## Chapter 12: In Defense of Sterling - A Summary
Chapter 12 of this transcript provides a detailed account of the international monetary crisis surrounding the British pound sterling in the 1960s, focusing on the efforts of the Federal Reserve Bank of New York, particularly through the actions of Alfred Hayes and Charles Coombs, to defend the currency against speculative attacks.
The chapter begins by describing the imposing and austere architecture of the Federal Reserve Bank of New York, emphasizing its role as the chief operating arm of the US central banking system and the central bank for most non-communist countries. The narrative highlights the bank's immense gold reserves, stored deep beneath the city, and its function as a "fluoroscopic vision" into international finance, capable of detecting currency vulnerabilities.
The core of the chapter details the escalating crisis of the pound sterling. Starting in 1964, Britain faced a significant balance of payments deficit due to over-exuberant domestic expansion. This led to a loss of confidence in the pound, exacerbated by the uncertainty surrounding the upcoming British election and the perception of the Labour Party's economic policies. Currency speculators and nervous importers and exporters began selling pounds, putting immense pressure on the Bank of England to maintain its fixed exchange rate.
Alfred Hayes and Charles Coombs, key figures at the Federal Reserve Bank, closely monitored the situation, working tirelessly to coordinate with their British counterparts, including the Earl of Cromer, and other central bankers. The chapter meticulously describes the intricate mechanics of international financial dealings, explaining how currency fluctuations are normally managed within agreed-upon limits. It highlights the devastating potential of devaluation, which can lead to a loss of confidence in other currencies, a decline in international trade, and even economic depression, recalling the crisis of 1931.
The narrative emphasizes the role of the Bank for International Settlements (BIS) in Basel, Switzerland, as a crucial forum for informal discussions among central bankers, facilitating international monetary cooperation. Coombs attends a meeting in Basel where growing concern regarding the pound is apparent.
The chapter vividly recounts the events of November 1964, when the crisis reached its peak. The Labour government's initial response was deemed insufficient, and the Bank of England was rapidly depleting its reserves. In a dramatic move, the British government decided to raise the bank rate to 7% (and against ritual do so on a Monday) to attract investment and stabilize the currency. The Federal Reserve Bank, recognizing the potential for the crisis to spread to the dollar, raised its own lending rate as well.
Although the initial reaction was positive, confidence quickly eroded, and the pound was once again under intense pressure. Hayes and Coombs, with their Washington colleagues, were thus required to urgently work to build an enormous massing of outside credit to the bank of England; the initial move to build it involved the US increasing their own financial contributions significantly, The success of this campaign, as well as the initial boost from an elevated interest-rate, hung on whether or not a strong credit source could be achieved in time.
The chapter then describes a frantic day as the Americans raced against the clock to secure pledges from central banks around the world, including Germany, Italy, and Japan. A coordinated announcement of a $3 billion credit package ultimately stemmed the tide of speculation. The Federal Reserve's intervention served as a warning to speculators, demonstrating a unified front of support for the British currency. The news release by Federal Reserve, Treasury and Bank of England at 2 p.m. in New York and 7 p.m. in London was critical and turned market attitudes on its head.
The chapter describes the details and impact of this announcement, followed by details regarding the characters of President Hayes and Vice President Coombs. It is explained how their skills, particularly Croombs familiarity with the central bankers of the world, were highly beneficial.
The chapter also highlights the tensions within the international financial community and the constant risk of a domino effect. The fight to maintain the pound's value continues over subsequent months and years, with peaks, valleys and setbacks. But none of the solutions found can be viewed as fully effective, because in the end the fight for sterling ended in defeat.
The narrative culminates with the 1967 devaluation of the pound and the subsequent attack on the dollar. The chapter concludes with a sense of uncertainty and apprehension about the future of the international monetary system.