A Heroic Defense

While their names are seldom in the headlines and the real extent of their power is appreciated by only a few in siders, there is in the non-Communist world a band of global money managers who have done almost as much as politicians or generals to head off crisis and knit nations together. Using their specialized skills, they have built a delicately balanced monetary structure that for 20 years has helped to expand trade, travel and economic growth around the world. Last week they faced -- and over came -- the greatest challenge since their financial fortress was created at Bretton Woods, N.H., in 1944. It was a British crisis, but the U.S. reactions to it hold potentially important consequences for the U.S. economy.

By raising the U.S. discount rate from 3-s% to 4% in response to a hike in the British discount rate--the interest that central banks charge their members--the Federal Reserve Board showed how closely interwoven have become economies that are oceans apart. By helping to rescue the faltering British pound (see THE WORLD), the U.S.'s money managers demonstrated how tightly bound together are the fates of the Western world's two major currencies. "It was an orderly operation all the way," said William McChesney Martin Jr., chairman of the Federal Reserve, "and showed that the bankers' international contacts are pretty good." Despite that typical banker's understatement, the operations had many of the elements of secrecy, mystery and intrigue that would do justice to James Bond--or to Goldfinger, his gold-hungry foe.

With Resignation. The U.S. had little choice but to do what it did, and it moved with skill and speed. The British raised their discount rate from 5% to 7% to strengthen the pound against banks and corporations that were dumping it in fear of possible devaluation, and against speculators who sold short in the hope that the pound would be devalued and they could later buy it back at depressed prices. The rise meant that the British rate would be twice as high as the 31% U.S. rate, and, as one Swiss banker put it, "7% would drag money from the moon." The Federal Reserve and the Treasury were concerned that it might pull too many U.S.

dollars to Britain, causing further difficulties for the U.S. balance of payments, which had been doing somewhat better this year.

But beyond that, said Federal Reserve Chairman Martin in an unprecedented press conference, the hike was "an insurance measure" designed to prove "that we are ready to defend and preserve the dollar." The U.S. money managers feared that European speculators, many of whom received dollars for the pounds they were unloading, might be tempted to convert those dollars into other currencies unless the U.S. demonstrated that it intended to keep the dollar stable. The U.S. did just this by raising the discount rate, thus averted possible speculative pressure on the dollar. In so acting, Martin and his governors placed the nation's international monetary policy at least on a par with the needs of the domestic economy.

Those needs have been best served up to now by a money policy of relative ease. A prime reason that the current expansion has been so prolonged is the abundance of easy credit for installment buying and capital spending--and Lyndon Johnson, for one, has been telling everyone within earshot of his desire to keep money cheap and easy.

Immediately before the Federal Reserve governors acted, Secretary of the Treasury Douglas Dillon called Lyndon Johnson at his Texas ranch to tell him their decision. Johnson accepted the news with resignation.

"For Shame, for Shame." Others were not so resigned. "For shame, for shame!" cried Congressman Wright Patman, chairman of the House Banking Committee, who went on to predict "a marked slowdown in our economic growth" as a result of the hike. The A.F.L.-C.I.O. executive council complained that the move would discourage borrowing by consumers and business alike. Coming at a time when many businessmen were beginning to wonder aloud whether the U.S.'s 45-month economic upswing could continue much beyond mid-1965, the discount-rate hike also raised fears among many businessmen of a recurrence of 1960, when an economic expansion was pinched off and a recession brought on by a tightening of money.

To such fears Chairman Martin had a ready answer: the Federal Reserve, he said, will continue its present policy of "cautious ease," preventing the rate hike from hurting the economy by buying Government securities in the open market and thus pumping money into the banking system. In Martin's view, the hike would not raise loan or mortgage rates, or affect the economy: "I think that it would have a negligible effect on the money supply." To attract more savings and further increase the supply of money, the Federal Reserve simultaneously allowed banks to increase their maximum interest on savings deposits from 31% to 4%. The board thus hopes, in a deft balancing act, to hold long-term interest rates low at the same time that it raises short-term rates. Not all bankers will play along, of course; at week's end, Atlanta's Citizens & Southern became the first major bank to raise its prime rate for long-term loans to blue-chip borrowers, from 41% to 4|%

The Most Daring. If the U.S. had to pay a price for the protection of the dollar--and only time would tell just what that cost to the economy would be -- it was also moved by self-interest in coming massively to the aid of the pound, which continued to weaken de spite Britain's rate hike. Had Britain been forced to devalue the pound, the resulting chaos might not only have snarled world trade and weakened the West, but would almost certainly have undermined the dollar as well. It was clear to the Americans that they had to act just as resolutely in defense of the pound as they had to follow Brit ain's rate rise. Said Treasury Under Secretary Robert Roosa: "It's like a run on a bank: if you roll the money truck in the door, the depositors who planned to withdraw will go away." The rescue that followed was the most dar ing ever tried.

Just as there is a certain element of conspiracy in the attempts of inter national speculators to bring down a whole nation's monetary structure, strong elements of secrecy and suspense go into the efforts to foil them. By sheer guesswork, the U.S. and British bankers set the size of the rescue needed by Britain at a record $3 billion, not count ing the $1 billion already available through the International Monetary Fund. The U.S. agreed to put up $1 billion of the amount -- and to ask ten nations to put up the other $2 billion.

Working with Bank of England Gover nor Lord Cromer and his British col leagues, the Americans got onto tele phone lines stretching around the world.

At the New York Federal Reserve Bank, Vice President Charles Coombs and his aides worked through the night, some of them taking off a few hours to nap in "hotbeds" kept at the office for such emergencies; coordinating their efforts, Bank President Alfred Hayes was on the job before dawn, when European offices began to open. In Washington, Martin and Roosa each made pitches to half a dozen bankers overseas. It was, in fact, Roosa's swan song in Government after a distinguished four-year career; at week's end, in accordance with a previous plan, he submitted his resig nation to enter private banking.

Tuxedos & Secrecy. The bankers twisted a few arms, carefully kept excitement out of their voices to ensure that foreign bankers got no chance impression of panic, and made occasional use of what is known in Washington as "the crossruff": the practice of getting someone to join a party by telling him someone else is coming in. The need for secrecy was so important that in the midst of negotiations, Roosa even donned a tuxedo in the office and went off to a scheduled piano recital at the Polish embassy lest anyone suspect by his absence what was afoot. He kept a car waiting outside with its motor running, just in case.

Just before midday, when France's Giscard d'Estaing signaled approval from his government, the deal was finally closed. Almost overnight, a handful of men had managed to raise $3 bil lion, relying completely on gentlemanly agreements and a structure of confidence built up over many years. The bundle that they produced will enable Britain's central bankers to buy, buy, buy sterling--until the speculators finally get tired of selling. It was a remarkable show of ability and confidence, and it dramatically demonstrated that the world's cool money managers can perform truly heroic feats in defense of the wealth of nations.

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