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The
Money Club (part 3)
HARPER'S
November 1983
by
Edward Jay Epstein
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The inner club is made up of the half
dozen or so powerful central bankers who find themselves more
or less in the same monetary boat: along with Pohl are Volcker
and Wallich from the Fed, Leutwiler from the Swiss National
Bank, Lamberto Dini of the Bank of Italy, Haruo Mayekawa of
the Bank of Japan, and the retired governor of the Bank of
England, Lord Gordon Richardson (who had presided over the
G-10 meetings for the past ten years). They are all comfortable
speaking English; indeed, Pohl recounted how he has found
himself using English with Leutwiler, though both are of course
native German-speakers. And they all speak the same language
when it comes to governments, having shared similar experiences.
Pohl and Volcker were both under secretaries of their respective
treasuries; they worked closely with each other, and with
Lord Richardson, in the futile attempts to defend the dollar
and the pound in the 1960s. Dini was at the IMF in Washington,
dealing with many of the same problems. Pohl had worked closely
with Leutwiler in neighboring Switzerland for two decades.
"Some of us are very old friends," Pohl said. Far more important,
these men all share the same set of well-articulated values
'about money.
The prime value, which also seems
to demarcate the inner club from the rest of the BIS members,
is the firm belief that central banks should act independently
of their home governments. This is an easy position for Leutwiler
to hold, since the Swiss National Bank is privately owned
(the only central bank that is not government owned) and completely
autonomous. ("I don't think many people know the name of the
president of Switzerland-even in Switzerland," Pohl joked,
"but everyone in Europe has heard of Leutwiler.") Almost as
independent is the Bundesbank; as its president, Pohl is not
required to consult with government officials or to answer
the questions of Parliament-even about such critical issues
as raising interest rates. He even refuses to fly to Basel
in a government plane, preferring instead to drive in his
Mercedes limousine.
The Fed is only a shade less independent
than the Bundesbank: Volcker is expected to make periodic
visits to Congress and at least to take calls from the White
House-but he need not follow their counsel. While in theory
the Bank of Italy is under government control, in practice
it is an elite institution that acts autonomously and often
resists the government. (In 1979, its then governor, Paolo
Baffi, was threatened with arrest, but the inner club, using
unofficial channels, rallied to his support.) Although the
exact relationship between the Bank of Japan and the Japanese
government purposely remains inscrutable, even to the BIS
governors, its chairman, Mayekawa, at least espouses the principle
of autonomy. Finally, though the Bank of England is under
the thumb of the British government, Lord Richardson was accepted
by the inner club because of his personal adherence to this
defining principle. But his successor, Robin Leigh-Pemberton,
lacking the years of business and personal contact, probably
won't be admitted to the inner circle.
In any case, the line is drawn at
the Bank of England. The Bank of France is seen as a puppet
of the French government; to a lesser degree, the remaining
European banks are also perceived by the inner club as extensions
of their respective governments, and thus remain on the outside.
A second and closely related belief
of the inner club is that politicians should not be trusted
to decide the fate of the international monetary system. When
Leutwiler became president of the BIS in 1982, he insisted
that no government official be allowed to visit during a "Basel
weekend." He recalled that in 1968, U.S. Treasury undersecretary
Fred Deming had been in Basel and stopped in at the bank.
"When word got around that an American Treasury official was
at the BIS," Leutwiler said, "bullion traders, speculating
that the U.S. was about to sell its gold, began a panic in
the market." Except for the annual meeting in June (called
"the Jamboree" by the staff ), when the ground floor of the
BIS headquarters is open to official visitors, Leutwiler has
tried to enforce his rule strictly. "To be frank," he I have
no use for politicians. They lack the judgment of central
bankers." This effectively sums up the common antipathy of
the inner club toward "government muddling," as Pohl puts
it.
The inner-club members also share
a strong preference for pragmatism and flexibility over any
ideology, whether that of Lord Keynes or Milton Friedman.
Rather than resorting to rhetoric and invoking principles,
the inner club seeks any remedy that will relieve a crisis.
For example, earlier this year, when Brazil failed to pay
back on time a BIS loan that was guaranteed by the central
banks, the inner club quietly decided to extend the deadline
instead of collecting the money from the guarantors. "We are
constantly engaged in a balancing act-without a safety net,"
Leutwiler explained.
THE FINAL and by far the most important
belief of the inner club is the conviction that when the bell
tolls for any single central bank, it tolls for them all.
When Mexico faced bankruptcy in the early eighties. The issue
for the inner club was not the welfare of that country but,
as Dini put it, "the stability of the entire banking system."
For months Mexico had been borrowing overnight funds from
the interbank market in New York-as every bank recognized
by the Fed is permitted to do-to pay the interest on its $80
billion external debt. Each night it had to borrow more money
to repay the interest on the previous night's transactions,
and, according to Dini, by August Mexico had borrowed nearly
one quarter of all the "Fed Funds," as these overnight loans
between banks are called.
The Fed was caught in a dilemma: if
it suddenly stepped in and forbade Mexico from further using
the interbank market, Mexico would be unable to repay its
enormous debt the next day, and 25 percent of the entire banking
system's ready funds might be frozen. But if the Fed permitted
Mexico to continue borrowing in New York, in a matter of months
it would suck in most of the interbank funds, forcing the
Fed to expand drastically the supply of money.
It was clearly an emergency for the
inner club. After speaking to Miguel Mancera, director of
the Banco de Mexico, Volcker immediately called Leutwiler,
who was vacationing in the Swiss mountain village of Grison.
Leutwiler realized that the entire system was confronted by
a financial time bomb: even though the IMF was prepared to
extend $4.5 billion to Mexico to relieve the pressure on its
long-term debt, it would require months of paperwork to get
approval for the loan. And Mexico needed an immediate 1.85
billion dollar loan to get out of the interbank market, which
Mancera had agreed to do. But in less than forty eight hours,
Leutwiler had called the members of the inner club and arranged
the temporary bridging loan.
While this $1.85 billion appeared
in the financial press to have come from the BIS, virtually
all the funds came from the central banks in the inner club.
Half came directly from the United States -$600 million from
the Treasury's exchange-equalization fund and $325 million
from the Fed's coffers; the remaining $925 million mainly
from deposits of the Bundesbank, Swiss National Bank, Bank
of England, Bank of Italy, and Bank of Japan, deposits that
were specifically guaranteed by these central banks, though
advanced pro forma by the BIS (with a token amount advanced
by the BIS itself against the collateral of Mexican gold).
The BIS undertook virtually no risk in this rescue operation;
it merely provided a convenient cloak for the inner club.
Otherwise, its members, especially Volcker, would have had
to take the political heat individually for what appeared
to be the rescue of an underdeveloped country. In fact, they
were true to their paramount values: rescuing the banking
system itself.
Inner club members publicly pay lip
service to the ideal of preserving the character of the BIS
and not turning it into a lender of last resort for the world
at large. Privately, however, they will undoubtedly continue
their maneuvers to protect the banking system at whatever
point in the world it seems most vulnerable. After all, it
is ultimately the central banks' money at risk, not the BIS's.
And the inner club will also keep using the BIS as its public
mask, and pay the requisite price for the disguise.
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