“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 twenty-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.