by John Brooks
By Thursday, according to subsequent reports, a sharp private dispute had erupted between the Bank of England and the British government on the bank-rate question—Lord Cromer arguing, for the bank, that a rise of at least one per cent, and perhaps two per cent, was absolutely essential, and Wilson, Brown, and Callaghan still demurring. The upshot was no bank-rate rise on Thursday, and the effect of the inaction was a swift intensification of the crisis. Friday the twentieth was a black day in the City of London. The Stock Exchange, its investors moving in time with sterling, had a terrible session. The Bank of England had by now resolved to establish its last-line trench on the pound at $2.7825—a quarter of a cent above the bottom limit. The pound opened on Friday at precisely that level and remained there all day, firmly pinned down by the speculators’ hail of offers to sell; meanwhile, the bank met all offers at $2.7825 and, in doing so, used up more of Britain’s reserves. Now the offers were coming so fast that little attempt was made to disguise their places of origin; it was evident that they were coming from everywhere—chiefly from the financial centers of Europe, but also from New York, and even from London itself. Rumors of imminent devaluation were sweeping the bourses of the Continent. And in London itself an ominous sign of cracking morale appeared: devaluation was now being mentioned openly even there. The Swedish economist and sociologist Gunnar Myrdal, in a luncheon speech in London on Thursday, had suggested that a slight devaluation might now be the only possible solution to Britain’s problems; once this exogenous comment had broken the ice, Britons also began using the dread word, and, in the next morning’s Times, Our City Editor himself was to say, in the tone of a commander preparing the garrison for possible surrender, “Indiscriminate gossip about devaluation of the pound can do harm. But it would be even worse to regard use of that word as taboo.”
When nightfall at last brought the pound and its defenders a weekend breather, the Bank of England had a chance to assess its situation. What it found was anything but reassuring. All but a fraction of the billion dollars it had arranged to borrow in September under the expanded swap agreements had gone into the battle. The right that remained to it of drawing on the International Monetary Fund was virtually worthless, since the transaction would take weeks to complete, and matters turned on days and hours. What the bank still had—and all that it had—was the British reserves, which had gone down by fifty-six million dollars that day and now stood at around two billion. More than one commentator has since suggested that this sum could in a way be likened to the few squadrons of fighter planes to which the same dogged nation had been reduced twenty-four years earlier at the worst point in the Battle of Britain.
THE analogy is extravagant, and yet, in the light of what the pound means, and has meant, to the British, it is not irrelevant. In a materialistic age, the pound has almost the symbolic importance that was once accorded to the Crown; the state of sterling almost is the state of Britain. The pound is the oldest of modern currencies. The term “pound sterling” is believed to have originated well before the Norman Conquest, when the Saxon kings issued silver pennies—called “sterlings” or “starlings” because they sometimes had stars inscribed on them—of which two hundred and forty equalled one pound of pure silver. (The shilling, representing twelve sterlings, or one-twentieth of a pound, did not appear on the scene until after the Conquest.) Thus, sizable payments in Britain have been reckoned in pounds from its beginnings. The pound, however, was by no means an unassailably sound currency during its first few centuries, chiefly because of the early kings’ unfortunate habit of relieving their chronic financial embarrassment by debasing the coinage. By melting down a quantity of sterlings, adding to the brew some base metal and no more silver, and then minting new coins, an irresponsible king could magically convert a hundred pounds into, say, a hundred and ten, just like that. Queen Elizabeth I put a stop to the practice when, in a carefully planned surprise move in 1561, she recalled from circulation all the debased coins issued by her predecessors. The result, combined with the growth of British trade, was a rapid and spectacular rise in the prestige of the pound, and less than a century after Elizabeth’s coup the word “sterling” had assumed the adjectival meaning that it still has—“thoroughly excellent, capable of standing every test.” By the end of the seventeenth century, when the Bank of England was founded to handle the government’s finances, paper money was beginning to be trusted for general use, and it had come to be backed by gold as well as silver. As time went on, the monetary prestige of gold rose steadily in relation to that of silver (in the modern world silver has no standing as a monetary reserve metal, and only in some half-dozen countries does it now serve as the principal metal in subsidiary coinage), but it was not until 1816 that Britain adopted a gold standard—that is, pledged itself to redeem paper currency with gold coins or bars at any time. The gold sovereign, worth one pound, which came to symbolize stability, affluence, and even joy to more Victorians than Bagehot, made its first appearance in 1817.
Prosperity begat emulation. Seeing how Britain flourished, and believing the gold standard to be at least partly responsible, other nations adopted it one after another: Germany in 1871; Sweden, Norway, and Denmark in 1873; France, Belgium, Switzerland, Italy, and Greece in 1874; the Netherlands in 1875; and the United States in 1879. The results were disappointing; hardly any of the newcomers found themselves immediately getting rich, and Britain, which in retrospect appears to have flourished as much in spite of the gold standard as because of it, continued to be the undisputed monarch of world trade. In the half century preceding the First World War, London was the middleman in international finance, and the pound was its quasi-official medium. As David Lloyd George was later to write nostalgically, prior to 1914 “the crackle of a bill on London”—that is, of a bill of credit in pounds sterling bearing the signature of a London bank—“was as good as the ring of gold in any port throughout the civilized world.” The war ended this idyll by disrupting the delicate balance of forces that had made it possible and by bringing to the fore a challenger to the pound’s supremacy—the United States dollar. In 1914, Britain, hard pressed to finance its fighting forces, adopted measures to discourage demands for gold, thereby abandoning the gold standard in everything but name; meanwhile, the value of a pound in dollars sank from $4.86 to a 1920 low of $3.20. In an effort to recoup its lost glory, Britain resumed a full gold standard in 1925, tying the pound to gold at a rate that restored its old $4.86 relation to the dollar. The cost of this gallant overvaluation, however, was chronic depression at home, not to mention the political eclipse for some fifteen years of the Chancellor of the Exchequer who ordered it, Winston Churchill.
The general collapse of currencies during the nineteen-thirties actually began not in London but on the Continent, when, in the summer of 1931, a sudden run on the leading bank of Austria, the Creditanstalt, resulted in its failure. The domino principle of bank failures—if such a thing can be said to exist—then came into play. German losses arising from this relatively minor disaster resulted in a banking crisis in Germany, and then, because huge quantities of British funds were now frozen in bankrupt institutions on the Continent, the panic crossed the English Channel and invaded the home of the imperial pound itself. Demands for gold in exchange for pounds quickly became too heavy for the Bank of England to meet, even with the help of loans from France and the United States. Britain was faced with the bleak alternatives of setting an almost usurious bank rate—between eight and ten per cent—in order to hold funds in London and check the gold outflow, or abandoning the gold standard; the first choice, which would have further depressed the domestic economy, in which there were now more than two and a half million unemployed, was considered unconscionable, and accordingly, on September 21, 1931, the Bank of England announced suspension of its responsibility to sell gold.
The move hit the financial world like a thunderbolt. So great was the prestige of the pound in 1931 that John Maynard Keynes, the already famous British economist,
could say, not wholly in irony, that sterling hadn’t left gold, gold had left sterling. In either case, the mooring of the old system was gone, and chaos was the result. Within a few weeks, all the countries on the vast portion of the globe then under British political or economic domination had left the gold standard, most of the other leading currencies had either left gold or been drastically devalued in relation to it, and in the free market the value of the pound in terms of dollars had dropped from $4.86 to around $3.50. Then the dollar itself—the potential new mooring—came loose. In 1933, the United States, compelled by the worst depression in its history, abandoned the gold standard. A year later, it resumed it in a modified form called the gold-exchange standard, under which gold coinage was ended and the Federal Reserve was pledged to sell gold in bar form to other central banks but to no one else—and to sell it at a drastic devaluation of forty-one per cent from the old price. The United States devaluation restored the pound to its old dollar parity, but Britain found it small comfort to be tied securely to a mooring that was now shaky itself. Even so, over the next five years, while beggar-my-neighbor came to be the rule in international finance, the pound did not lose much more ground in relation to other currencies, and when the Second World War broke out, the British government boldly pegged it at $4.03 and imposed controls to keep it there in defiance of the free market. There, for a decade, it remained—but only officially. In the free market of neutral Switzerland, it fluctuated all through the war in reflection of Britain’s military fortunes, sinking at the darkest moments to as low as $2.
In the postwar era, the pound has been almost continuously in trouble. The new rules of the game of international finance that were agreed upon at Bretton Woods recognized that the old gold standard had been far too rigid and the virtual paper standard of the nineteen-thirties far too unstable; a compromise accordingly emerged, under which the dollar—the new king of currencies—remained tied to gold under the gold-exchange standard, and the pound, along with the other leading currencies, became tied not to gold but to the dollar, at rates fixed within stated limits. Indeed, the postwar era was virtually ushered in by a devaluation of the pound that was about as drastic in amount as that of 1931, though far less so in its consequences. The pound, like most European currencies, had emerged from Bretton Woods flagrantly overvalued in relation to the shattered economy it represented, and had been kept that way only by government-imposed controls. In the autumn of 1949, therefore, after a year and a half of devaluation rumors, burgeoning black markets in sterling, and gold losses that had reduced the British reserves to a dangerously low level, the pound was devalued from $4.03 to $2.80. With the isolated exceptions of the United States dollar and the Swiss franc, every important non-Communist currency almost instantly followed the pound’s example, but this time no drying up of trade, or other chaos, ensued, because the 1949 devaluations, unlike those of 1931 and the years following, were not the uncontrolled attempts of countries riddled by depression to gain a competitive advantage at any cost but merely represented recognition by the war-devastated countries that they had recovered to the point where they could survive relatively free international competition without artificial props. In fact, world trade, instead of drying up, picked up sharply. But even at the new, more rational evaluation the pound continued its career of hairbreadth escapes. Sterling crises of varying magnitudes were weathered in 1952, 1955, 1957, and 1961. In its unsentimental and tactless way, the pound—just as by its gyrations in the past it had accurately charted Britain’s rise and fall as the greatest of world powers—now, with its nagging recurrent weakness, seemed to be hinting that even such retrenchment as the British had undertaken in 1949 was not enough to suit their reduced circumstances.
And in November, 1964, these hints, with their humiliating implications, were not lost on the British people. The emotional terms in which many of them were thinking about the pound were well illustrated by an exchange that took place in that celebrated forum the letters column of the Times when the crisis was at its height. A reader named I. M. D. Little wrote deploring all the breast-beating about the pound and particularly the uneasy whispering about devaluation—a matter that he declared to be an economic rather than a moral issue. Quick as a flash came a reply from a C. S. Hadfield, among others. Was there ever a clearer sign of soulless times, Hadfield demanded, than Little’s letter? Devaluation not a moral issue? “Repudiation—for that is what devaluation is, neither more nor less—has become respectable!” Hadfield groaned, in the unmistakable tone, as old in Britain as the pound itself, of the outraged patriot.
IN the ten days following the Basel meeting, the first concern of the men at the Federal Reserve Bank of New York was not the pound but the dollar. The American balance-of-payments deficit had now crept up to the alarming rate of almost six billion dollars a year, and it was becoming clear that a rise in the British bank rate, if it should be unmatched by American action, might merely shift some of the speculative attack from the pound to the dollar. Hayes and Coombs and the Washington monetary authorities—William McChesney Martin, chairman of the Federal Reserve Board, Secretary of the Treasury Douglas Dillon, and Under-Secretary of the Treasury Robert Roosa—came to agree that if the British should raise their rate the Federal Reserve would be compelled, in self-defense, to competitively raise its rate above the current level of three and a half per cent. Hayes had numerous telephone conversations on this delicate point with his London counterpart, Lord Cromer. A deep-dyed aristocrat—a godson of King George V and a grandson of Sir Evelyn Baring, later the first Earl of Cromer (who, as the British agent in Egypt, was Chinese Gordon’s nemesis in 1884–85)—Lord Cromer was also a banker of universally acknowledged brilliance and, at forty-three, the youngest man, as far as anyone could remember, ever to direct the fortunes of the Bank of England; he and Hayes, in the course of their frequent meetings at Basel and elsewhere, had become warm friends.
During the afternoon of Friday the twentieth, at any rate, the Federal Reserve Bank had a chance to show its good intentions by doing some front-line fighting for the pound. The breather provided by the London closing proved to be illusory; five o’clock in London was only noon in New York, and insatiable speculators were able to go on selling pounds for several more hours in the New York market, with the result that the trading room of the Federal Reserve Bank temporarily replaced that of the Bank of England as the command post for the defense. Using as their ammunition British dollars—or, more precisely, United States dollars lent to Britain under the swap agreements—the Federal Reserve’s traders staunchly held the pound at or above $2.7825, at ever-increasing cost, of course, to the British reserves. Mercifully, after the New York closing the battle did not follow the sun to San Francisco and on around the world to Tokyo. Evidently, the attackers had had their fill, at least for the time being.
What followed was one of those strange modern weekends in which weighty matters are discussed and weighty decisions taken among men who are ostensibly sitting around relaxing in various parts of the world. Wilson, Brown, and Callaghan were at Chequers, the Prime Minister’s country estate, taking part in a conference that had originally been scheduled to cover the subject of national-defense policy. Lord Cromer was at his country place in Westerham, Kent. Martin, Dillon, and Roosa were at their offices or their homes, in and around Washington. Coombs was at his home, in Green Village, New Jersey, and Hayes was visiting friends of his elsewhere in New Jersey. At Chequers, Wilson and his two financial ministers, leaving the military brass to confer about defense policy with each other, adjourned to an upstairs gallery to tackle the sterling crisis; in order to bring Lord Cromer into their deliberations, they kept a telephone circuit open to him in Kent, using a scrambler system when they talked on it, so as to avoid interception of their words by their unseen enemies the speculators. Sometime on Saturday, the British reached their decision. Not only would they raise the bank rate, and raise it two per cent above its current level—to seven per cent—but, in defiance of
custom, they would do so the first thing Monday morning, rather than wait for another Thursday to roll around. For one thing, they reasoned, to postpone action until Thursday would mean three and a half more business days during which the deadly drain of British reserves would almost certainly continue and might well accelerate; for another, the sheer shock of the deliberate violation of custom would serve to dramatize the government’s determination. The decision, once taken, was communicated by British intermediaries in Washington to the American monetary officials there, and relayed to Hayes and Coombs in New Jersey. Those two, knowing that the agreed-upon plan for a concomitant rise in the New York bank rate would now have to be put into effect as quickly as possible, got to work on the telephone lining up a Monday-afternoon meeting of the Federal Reserve Bank’s board of directors, without whose initiative the rate could not be changed. Hayes, a man who sets great store by politeness, has since said, with considerable chagrin, that he fears he was the despair of his hostess that weekend; not only was he on the telephone most of the time but he was prevented by the circumstances from giving the slightest explanation of his unseemly behavior.