A History of the Federal Reserve, Volume 2 by Allan H. Meltzer Read Free Book Online

deposits from London. They expected to lose much of their remaining (net) reserve of $800 million when they announced the latest trade data the following week. Overall, Britain’s gold stock declined from 71 million ounces in 1964 to 37 million in 1967.
    The immediate problem arose because the British government would not raise the Bank rate to the level of euro-dollar rates. Money flowed out of covered sterling deposits into euro-dollars, draining reserves. The Bank of England used several stopgaps that raised market rates without raising Bank rate. The outflow continued.
    Market data suggested that Bank rate should have increased by one percentage point. After some delay, the Bank raised the rate by 0.5. This was not sufficient to stop reserve losses (Maisel diary, October 24, 1967, 1–3).
    Fowler mentioned the advantage of ending the recurrent problem by devaluing the pound. He rejected that course. “The risks to us are just too great to take this gamble” (ibid., 2). 34 Pressure would shift to the dollar. France might follow Britain by devaluing to increase pressure on the U.S. to raise the gold price. There would be a run on the gold market.
    Fowler tried to get agreement on another loan. International cooperation failed. The United States offered to buy $500 million in pounds with a guar antee of exchange value, but the principal European central banks would not agree to a long-term loan, and the British would not accept additional short-term loans. The IMF directorate would not agree to a $3 billion dollar package as an alternative (Board Minutes, November 14, 1967, 4–9). 35
    34. More than two years earlier the State Department made its position clear. It opposed devaluation. “If they should make a big external move, they would wreck much more than the monetary system. Our foreign political and defense policies would be badly mangled” (“Some thoughts on the British Crisis,” Department of State, Ball papers, Johnson Library, Lot 74 D272, July 28, 1965).

    Martin urged Fowler to try to persuade the IMF’s managing director, Pierre-Paul Schweitzer, to change his mind. The most Schweitzer would offer was $1.4 billion. 36 That was not enough for the British. Unlike the 1920s, they wanted no more short-term credit or partial support. In a sign of the change in attitudes that had occurred, Britain preferred devaluation to repetitive crises. Governor Robertson opined that “funds advanced to the British and disbursed by them were likely in the end to represent additional drains on the U.S. gold stock. The decision regarding the position of the United States was for the administration rather than the System to make, but in his opinion the time for sterling devaluation was at hand” (FOMC Minutes, November 14, 1967, 28). Robertson recognized that a British devaluation would increase speculation against the dollar. “The United States was in a better position to deal with them [speculators] now than it might be one or two years hence” (ibid.).
    Only Maisel supported Robertson. Brimmer took issue with them, claiming that the pound was not overvalued permanently. The measures to control spending and costs “appeared to be taking hold” (ibid., 33). He thought that the United States should help the British continue their program. 37 As often happens in decisions of this kind, there was less interest in facts than in being finished with the problem.
    Four days later, on Saturday, November 18, 1967, Britain devalued the pound from $2.80 to $2.40. As in 1931, this was a major break in the fixed exchange rate system. The system was now under increased pressure from gold losses. The Federal Reserve responded by raising the discount rate 0.5 to 4.5 percent to defend the dollar. The British government imposed new restrictions, and the Bank of England raised the discount rate to 8 percent. France let it be known that it had withdrawn from the gold pool in June. This increased the U.S. share of withdrawals from the gold