“Nothing at the moment. But nobody goes home this evening until I say so. We might have to stay on right through Tokyo tonight.”
He hung up and redialed. “Joan, get me the President of the National Bank in Zurich, please. Right away.”
The call was through in less then thirty seconds. “This is Bollinger. How do things look to you?”
“We don’t like it a bit. Where’s all this selling coming from?”
Bollinger thought carefully before he replied. “Seems to have started in Eastern Europe. Then Zurich, Frankfurt, Paris, it would seem.”
“What are you fellows going to do?”
“I’m not sure. Maybe it will start to correct itself in New York.”
The National Bank president did not seem to buy that one.
“I’m not so sure. Funny damned thing. It came out of absolutely nowhere. We’ve more or less got used to these currency speculators crawling out of the woodwork every fall, but normally you can see them coming. This thing has all built up within twenty-four hours.”
“You’ve heard about New York, I suppose. The dollar has dropped below the 3.31 level. Will you start to intervene?”
“We’re having a meeting in about fifteen minutes on that subject. My guess is that we’ll try to hold it here for the rest of the day. A slight turnaround in Europe tomorrow could produce a surge of covering of short positions. Then we would be out of the woods. That’s my thinking at the moment.”
“Thanks. That’s very important for us. We will probably also be in the market in New York within a short time, trying to stop this thing. I’ll keep in touch.”
“What are the people in Washington saying?”
“I don’t know. I expect to hear from them any moment now,” replied Bollinger.
“Right. Thanks for the call.”
Although already five o’clock in Switzerland, it was only eleven in the morning in Washington. The secretary of the treasury was just entering the White House grounds in his limousine. As he stepped out of the car another government vehicle rolled up right behind him. It was the secretary of state. Both cleared the security people together, and were immediately met by one of the president’s assistants who took them directly to the Cabinet room.
The chairman of the Federal Reserve Board was already there. Less than a minute later the president arrived and asked them all to be seated.
He turned first to Secretary of the Treasury Henry Crosby.
“Henry, what’s going on? I got word from the Intelligence people less than an hour ago. They report that massive selling of the dollar has set in in Europe, and that the gold price has gone sky high. What’s more, they claim that the Russians started it all. How is that possible, for God’s sake?”
“I don’t know. I just know that it’s a fact.”
“When did it start exactly?”
“Yesterday. During the afternoon in New York, and then at the tail end of the banking day in San Francisco. Nothing startling, but steady selling was there. Then during the European business day today that’s just ending, it really started to pick up steam. The last hours have seen nothing short of a mass movement out of dollars and into the Swiss franc, the German mark, the guilder—you name it. The speculators seem to have joined in with full force only today.”
“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.”