“How can you tell?”
“All of a sudden the rates of future dollars began to plummet. And the gold price shot up $4 within one hour. What has everybody worried is that suddenly this has taken on all the characteristics of a highly organized effort.”
“What do you propose to do, Henry?” As so often in the past, it was to Crosby that the president turned for advice when faced with a crisis situation.
“Well, we must be careful not to repeat the mistake the British made in 1967.”
“And that was?”
“The circumstances were very similar to those right now. Somehow the word started getting around on a Tuesday or Wednesday that the pound was going to go on the weekend. By Thursday every last bank clerk in Europe knew about it. Instead of facing the fact that the news had leaked, the Bank of England intervened to protect the pound right down to the wire, not only in the spot market—they also were buying everything that was being offered by speculators in the forward markets as well. They lost £1.5 billion in two days that way, until even they had to give up around noon on Friday.
“The entire exercise had proven futile. Their losses could be peanuts compared to what it could cost us this week should the buildup against the dollar continue. My guess is anything between five and ten billion.”
“What’s the answer?”
“We’ve just two alternatives. Close the banks now, before this develops into total chaos. Or bluff our way through, cost what it may, knowing we may make fools of ourselves in the process.”
The president had listened carefully to every word. Then he turned to the secretary of state.
“Charles, what do you think?”
“First, I disagree with the diagnosis. We are still a long way from what Henry terms total chaos. The rates have barely fallen to levels where government intervention becomes necessary. This has happened before. In fact, since 1971 it must have occurred a dozen times. We bluffed our way through then, and I’m sure we can do it again now. After all, we only have a few more days to go.”
The secretary of the treasury shook his head as he listened to these comments, but the secretary of state continued without taking notice.
“But all this is really beside the point. Even if Henry is correct, and even if it would cost us five to ten billion, still in my judgment we have no choice but to defend the dollar right up to the weekend. What if we don’t? The whole world will witness what they will thereafter believe was a forced tripling of the price of gold by the United States, in spite of all prior policy statements to the contrary. And much of the world would be only too happy to accept that it had been the Russians who engineered the whole thing. Imagine what would happen to future faith in the dollar. Look at what happened to Britain. Once the world lost faith in sterling, its influence in Asia, in Africa, and even in Europe proper went to the lowest levels in history. All within just a few years. Oh, no! To follow such a path of action would be political suicide. That we must raise the price of gold and once again make the dollar convertible is clear. But we must do this according to our plan, and our schedule.”
The chairman of the Federal Reserve Board then spoke up for the first time.
“We could always change the plan, you know.”
The president sighed. For years the man heading the Federal Reserve Board had been pushing for a restoration of convertibility of the dollar. It was he who had insisted that this could only be done through a massive increase in the official gold price. It was he who pressed the urgency of the problem. Until the president had decided to follow that advice. This, now, apparently made the entire concept suspect. Unbelievable what happens so often to reasonable men who develop illusions of greatness when in office.
“Frank,” said the president, “I think we can forget that idea. It’s too late to turn back at this point. What could we possibly gain from it? Irrespective of what happens in the markets during the next day or so, the fundamental problem remains. We must restore convertibility of the dollar. What’s happening today only proves how urgent this is. Either we act now, or the world will act against us.”
“But—”
“Look, the point that the secretary of state made is a valid one. The overriding consideration now must be the preservation of the prestige of the dollar. That is, after all, the whole objective of this exercise. We not only want to put the dollar back onto a realistic basis, but just as important, we want to regain once and for all the respect of the world for the people who manage the dollar—and that means, ultimately, the people in this room. People don’t trust managers who panic. Nor do they trust people who let themselves be taken for a ride by either the Russians or the speculators.”
“I’m afraid I’m being misunderstood,” said the man from the Federal Reserve. “I am not for abandoning the objectives of our plan. My position on that is quite well known. I am referring to the method employed to achieve that objective. Nobody says that we must raise the price of gold to $125 overnight. Nobody says that we must, in our God-given wisdom, decide that the dollar must be devalued by 15 percent this weekend. We can let the dollar find its own level. And the same for gold. Turn them loose. Let the markets decide. Go back to floating.”
Henry Crosby interrupted, “Frank, we’ve been over that subject at least a hundred times. You professors, or ex-professors, always toot on the same note. But 1971 proved, once and for all, that floating does not work. Everybody cheated last time, including ourselves. It would be folly to attempt that again.”
The president had heard all this before. He recognized the merits of both arguments. But now he was convinced that Crosby was right. The world of commerce wanted stability; businessmen wanted to work with knowns, wanted to know where they stood not only today, but a year from today. If the United States could not give them a stable dollar based on gold that would meet their needs, they would use something else. And the Common Market would just love to give it to them. He did not want to turn this into another debate on economics. He had attended two semesters on that subject in college. And that had been quite enough.
“Gentlemen,” he said, “we shall stick to the original plan. And the methodology and timing already agreed upon. But we are going to have to prevent a panic. I’m prepared to intervene in the markets right now. From what our intelligence reports said, if we let the rates slip any further a real run could start immediately. Is that right?”
The other men in the room indicated their agreement with this analysis. Again the president turned to his secretary of the treasury, Henry Crosby.
“Henry, how much will it take, and how should we go about it?”
“Mr. President, I figure that we will need as much as $5 billion to ride out the next twenty-four hours—up to noon our time tomorrow. I would not want to venture even a guess beyond that point.”
“How will we work?”
“Quite simply. We will go into the market as a seller of francs, marks, guilders, yen—whatever comes pouring in at us. This way we will keep their rates relative to the dollar inside the IMF limits. Otherwise, we would be faced with a progressive de facto devaluation.”
“Have we got enough of those currencies to do the job?”
“No, but we can borrow almost unlimited amounts through the Bank for International Settlements. Thank God we brought Bollinger into this plan ahead of time. I’m sure he’s right on top of the situation and will be able to work out a swap arrangement in Europe immediately. We’ll swap dollars for a bushel basket of those other currencies and have lots of ammunition to work with. There’s one hooker here, however. The BIS will no doubt demand an insurance clause on behalf of the countries putting up their currencies. In other words, we will have to bear the risk and cost of the dollar devaluation. I am sure that once we have demonstrated such a firm stand, the Europeans will not just stay idle but also help us ward off the speculators. Between us, we should be able to withstand enormous pressure. Of course, there are always limits. That’s why I say, let’s try it for twe
nty-four hours, and then look again.”
The president appeared fully satisfied with Crosby’s proposal.
“What do you think we should do about the gold price?”
“There’s absolutely nothing we can do. After all, we’re hardly going to sell any gold from Fort Knox at current free market prices when we know that from Saturday on it will be worth $125 an ounce. I’d say, let’s just ignore gold and concentrate on stopping the run out of the dollar.”
“I’ll buy that,” said the president. “Now, what do we do about the Russians?”
“Scare the bejeezus out of them” was the advice of Henry Crosby.
“How?”
“Give ’em a bit of their own medicine,” said Crosby.
“I don’t think we have that kind of medicine in stock.”
“Oh, yes, we do. Wheat. They’ve just gone through the biggest crop failure in Russia since the revolution. They need our wheat desperately. Look,” said Crosby, now in full command, “it’s no longer the good old days over there. Their people won’t accept going back to bread rationing, or anything near it. But if we stop all grain shipments, that’s what will have to happen. The Canadians are sold out, and so are the Australians. That’s why they originally came to us. Well, we’ll just tell them that we’ve changed our minds; that we’re putting an immediate embargo on all food exports to Eastern Europe. And tell them that their own foolish actions in the currency field, which are doomed to failure anyway, are responsible.”
“And if the public hears about this?”
“Not a chance. We’ll use the hot line to Moscow. The news won’t get beyond this room and the Kremlin. Believe me, the Russians will keep quiet while they think things over.”
“And if they escalate?” interjected the secretary of state.
“Then we’ll escalate,” replied the president promptly. “But let’s move one step at a time. Everybody agree?”
They did.
The president turned back to his secretary of state.
“Could you start drafting that message right away? I’ll want to review it very carefully before we send it off. But it must go out no later than this evening.”
And then to Crosby. “Henry, you’d better get onto that fellow in Switzerland before things get out of hand over there.”
With that the meeting was adjourned.
The secretary of the treasury hurried back to his office, and had Dr. Bollinger of the BIS on the telephone within two minutes.
“Dr. Bollinger, this is Henry Crosby.”
“Yes, Mr. Secretary. Actually I tried to phone you a while ago, but your people told me you were unavailable at that time. It does not look too good, does it?”
“No. We’re going to have to ask you for some help. We want to have an immediate standby facility of $5 billion equivalent of European currencies, on a swap basis. We are going to stop this thing in the market. Right now.”
“This can prove enormously expensive.”
“We know it. The president has just made the decision.”
“But the plan is still on?”
“Yes.”
“I see.”
“Bollinger, now what about that swap?”
“As you know, almost all of this has been discussed previously. I shall have to finalize the arrangements immediately, but that should be possible within the hour. You realize, of course, that everyone will require an insurance clause. Along the lines agreed to by the British a number of years ago.”
“We agree. Put everything through to me directly as soon as you have the package together. I’ll not leave my office until I hear from you. Thank you very much, Dr. Bollinger. We won’t forget it.”
One hour and seven minutes later, the swap arrangement had been formally completed. It was the biggest single financial transaction ever made.
By three that afternoon the foreign exchange markets in New York had reached the boiling point. The United States government had pumped in almost $3 billion in foreign currencies to hold the dollar against the stampede of speculators who seemed hell-bent on bringing Uncle Sam to his knees. It was with the greatest possible relief that the banks in that city finally closed their doors. In Chicago and San Francisco they played it cute. The banks there had always had only a marginal involvement in international finance and especially foreign exchange. On this day they either refused to make a market or just shut off the telephones in their trading departments. Their attitude: Let the Japanese handle this hot potato next.
About the same time as the American banks had closed their doors to the public after a hectic day, Dr. Walter Hofer was finishing his coffee in his home, high above the Lake of Zurich. The first snow of the year was just starting to fall outside, and his wife had decided to light the fireplace to mark the occasion.
“What’s Mary all excited about?” he asked his wife.
“She’s got a date. Her first in Switzerland. With a young man from the bank, I forget his name.”
“Where’s her mother?”
“Walter, it’s not her mother, in that tone of voice. She’s my sister.”
“Well, I prefer to think of her as Mary’s mother, if you don’t mind. That super-American act of hers gets on my nerves every time she shows up here. She was born and raised right in Brugg just like you. Why in the world we have to speak English with her is beyond me.”
“Now, Walter. Thirty years in America is a long time. And you have to admit, she has done a very nice job in bringing up Mary.”
“Fine. Then where’s your sister?”
“She went to the theatre.”
The doorbell rang and Mrs. Hofer immediately rose. A minute later she returned with the young man. It was Zimmerer of the foreign exchange desk, scrubbed a healthy Swiss pink and embarrassed as hell.
“Walter, won’t you look after Mr. Zimmerer for a moment. I want to go up and tell Mary he’s here.”
It was not exactly Hofer’s style to entertain department heads of the bank in his living room, but he accepted the challenge fairly gracefully. Zimmerer turned down his offer of coffee but gratefully accepted a cognac.
“Well, well, Herr Zimmerer. Apparently my niece and you have found a common interest in foreign exchange.”
Zimmerer grunted something rather inaudible and took another slug of cognac. Hofer continued, “Actually, it’s very good that you dropped by. I hear that all hell broke loose in New York during the past couple of hours.”
“Yes, sir. The rumours that the dollar is under steady attack from Eastern Europe seem to be proving out. Now everybody’s getting into the act. I’m not sure how long the Americans can hold the dollar. Apparently, they have been massively intervening in the market all day in New York, but if the selling keeps up, it’s hard to say what will happen.”
“What do you think?”
“I really don’t know. I can say, however, that the bank’s in good shape. On balance, we are now about $2 billion short, just as you instructed, sir. But I’m afraid that we could not fill all the orders for some of our customers with the same idea. The markets were simply too hectic, and some of our major partner banks have simply stopped trading for the moment.”
“Is the word out that we’ve been selling a lot of dollars?”
“I’m afraid it is, sir. You know how these things work. When four or five banks keep getting selling orders from us, in time their traders start talking to each other. Very gossipy bunch, you know.”
“Fine, Zimmerer. Now until I say differently, I want you to stay right on the fence from now on. No more selling of dollars. But also no buying. Just keep trading within very very narrow margins. Come to think of it, if necessary buy more dollars than you sell tomorrow morning. And make sure everybody notices it.” He paused. “Now tell me about gold.”
“Well, Kellermann insisted we start executing those buy orders for that numbered account. And at the same time, the fellows across the street also came into the afternoon fixing with a very big purchase. The result was in
evitable. The price had to be pushed up over $4 an ounce, unless somebody wanted to intervene.”
“And tomorrow?”
“It can only go higher. Much higher.”
“Well, I don’t want it to go higher. I want you to use the bank’s own gold stocks to meet every buy order tomorrow. I want the price to be kept below $80 an ounce. I’m holding you personally responsible for this.”
“Yes sir, I’ll be at the gold fixing meetings myself in that case. But although we can control the Zurich market, at least for a day or two, I’m afraid that there’s little we can do in London.”
“Let me worry about that, Zimmerer. You just carry out your instructions here.”
At this point, Hofer’s niece appeared. In contrast to her mother she thought Switzerland was just great. She had donned a white lace blouse and the type of dirndl so popular in the Alpine countries. Hofer, who had no children of his own, liked the young lady immensely and went out of his way to compliment her on how nice she looked. He escorted her and the young man to the door and even lingered a moment, watching them descend the stairs to the car parked below, chattering together.
“Walter,” called his wife, “please come back in. You’ll catch cold standing out there.”
Soon he had returned to his usual chair near the fireplace.
“Troubles?” said Martha.
Hofer did not even glance up. He was gazing into the fire.
“Walter!”
“Yes, Martha. What is it?”
“I just asked you if you have troubles. You’ve been about ten kilometres away ever since you came home this evening.”
No reply.
“Now, you know it’s always better to get things off your chest. Otherwise you just sink deeper and deeper into yourself, and soon all we will be doing is grunting at each other.”
The Billion Dollar Sure Thing Page 17