3SPRINGTIME FOR BRETTON WOODS?Patchwork Governance in the 1960s
The power and influence that central bankers gained after the First World War was lost after the Great Depression and the Second World War. These crises altered the mandates, goals, and independence of central banks.1 The Depression tested their credibility in preventing and resolving such grave crises. Midcentury central banks lost much of the autonomy from political interference that they held so closely in the interwar years. Now, central bankers were not primarily tasked with postwar reconstruction and development. Governments were in charge again, and central banks were relegated to being their de facto agents.2 The Bretton Woods institutions—the International Monetary Fund (IMF) and the World Bank—were tasked with managing global finance and the gold-dollar monetary system.
After initial teething problems of this new governance architecture in the years immediately after the 1944 conference at Bretton Woods, the 1958–1971 period has been characterized as the heyday of the Bretton Woods era.3 The international monetary system was bolstered by robust global financial institutions tasked to ensure the key pillars of monetary stability—liquidity, adjustment, and confidence—and postwar reconstruction and development.
But underlying this system were larger systemic fault lines, broadly captured by the Triffin dilemma: if the United States stopped running its balance of payments deficit, the rest of the world would lose access to reserve liquidity. At the same time, continually running a large deficit would hinder confidence in the reserve currency. Policymakers were once again faced with problems of adjustment and liquidity not dissimilar to those of the interwar period.
Most scholarship on this period in history has focused on the stability of the 1960s, the role of the IMF in managing the instabilities predicted by Robert Triffin, the collapse of the monetary regime, and the reemergence of global capital. These studies provide key insights into the stability and the breakdown of this monetary order, the gold-dollar standard.4 Explanations privilege and prioritize the role of governments and international institutions in facilitating international cooperation to stabilize the system, and the power political, material, and ideational factors that contributed to the system's demise. This history has been thoroughly documented and analyzed, and explaining the collapse of the Bretton Woods system is not the goal of this chapter.
Instead, I show that, underlying these broader structural and ideational dynamics, bilateral cooperation for liquidity provision once again emerged from ad hoc experimentation facilitated by central bankers’ interpersonal relations of trust and goodwill. The 1960s—viewed as the heyday of global financial governance, armed with institutional capacity, rules, and order—were in fact similar to the 1920s. Like the interwar years, central bank officials in the 1960s actively cooperated to generate innovative governance responses to cover up cracks in the system. They extended bilateral credits known as “swap lines” to one another to provide liquidity and maintain exchange-rate pegs under the gold-dollar standard. But this form of monetary management, although similar to the 1920s, emerged in very different economic and political environments in the 1960s.
This time, ad hoc and bilateral cooperation around the swap lines and credits emerged in a postwar economy governed by a different set of rules (the gold-dollar standard) and governance institutions (the IMF and World Bank). Crises in the midcentury period were also different: much less immediate and much more a feature of the monetary system of the time. Occasional flare-ups took the form of currency crises, mainly in sterling and dollar funding pressures, rooted in systemic disjunctures and balance of payments mismatches, encapsulated in Triffin's observation. And still, the outcome of interest—the policy and governance devices used to manage these pressures—mirrored those adopted in the interwar 1920s—bilateral, ad hoc, and innovative liquidity credits. Liquidity assurance came primarily from one central bank, the New York Fed, dubbed by Charles Coombs as “the bankers for all major foreign central banks,” supplemented with help from the BIS.5
I show that central bankers’ interpersonal trust networks enabled central bankers to enter into risky lending programs, without additional safeguards and conditionality, unlike IMF and other intergovernmental alternatives. Through these networks, monetary authorities could circumvent the institutional constraints now placed on their banks to put out fires by creating new and innovative policy tools.
Accounting for the changing global political and economic context of this time, I focus on ad hoc and bilateral central bank cooperation around the creation of the 1960s Basel Arrangements extended through the Bank for International Settlements (BIS), and the Reciprocal Currency Arrangements (RCA), which was the Federal Reserve's swap network arranged by the New York Fed to support the flailing Bretton Woods monetary system.6 These arrangements, like the bilateral credits of the 1920s, were designed to support the US dollar and sterling exchange positions against fluctuations and speculative attacks, avoid drains on US gold holdings, enhance broader international monetary cooperation, and supplement IMF exchange arrangements. These efforts were made to provide central banks the necessary liquidity to pursue these goals in the long run and meet growing liquidity needs in the expanding global economy. Many European central banks also used these lines to support their currencies against fluctuations.7
Even more, by the 1960s, for the first time since the Second World War, the United States found itself in need of liquidity, and essentially, an international lender of last resort. But, as Daniel McDowell argues, in the context of an under-resourced IMF, which the United States had designed to push the burden of adjustment onto debtor countries, growing payments imbalances meant that the United States had become a debtor country as well, putting the US dollar's exchange and US gold stocks at risk.8 The prospects of turning to the IMF were further hampered by the political and economic risks of the General Agreements to Borrow (GAB) mechanism, due to the slow negotiation process with multiple creditors, and the conditions attached to IMF assistance. In turn, the Fed swap program gave US policymakers an alternative liquidity mechanism, which was quick and responsive in a crisis, to provide countercyclical assistance with no conditions attached. The swap program was a response to structural inadequacies, supported by US power.
At the center of these arrangements was Charles Coombs, vice-president of the New York Fed's (FRBNY) Foreign Department at the time. In that sense, US power was vital to the American response to the structural inadequacies of the international lender of last resort mechanism through the IMF, harnessed and enacted on by Coombs. However, important parallel dynamics also influenced the creation of the Fed swap network, the RCA. First, on many occasions, especially in the creation and the expansion of the RCA, Coombs's actions were not representative of US preferences, and often did not represent the Fed's interests and preferences. Second, Coombs did not, and could not, act alone but relied on the support and cooperation of his close and trusted counterparts overseas. In fact, the initial ideas and mechanisms of the swap arrangement were engineered not by Coombs or other Fed officials but central bankers from continental Europe, first arranged through Basel.
The narrative presented in this chapter foregrounds the role of personalities and personal relations across national central banks, in facilitating the cooperative response to emergent crises. Alongside important structural variables such as state power in determining cooperation, these interpersonal and relational factors also helped shape the cooperative response of ad hoc, bilateral liquidity assistance during the heyday of the Bretton Woods era.
Central bankers’ interpersonal relations, especially Coombs's friendship and mutual trust with his counterparts, were central to the Fed swap network. The influence of Coombs's friendly and trusting relationships, with various configurations of his counterparts, were especially prominent in signing the initial swaps. Key figures of this period included Max Iklé at the Swiss National Bank (SNB), Julien-Pierre Koszul at the Bank of France, Guido Carli at the Bank of Italy, Johannes Tüngeler at the Bundesbank, and Lord Cobbold and his successor, Lord Cromer, at the Bank of England. The case of British and American monetary relations, of slow and stalling cooperation, in part due to mistrust of Coombs among Bank of England associates, is particularly intriguing, given the otherwise close relationship between these two economies. I show that friendly relations between Cromer, William (Bill) McChesney Martin, chairman of the Federal Reserve Board in Washington, DC, and Coombs were key to overcoming this hurdle.
After providing a brief overview of the post-1945 period until current account convertibility was achieved in Europe, this chapter illustrates how these innovative governance efforts were activated through interpersonal cooperation among these central bankers and differentiated by the strength of these ties in their speed, amounts, and ability to limit political input into their activities.
1945–1958: After the War
As is well known, the United States had emerged out of the Second World War as a clear hegemonic power in the Western bloc and took the lead in European reconstruction. Under the Bretton Woods monetary system, the US dollar was pegged to gold at $35 per ounce; all other currencies in the system were pegged to the US dollar. The system was designed to “avoid the ‘mistakes’” of the interwar years, achieve current account convertibility, prevent competitive devaluations, and promote economic growth.9
Through the late 1940s, the postwar global dollar shortage outside the United States was slowly reversed into a global dollar glut and a shortage in the United States, which now ran a small balance of payments deficit to flush the global economy with liquidity. The Cold War pushed the United States to exercise what the historian Gianni Toniolo calls “benevolent,” or “consensual” hegemony over its allies in Japan and Western Europe after 1947.10
For the first dozen or so postwar years, payments adjustments and crises were addressed primarily by governments via intergovernmental arrangements and enacted by central banks. After the war, Europe and Japan were relatively weak and very dependent on US support. They benefited from narrow US balance of payments deficits, in exchange for dollar liquidity. The United States supported Europe's recovery through the Marshall Plan, and the European Payments Union (EPU) and the European Monetary Agreement were created to manage European currencies in a context of limited convertibility. With the help of Marshall Plan aid, European currencies were managed by the EPU.11 The BIS played a technical role in facilitating multilateral cooperation among European governments and monetary authorities, moving away from bilateral payments.
Governments and monetary authorities were occupied with a series of financial pressures and new efforts aside from those of reconstruction and development in Europe as they adapted to the new currency system established at Bretton Woods. The creation of the Organisation for European Economic Co-operation (OEEC) helped create favorable economic conditions in Europe for both international cooperation and the strengthening of domestic institutions in Europe.
The EPU, deemed “a successful pioneering effort in economic and monetary cooperation,” was the main instrument responsible for achieving current account convertibility by 1958 and facilitating the rapid liberalization of trade.12 It was supported by intensive central bank cooperation and was terminated upon restoring convertibility in Europe soon after 1958. Similar efforts were less successful in the United Kingdom. Sterling, the second reserve currency in the international monetary system, had a bumpier journey to convertibility, facing several balance of payments shortages through the 1950s, resulting from significant deficits in overseas transactions, a lack of competitiveness, and the collapse of the British Empire.13 The shortage of official reserves in the United Kingdom posed an added impediment to counter a run on the pound, necessitating assistance from the BIS.
Unlike in the 1920s, central bankers now were not only more constrained by governments and political interests, but many had also been nationalized after the disasters of the Great Depression and the Second World War. Right before the Second World War, most central banks became government agents of ministers of finance, “de facto if not literally nationalized until later.”14 Only the Fed regained its independence in 1951 and the Bundesbank in 1957. Most other European central banks regained their independence in the 1990s.
Central banks’ primary tasks were to advise governments and the IMF, and implement their decisions, “but they did not take the lead.”15 As a result, the central banking profession itself also changed. In a climate of increasing state intervention, the financial governance system evolved in a way that required more bureaucratic work from central banks. Unlike the “lords of finance” from banking dynasties of the early 1900s, the goals, internal organization, and political influence in central banks led to the bureaucratization of central bankers.16
Postwar structural and institutional changes certainly created an environment more conducive to cooperation than the 1920s. This new context lends favorably to conventional explanations for cooperation: American hegemony, US dollar centrality, and Cold War alliances all shaped financial governance. International organizations played central roles in the global financial governance system, all while central banks were beholden to their governments.
With the establishment of the Bretton Woods institutions as key orchestrators in postwar reconstruction, the IMF played a greater role in managing international monetary affairs. Paul Einzig, an economic and political writer of the time, notes that the BIS had fallen out of favor with the US government and Treasury for siding with the enemy or for being “scrupulously neutral” during the war.17 Many European governments also took an unfavorable position toward the BIS. Central banks were poorly represented at Bretton Woods, where it was even suggested that the BIS ought to be liquidated with the creation of the IMF.18 Central bankers now operated in a world that had shrunk their previously outsized influence, tasked to simply guide the politicians and international organizations as they muddled through their postwar reconstruction efforts. And still, the troubles of the 1960s were managed largely through ad hoc cooperation, facilitated by central bankers’ interpersonal trust and personal relations.
After 1958: The Heyday of Bretton Woods?
The system that was designed at the Bretton Woods Conference only became fully functional in 1958; it lasted until 1973, when countries began to float their currencies against one another after Nixon suspended the “gold window” in 1971. During this time, the Kennedy and Johnson administrations fought their political battles over European and British currency management through the US Treasury.19 Central banks, still subordinated to the political preferences of their governments and finance ministries, cooperated extensively to support what Harold James describes as the heyday of Bretton Woods and the “golden age of capitalism.”20 A few central bankers, mostly those in charge of their foreign departments, collectively circumvented these institutional constraints to cooperate and innovate their way through the systemic fault lines.
Following extensive reconstruction and rebuilding efforts, aided by the United States through the Marshall Plan, the expansion of trade and economic growth in Europe and Japan shifted the balance of power toward these economies in the international system by the end of the 1950s. The increase in exports from Europe and Japan, combined with the United States's increase in military spending, rapidly expanded US deficits.21 Now, US financing to rebuild Europe and Japan had created significant dollar shortages at home and a dollar glut overseas. But when central banks redeemed their dollars for gold, US gold reserves would fall to dangerously low levels.
It was this structural problem, and the implications of attempting to resolve it, identified and exposed by Triffin in 1960, that came to consume policymakers’ attention through the rest of the decade. He predicted that if the United States corrected its persistent balance of payments deficits, the international community would lose its primary and largest source of reserves, which could not be sustained by adequate gold production at $35 an ounce. But if the United States continued to run deficits, its foreign liabilities would eventually exceed its ability to convert dollars into gold and erode confidence in the dollar.
No doubt, postwar cooperation, both multilateral and bilateral, benefited from the presence of a hegemonic power to play the role of an economic stabilizer.22 But, the heyday of the Bretton Woods era was not the result of US hegemony alone. America's consensual hegemony in the 1940s and 1950s slowly eroded the political and economic conditions that had sustained postwar cooperation by the 1960s, while dollar centrality remained. European economies faced continued trouble managing their currency pegs, and the United States and the United Kingdom, who controlled the two reserve currencies, faced large and unsustainable deficits. Dollar funding remained a central issue for the entire system, and the United States relied as much on the support and cooperation of its partners as they did on the hegemon. As James reminds us, the United States and the United Kingdom “found their situations increasingly difficult” and had to resort to “expedients, devices, gimmicks and ad hockery to maintain their international position.”23
The IMF and the BIS were important for cooperation and seen as central pillars of the governance architecture.24 But the extent to which policymakers, including central bankers, saw the IMF and BIS as central to managing crises and financial pressures is intriguing. The IMF was indeed tasked with the role of acting as an international lender of last resort. To do this, it created important backstops and lending facilities to provide financial support in Europe—the GAB—in case, as the IMF's managing director, Per Jacobsson, said, “Borrowing could not really be improvised in a crisis: some advanced arrangements had to be made.”25 But the Bretton Woods system did not seem to rely on a robust, institutionalized governance framework. As the Triffin dilemma materialized, these institutions proved inadequate. Still, policymakers were able to prolong the gold-dollar standard for another dozen years.26
Setting aside the discussions and negotiations leading up to the GAB, I highlight monetary authorities’ preference for improvised cooperation for bilateral liquidity assistance over such multilateral tools to avoid the cost of IMF assistance and the laborious negotiations with governments. I show that central bankers, with the help of their friends, spent the decade postponing the eventuality that Triffin had predicted. They engineered devices and gimmicks to find ways for surplus countries—Germany, France, Italy, and later Japan—to lend dollars to the United States and the United Kingdom to finance deficits. Liquidity provision in a crisis was once again up for innovation.
In the Bretton Woods system, central bankers played a largely subordinate and technical role.27 Most leaders did not enjoy the same discretion and independence from governments as their predecessors. Given the bureaucratization and enlargement of central banks, individual leaders alone did not steer the global economy through the decade, as they had done in the interwar period. But emerging systemic problems and changes gave central bankers a new raison d’être: the financial system was rapidly evolving, with the emergence and growth of the Eurodollar market and the increasingly complex financial instruments used in private finance. With current account convertibility and the need to engineer improvised arrangements to prop up the dollar and pound, central bankers’ technical expertise was invaluable. These emergent technical problems helped separate the central banking wheat from the political chaff.
Central bankers themselves were learning the ways of the growing private financial sector in real time, coming to grips with how the international monetary system was evolving. Coombs, at the New York Fed, wrote to Allan Sproul, a former president there, in 1964: “I can well understand your dismay at the growing complexity of the exchange operations reported in our last article. Sometimes I feel like we are trying to play half a dozen games of poker at once, although I am consoled by the fact that so far we have not wound up pursuing any busted flushes.”28
As national economies grew increasingly interconnected, central banks’ foreign currency desks and the BIS became a safe haven for their autonomy, at least in conducting their overseas operations. High-level staff and leaders in central banks’ foreign departments played a key role in managing their activities, especially from their international desks and foreign exchange offices. From behind the scenes, a “new class of close-knit global technocrats” emerged.29
Per Triffin's 1960 diagnosis, endogenous mismatches in the system suggested that the collapse of the system was predetermined, and emerging imbalances were further complicated by the reemergence of global finance.30 In response, central bankers took to extensive improvisation. Early in 1961, European central bankers, primarily Max Iklé in Switzerland and Cameron Cobbold at the Bank of England, created the Basel Arrangements through the BIS. Soon after, Coombs followed suit to arrange bilateral credits with his continental counterparts, starting with Iklé from Switzerland and Tüngeler at the Bundesbank. These early experiments laid the groundwork for a much larger effort: the creation of the RCA, also known as the Federal Reserve swap network. Together, these innovations kept the system going to maintain its external facade of stability.
These governing arrangements were generated and managed through extensive cooperation among central bankers. They worked to prop up the dollar, maintain exchange rate pegs, and provide liquidity to the global monetary system. But their success was short-lived. The balance of payments troubles that Triffin observed eventually culminated in the gold and dollar crises in 1971 and onward. Dollar convertibility was suspended that year, and with it came the demise of the Bretton Woods gold-dollar exchange rate standard.31
The Basel Arrangements
In 1961, a swap network created at the BIS emerged to support sterling. These came to be known as the “Basel Arrangements,” the “Basel credits,” or the “Bilatéral concerté.”32 They emerged following the revaluation of the German mark, Swiss franc, and Dutch guilder in 1961. These created what Coombs describes as a “burst of speculation against sterling” and the “dollar as usual was caught in the speculative backwash.”33 Emerging currency pressures led to a series of bilateral efforts by a few central bankers, namely, Coombs in New York, Tüngeler at the Bundesbank, and Iklé at the Swiss National Bank. Within months, these credits incorporated a handful of European central bankers through the BIS monthly meetings.
The Basel Arrangements and the Fed RCA network operated similarly: central banks exchanged their currencies for dollar credits from partner banks. The Basel Arrangements were provided by central banks to one another. They were used to boost reserve liquidity to fund exchange rate commitments and payments imbalances in 1961. These lines did not involve the high costs and supranational enforcement associated with IMF assistance. The Basel Arrangements were also specifically not created by BIS authorities. They were bilateral lines between central banks that just happened to first be arranged during the March BIS meeting in 1961. As an internal communication within the Bank of England shows, the press announcement of the Basel Arrangements would qualify “that this was only what the Press had come to call them and that the basic fact, viz. that it was Central Bank co-operation which had happened to have started at a B.I.S. Meeting came out quite early in the Article [the Bank Bulletin.]” to reflect the preferences of central bankers in Basel.34
Coombs was not directly involved in making these arrangements; they came about primarily between central bankers at the Bank of England and on the continent. However, Coombs's initial interactions with Guido Carli at the Bank of Italy, and Tüngeler, laid essential groundwork for these arrangements. Central to what soon became the Basel Arrangements were interpersonal ties of goodwill between Iklé and Coombs that led Iklé to approach his European counterparts to help offset pressures on US gold stocks to support Coombs. These initial interactions and informal bilateral conversations among friends at the BIS were the starting point for what developed into the Fed swap network in the following year.
Coombs Goes to Basel
Coombs recounts that when the German mark was being pressed “hard against its official ceiling in the exchange markets,” the IMF approved the revaluation of the mark. This move was soon followed by similar moves in neighboring countries in the early 1960s. Currency revaluation on the continent triggered significant capital flight out of Britain toward Germany and Switzerland. At that time, the United States also faced gold losses, pushing important cooperative efforts between Coombs and Tüngeler. The Germans regarded this American assistance in 1961 as an important cooperative gesture and depended greatly on the trust and confidence shared among Coombs, Tüngeler, and Karl Blessing, president of the Bundebank.35
When these currency pressures emerged, and after the revaluation of the deutsche mark, the Bundesbank was flooded with speculative dollars, draining the United States's gold stock. Tüngeler called Coombs to discuss this issue and take decisive action to control the situation. Coombs “stopped off in Frankfurt and spent an evening at Tüngeler's home, drinking beer before his fireplace, and exploring with him ways and means … to check speculation against the dollar.” Coombs highlights Tüngeler's “generous solution” to the problem, also noting, “Over the years, I have known no other central banker whom I have trusted more.”36
Days later, Blessing, aided by Tüngeler, head of the Foreign Department at the Bundesbank, proposed a mark-dollar swap in the forward foreign exchange markets to Coombs. Coombs recalls the goodwill and friendship he shared with Tüngeler and Blessing at the Bundesbank. Blessing had watched the breakdown of cooperation in the 1930s from Basel, and now, as president of the Bundesbank, “with the mark entrusted to his care, he wielded his enormous authority with courage and discernment of his world financial responsibilities.”37 He played a towering role and was “an unfailing source of strength and morale in [all] Basel discussions.” He understood “when to be helpful” and preferred bilateral cooperation to avoid long and complex negotiations involving governments.38 Coombs described Tüngeler, with whom he developed a very close friendship, as a “courteous, easy-going German” who managed the bank's huge foreign operations “with highly professional skill and a remarkable sense of responsibility not only to his own country but to the outside world.” But early that year, their “professional and personal friendship was just beginning.”39
Tüngeler's suggestion was for Coombs to begin “forceful sales of forward marks” in New York, which would provide markets insurance against the risk of further revaluation. The problem was that the New York Fed did not own enough German currency to honor the ninety-day forward contract. Here, Tüngeler's ingenuity and goodwill came to Coombs's aid. If Coombs's bank could not honor spot purchases when the swap reached maturity, the Bundesbank would sell them marks for dollars at the same rate as in New York's forward sales. Because at the time the FRBNY did not have the independent authority to enter this agreement, Coombs sought the support of Robert Roosa and Douglas Dillon at the US Treasury, who authorized him “to conduct this pioneering experiment.”
A previous, similarly experimental exchange just weeks before, between Coombs and Guido Carli, of “poor, war-torn, defeated Italy,” had encouraged Coombs to consider these improvised solutions. Carli had been appointed as general manager of the Bank of Italy in 1959 and was promoted to governor in 1960. He was a man of few words but a “skilled economist, with finely honed analytical powers.”40 Carli had visited Coombs to discuss how to curb further gold losses in the United States, while the Bank of Italy “had a swollen dollar portfolio” that was legally convertible to gold at the Treasury. Any such conversion at the time would have posed a problem for the United States, given the extensive gold losses it was already seeing.
Carli enjoyed considerable authority among his foreign colleagues, “owing to his power of persuasion and also to the gold and dollar reserves on which he was sitting.” His visit to New York came with an offer to sell $100 million of gold to the New York Fed to help maintain its gold stock when needed. Coombs and Carli's shared trust and friendship facilitated this generous offer, insofar as agreeing to make the transaction the same day that Coombs requested. Carli later recalled that it was in central bankers’ informal meetings where the most significant decisions were arrived at.41 Carli and Coombs developed a very close relationship with one another, where Carli “took over the role of [the New York Fed's] ‘Italian Navigator.’”42 Coombs's memoir, The Arena of International Finance, is even dedicated to Carli.
Creating the Basel Arrangements
While these early experiments between Coombs, Carli, and Tüngeler had proved successful, gold losses in the United States and hot money flows to Switzerland continued. At the Swiss National Bank (SNB), Iklé, who was in charge of banking operations, was quick to identify the same systemic threats that Triffin later exposed in 1960. Iklé was a lawyer by training who was “quick to acquire the necessary economic expertise.”43 He was personally very well connected with both Swiss commercial banks on Zurich's high street and his foreign central bank colleagues across Europe and in the United States. In the 1950s, he engineered small, short-term domestic swaps (which operated very differently to the international central bank swaps, but were similarly ad hoc) through the BIS to maintain fixed exchange rates in Switzerland.
As European central bankers grew concerned with increasing gold inflows and decreasing gold reserves in the United States at the turn of the decade, it was clear that the Bretton Woods system was under threat from short-term capital movements and speculation. At the time, the legal provisions governing the SNB meant that Swiss loans overseas could only be granted by the government. After 1959, a “radical transformation of this policy was then initiated … notably at the instigation of the imaginative Head of Department III, Max Iklé.”44 The domestic window-dressing swaps that Iklé engineered in the 1950s, and later, participating in international currency loans, were a significant break in tradition that Walter Schwegler, Iklé's predecessor in Department III, strongly opposed. Even under Iklé, the SNB Governing Board had declined a swap proposal from the BIS stating that “such a transaction would not be entirely compatible with the statutory provisions, and the bank currently has no need for additional income.”45 Iklé, acknowledging the legal restrictions, explained the high costs of exchange rate hedging, which Schwegler turned down.
So, Iklé took his ideas overseas, generating the earliest plans for swap lines with the New York Fed and the BIS to manage foreign exchange and provide liquidity assistance between central banks. In February 1961, Iklé first approached his counterpart in New York, Coombs, who managed the New York Fed's foreign currency transactions, when they were in Basel.46 Here, he raised the idea of a Swiss franc-dollar swap to Coombs privately and “in lengthy letters and in personal meetings.”47 Iklé also shared this proposal of a Swiss franc-dollar swap with Roy Bridge at Bank of England and the SNB Governing Board, where he explained in detail the transaction itself, topped off with a list of its advantages for both Switzerland and the United States.
Iklé's moment arrived that March. The revaluation of the mark in 1961 had caused havoc in sterling markets and substantial gold drains in the US gold stock. When Coombs traveled to Switzerland during the 1960–1961 winter, he “had lengthy conversations with Iklé and had enjoyed the hospitality of his home,” to find a solution to US gold drains and sterling's woes. During Coombs's visit, he recounts that Iklé “readily agreed” that as Switzerland had emerged as a “haven for hot money from all over the world” the SNB could no longer punish the US dollar “for buying gold with the proceeds of capital flight.” Coombs was constrained and “irritated by the total lack on the American side of any technical facilities to deal with the problem. Here, Iklé's “good will was put to the test.”48
It was this gentleman's agreement between a domestically constrained Coombs and Iklé to find a solution to the gold and dollar pressures in the United States that could circumvent institutional constraints on the FRBNY. To do this, Iklé turned to his European associates when they met in Basel the following Saturday. First, Iklé separately offered Bridge a three-month $310 million credit for the Bank of England over breakfast during the Basel weekend, on March 30, 1961. Bridge flat out refused at first. However, Cobbold, the governor of the Bank of England, a “genuinely apolitical” central banker, who championed the “we know how markets work” approach, got involved in Iklé's endeavors. Over the rest of the weekend, Cobbold actively worked to round up credits from continental central bankers, which “provided the all-important nucleus of a billion-dollar package” that soon came to be called the “Basel Arrangements.” This weekend has been described by Frederick Connolly at the Bank of England as “a crystallisation point for the construction of a general swap network.”49 This “one stroke” cooperation among European central bankers, through the Basel Arrangements, saved both sterling and the dollar against immediate gold drains in 1961.50
The pressures triggered by currency realignment in Germany and Switzerland had been central to the inception of the Basel Arrangements, created primarily by Iklé and Cobbold, but also largely to honor Iklé's goodwill and reassurance to Coombs. At this time, however, a swap line between the New York Fed and the Swiss National Bank would have been out of step with the Governing Board of the SNB before Iklé took over the department. Iklé played a crucial role in changing the fundamental ways of his bank and recognized that his schemes overstepped the statutory provisions of the SNB, while the Fed and US Treasury were hesitant to enter such an arrangement without adequate cash reserves or any guarantee, which the SNB was not authorized to give. Iklé explicitly noted to Coombs that “such an operation, however, would mean throwing our tradition in respect of forwarding transactions overboard. We rather think that this would even go beyond the provisions of our banking law; all the same, the Board of Management of the Swiss National Bank would be prepared to assume full responsibility, provided an effective contribution toward the solution of the international monetary problem can thus be secured.”51
To sidestep this hurdle, Bill Martin at the Federal Reserve Board suggested harking back to a central bank practice from the First World War to borrow foreign currencies via the Treasury and that this could be done by issuing a Treasury security in Swiss francs; Dillon and Roosa at the US Treasury agreed.52 Coombs and Iklé engaged in swapping dollars for Swiss francs to “encourage the retention of dollar reserves” that August.53 The success of the Fed's operations in German mark and Swiss franc markets “stimulated other European central banks to suggested similar experiments.”
Iklé was also not the only central banker of that period to reshape his banks’ international footprint. Coombs and the president of the New York Fed, Alfred Hayes, were also the first to break with the Fed's tradition of not participating in the Basel meetings when Coombs first attended a meeting in 1960, quickly becoming regular attendees.54 This was an integral step for the Fed, and specifically for the New York Fed's leadership, to cultivate close relations with their European colleagues without which these informal discussions could not take place.
Personal visits and requests of this sort had become the modus operandi among Coombs and his friends. The success of the Fed's operations with the Swiss and the Germans had instilled a great deal of confidence in many Europeans about Coombs's plans. Monthly trips to Basel provided central bankers the ideal private and informal setting to discuss these requests. Later in 1961, in a similar private encounter at the BIS, President Holtrop of the Netherlands Bank approached Coombs saying, “Why don’t you get together with my Foreign Department people and see if you can invent a way for me to avoid buying gold?” Coombs took on the request, arranging a cash balance at the Treasury to provide reserves for guilder operations in 1962.55
The “Basel” in the Basel Arrangements
Even though the Basel Arrangements were arranged at the BIS, they were not multilateral, institutional arrangements. After 1962, they provided an extension to the Fed's swap network to buttress its governance system with additional temporary measures, which could be arranged among European banks through Basel, without involving the Fed. These arrangements proved especially useful in overcoming several Bank of England associates’ lack of trust in Coombs that I discuss ahead. Iklé was also keen to emphasize that these lines remained bilateral and between central banks. He “was worried about references to the ‘Basle [Basel] Arrangements’ saying, quite correctly, that the essence of the thing was a series of bilateral arrangements between Central Banks.”56
Iklé's concern was part of a larger interest in protecting “the ability of central banks to extend such credits promptly, flexibly, and secretly, and affords a unique and potentially highly effective instrument of international financial cooperation.”57 Bilateral arrangements were generally preferred over having to resort to the IMF as a primary source of assistance. These ad hoc and “quickly mobilizable reserves” proved crucial for open market interventions by central banks, which were regularly arranged at the Basel weekends.58
The Bank for International Settlements in Basel offered central bankers a forum to regularly meet and get to know one another. Here, they had many opportunities to conduct their private, bilateral, or group meetings in a setting isolated and insulated from governmental and political interference. The Basel meetings were informal and were not institutionalized until 1964, when the monthly meetings officially became the G10 governors’ meetings. The most valuable parts of the Basel weekend were the informal meeting and the governors’ dinner, which was and remains by invitation only. Several Bank of England memoranda highlight that these meetings were “friendly and useful; most participants knew each other pretty well and a meeting of the minds was not difficult to achieve.”59 The camaraderie that central bankers developed in Basel was what attracted them to eagerly return each month. Louis Rasminsky of the Bank of Canada said that these visits were “an invariable source of pleasure” that also “served a therapeutic purpose.”60
Central bankers also valued their visits to Basel for the private, bilateral meetings with their close friends, which “were in themselves worth the trip: they provided not only a quiet testing ground for new ideas and approaches but also an early warning system when things were beginning to go wrong.”61 One Bank of England official noted, “The unique character of the BIS made it possible to organize these arrangements with great speed, to employ flexible techniques & above all to maintain secrecy which was essential to combat the speculative forces which were at work. This essential need for secrecy, made it inevitable that a clear statistical explanation cd [sic] not be given at the time.”62
The interests and goals of the BIS focused on managing the global financial system. Its operation depended greatly on who was present and the personal relations that they shared with their foreign colleagues. As already noted in the introduction to this book, Karl Otto Pöhl, a former president of the Bundesbank, had talked of the importance of close friendships, rather than financial resources, that are the real strength of the BIS. Indeed, changing personnel and personalities could mean a different BIS.63
The flexibility and informal nature of the Basel Arrangements were key factors in central bankers’ preference to avoid the IMF. Central bankers in Europe disclosed “a very wide measure of agreement of the desirability of arranging that the first shock be taken up by ad hoc inter-Central Bank arrangements, the shape of which would not be in any way formalized, and that thereafter if the capital movements which these were designed to offset did not reverse themselves after quite a short period, the country losing reserves should go to the Fund for a drawing which it would use to repay Central Bank credits where repayment was desired.”64 When contracts could not or were not honored, central bankers would have to turn to the IMF, but the first port of call would be the bilateral network. Lord Cobbold wrote: “Our policy is to defer an approach to I.M.F. until later if possible, and then to use a drawing for some consolidation of Central Bank arrangements.”65
Another key condition that facilitated these arrangements was secrecy over discussions and decisions. Operational secrecy was dearly guarded by central bank leaders across Europe; many of the earliest conversations leading to the creation of the Fed and the BIS swap networks took place in informal and private meetings. In 1961, Cromer wrote in his memorandum of the Experts meeting that December that his “instinct is that a written record, even of the figuring on balance of payments and even if it is confined to the participants of the management of the B.I.S. is, sooner or later, going to inhibit free discussion if that is the object of the exercise. I cannot escape the conclusion that if there is anything really serious that the Central Banks wish to tell one another, the right channel is between Governors.”66
Sometimes this meant that not enough information was available to governments or markets regarding the proceedings of international transactions. But for central bankers, losing their autonomy and preference for secrecy was much too high a price to pay for increased transparency. It was essential for central banks to privately conduct their own dealings, which underpinned their cooperative arrangements of the 1960s.
While initial cooperative measures were being deliberated in Basel, the Bank of England's reports indicate that it was not alone in wanting to maintain this secrecy. It was repeatedly emphasized that “in the future, as in the past, secrecy must be paramount at a time when operations are in progress.”67 In discussions around the publication of the Bank's Quarterly Bulletin it was mentioned that “help was provided by institutions other than those mentioned…. [For your confidential information these were BIS and the Federal Reserve of the United States, both of which do not wish to be mentioned.] It may be asked which these institutions were, and the answer must be that this cannot be disclosed. It is of the essence of such operations that central banks participating should be able to do so without disclosure, if that is their wish.”68
Even as the use of Fed or BIS swaps became more frequent and routine, keeping operations quiet remained a priority for central bankers. In 1964, regarding reports on the Basel Arrangements, a Bank of England report noted, “I think we could, if pressed, concede notification on the day following each operation, rather than the accumulation of a group of notifications; but even among friends there is something in operational secrecy and I do not think it should be easily conceded.”69
The intimate setting of the Basel meetings and the regular personal travel and correspondence between central bank leaders afforded them a degree of privacy that they were accustomed to. Central bank operations also evolved in a manner that needed this cloister to arrange these transactions in an ad hoc and exclusive manner. Coombs characterizes them as “a major breakthrough in postwar international finance. At one stroke, European central bank cooperation had not only saved sterling but also had protected the dollar against heavy gold drains.” The event also persuaded Fed officials of the need to “develop an active role in international financial markets” and encouraged Coombs in his monthly Basel visits “to explore new possibilities of transatlantic central bank cooperation,” which emerged in the form of the RCA network in 1962.70
The Reciprocal Currency Arrangements
Differentiated personal ties among central bankers also influenced the scope and speed of cooperation. Among some, bilateral cooperation was seamless. Following Bridge's initial resistance to Iklé's ideas to collaborate with Coombs, further conversations took place exclusively among Coombs, Iklé, and Tüngeler. Coombs had “developed close and confidential relationships with his counterparts abroad.”71 He notes that he enjoyed “their full trust and confidence” before the Fed's network grew to include more partner banks.72 The Fed swap network took a “hub and spoke” form, comprised of bilateral swap lines between Coombs and his partners. By 1971, the network grew eventually to include fourteen central banks and the BIS.73 But the establishment of this program began with innovation that mirrored the 1920s programs, through bilateral central bank exchanges.
The earliest swaps that were taking off between the Swiss and the New York Fed, orchestrated intimately between Coombs, Iklé, and Tüngeler, laid the groundwork for the Fed's swap network in Europe. Coombs's account highlights the personal conversations and cooperation with his counterpart in France, crediting Julien-Pierre Koszul, the managing director of Foreign Services at the Bank of France, for designing that swap arrangement that evolved into the Fed's RCA.74 Again, the swap arrangement between the Fed and the Bank of France emerged out of private, personal, and informal discussions between close friends. Coombs described Koszul as “a master of his profession” and a “quick-tempered French patriot, who nevertheless acknowledged some satisfaction in distant Polish and American ancestry,” before these arrangements evolved into something more institutional and automatic.75
The conversation that led to the first swaps between the Bank of France and the New York Fed took place in private between Coombs and Koszul, when Coombs's thoughts turned to “the possibility of bilateral financing arrangements” with other central banks. In January 1962, he stopped by Koszul's apartment in Paris to talk over his ideas. He recalls that Koszul quickly “drove [his] problem into a corner and forced it to surrender the solution.”76 In doing so, he also offered the simplest explanation of how these swaps work, and how easily such ad hoc arrangements can be made: “Mon cher Charlie,” he said, “it is very simple. We just do a swap of our currencies: we credit French francs to your account here in Paris against dollars to mine in New York. If you want to use your francs to defend the dollar in the exchange market, fine; if not, at the end of three months we reverse the transaction at the same rate, the money on both sides disappears, and everything is unchanged.”77
It was very quickly agreed that the two banks would credit each other's accounts with an amount equivalent to $50 million in dollars and French francs. This agreement “became the prototype of all subsequent swap arrangements.” Through this simple ninety-day loan arrangement, Koszul and Coombs were able to create an additional $100 million of international reserves “out of thin air.”78 This swap arrangement was much like the standing ninety-day transactions that Strong had arranged with the Bank of England in 1925, and so for Coombs, the FRBNY faced no legal obstacle, as it required no new legislation to undertake this task.
However, Martin knew that most of the Federal Open Market committee (FOMC) did not have any experience in international finance and would, as Robert Brummer highlights, “be reluctant to accept unfamiliar risks that might involve financial losses and new political risks.”79 While scholars have argued that the RCA was created and expanded with such ease because it served US interests, I highlight below that Coombs's persuasive role within the Fed, and his personal relations in Europe that helped facilitated this arrangement, were critical to getting the program off the ground.80 The creation and expansion of this instrument went against the preferences of the FOMC and the Board to whom Coombs answered, who were wary of his experimental devices. Caution against this program included opposition from counterparts in Europe and hesitation toward the program by Martin himself. The arrangement faced similar opposition of Jacques Brunet, the governor of the Bank of France. As such, the informal and personal interaction between Coombs and Koszul that led to this initial agreement was especially important for the Fed-Bank of France swap line.
In May 1962, Brunet wrote to Cromer, who had just assumed the governorship at the Bank of England, that he “thought that the American idea of organizing swap facilities around Europe for large sums indefinite in time was wrong in principle” as it allowed the United States to avoid turning to the IMF to address the “deep seated difficulties” in the dollar.81 Brunet was not opposed to central bank cooperation per se. He had cautiously suggested some cooperation among European central banks to pool resources in London gold markets, which was later visited to create the gold pool. However, Brunet, along with his government, grew increasingly frustrated with the United States for its dollar problems and exorbitant privilege that without Koszul the swap line arguably may not have come about. A line was also established, after much disagreement, with the Bank of England, once personal distrust and disagreements were overcome.
Following the success with the French swap, and a brief, speculative bout on Wall Street that sent money flowing back into mainland Europe, Coombs had “encouraging discussions” with Holtrop in the Netherlands, and Hubert Ansiaux in Belgium, and negotiated arrangements with the Belgians and the Dutch of $50 million each. But continuing dollar flows into Switzerland out of New York, and soon Canada, led Coombs back to Iklé, with whom he had taken on his earliest improvised efforts. Now, Coombs envisioned a swap of $200 million dollars, not the standing $50 million available to other European partners.
As Milton Gilbert, a former economic adviser to the BIS, describes, these swap lines were “imaginative tactical arrangements” created with great ease from informal and personal conversations rooted in “the spirit of trust and cooperation” that Coombs and his colleagues had developed through their “expertise and frankness.”82 Central bankers’ ability to generate millions of dollars of international reserves inspired more ambitious plans in Coombs's mind. After his successful interactions with the French and the Swiss, Coombs spent the rest of the year in informal and private talks with his fellow central bankers in the rest of Europe and Canada. Walking in the shoes of Benjamin Strong, Coombs “embarked on a tour of European banks” to formalize these bilateral swap arrangements, which could be drawn by either party in the agreement, with little notice, and could be used for a wide range of purposes, such as propping up exchange rates or for liquidity provision.83 By the end of 1962, Coombs had personally established swap lines with seven central banks in Europe as well as with the Bank of Canada, the Bank of Japan, and the BIS.
In doing so, Coombs was acting very much independently and not in line with the Federal Reserve Board. In a Joint Economic Committee Hearing in January 1962, Martin noted, the Fed “was not anxious to engage in this type of activity” and that these transactions needed to be “looked at on an ad hoc basis.”84 The FOMC, the main entity within the US Federal Reserve System tasked with all activities aimed at providing liquidity to the banking system, noted that these operations were “considered to be exploratory and experimental in nature.” The committee found this arrangement to be “very new and radical.” The Fed called on a Swiss witness to explain what it was doing.85 In fact, on making these arrangements informally and privately, Coombs then had to convince the FOMC of their need and value.
In order to capitalize on this unique ability of central banks, it was important that central bankers could trust one another and have open discussions that facilitate such flexibility and informal assistance. Coombs recalls that through his visits to Basel and his own travel across Europe, he had got to know and trust many of his fellow central bankers. He recounts, “Officials of the German Federal Bank [the Bundesbank] had been quite explicit in indicating that they would not want a third party involved in the arrangement between the Bank and the Federal Reserve.” These relations were important to maintaining a bilateral and ad hoc approach solely among partner central banks. As he told the FOMC, he also believed that this attitude “may have reflected in parts considerations of confidentiality and in part considerations of speed.”86
For Coombs, the “professional understanding and personal friendship that quickly flowered” with his opposite numbers was what was so deeply satisfying in the “true camaraderie” of cooperation among central bankers.87 It was vital for the New York Fed swap network that Coombs had created close personal relations with central bankers abroad and managed this system with the support of a small club of central bankers.88 Even at the BIS, when discussing central banks’ management of reserve assets, either through the Bank or even the IMF, central bankers noted the benefits of having different approaches and treatment of some countries, liking “the idea of a club of friends—‘on peut se permettre le luxe de certaines volies avec ces gen là [we can afford the luxury of certain follies with these people].’”89
In the absence of a reliable and robust financial governance framework, these “ad hoc devices as central bank swap arrangements seemed to be patching up the world financial system with ‘chewing gum and bailing wire,’” as described by many university economists who had little interest in the “ingenious scheme for creating world liquidity” engineered by central banks.90 These arrangements grew into a large network of swap lines between the New York Fed and fourteen foreign central banks and the BIS, totaling $11.7 billion in foreign exchange reserves.91 They resulted from “the close cooperation that has grown up among senior financial officials … supplementing older relationships through the IMF, and through bilateral contacts.”92
As the supplier of the global reserve currency and therefore the primary transactions currency, bilateral financial assistance with the New York Fed was initially the primary form of cooperation. But it takes two to swap, and Coombs relied as much on his counterparts as they did on him and the Fed. This was because European currencies were only convertible to dollars and inconvertible to any other currency. As Coombs explained to Allan Sproul, a former president of the New York Fed, “The New York Bank has now become virtually the balance wheel of the international financial machinery.”93 Together with the BIS, the FRBNY stepped in to offer another option for liquidity and exchange rate management, facilitating an “array of short-term credit arrangements between central banks” to fend of speculative attacks on their currencies.94
Differentiated Ties: Distrust and Vouching at the Bank of England
Despite the ease of arranging bilateral swaps, and the low cost of these instruments to central banks, some central bankers in Europe were less enthusiastic about Coombs's scheme. Early on in Coombs's RCA endeavors, poor personal relations and a substantial lack of trust in Coombs and his swap program at the Bank of England hindered cooperation to arrange a Fed-Bank of England swap line. Where these ties were weaker or absent, such cooperation was more arduous, and arrangements significantly watered down. This was the fate of the Bank of England even though Britain and the United States had long enjoyed a special relationship, and the Bank of England was the New York Fed's closest foreign economic partner.
To offset the initial stumbling blocks in arranging a Fed swap with the Bank of England, the Basel Arrangements through mostly European central banks helped manage the pressures of gold and dollar drains on sterling. It was only later, when Cromer took over the Bank of England governorship that the Bank of England entered into a sterling-dollar arrangement to which they “agreed for the sake of good relations” with the Fed.95 Still, a lack of trust and goodwill among other Bank of England staff and Coombs led to a much more limited swap line between the banks.
A closer look at the conversations and negotiations leading up to these arrangements highlights the conditions that allowed central banks to engage in such cooperation: trusted counterparts of Bank of England officials—Iklé and Tüngeler—who vouched for their successful interactions with Coombs to Cromer, and their trust in his plans, helped get a sterling-dollar swap line off the ground. Cromer played an integral role in overcoming the obstacles of poor relations between Bridge and Coombs, through his friendship with Alfred Hayes, president of the New York Fed, and Bill Martin, chairman of the Federal Reserve Board. They emphasized the importance of secrecy in their interbank dealings, keeping their plans outside the political and the public view.
The Fed's emergence on the Basel scene had several Bank of England officials anxious, especially Bridge, who managed the Bank's international currency operations. Coombs and his European supporters, particularly Iklé and Tüngeler, helped push the idea of arranging central bank swaps between the Fed and partner banks at a BIS meeting in April 1961. Unlike Iklé and Tüngeler, with whom Coombs began his mission to engineer swap lines in Europe, the Bank of England was hesitant and turned down the offer. Bridge's lack of trust in Coombs delayed the Bank of England's inclusion in the Fed's swap network at its inception.96
Internal correspondence among Bank of England officials on the pilot sterling-dollar swap indicates that Bridge and his colleagues felt uneasy and threatened by the new American “arrival on the Basel and Paris scenes,” which throughout 1961 and until 1962 highlighted Bridge's apprehension over Coombs and his plans.97 In October 1961, Bridge wrote to his colleagues that the scheme “leaves little room for maneuver and could generate a lot of steam.”98 These concerns of overheating the economy and the artificial transactions engineered to manage sterling continued, as Bridge reiterated. He wrote to Maurice Parsons, then executive director at the Bank of England: “We ought to be reluctant to facilitate [the Fed's] using sterling in support of the dollar…. Coombs’ proposal would produce an artificial increase to our reserve…. We do not want that.”99 And responding to Coombs's push for his swaps and gold schemes, Humphrey Mynors, deputy governor at the Bank of England, also expressed his own personal frustration at Coombs's agenda, writing, “As a bystander, I do not understand why so much attention is paid to the ideas of the unrepresentative and evanescent Coombs.”100
But the unrepresentative and evanescent Coombs had interests much bigger than what his English colleagues anticipated. Coombs saw a need to arrange a reciprocal currency facility for last-minute emergency use and the best way to do this was a swap that “might conceivably involve an amount ranging up to $300 million.”101 Coombs met with Cromer in Basel and felt that the initial reception to his plan was “markedly sympathetic.”102 And when it came to arranging the line, it was Bridge who was sent to New York to deal with Coombs. Coombs mentions that “in British parlance” he “got a fairly dusty answer, not so much from Cromer as from some of his senior associates,” sensing that Cromer's senior staff were suspicious of his plan despite his goodwill.103
This feeling is also evident in the Bank of England's records of the next Basel meeting, where it was noted that Coombs was “agitated at the lack of mutual trust between London and New York and cited some recent instances, including that the F.R.B.N.Y. were surprised that we did not like the form of the existing facility that they had given us [the Bank of England] and that they had accordingly reduced it by half thinking they were doing us a good turn.”104 At this time, Coombs learned that the British Treasury had “swung to much more ambitious schemes of converting the IMF into a largely automatic credit facility,” which they had long seen as a last-resort option. And still, Bank of England associates deemed Coombs's swap proposal to be inadequate.105
In internal Bank correspondence, Bridge confirmed Coombs's assessment, explaining his reluctance in the matter to Parsons, saying he, Bridge, “had not yet come to trust” Coombs, throwing his plan off course.106 Despite the long-standing political and economic partnership between the United States and the United Kingdom, and between their central banks, the lack of trust and friendship with Coombs at the Bank of England stifled the scope of cooperation through bilateral assistance between these bankers.
It was after “a certain amount of Anglo-American squabbling” that Bridge finally went to New York to discuss the swap. But the goodwill that Coombs counted on with his counterparts in Europe was missing. His hopes to arrange a swap of up to $300 million, which to many Bank of England associates seemed inadequate, was then negotiated down by Bridge to a much humbler $50 million.107 Even this modest arrangement needed the supporting and vouching of Bank of England associates’ trust partners on the continent. Ultimately, this swap line was not even drawn on when it expired in August 1961 and was liquidated and placed on standby.
What is especially interesting is that while senior associates at the Bank of England were so suspicious of Coombs's efforts, despite their success elsewhere in Europe, the Bank had entered into a similar agreement with Iklé in Switzerland in 1961—the one Bridge at first turned down. Once he had been convinced by Iklé of its merits after the revaluation of the German mark in 1961, the Bank of England was eventually “only too glad to accept” Iklé's offer of a three-month credit of $310 million.108 Forrest Capie, a historian of the Bank of England, describes this moment as marking “the real turning point in central bank co-operation” for the Bank of England.109 And given the SNB's initial resistance to Iklé's proposal to extend these swap lines, Iklé noted that he managed to get Schwegler's approval on a car journey from Zurich to Berne. Until then, Schwegler had been less enthusiastic about the SNB's engagement in international operations110
This agreement among the banks was first reached informally between Iklé and Parsons. Parsons wrote that “during the course of our conversation in Basel on Monday on the subject of the arrangement of a dollar deposit by the Banque Nationale Suisse with the Bank of England” Iklé had raised the question of “the free availability of these dollars” in the event that the SNB wished to call them. Iklé asked Parsons for some assurance that he “need have no fears that they will be blocked by Government action.” Parsons responded that he was unable to give Iklé any “formal assurance on behalf of Her Majesty's Government.” But in his view, “it was inconceivable that, short of the existence of a state of war between Switzerland and the United Kingdom, any action would be taken by Her Majesty's Government to interfere with [Switzerland's] rights to withdraw these dollars at any time you pleased.”111
It was only then, following successful cooperation with the SNB, and on hearing affirmative words from Iklé and a similar vote of confidence from Tüngeler about their cooperation in the Fed's swap and currency intervention operations, vouching for Coombs and his plan, that Bridge and others at the Bank of England were swayed by Cromer to reconsider the Fed swap proposal. Cromer wrote to his associates, including Bridge and Parsons, “I ought also to record that both Iklé and Tüngeler in private conversation with me were insistent that their experience with the [New York] Federal in the matter of intervention. At no time had the Federal acted in the Market without advising the Bundesbank or the Swiss National Bank beforehand and, indeed, on most occasions had actually acted on the advice of the other Central Bank.”112
Only then was Bridge convinced by Coombs's scheme and began to trust his word. In his memo on the “American Ideas for Strengthening the International Exchange Structure,” Bridge closely evaluated how these “two-way credit facilities” were for use “in times of need.”113 In justifying the plan to his fellow associates, Bridge explained, “They have got arrangements of one kind or another lined up with the Germans, Swiss, Italians, and French. They now make certain proposals to us…. They stress however that while attaching—for obvious reasons—great importance to some arrangement with us they would not wish to press us to participate in any arrangement with which we are not in sympathy. I believe this protestation to be completely honest.”114
Getting the Fed-Bank of England swap line off the ground was in no small part the doing of Cromer, and his predecessor, Cobbold, who left the bank “just after he had helped inaugurate the epoch of central bank co-operation through exchange swaps.”115 Cromer, who Coombs described as “enterprising and decisive,” later suggested a “ten-fold increase” of the dollar-sterling swap to $500 million, in 1963, which Coombs “heartily welcomed” when the pound was again hit by heavy sales. But Cobbold before Cromer had not been convinced by this scheme. Cromer created support for the swap line among his colleagues by appealing to Iklé and Tüngeler. At that time, British financial relations with the United States had hit several rough patches and “increasing bitterness,” due to the repeated sterling crises in the 1950s and 1960s and regular calls for American support.116 Cromer played a key role in navigating these intergovernmental disagreements through his diplomatic connections in Washington, DC, before returning to London.
Still, the ease of arranging a swap as significant and sizable as Coombs had imagined had initially been hindered by the absence of closer friendship and goodwill between the foreign department leaders in London and New York. While the agreement did eventually get off the ground, once vouched for by Iklé and Tüngeler, the eventual agreement made was still much smaller than was necessary, negotiated down by Bridge from $300 million to $50 million.
In 1961, while Coombs was attempting to garner support for a Fed swap, British and American officials squabbled over sterling's woes. Eventually, the Treasury was forced to turn to the IMF to negotiate a drawing of $1,500 million to repay previous multilateral credits. But these early programs proved to only provide stopgap solutions to sterling's woes. The pound had come under crisis in 1961 following the revaluation of the deutsche mark and again in 1963. Both crises, as discussed above, were arrested with support packages arranged bilaterally with central banks.
From Cromer to O’Brien: Sterling Support, 1964–1967
At the Bank of England, Cromer's governorship similarly “covers the key years of central bank co-operation” in a way that proved hard to engineer in his absence.117 Although this era was initiated by Cobbold just as Cromer assumed office, the close relations that Cromer had fostered in the United States were crucial for Britain's participation in the network of central bank support of the 1960s. Like Coombs and Iklé, Cromer's influence in facilitating the Bank of England's participation in the RCA was significant for many reasons. Most crucially, it was pivotal for maintaining sterling stability during the 1960s, when sterling faced repeated crises of confidence and credibility, especially between 1964 and 1967. Cromer's influence at the Bank, his ability to stave off political interference, and his close ties with Martin at the Federal Reserve helped secure financing to prop up the sterling peg. Capie suggests, “Perhaps Cromer's main contribution as Governor was his skillful use of central bank contacts in raising financial support when confidence in sterling was low.”118 Indeed, these efforts gave way to sterling's eventual devaluation in 1967, soon after Cromer left the Bank.
Cromer had spent much of his career in Washington, DC, where he developed close bonds with high-level officials at the Fed. It was fortunate that the apparently less personable Sir Oliver Franks, who had been offered the governorship to succeed Cobbold, turned down the job. Cromer was seen as “a congenial man, unfailingly courteous and considerate, and seemingly incapable of dissembling.”119 Cromer could and did capitalize on his personal relations. Cromer and Hayes in New York shared a “friendship that quickly developed” and was “communicated down the line, and cooperation between their two banks became the order of the day.”120 Franks, on the other hand, had a “rather cold personality” and did “not automatically exude bonhomie,” which may have discouraged fellow bankers from talking freely with him. A close associate of the Bank called Franks “the dullest of dogs, a bum-faced purveyor of last year's platitudes.”
After a brief lull in pressures on the pound, sterling came under fire again in 1964. Soon after, the Labor government was elected in 1964. Labor's election stoked fears of Britain's growing balance of payments deficits, and the Bank of England was slow to respond. There had already been talk of devaluation earlier in 1964, but it was not clear that such a policy would provide more than passing relief. These fears triggered a second sterling crisis that followed only weeks after the first. But the new government did not devalue. Instead, the 1964 sterling crisis was again responded to by Cromer and his counterparts through bilateral central bank arrangements. Cromer squabbled with Britain's new prime minister, Harold Wilson, who opposed any increase in the bank rate to alleviate speculative pressures. Wilson and Cromer did not like or respect one another. For Wilson, Cromer was “a right-wing reactionary in Labor circles, in the direct line of descent from Montagu Norman.” Cromer called Wilson “slippery and unsound.” Their antagonism did not help Britain's circumstances, and the crisis escalated quickly and peaked on November 24.
In the face of these troubles, Coombs learned that the Bank of England was losing reserves at “the rate of $1 million per minute” and that all credit facilities with the IMF and the Bank's swap line with the Fed had been exhausted. Cromer told the chancellor that the crisis was worsening because of a lack of confidence in the government's policies. All that time, Cromer had also been in constant communication with his counterparts across the continent and with Martin and Coombs. At 7 p.m. on November 24, a $3 billion rescue package of swap lines with eleven central banks was announced, which was achieved “largely at the personal initiative of the Governor” along with Coombs, who had similarly called on the support of his central bank contacts and had also managed to get the support of his own bank for this arrangement.121 But Cromer knew this was a short-term fix and would not suffice in restoring confidence. He was right. Reserve losses recommenced and continued through to the start of the new year, followed by a few quiet months in 1965.
While the crises of 1964 had abated, fears of pressures on sterling, and concerns that the pound was overvalued, remained. That year, at the initiative of the government, the Bank took a range of measures, including exchange and investment controls. Cromer was not confident that these measures would work for confidence beyond providing moderate relief, nor was he confident that they would work in a crisis. And that crisis was only months away. Cromer wanted to keep all options to discussions among central banks only and did not say anything to the chancellor or the government. In August 1965, Cromer told Martin in the United States that “things were not encouraging,” and so Martin felt that something needed to be done to “reverse the psychological malaise in which sterling now found itself.”122 Martin broached the possibility that the Fed could float up to $2 billion with European assistance but without the possibility of renewal.
At this time, US president, Lyndon Johnson, expressed his frustration and lack of faith in the British administration to Martin, pushing him to “abandon sterling,” “protect the dollar and let [the British] go their own way.”123 Martin had also lost confidence in sterling but did not share Johnson's ire toward Wilson and his government, and especially not toward Cromer. Johnson described the situation as “I have this feeling that just like a reckless boy that goes off and gets drunk and writes checks on his father, and he can honor 2 or 3 or 4 of them and finally [you] call him in and just tell him, now we’ve got to work this out where you live off what you’re making … and if you don’t I can’t come to your rescue any more and he just goes on and ignores it and writes another one. Now the time is come that we’ve got to turn him down.”124 But while Martin shared Johnson's concerns, he was opposed to devaluation and sought to support Cromer.
Cromer and Martin, however, were friendly and trusted one another, as Cromer did with Hayes in New York. Together, while Johnson and Wilson's disagreement and dispute over sterling's troubles continued, Martin and Cromer devised the “Cromer-Martin Plan” to support sterling through central banks and the BIS. Cromer also requested an enlargement of its swap lines with the Fed and at Basel. Martin and Cromer were keenly aware “of the risks of political abuse of central bank credits” and were eager to limit cooperation to central bank support.125 With the support of Henry Fowler of the US Treasury, all of the European banks and the BIS, who had participated in the 1964 sterling arrangement, once again sought to cobble together another round of sterling assistance. Coombs, Leslie O’Brien (now deputy governor of the Bank of England), and Bridge sought support from Iklé, Tüngeler, Carli, and others. It seemed that all were on board following a host of informal lunches and phone calls among the central bankers.
Once they all got to Basel in September 1965, it seemed as though many central bankers now found themselves at the end of their patience to support sterling yet again. In an acrimonious meeting, Coombs pressed his European counterparts to sign up for a new credit agreement to Britain.126 But the Wilson government had interfered in the central bankers’ plans, which had the effect of pushing prospective participants away. France withdrew, and others reduced their commitments to the sterling arrangement. The final arrangements were made largely by Coombs, who ran most of the negotiations with Europe. Cromer, Martin, and Hayes could not alleviate their counterparts’ suspicions; Martin honored the Fed's share of the plan, and forthcoming sterling support was announced, with little information about who participated and overall amounts. It had the intended psychological effects, however, and funds flowed back into London.127
But once again, this temporary fix proved to be just that, and sterling's troubles were still not behind them. By the end of 1965, the next stage of sterling's crisis decade was brewing, and the Basel facilities available to the Bank of England were to expire in March 1966. By the middle of the year, when sterling was again under fire, Fowler tasked Coombs to put “together a $1 billion ‘war chest to defeat a possible bear raid on sterling during September.’”128
Important leadership changes had taken place in 1966. This stage of the crisis was now under a new governor of the Bank of England. Cromer's appointment ended in 1966, and on July 1, O’Brien, who had been his deputy since 1964, took over. During his tenure, Cromer had reshuffled roles among high-level officials at the Bank in 1964. Humphrey Mynors, who had served as deputy governor with Cromer, retired. Prior to taking on the position of governor, O’Brien had been placed in charge of domestic issues, while Parsons had taken up the international front, which had important implications for when Cromer departed the Bank two years later.
Important political changes had also occurred. By the mid-1960s, Anglo-American political relations had soured, despite their deep economic and financial ties, as well as political alliance in the Cold War era. Monetary tensions between the United States and United Kingdom in fact exacerbated emerging political tensions that eroded this traditionally special, interstate partnership.129 Wilson and Johnson parted ways over the war in Vietnam and heightened economic tensions as the United States supported sterling through its troubles early in the 1960s. Still, it was very much in the American interest also that sterling was not devalued, as the two international currencies (the other being the dollar) were deeply interconnected.
When O’Brien came into office, talk of the prospect of sterling's collapse had grown in the public and in the media. The Observer reported, “The sooner sterling topples, the better.”130 All through July 1966, the Bank lost almost $1 billion in reserves, some of which it secretly financed with its Fed swaps and Basel credits. Bridge wrote to O’Brien two weeks days after he took office: “The smell of the start of another crisis—like November 1964 or March or July/August 1965—is unmistakable.”131 O’Brien was also opposed to devaluation, as was Cromer before him. But it seemed as though the mood was changing among higher-ups in the Bank that its possibility ought to be promoted from an “unthinkable last resort” to an “explicit possible policy.”132
O’Brien took up Cromer's efforts to secure cooperative assistance from Martin and his counterparts in Europe. Fowler supported O’Brien's effort to secure $3 billion, and “talks with Fowler … got off to a good start.” He was favorable to O’Brien's plan, which was essentially a repeat of the Martin-Cromer plan from 1965. Fowler advised Johnson that the risks of devaluation to the United States were just too great, and devaluation was “desirable only if the devaluation were modest, if others didn’t follow, if Wilson was also able to keep up his military commitments overseas, if the government didn’t fall and, finally, if inflationary pressures didn’t undermine the impact.”133
But O’Brien could not muster up the support of central bankers in Europe, who had now refused to even hold guaranteed sterling. Instead of providing bilateral credits, they prescribed that O’Brien went instead to the IMF's GAB for the full $3 billion standby arrangement. This would use up most of the IMF's coffers, making it difficult for the United States to borrow anything before sterling was finished. But before both US or British Treasury officials, “who negotiated vigorously” with central bankers and the IMF to secure an arrangement, Wilson decided on November 13, 1967, that sterling would be devalued. The US Treasury officials, who now feared a speculative attack on the dollar would follow, amped up their efforts with the support of British civil servants to “persuade continentals to cooperate in securing something” in the days that followed. After an arduous four days, it seemed as though a short-term credit was in sight, with support from Italy and Germany. But this agreement came too little too late, and by the evening of November 17, it was announced that sterling was to be devalued from $2.80 to $2.40.
Under Cromer, the Bank could resist political pressure, and instead put pressure on governments by warning or threatening them over their policy decisions. He saw great value in the short-term central bank credits and the flexibility of having them available on standby. These views were important for garnering support for the swap network among his colleagues.134
On Cromer's departure in 1966, the intense ad hoc cooperation in which the Bank actively engaged “began to fade” when he was no longer around to manage market and political pressures on sterling and the currency system.135 Sterling's crisis and eventual devaluation occurred alongside political disputes at the intergovernmental level between Britain and the United States, and each crisis was progressively worse than the previous. But there was nonetheless also a remarkable difference in the Bank of England's ability to secure support for sterling under Cromer and O’Brien, suggesting again that leadership changes can contribute to changes in outcomes of liquidity assurance through ad hoc and bilateral assistance in times of crisis.
The Patchwork Frays
Midcentury central bank cooperation was both a reflection of central bankers in the past and a glimpse into the future. The Basel Arrangements and the Federal Reserve swap network are reminiscent of the cooperative efforts of the 1920s. These improvised efforts to create money out of thin air were already part of central banks’ toolkits in the post–Second World War era. Central bankers relied on their personal relations with each other to support partner banks in maintaining currency pegs and provided liquidity to do so. IMF facilities were decidedly last resort options which central bankers actively sought to avoid. They turned instead to ad hoc arrangements to maintain stability and prolong the life of the Bretton Woods system.
Although most central banks were not independent during this time, key practices and methods from the interwar days remained intact. First, central bankers’ informal and personal relations, correspondences, and interactions greased the wheels of the global financial system. Second, their distance from politics affected how some central bankers viewed their professions, duties, and their colleagues. Finally, aided by the privacy of the BIS, central bankers continued to cooperate with one another on a personal level, behind closed doors and outside the public eye.
Central banks used instruments that mirrored the bilateral and ad hoc credits used all through the 1920s, but in a different international monetary system under the gold-dollar standard. It was therefore not entirely certain that these instruments would work similarly and as effectively in this new postwar climate, as Martin and other central bankers highlighted early in the 1960s. Thus, although bilateral swaps and credits had not left central banks’ toolkits since the interwar period, central bankers understood this as a policy innovation.
At the heart of the Basel Arrangements first created in 1961 were important trusting, trust-building, and reciprocal relationships between Coombs in New York and his counterparts Carli and Tüngeler in Italy and Germany. Iklé played a crucial role in laying the foundation of the Basel Arrangements network, which was only possible with his and Cobbold's support. Soon, these lines expanded to incorporate the New York Fed. To make these arrangements, it was essential that Coombs was able to circumvent restrictions on the Fed's ability to enter these arrangements.
Where personal affinities were less trusting and friendly, and central bankers did not share interpersonal relations of trust and goodwill, swaps were harder to arrange and were ultimately watered down as well. This was the case of cooperation between Coombs and the Bank of England, where several associates distrusted and were wary of Coombs's endeavors in Europe. As a result, the initial swap line between New York and London took longer to get off the ground and was ultimately much smaller than Coombs had hoped. Interestingly, Iklé's proposal, of a much larger credit, while initially rejected was quickly taken up in the proposed capacity the year before.
In joining BIS meetings, Coombs broke with the long American tradition of not officially participating in the institution. Iklé similarly broke with tradition of the SNB in staying out of such policy areas as his predecessor, Schwegler, had done. Moreover, the BIS played a critical role in providing central bankers privacy and insulation from political interference to undertake their operations, even when many central banks did not enjoy statutory independence from governments and treasuries as they had in the past.
All in all, the troubles of the Bretton Woods era were patched up using ad hoc efforts, which were short-term fixes (and viewed to be such). Ad hoc governance innovation that emerged through interpersonal channels played a meaningful role in shaping outcomes of bilateral and ad hoc cooperation throughout the 1960s to delay the inevitable demise that Triffin had predicted.
Eventually, however, the international monetary system succumbed to the absence of any fundamental remedies for its underlying fault lines and imbalances. In 1967, sterling's devaluation was not welcomed in the United States, and as predicted, gold sales and speculative attacks made their way to the dollar. Within weeks, the United States suffered “the most severe monetary crisis” that it had faced until then in the postwar period.136 Devaluation also did not end Britain's financial problems, or its difficulties in fending off speculative attacks. Instead, the sterling crises evolved into larger and more severe dollar crises after 1968. Persistent uncertainty and speculative attacks in the years that followed impaired central bank cooperation and ultimately led to President Nixon's unilateral decision to close the gold window on August 15, 1971, prompting the collapse of the Bretton Woods system and a pivot toward a new system of fiat currency.
Why the system collapsed has been documented and thoroughly debated in a large scholarly literature.137 Explaining the collapse of the Bretton Woods monetary system is not the goal of this chapter. Instead, I have demonstrated that to cooperatively kick the Triffin dilemma can down the road, Coombs at the New York Fed relied on his personal relations with his European counterparts, as did European central bankers in Basel with each other.
The Hardy Perennial
The years immediately after the Nixon shock were some of unprecedented volatility. The 1970s were marked by energy crises, stagflation, and conflict. The economic boom of the early 1970s stirred up enormous inflationary pressures in the United States and elsewhere in Europe. Inflationary pressures came alongside the end of decades of growth and expansion after 1945, bringing on a period of stagflation across much of the West.138
As is well known, these economic troubles were exacerbated by war and oil politics when Arab oil countries that made up the Organization of Petroleum Exporting Countries (OPEC) announced an embargo on countries that supported Israel during the 1973 Arab-Israeli War and raised oil prices, further increasing inflation by 1974. The first energy crisis was shortly followed by the second oil shock in 1979, after the Iranian Revolution, and further aggravated with the Iran-Iraq War in 1980.
The oil shocks triggered grave crises as oil-importing countries accumulated debts that they could not pay, and oil exporters accumulated large amounts of dollars. These petro-dollars were recycled through foreign banks, which were then loaned to governments especially of oil-importing countries to finance their payments deficits. Much of this financing was used to buy oil and pay for other imports, perpetuating this recycling. Many of these countries were seen as good loan prospects in the 1960s and 1970s. By the early 1980s, the governments of Mexico, Brazil, Argentina, and many others started to find that they could not service their debts.
The Latin American debt crises were followed by another decade of crisis in emerging markets, including the Mexican peso crisis of 1994 and the East Asian crises in 1997. As discussed in the introduction to this book, I do not deal with these crises because the types of evidence necessary to identify a link between interpersonal relations of trust and the likelihood of ad hoc lending (versus multilateral options), such as records of correspondence between central bank leaders or firsthand interview accounts, are unavailable or insufficient.
As Kindleberger observed, financial crises are “a hardy perennial”; they are an inevitable part of economic life.139 The road to the global financial crisis (GFC) was peppered with crises, now largely in emerging and developing countries. The East Asian crisis was followed by a currency crisis in Russia in 1998, a debt crisis in Argentina in 2001, and the bursting of the dot-com bubble just a few years before policymakers in the United States, Europe, and soon most of the world were once again put to the test, when the GFC began in 2007.