Business Adventures

by John Brooks

  So much for Sunday and moral speculation. On Monday, the financial world, or most of it, went back to work, and the devaluation began to be put to its test. The test consisted of two questions. Question One: Would the devaluation accomplish its purpose for Britain—that is, stimulate exports and reduce imports sufficiently to cure the international deficit and put an end to speculation against the pound? Question Two: Would it, as in 1931, be followed by a string of competitive devaluations of other currencies, leading ultimately to a devaluation of the dollar in relation to gold, worldwide monetary chaos, and perhaps a world depression? I watched the answers beginning to take shape.

  On Monday, the banks and exchanges in London remained firmly closed, by government order, and all but a few traders elsewhere avoided taking positions in sterling in the Bank of England’s absence from the market, so the answer to the question of the pound’s strength or weakness at its new valuation was postponed; On Threadneedle and Throgmorton Streets, crowds of brokers, jobbers, and clerks milled around and talked excitedly—but made no trades—in a city where the Union Jack was flying from all flagstaffs because it happened to be the Queen’s wedding anniversary. The New York stock market opened sharply lower, then recovered. (There was no really rational explanation for the initial drop; securities men pointed out that devaluation just generally sounds depressing.) By nightfall on Monday, it had been announced that eleven other currencies—those of Spain, Denmark, Israel, Hong Kong, Malta, Guyana, Malawi, Jamaica, Fiji, Bermuda, and Ireland—were also being devalued. That wasn’t so bad, because the disruptive effect of a currency devaluation is in direct proportion to the importance of that currency in world trade, and none of those currencies were of great importance. The most ominous move was Denmark’s, because Denmark might easily 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 on pounds held in its reserves at the time of devaluation, held firm, 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 trading limits 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 balloon slipped from a child’s hand, and stayed there all day; indeed, for obscure reasons inapplicable to balloons, it spent much of the day slightly above the ceiling. Now, instead of paying dollars for pounds, the Bank of England was supplying pounds for dollars, and thereby beginning the process of rebuilding its reserves. I called Waage to share what I thought would be his jubilation, but found him taking it all calmly. The pound’s strength, he said, was “technical”—that is, it was caused by the previous week’s short sellers’ buying pounds back to cash in their profits—and the first objective test of the new pound would not come until Friday. Seven more small governments announced devaluations during the day. In Malaysia, which had devalued its old sterling-backed pound but not its new dollar, based on gold, and which continued to keep both currencies in circulation, the injustice of the situation led to riots, and over the next two weeks more than twenty-seven people were killed in them—the first casualties of devaluation. Apart from this painful reminder that the counters in the engrossing game of international finance are people’s livelihoods, and even their lives, so far so good.

  But on Wednesday the twenty-second a less localized portent of trouble appeared. The speculative attack that had so long battered and at last crushed the pound now turned, as everyone had feared it might, on the dollar. As the one nation that is committed to sell gold in any quantity to the central bank of any other nation at the fixed price of thirty-five dollars an ounce, the United States is the keystone of the world monetary arch, and the gold in its Treasury—which on that Wednesday amounted to not quite thirteen billion dollars’ worth—is the foundation. Federal Reserve Board Chairman Martin had said repeatedly that the United States would under any condition continue to sell it on demand, if necessary down to the last bar. Despite this pledge, and despite President Johnson’s reiteration of it immediately after Britain’s devaluation, speculators now began buying gold with dollars in huge quantities, expressing the same sort of skepticism toward official assurances that was shown at about the same time by New Yorkers who took to accumulating and hoarding subway tokens. Gold was suddenly in unusual demand in Paris, Zurich, and other financial centers, and most particularly in London, the world’s leading gold market, where people immediately began to talk 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, who are forbidden by law to buy or own monetary gold. And who was to sell the stuff to these invisible multitudes so suddenly repossessed by the age-old lust for it? Not the United States Treasury, which, through the Federal Reserve, sold gold only to central banks, and not other central banks, which did not promise to sell it at all. To fill this vacuum, still another coöperative international group, the London gold pool, had been established in 1961. Provided by its members—the United States, Britain, Italy, the Netherlands, Switzerland, West Germany, Belgium, and, originally, France—with gold ingots in quantities that might dazzle a Croesus (fifty-nine per cent of the total coming from the United States), the pool was intended to quell money panics by supplying gold to non-governmental buyers in any quantity demanded, at a price effectively the same as the Federal Reserve’s, and thereby to protect the stability of the dollar and the system.

  And that is what the pool did on Wednesday. Thursday, though, was much worse, with the gold-buying frenzy in both Paris and London breaking even the records set during the Cuban missile crisis of 1962, and many people, high British and American officials among them, became convinced of something they had suspected from the first—that the gold rush was part of a plot by General de Gaulle and France to humble first the pound and now the dollar. The evidence, to be sure, was all circumstantial, but it was persuasive. De Gaulle and his Ministers had long been on record as wishing to relegate the pound and the dollar to international roles far smaller than their 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’s government had let slip, through a press leak, that it intended to withdraw from the gold pool (according to subsequent information, France hadn’t contributed anything to the pool since the previous June anyhow), and the French government was also accused of having had a hand in spreading false rumors that Belgium and Italy were about to withdraw, too. And now it was coming out, bit by bit, that in the days just before the devaluation France had been by far the most reluctant nation to join in another credit package to rescue sterling, and that, for good measure, France had withheld until the very last minute its assurance that it would maintain its own exchange rate if Britain devalued. All in all, there was a good case for the allegation that de Gaulle & Co. had been playing a mischievous part, and, whether it was true or not, I couldn’t help feeling that the accusations against them were adding a good deal of spice to the devaluation crisis—spice that would become more piquant a few months later, when the franc would be in dire straits, and the United States forced by circumstances to come to its aid.

  ON Friday, in London, the pound spent the whole day tight up against its ceiling, and thus came through its first really significant post-devaluation test with colors flying. Only a few small governments had announced devaluations since Monday, and it was now evident that Norway, Sweden, and the Netherlands were going to hold firm. But on the dollar front things looked worse than ever. Friday’s gold buying in London and Paris had far exceeded the previous day’s record, and estimates were that gold sales in all markets over the preceding three days added up to something not far under the billion-dollar mark; there was near pandemonium all day in Johannesburg as speculators scrambled to
get their hands on shares in gold-mining companies; and all over Europe people were trading in dollars not only for gold but for other currencies as well. If the dollar was hardly in the position that the pound had occupied a week earlier, at least there were uncomfortable parallels. Subsequently, it was reported that in the first days after devaluation the Federal Reserve, so accustomed to lending support to other currencies, had been forced to borrow various foreign currencies, amounting to almost two billion dollars’ worth, in order to defend its own.

  Late Friday, having attended a conference at which Waage was in an unaccustomed mood of nervous jocularity that made me nervous, too, I left the Federal Reserve Bank half believing that devaluation of the dollar was going to be announced over the weekend. Nothing of the sort happened; on the contrary, the worst was temporarily over. On Sunday, it was announced that central-bank representatives of the gold-pool countries, Hayes and Coombs among them, had met in Frankfurt and formally agreed to continue maintaining the dollar at its present gold-exchange rate with their combined resources. This seemed to remove any doubt that the dollar was backed not only by the United States’ thirteen-billion-dollar gold hoard but also by the additional fourteen billion dollars’ worth of gold in the coffers of Belgium, Britain, Italy, the Netherland, Switzerland, and West Germany. The speculators were apparently impressed. On Monday, gold buying was much lower in London and Zurich, continuing at a record pace only in Paris—and this in spite of a sulphurous press audience granted that day by de Gaulle himself, who, along with bemusing opinions on various other matters, hazarded the view that the trend of events was toward the decline of the dollar’s international importance. On Tuesday, gold sales dropped sharply everywhere, even in Paris. “A good day today,” Waage told me on the phone that afternoon. “A better day tomorrow, we hope.” On Wednesday, the gold markets were back to normal, but, as a result of the week’s doings, the Treasury had lost some four hundred and fifty tons of gold—almost half a billion dollars’ worth—in fulfilling its obligations to the gold pool and meeting the demands of foreign central banks.

  Ten days after devaluation, everything was quiet. But it was only a trough between succeeding shock waves. From December 8th to 18th, there came a new spell of wild speculation against the dollar, leaching another four hundred tons or so of gold out of the pool; this, like the previous wave, was eventually calmed by reiterations on the part of the United States and its gold-pool partners of their determination to maintain the status quo. By the end of the year, the Treasury had lost almost a billion dollars’ worth of gold since Britain’s devaluation, reducing its gold stock to below the twelve-billion-dollar mark for the first time since 1937. President Johnson’s balance-of-payments program, announced January 1st, 1968 and based chiefly on restrictions on American bank lending and industrial investments abroad, helped keep speculation down for two months. But the gold rush was not to be quelled so simply. All pledges notwithstanding, it had powerful economic and psychological forces behind it. In a larger sense, it was an expression of an age-old tendency to distrust all paper currencies in times of crisis, but more specifically it was the long-feared sequel to sterling devaluation, and—perhaps most specifically of all—it was a vote of no confidence in the determination of the United States to keep its economic affairs in order, with particular reference to a level of civilian consumption beyond the dreams of avarice at a time when ever-increasing billions were being sent abroad to support a war with no end in sight. The money in which the world was supposed to be putting its trust looked to the gold speculators like that of the most reckless and improvident spendthrift.

  When they returned to the attack, on February 29th—choosing that day for no assignable reason except that a single United States senator, Jacob Javits, had just remarked, with either deadly seriousness or casual indiscretion, that he thought his country might do well to suspend temporarily all gold payments to foreign countries—it was with such ferocity that the situation quickly got out of hand. On March 1st, the gold pool dispensed an estimated forty to fifty tons in London (as against three or four tons on a normal day); on March 5th and 6th, forty tons per day; on March 8th, over seventy-five tons; and on March 13th, a total that could not be accurately estimated but ran well over one hundred tons. Meanwhile, the pound, which could not possibly escape a further devaluation if the dollar were to be devalued in relation to gold, slipped below its par of $2.40 for the first time. Still another reiteration of the now-familiar pledges, this time from the central-bankers’ club at Basel on March 10th, seemed to have no effect at all. The market was in the classic state of chaos, distrustful of every public assurance and at the mercy of every passing rumor. A leading Swiss banker grimly called the situation “the most dangerous since 1931.” A member of the Basel club, tempering desperation with charity, said that the gold speculators apparently didn’t realize their actions were imperilling the world’s money. The New York Times, in an editorial, said, “It is quite clear that the international payments system … is eroding.”

  On Thursday, March 14th, panic was added to chaos. London gold dealers, in describing the day’s action, used the un-British words “stampede,” “catastrophe,” and “nightmare.” The exact volume of gold sold that day was unannounced, as usual—probably it could not have been precisely counted, in any case—but everyone agreed that it had been an all-time record; most estimates put the total at around two hundred tons, or two hundred and twenty million dollars’ worth, while the Wall Street Journal put it twice that high. If the former estimate was right, during the trading day the United States Treasury had paid out through its share of the gold pool alone one million dollars in gold every three minutes and forty-two seconds; if the Journal figure was right (as a subsequent Treasury announcement made it appear to be), a million every one minute and fifty-one seconds. Clearly, this wouldn’t do. Like Britain in 1964, at this rate the United States would have a bare cupboard in a matter of days. That afternoon, the Federal Reserve System raised its discount rate from four and a half to five per cent—a defensive measure so timid and inadequate that one New York banker compared it to a popgun, and the Federal Reserve Bank of New York, as the System’s foreign-exchange arm, was moved to protest by refusing to go along with the token raise. Late in the day in New York, and toward midnight in London, the United States asked Britain to keep the gold market closed the next day, Friday, to prevent further catastrophe and clear the way to the weekend, when face-to-face international consultations could be held. The bewildered American public, largely unaware of the gold pool’s existence, probably first sensed the general shape of things when it learned on Friday morning that Queen Elizabeth II had met with her Ministers on the crisis between midnight and 1 A.M.

  On Friday, a day of nervous waiting, the London markets were closed, and so were foreign-exchange desks nearly everywhere else, but gold shot up to a big premium in the Paris market—a sort of black market, from the American standpoint—and in New York sterling, unsupported by the firmly locked Bank of England, briefly fell below its official bottom price of $2.38 before rallying. Over the weekend, the central bankers of the gold-pool nations (the United States, Britain, West Germany, Switzerland, Italy, the Netherlands, and Belgium, with France still conspicuously missing and, indeed, uninvited this time) met in Washington, with Coombs participating for the Federal Reserve along with Chairman Martin. After two full days of rigidly secret discussions, while the world of money waited with bated breath, they announced their decisions late on Sunday afternoon. The thirty-five-dollar-an-ounce official monetary price of gold would be kept for use in all dealings among central banks; the gold pool would be disbanded, and the central banks would supply no more gold to the London market, where privately traded gold would be allowed to find its own price; sanctions would be taken against any central bank seeking to profit from the price differential between the central-bank price and the free-market price; and the London gold market would remain closed for a couple of weeks, until the dust settled.
During the first few market days under the new arrangements, the pound rallied strongly, and the free-market price of gold settled at between two and five dollars above the central-bank price—a differential considerably smaller than many had expected.