by John Brooks
The central banks had done it again, and somewhat later I went down to the Federal Reserve Bank to learn the details. It was Coombs I saw, and I found him in a sanguine and extraordinarily talkative mood. “This year’s operation was entirely different from last year’s,” he told me. “It was an aggressive move on our part, rather than a last-ditch-defensive one. You see, early this September we came to the conclusion that the pound was grossly oversold—that is, the amount of speculation against it was way out of proportion to what was justified by the economic facts. Actually, during the first eight months of the year, British exports had risen more than five per cent over the corresponding period in 1964, and Britain’s 1964 balance-of-payments deficit seemed likely to be cut in half in 1965. Very promising economic progress, and the bearish speculators seemed not to have taken account of it. They had gone right on selling the pound short, on the basis of technical market factors. They were the ones who were in an exposed position now. We decided the time was ripe for an official counterattack.”
The counterattack, Coombs went on to explain, was plotted in leisurely fashion this time—not on the telephone but face to face, over the weekend of September 5th in Basel. The Federal Reserve Bank was represented by Coombs, as usual, and also by Hayes, who cut short his long-planned vacation on Corfu to be there. The coup was planned with military precision. It was decided not to announce the amount of the credit package this time, in order to further confuse and disconcert the enemy, the speculators. The place chosen for the launching was the trading room of the Federal Reserve Bank, and the hour chosen was 9 A.M. New York time—early enough for London and the Continent to be still conducting business—on September 10th. At zero hour, the Bank of England fired a preliminary salvo by announcing that new central-bank arrangements would shortly enable “appropriate action” to be taken in the exchange markets. After allowing fifteen minutes for the import of this demurely menacing message to sink in, the Federal Reserve Bank struck. Using, with British concurrence, the new bundle of international credit as its ammunition, it simultaneously placed with all the major banks operating in the New York exchange market bids for sterling totalling nearly thirty million dollars, at the then prevailing rate of $2.7918. Under this pressure, the market immediately moved upward, and the Federal Reserve Bank pursued the movement, raising its bid price step by step. At $2.7934, the bank temporarily ceased operations—partly to see what the market would do on its own, partly just to confuse things. The market held steady, showing that at that level there were now as many independent buyers of sterling as there were sellers, and that the bears—speculators—were losing their nerve. But the bank was far from satisfied; returning vigorously to the market, it bid the price on up to $2.7945 in the course of the day. And then the snowball began to roll by itself—with the results I had read about in my newspapers. “It was a successful bear squeeze,” Coombs told me with a certain grim relish, which was easy to sympathize with; I found myself musing that for a banker to rout his opponents, to smite them hip and thigh and drive them to cover, and not for personal or institutional profit but, rather, for the public good, must be a source of rare, unalloyed satisfaction.
I later learned from another banker just how painfully the bears had been squeezed. Margins of credit on currency speculation being what they are—for example, to commit a million dollars against the pound a speculator might need to put up only thirty or forty thousand dollars in cash—most dealers had made commitments running into the tens of millions. When a dealer’s commitment was ten million pounds, or twenty-eight million dollars, each change of one-hundredth of a cent in the price of the pound meant a change of a thousand dollars in the value of his account. Between the $2.7918 on September 10th, then, and the $2.8010 that the pound reached on September 29th, such a dealer on the short side of the pound would have lost ninety-two thousand dollars—enough, one might suppose, to make him think twice before selling sterling short again.
An extended period of calm followed. The air of impending crisis that had hung over the exchanges during most of the preceding year disappeared, and for more than six months the world sterling market was sunnier than it had been at any time in recent years. “The battle for the pound sterling is now ended,” high British officials (anonymous, and wisely so) announced in November, on the first anniversary of the 1964 rescue. Now, the officials said, “we’re fighting the battle for the economy.” Apparently, they were winning that battle, too, because when Britain’s balance-of-payments position for 1965 was finally calculated, it showed that the deficit had been not merely halved, according to predictions, but more than halved. And meanwhile the pound’s strength enabled the Bank of England not merely to pay off all its short-term debts to other central banks but also to accumulate in the open market, in exchange for its newly desirable pounds, more than a billion fresh dollars to add to its precious reserves. Thus, between September, 1965, and March, 1966, those reserves rose from two billion six hundred million dollars to three billion six hundred million—a fairly safe figure. And then the pound breezed nicely through a national election campaign—as always, a stormy time for the currency. When I saw Coombs in the spring of 1966, he seemed as cocky and blasé about sterling as an old-time New York Yankee rooter about his team.
I had all but concluded that following the fortunes of the pound was no longer any fun when a new crisis exploded. A seamen’s strike contributed to a recurrence of Britain’s trade deficit, and in early June of 1966 the quotation was back below $2.79 and the Bank of England was reported to be back in the market spending its reserves on the defense. On June 13th, with something of the insouciance of veteran firemen responding to a routine call, back came the central banks with a new bundle of short-term credits. But these helped only temporarily, and toward the end of July, in an effort to get at the root of the pound’s troubles by curing the deficit once and for all, Prime Minister Wilson imposed on the British people the most stringent set of economic restraints ever applied in his country in peacetime—high taxes, a merciless squeeze on credit, a freeze on wages and prices, a cut in government welfare spending, and a limit of a hundred and forty dollars on the annual amount that each Briton could spend on travel abroad. The Federal Reserve, Coombs told me later, helped by moving into the sterling market immediately after the British announcement of the austerity program, and the pound reacted satisfactorily to this prodding. In September, for good measure, the Federal Reserve increased its swap line with the Bank of England from seven hundred and fifty million to one billion three hundred and fifty million dollars. I saw Waage in September, and he spoke warmly of all the dollars that the Bank of England was again accumulating. “Sterling crises have become a bore,” the Economist remarked at about this time, with the most reassuring sort of British phlegm.
Calm again—and again for just a little more than six months. In April of 1967, Britain was free of short-term debt and had ample reserves. But within a month or so came the first of a series of heartbreaking setbacks. Two consequences of the brief Arab-Israeli war—a huge flow of Arab funds out of sterling into other currencies, and the closing of the Suez Canal, one of Britain’s main trade arteries—brought on a new crisis almost overnight. In June, the Bank of England (under new leadership now, for in 1966 Lord Cromer had been succeeded as governor by Sir Leslie O’Brien) had to draw heavily on its swap line with the Federal Reserve, and in July the British government found itself forced to renew the painful economic restraints of the previous year; even so, in September the pound slipped down to $2.7830, its lowest point since the 1964 crisis. I called my foreign-exchange expert to ask why the Bank of England—which in November, 1964, had set its last-line trench at $2.7860, and which, according to its latest statement, now had on hand reserves amounting to more than two and a half billion dollars—was letting the price slide so dangerously near the absolute bottom (short of devaluation) of $2.78. “Well, the situation isn’t quite as desperate as the figure suggests,” he replied. “The speculative pressure
so far isn’t anything like as strong as it was in 1964. And the fundamental economic position this year—up to now, at least—is much better. Despite the Middle East war, the austerity program has taken hold. For the first eight months of 1967, Britain’s international payments have been nearly in balance. The Bank of England is evidently hoping that this period of weakness of the pound will pass without its intervention.”
At about that time, however, I became aware of a disturbing portent in the air—the apparent abandonment by the British of their long-standing taboo against bandying about the word “devaluation.” Like other taboos, this one seemed to have been based on a combination of practical logic (talk about devaluation could easily start a speculative stampede and thereby bring it on) and superstition. But now I found devaluation being freely and frequently discussed in the British press, and, in several respected journals, actually advocated. Nor was that all. Prime Minister Wilson, it is true, continued to follow a careful path around the word, even in the very act of pledging, as he did over and over, that his government would abstain from the deed; there would be “no change in existing policy” as to “overseas monetary matters,” he said, delicately, on one occasion. On July 24th, though, Chancellor of the Exchequer James Callaghan spoke openly in the House of Commons about devaluation, complaining that advocacy of it as a national policy had become fashionable, declaring that such a policy would represent a breach of faith with other nations and their people and also pledging that his government would never resort to it. His sentiments were familiar and reassuring; his straightforward expression of them was just the opposite. In the darkest days of 1964, no one had said “devaluation” in Parliament.
All through the autumn, I had a feeling that Britain was being overtaken by a fiendish concatenation of cruel mischances, some specifically damaging to the pound and others merely crushing to British morale. The previous spring, oil from a wrecked, and wretched, tanker had defiled the beaches of Cornwall; now an epidemic was destroying tens, and ultimately hundreds, of thousands of head of cattle. The economic straitjacket that Britain had worn for more than a year had swelled unemployment to the highest level in years and made the Labour Government the most unpopular government in the postwar era. (Six months later, in a poll sponsored by the Sunday Times, Britons would vote Wilson the fourth most villainous man of the century, after Hitler, de Gaulle, and Stalin, in that order.) A dock strike in London and Liverpool that began in mid-September and was to drag on for more than two months decreased still further the already hobbled export trade, and put an abrupt end to Britain’s remaining hope of ending the year with its international accounts in balance. Early in November, 1967, the pound stood at $2.7822, its lowest point in a decade. And then things went downhill fast. On the evening of Monday the thirteenth, Wilson took the occasion of his annual appearance at the Lord Mayor of London’s banquet—the very platform he had used for his fiery commitment to the defense of sterling in the crisis three years earlier—to implore the country and the world to disregard, as distorted by temporary factors, his nation’s latest foreign-trade statistics, which would be released the next day. On Tuesday the fourteenth, Britain’s foreign-trade figures, duly released, showed an October deficit of over a hundred million pounds—the worst ever reported. The Cabinet met at lunch on Thursday the sixteenth, and that afternoon, in the House of Commons, Chancellor Callaghan, upon being asked to confirm or deny rumors of an enormous new central-bank credit that would be contingent upon still further unemployment-breeding austerity measures, replied with heat, and with what was later called a lack of discretion, “The Government will take what decisions are appropriate in the light of our understanding of the needs of the British economy, and no one else’s. And that, at this stage, does not include the creation of any additional unemployment.”
With one accord, the exchange markets decided that the decision to devalue had been taken and that Callaghan had inadvertently let the cat out of the bag. Friday the seventeenth was the wildest day in the history of the exchange markets, and the blackest in the thousand-year history of sterling. In holding it at $2.7825—the price decided on this time as the last-line trench—the Bank of England spent a quantity of reserve dollars that it may never see fit to reveal; Wall Street commercial bankers who have reason to know have estimated the amount at somewhere around a billion dollars, which would mean a continuous, day-long reserve drain of over two million per minute. Doubtless the British reserves dropped below the two-billion-dollar mark, and perhaps far below it. Late on a Saturday—November 18th—full of confused alarms, Britain announced its capitulation. I heard about it from Waage, who telephoned me that afternoon at five-thirty New York time. “As of an hour ago, the pound was devalued to two dollars and forty cents, and the British bank rate went to eight per cent,” he said. His voice was shaking a little.
ON Saturday night, bearing in mind that scarcely anything but a major war upsets world financial arrangements more than devaluation of a major currency, I went down to the capital of world finance, Wall Street, to look around. A nasty wind was whipping papers through empty streets, and there was the usual rather intimidating off-hours stillness in that part-time city. There was something unusual, though: the presence of rows of lighted windows in the otherwise dark buildings—for the most part, one lighted row per building. Some of the rows I could identify as the foreign departments of the big banks. The heavy doors of the banks were locked and barred; foreign-department men evidently ring to gain entrance on weekends, or use invisible side or rear entrances. Turning up my coat collar, I headed up Nassau Street toward Liberty to take a look at the Federal Reserve Bank. I found it lighted not in a single line but—more hospitably, somehow—in an irregular pattern over its entire Florentine façade, yet it, too, presented to the street a formidably closed front door. As I looked at it, a gust of wind brought an incongruous burst of organ music—perhaps from Trinity Church, a few blocks away—and I realized that in ten or fifteen minutes I hadn’t seen anyone. The scene seemed to me to epitomize one of the two faces of central banking—the cold and hostile face, suggesting men in arrogant secrecy making decisions that affect all the rest of us but that we can neither influence nor even comprehend, rather than the more congenial face of elegant and learned men of affairs beneficently saving faltering currencies over their truffles and wine at Basel. This was not the night for the latter face.
On Sunday afternoon, Waage held a press conference in a room on the tenth floor of the bank, and I attended it, along with a dozen other reporters, mostly regulars on the Federal Reserve beat. Waage discoursed generally on the devaluation, parrying questions he didn’t want to answer, sometimes by replying to them, like the teacher he once was, with questions of his own. It was still far too early, he said, to tell how great the danger was that the devaluation might lead to “another 1931.” Almost any prediction, he said, would be a matter of trying to outguess millions of people and thousands of banks around the world. The next few days would tell the story. Waage seemed stimulated rather than depressed; his attitude was clearly one of apprehension but also of resolution. On the way out, I asked him whether he had been up all night. “No, last evening I went to ‘The Birthday Party,’ and I must say Pinter’s world makes more sense than mine does, these days,” he replied.
The outlines of what had happened Thursday and Friday began to emerge during the next few days. Most of the rumors that had been abroad turned out to have been more or less true. Britain had been negotiating for another huge credit to forestall devaluation—a credit of the order of magnitude of the three-billion-dollar 1964 package, with the United States again planning to provide the largest share. Whether Britain had devalued from choice or necessity remained debatable. Wilson, in explaining the devaluation to his people in a television address, said that “it would have been possible to ride out this present tide of foreign speculation against the pound by borrowing from central banks and governments,” but that such action this time would have been “irresp
onsible,” because “our creditors abroad might well insist on guarantees about this or that aspect of our national policies”; he did not say explicitly that they had done so. In any event, the British Cabinet had—with what grim reluctance may be imagined—decided in principle on devaluation as early as the previous weekend, and then determined the exact amount of the devaluation at its Thursday-noon meeting. At that time, the Cabinet had also resolved to help insure the effectiveness of the devaluation by imposing new austerity measures on the nation, among them higher corporate taxes, a cutback in defense spending, and the highest bank rate in fifty years. As for the two-day delay in putting the devaluation into effect, which had been so costly to British reserves, officials now explained that the time had been necessary for conferences with the other leading monetary powers. Such conferences were required by international monetary rules before a devaluation, and, besides, Britain had urgently needed assurances from its leading competitors in world trade that they did not plan to vitiate the effect of the British devaluation with matching devaluations of their own. Some light was now shed, too, on the sources of the panic selling of pounds on Friday. By no means all of it had been wanton speculation by those famous—although invisible and perhaps nonexistent—gnomes of Zurich. On the contrary, much of it had been a form of self-protection, called hedging, by large international corporations, many of them American, that made short sales of sterling equivalent to what they were due to be paid in sterling weeks or months later. The evidence of this was supplied by the corporations themselves, some of them being quick to assure their stockholders that through their foresight they had contrived to lose little or nothing on the devaluation. International Telephone & Telegraph, for example, announced on Sunday that the devaluation would not affect its 1967 earnings, because “management anticipated the possibility of devaluation for some time.” International Harvester and Texas Instruments reported that they had protected themselves by making what amounted to short sales of sterling. The Singer Company said it might even have accidentally made a profit on the deal. Other American companies let it be known that they had come out all right, but declined to elaborate, on the ground that if they revealed the methods they had used they might be accused of taking advantage of Britain in its extremity. “Let’s just say we were smart” was the way a spokesman for one company put it. And perhaps that, if lacking in grace and elegance, was fair enough. In the jungle of international business, hedging on a weak foreign currency is considered a wholly legitimate use of claws for self-defense. Selling short for speculative purposes enjoys less respectability, and it is interesting to note that the ranks of those who speculated against sterling on Friday, and talked about it afterward, included some who were far from Zurich. A group of professional men in Youngstown, Ohio—veteran stock-market players, but never before international currency plungers—decided on Friday that sterling was about to be devalued, and sold short seventy thousand pounds, netting a profit of almost twenty-five thousand dollars over the weekend. The pounds sold had, of course, ultimately been bought with dollars by the Bank of England, thus adding a minuscule drop to Britain’s reserve loss. Reading about the little coup in the Wall Street Journal, to which the group’s broker had reported it, presumably with pride, I hoped the apprentice gnomes of Youngstown had at least grasped the implications of what they were doing.