the time—it was subsequently reported to have been around one billion—and over the next few days I watched the market price of the pound rise, little by little, until by the end of the month it was above $2.80 for the first time in sixteen months.
