Money: 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.