AMONG THE GREATEST problems facing American industry today,one may learn by talking with any of a large number ofindustrialists who are not known to be especially given topontificating, is “the problem of communication.” Thispreoccupation with the difficulty of getting a thought out of onehead and into another is something the industrialists share witha substantial number of intellectuals and creative writers, moreand more of whom seem inclined to regard communication, orthe lack of it, as one of the greatest problems not just ofindustry but of humanity. (A group of avant-garde writers andartists have given the importance of communication abackhanded boost by flatly and unequivocally proclaimingthemselves to be against it.) As far as the industrialists areconcerned, I admit that in the course of hearing them invokethe word “communication”—often in an almost mysticalway—over a period of years I have had a lot of troublefiguring out exactly what they meant. The general thesis is clearenough; namely, that everything would be all right, first, if theycould get through to each other within their own organizations,and, second, if they, or their organizations, could get through toeverybody else. What has puzzled me is how and why, in thisday when the foundations sponsor one study of communicationafter another, individuals and organizations fail so consistently toexpress themselves understandably, or how and why theirlisteners fail to grasp what they hear.
A few years ago, I acquired a two-volume publication of theUnited States Government Printing Office entitled HearingsBefore the Subcommittee on Antitrust and Monopoly of theCommittee on the Judiciary, United States Senate,Eighty-seventh Congress, First Session, Pursuant to S. Res.
52, and after a fairly diligent perusal of its 1,459 pages Ithought I could begin to see what the industrialists are talkingabout. The hearings, conducted in April, May, and June, 1961,under the chairmanship of Senator Estes Kefauver, ofTennessee, had to do with the now famous price-fixing andbid-rigging conspiracies in the electrical-manufacturing industry,which had already resulted, the previous February, in theimposition by a federal judge in Philadelphia of fines totaling$1,924,500 on twenty-nine firms and forty-five of theiremployees, and also of thirty-day prison sentences on seven ofthe employees. Since there had been no public presentation ofevidence, all the defendants having pleaded either guilty or nodefense, and since the records of the grand juries that indictedthem were secret, the public had had little opportunity to hearabout the details of the violations, and Senator Kefauver feltthat the whole matter needed a good airing. The transcriptshows that it got one, and what the airing revealed—at leastwithin the biggest company involved—was a breakdown inintramural communication so drastic as to make the building ofthe Tower of Babel seem a triumph of organizational rapport.
In a series of indictments brought by the government in theUnited States District Court in Philadelphia between Februaryand October, 1960, the twenty-nine companies and theirexecutives were charged with having repeatedly violated Section1 of the Sherman Act of 1890, which declares illegal “everycontract, combination in the form of trust or otherwise, orconspiracy, in restraint of trade or commerce among theseveral States, or with foreign nations.” (The Sherman Act wasthe instrument used in the celebrated trust-busting activities ofTheodore Roosevelt, and along with the Clayton Act of 1914 ithas served as the government’s weapon against cartels andmonopolies ever since.) The violations, the government alleged,were committed in connection with the sale of large andexpensive pieces of apparatus of a variety that is requiredchiefly by public and private electric-utility companies (powertransformers, switchgear assemblies, and turbine-generator units,among many others), and were the outcome of a series ofmeetings attended by executives of the supposedly competingcompanies—beginning at least as early as 1956 and continuinginto 1959—at which noncompetitive price levels were agreedupon, nominally sealed bids on individual contracts were riggedin advance, and each company was allocated a certainpercentage of the available business. The government furtheralleged that, in an effort to preserve the secrecy of thesemeetings, the executives had resorted to such devices asreferring to their companies by code numbers in theircorrespondence, making telephone calls from public booths orfrom their homes rather than from their offices, and doctoringthe expense accounts covering their get-togethers to conceal thefact that they had all been in a certain city on a certain day.
But their stratagems did not prevail. The federals, forcefully ledby Robert A. Bicks, then head of the Antitrust Division of theDepartment of Justice, succeeded in exposing them, withconsiderable help from some of the conspirators themselves,who, after an employee of a small conspirator company saw fitto spill the story in the early fall of 1959, flocked to turn state’sevidence.
The economic and social significance of the whole affair maybe demonstrated clearly enough by citing just a few figures. Inan average year at the time of the conspiracies, a total of morethan one and three-quarters billion dollars was spent topurchase machines of the sort in question, nearly a fourth of itby federal, state, and local governments (which, of course,means the taxpayers), and most of the rest by private utilitycompanies (which are inclined to pass along any rise in thecost of their equipment to the public in the form of rateincreases). To take a specific example of the kind of moneyinvolved in an individual transaction, the list price of a500,000-kilowatt turbine-generator—a monstrous device forproducing electric power from steam power—was oftensomething like sixteen million dollars. Actually, manufacturerssometimes cut their prices by as much as 25 percent in orderto make a sale, and therefore, if everything was above board, itmight have been possible to buy the machine at a saving offour million dollars; if representatives of the companies makingsuch generators held a single meeting and agreed to fix prices,they could, in effect, increase the cost to the customer by thefour million. And in the end, the customer was almost sure tobe the public.
IN presenting the indictments in Philadelphia, Bicks stated that,considered collectively, they revealed “a pattern of violationswhich can fairly be said to range among the most serious, themost flagrant, the most pervasive that have ever marked anybasic American industry.” Just before imposing the sentences,Judge J. Cullen Ganey went even further; in his view, theviolations constituted “a shocking indictment of a vast section ofour economy, for what is really at stake here is the survival of… the free-enterprise system.” The prison sentences showedthat he meant it; although there had been many successfulprosecutions for violation of the Sherman Act during the sevendecades since its passage, it was rare indeed for executives tobe jailed. Not surprisingly, therefore, the case kicked up quite aruckus in the press. The New Republic, to be sure,complained that the newspapers and magazines wereintentionally playing down “the biggest business scandal indecades,” but the charge did not seem to have muchfoundation. Considering such things as the public’s apathytoward switchgear, the woeful bloodlessness of criminal casesinvolving antitrust laws, and the relatively few details of theconspiracies that had emerged, the press in general gave thestory a good deal of space, and even the Wall Street Journaland Fortune ran uncompromising and highly informativeaccounts of the debacle; here and there, in fact, one coulddetect signs of a revival of the spirit of old-time antibusinessjournalism as it existed back in the thirties. After all, what couldbe more exhilarating than to see several dignified, impeccablytailored, and highly paid executives of a few of the nation’smost respected corporations being trooped off to jail likecommon pickpockets? It was certainly the biggest moment forbusiness-baiters since 1938, when Richard Whitney, the formerpresident of the New York Stock Exchange, was put behindbars for speculating with his customers’ money. Some called itthe biggest since Teapot Dome.
To top it all off, there was a prevalent suspicion of hypocrisyin the very highest places. Neither the chairman of the boardnor the president of General Electric, the largest of thecorporate defendants, had been caught in the government’sdragnet, and the same was true of Westinghouse Electric, thesecond-largest; these four ultimate bosses let it be known thatthey had been entirely ignorant of what had been going onwithin their commands right up to the time the first testimonyon the subject was given to the Justice Department. Manypeople, however, were not satisfied by these disclaimers, and,instead, took the position that the defendant executives weremen in the middle, who had broken the law only in responseeither to actual orders or to a corporate climate favoringprice-fixing, and who were now being allowed to suffer for thesins of their superiors. Among the unsatisfied was Judge Ganeyhimself, who said at the time of the sentencing, “One would bemost na?ve indeed to believe that these violations of the law, solong persisted in, affecting so large a segment of the industry,and, finally, involving so many millions upon millions of dollars,were facts unknown to those responsible for the conduct of thecorporation.… I am convinced that in the great number ofthese defendants’ cases, they were torn between conscience andapproved corporate policy, with the rewarding objectives ofpromotion, comfortable security, and large salaries.”
The public naturally wanted a ringleader, an archconspirator,and it appeared to find what it wanted in General Electric,which—to the acute consternation of the men endeavoring toguide its destinies from company headquarters, at 570Lexington Avenue, New York City—got the lion’s share ofattention both in the press and in the Subcommittee hearings.
With some 300,000 employees, and sales averaging some fourbillion dollars a year over the past ten years, it was not onlyfar and away the biggest of the twenty-nine accused companiesbut, judged on the basis of sales in 1959, the fifth-biggestcompany in the country. It also drew a higher total of fines($437,500) than any other company, and saw more of itsexecutives sent to jail (three, with eight others receivingsuspended sentences). Furthermore, as if to intensify in thishour of crisis the horror and shock of true believers—and theglee of scoffers—its highest-ranking executives had for yearstried to represent it to the public as a paragon of successfulvirtue by issuing encomiums to the free competitive system, thevery system that the price-fixing meetings were set up to mock.
In 1959, shortly after the government’s investigation of theviolations had been brought to the attention of G.E.’spolicymakers, the company demoted and cut the pay of thoseof its executives who admitted that they had been involved; onevice-president, for example, was informed that instead of the$127,000 a year he had been getting he would now get$40,000. (He had scarcely adjusted himself to that blow whenJudge Ganey fined him four thousand dollars and sent him toprison for thirty days, and shortly after he regained hisfreedom, General Electric eased him out entirely.) The G.E.
policy of imposing penalties of its own on these employees,regardless of what punishment the court might prescribe, wasnot adopted by Westinghouse, which waited until the judge haddisposed of the case and then decided that the fines andprison sentences he had handed out to its stable of offenderswere chastisement enough, and did not itself penalize them atall. Some people saw this attitude as evidence thatWestinghouse was condoning the conspiracies, but othersregarded it as a commendable, if tacit, admission thatmanagement at the highest level in the conniving companieswas responsible—morally, at least—for the whole mess and wastherefore in no position to discipline its erring employees. In theview of these people, G.E.’s haste to penalize the acknowledgedculprits on its payroll strongly suggested that the firm wastrying to save its own skin by throwing a few lucklessemployees to the wolves, or—as Senator Philip A. Hart, ofMichigan, put it, more pungently, during the hearings—“to do aPontius Pilate operation.”
EMBATTLED days at 570 Lexington Avenue! After years ofcloaking the company in the mantle of a wise and benevolentcorporate institution, the public-relations people at G.E.
headquarters were faced with the ugly choice of representing itsrole in the price-fixing affair as that of either a fool or a knave.
They tended strongly toward “fool.” Judge Ganey, by hisstatement that he assumed the conspiracies to have been notonly condoned but approved by the top brass and thecompany as a whole, clearly chose “knave.” But his analysismay or may not have been the right one, and after readingthe Kefauver Subcommittee testimony I have come to themelancholy conclusion that the truth will very likely never beknown. For, as the testimony shows, the clear waters of moralresponsibility at G.E. became hopelessly muddied by a struggleto communicate—a struggle so confused that in some cases, itwould appear, if one of the big bosses at G.E. had ordered asubordinate to break the law, the message would somehowhave been garbled in its reception, and if the subordinate hadinformed the boss that he was holding conspiratorial meetingswith competitors, the boss might well have been under theimpression that the subordinate was gossiping idly about lawnparties or pinochle sessions. Specifically, it would appear that asubordinate who received a direct oral order from his boss hadto figure out whether it meant what it seemed to or the exactopposite, while the boss, in conversing with a subordinate, hadto figure out whether he should take what the man told himat face value or should attempt to translate it out of a secretcode to which he was by no means sure he had the key.
That was the problem in a nutshell, and I state it here thusbaldly as a suggestion for any potential beneficiary of afoundation who may be casting about for a suitable project onwhich to draw up a prospectus.
For the past eight years or so, G.E. had had a company rulecalled Directive Policy 20.5, which read, in part, “No employeeshall enter into any understanding, agreement, plan or scheme,expressed or implied, formal or informal, with any competitor,in regard to prices, terms or conditions of sale, production,distribution, territories, or customers; nor exchange or discusswith a competitor prices, terms or conditions of sale, or anyother competitive information.” In effect, this rule was simply aninjunction to G.E.’s personnel to obey the federal antitrust laws,except that it was somewhat more concrete and comprehensivein the matter of price than they are. It was almost impossiblefor executives with jurisdiction over pricing policies at G.E. to beunaware of 20.5, or even hazy about it, because to make surethat new executives were acquainted with it and to refresh thememories of old ones, the company formally reissued anddistributed it at intervals, and all such executives were asked tosign their names to it as an earnest that they were currentlycomplying with it and intended to keep on doing so. Thetrouble—at least during the period covered by the court action,and apparently for a long time before that as well—was thatsome people at G.E., including some of those who regularlysigned 20.5, simply did not believe that it was to be takenseriously. They assumed that 20.5 was mere window dressing:
that it was on the books solely to provide legal protection forthe company and for the higher-ups; that meeting illegally withcompetitors was recognized and accepted as standard practicewithin the company; and that often when a ranking executiveordered a subordinate executive to comply with 20.5, he wasactually ordering him to violate it. Illogical as it might seem, thislast assumption becomes comprehensible in the light of the factthat, for a time, when some executives orally conveyed, orreconveyed, the order, they were apparently in the habit ofaccompanying it with an unmistakable wink. In May of 1948,for example, there was a meeting of G.E. sales managersduring which the custom of winking was openly discussed.
Robert Paxton, an upper-level G.E. executive who later becamethe company’s president, addressed the meeting and deliveredthe usual admonition about antitrust violations, whereuponWilliam S. Ginn, then a sales executive in the transformerdivision, under Paxton’s authority, startled him by saying, “Ididn’t see you wink.” Paxton replied firmly, “There was nowink. We mean it, and these are the orders.” Asked bySenator Kefauver how long he had been aware that ordersissued at G.E. were sometimes accompanied by winks, Paxtonreplied that he had first observed the practice way back in1935, when his boss had given him an instruction along with awink or its equivalent, and that when, some time later, thesignificance of the gesture dawned on him, he had become soincensed that he had with difficulty restrained himself fromjeopardizing his career by punching the boss in the nose.
Paxton went on to say that his objections to the practice ofwinking had been so strong as to earn him a reputation in thecompany for being an antiwink man, and that he, for his part,had never winked.
Although Paxton would seem to have left little doubt as tohow he intended his winkless order of 1948 to be interpreted,its meaning failed to get through to Ginn, for not long after itwas issued, he went out and fixed prices to a fare-thee-well.
(Obviously, it takes more than one company to make aprice-fixing agreement, but all the testimony tends to indicatethat it was G.E. that generally set the pattern for the rest ofthe industry in such matters.) Thirteen years later, Ginn—freshfrom a few weeks in jail, and fresh out of a $135,000-a-yearjob—appeared before the Subcommittee to account for, amongother things, his strange response to the winkless order. Hehad disregarded it, he said, because he had received a contraryorder from two of his other superiors in the G.E. chain ofcommand, Henry V. B. Erben and Francis Fairman, and inexplaining why he had heeded their order rather than Paxton’she introduced the fascinating concept of degrees ofcommunication—another theme for a foundation grantee to gethis teeth into. Erben and Fairman, Ginn said, had been morearticulate, persuasive, and forceful in issuing their order thanPaxton had been in issuing his; Fairman, especially, Ginnstressed, had proved to be “a great communicator, a greatphilosopher, and, frankly, a great believer in stability of prices.”
Both Erben and Fairman had dismissed Paxton as na?ve, Ginntestified, and, in further summary of how he had been ledastray, he said that “the people who were advocating the Devilwere able to sell me better than the philosophers that wereselling the Lord.”
It would be helpful to have at hand a report from Erben andFairman themselves on the communication technique thatenabled them to prevail over Paxton, but unfortunately neitherof these philosophers could testify before the Subcommittee,because by the time of the hearings both of them were dead.
Paxton, who was available, was described in Ginn’s testimony ashaving been at all times one of the philosopher-salesmen onthe side of the Lord. “I can clarify Mr. Paxton by saying Mr.
Paxton came closer to being an Adam Smith advocate thanany businessman I have met in America,” Ginn declared. Still,in 1950, when Ginn admitted to Paxton in casual conversationthat he had “compromised himself” in respect to antitrustmatters, Paxton merely told him that he was a damned fool,and did not report the confession to anyone else in thecompany. Testifying as to why he did not, Paxton said thatwhen the conversation occurred he was no longer Ginn’s boss,and that, in the light of his personal ethics, repeating such anadmission by a man not under his authority would be “gossip”
and “talebearing.”
Meanwhile, Ginn, no longer answerable to Paxton, was meetingwith competitors at frequent intervals and moving steadily upthe corporate ladder. In November, 1954, he was made generalmanager of the transformer division, whose headquarters werein Pittsfield, Massachusetts—a job that put him in line for avice-presidency. At the time of Ginn’s shift, Ralph J. Cordiner,who has been chairman of the board of General Electric since1949, called him down to New York for the express purpose ofenjoining him to comply strictly and undeviatingly with DirectivePolicy 20.5. Cordiner communicated this idea so successfullythat it was clear enough to Ginn at the moment, but itremained so only as long as it took him, after leaving thechairman, to walk to Erben’s office. There his comprehension ofwhat he had just heard became clouded. Erben, who was headof G.E.’s distribution group, ranked directly below Cordiner anddirectly above Ginn, and, according to Ginn’s testimony, nosooner were they alone in his office than he countermandedCordiner’s injunction, saying, “Now, keep on doing the way thatyou have been doing, but just be sensible about it and useyour head on the subject.” Erben’s extraordinary communicativeprowess again carried the day, and Ginn continued to meetwith competitors. “I knew Mr. Cordiner could fire me,” he toldSenator Kefauver, “but also I knew I was working for Mr.
Erben.”
At the end of 1954, Paxton took over Erben’s job andthereby became Ginn’s boss again. Ginn went right on meetingwith competitors, but, since he was aware that Paxtondisapproved of the practice, didn’t tell him about it. Moreover,he testified, within a month or two he had become convincedthat he could not afford to discontinue attending the meetingsunder any circumstances, for in January, 1955, the entireelectrical-equipment industry became embroiled in a drastic pricewar—known as the “white sale,” because of its timing and thebargains it afforded to buyers—in which the erstwhile amiablecompetitors began fiercely undercutting one another. Such amanifestation of free enterprise was, of course, exactly what theintercompany conspiracies were intended to prevent, but just atthat time the supply of electrical apparatus so greatly exceededthe demand that first a few of the conspirators and then moreand more began breaking the agreements they themselves hadmade. In dealing with the situation as best he could, Ginn said,he “used the philosophies that had been taught mepreviously”—by which he meant that he continued to conductprice-fixing meetings, in the hope that at least some of theagreements made at them would be honored. As for Paxton, inGinn’s opinion that philosopher was not only ignorant of themeetings but so constant in his devotion to the concept of freeand aggressive competition that he actually enjoyed the pricewar, disastrous though it was to everybody’s profits. (In hisown testimony, Paxton vigorously denied that he had enjoyedit.)Within a year or so, the electrical-equipment industry took anupturn, and in January, 1957, Ginn, having ridden out thestorm relatively well, got his vice-presidency. At the same time,he was transferred to Schenectady, to become general managerof G.E.’s turbine-generator division, and Cordiner again calledhim into headquarters and gave him a lecture on 20.5. Suchlectures were getting to be a routine with Cordiner; every timea new employee was assigned to a strategic managerial post, oran old employee was promoted to such a post, the lucky fellowcould be reasonably certain that he would be summoned to thechairman’s office to hear a rendition of the austere creed. Inhis book The Heart of Japan, Alexander Campbell reportsthat a large Japanese electrical concern has drawn up a list ofseven company commandments (for example, “Be courteousand sincere!”), and that each morning, in each of its thirtyfactories, the workers are required to stand at attention andrecite these in unison, and then to sing the company song(“For ever-increasing production/Love your work, give yourall!”). Cordiner did not require his subordinates to recite or sing20.5—as far as is known, he never even had it set tomusic—but from the number of times men like Ginn had itread to them or otherwise recalled to their attention, they musthave come to know it well enough to chant it, improvising atune as they went along.
This time, Cordiner’s message not only made an impressionon Ginn’s mind but stuck there in unadulterated form. Ginn,according to his testimony, became a reformed executive anddropped his price-fixing habits overnight. However, it appearsthat his sudden conversion cannot be attributed wholly toCordiner’s powers of communication, or even to thedrip-drip-drip effect of repetition, for it was to a considerableextent pragmatic in character, like the conversion of Henry VIIIto Protestantism. He reformed, Ginn explained to theSubcommittee, because his “air cover was gone.”
“Your what was gone?” Senator Kefauver asked.
“My air cover was gone,” replied Ginn. “I mean I had lostmy air cover. Mr. Erben wasn’t around any more, and all ofmy colleagues had gone, and I was now working directly forMr. Paxton, knowing his feelings on the matter.… Anyphilosophy that I had grown up with before in the past wasnow out the window.”
If Erben, who had not been Ginn’s boss since late in 1954,had been the source of his air cover, Ginn must have beenwithout its protection for over two years, but, presumably, inthe excitement of the price war he had failed to notice itsabsence. However that may have been, here he now was, aman suddenly shorn not only of his air cover but of hisphilosophy. Swiftly filling the latter void with a whole new set ofprinciples, he circulated copies of 20.5 among his departmentmanagers in the turbine-generator division and topped this offby energetically adopting what he called a “leprosy policy”; thatis, he advised his subordinates to avoid even casual socialcontacts with their counterparts in competing companies,because “once the relationships are established, I have come tothe conclusion after many years of hard experience that therelationships tend to spread and the hanky-panky begins to getgoing.” But now fate played a cruel trick on Ginn, and, allunknowing, he landed in the very position that Paxton andCordiner had been in for years—that of a philosopher vainlyendeavoring to sell the Lord to a flock that declined to buy hismessage and was, in fact, systematically engaging in thehanky-panky its leader had warned it against. Specifically,during the whole of 1957 and 1958 and the first part of 1959two of Ginn’s subordinates were piously signing 20.5 with onehand and, with the other, briskly drawing up price-fixingagreements at a whole series of meetings—in New York;Philadelphia; Chicago; Hot Springs, Virginia; and Skytop,Pennsylvania, to name a few of their gathering places.
It appears that Ginn had not been able to impart much ofhis shining new philosophy to others, and that at the root ofhis difficulty lay that old jinx, the problem of communicating.
Asked at the hearings how his subordinates could possibly havegone so far astray, he replied, “I have got to admit that Imade a communication error. I didn’t sell this thing to the boyswell enough.… The price is so important in the completerunning of a business that, philosophically, we have got to sellpeople not only just the fact that it is against the law, but …that it shouldn’t be done for many, many reasons. But it hasgot to be a philosophical approach and a communicationapproach.… Even though … I had told my associates not to dothis, some of the boys did get off the reservation.… I have toadmit to myself here an area of a failure in communications …which I am perfectly willing to accept my part of theresponsibility for.”
In earnestly striving to analyze the cause of the failure, Ginnsaid, he had reached the conclusion that merely issuingdirectives, no matter how frequently, was not enough; whatwas needed was “a complete philosophy, a completeunderstanding, a complete breakdown of barriers betweenpeople, if we are going to get some understanding and reallylive and manage these companies within the philosophies thatthey should be managed in.”
Senator Hart permitted himself to comment, “You cancommunicate until you are dead and gone, but if the point youare communicating about, even though it be a law of the land,strikes your audience as something that is just a folklore …you will never sell the package.”
Ginn ruefully conceded that that was true.
THE concept of degrees of communication was furtherdeveloped, by implication, in the testimony of another defendant,Frank E. Stehlik, who had been general manager of the G.E.
low-voltage-switchgear department from May, 1956, to February,1960. (As all but a tiny minority of the users of electricity arecontentedly unaware, switchgear serves to control and protectapparatus used in the generation, conversion, transmission, anddistribution of electrical energy, and more than $100 millionworth of it is sold annually in the United States.) Stehlikreceived some of his business guidance in the conventionalform of orders, oral and written, and some—perhaps just asmuch, to judge by his testimony—through a less intellectual,more visceral medium of communication that he called“impacts.” Apparently, when something happened within thecompany that made an impression on him, he would consult asort of internal metaphysical voltmeter to ascertain the force ofthe jolt that he had received, and, from the reading he got,would attempt to gauge the true drift of company policy. Forexample, he testified that during 1956, 1957, and most of 1958he believed that G.E. was frankly and fully in favor ofcomplying with 20.5. But then, in the autumn of 1958, GeorgeE. Burens, Stehlik’s immediate superior, told him that he,Burens, had been directed by Paxton, who by then waspresident of G.E., to have lunch with Max Scott, president ofthe I-T-E Circuit Breaker Company, an important competitor inthe switchgear market. Paxton said in his own testimony thatwhile he had indeed asked Burens to have lunch with Scott, hehad instructed him categorically not to talk about prices, butapparently Burens did not mention this caveat to Stehlik; inany event, the disclosure that the high command had toldBurens to lunch with an archrival, Stehlik testified, “had aheavy impact on me.” Asked to amplify this, he said, “Thereare a great many impacts that influence me in my thinking asto the true attitude of the company, and that was one ofthem.” As the impacts, great and small, piled up, theircumulative effect finally communicated to Stehlik that he hadbeen wrong in supposing the company had any real respectfor 20.5. Accordingly, when, late in 1958, Stehlik was orderedby Burens to begin holding price meetings with the competitors,he was not in the least surprised.
Stehlik’s compliance with Burens’ order ultimately brought ona whole new series of impacts, of a much more crudelycommunicative sort. In February, 1960, General Electric cut hisannual pay from $70,000 to $26,000 for violating 20.5; a yearlater Judge Ganey gave him a three-thousand-dollar fine and asuspended thirty-day jail sentence for violating the ShermanAct; and about a month after that G.E. asked for, and got, hisresignation. Indeed, during his last years with the firm Stehlikseems to have received almost as many lacerating impacts as aRaymond Chandler hero. But testimony given at the hearingsby L. B. Gezon, manager of the marketing section of thelow-voltage-switchgear department, indicated that Stehlik, againlike a Chandler hero, was capable of dishing out blunt impactsas well as taking them. Gezon, who was directly under Stehlikin the line of command, told the Subcommittee that althoughhe had taken part in price-fixing meetings prior to April, 1956,when Stehlik became his boss, he did not subsequently engagein any antitrust violations until late 1958, and that he did sothen only as the result of an impact that bore none of thesubtlety noted by Stehlik in his early experience with thisphenomenon. The impact came directly from Stehlik, who, itseems, left nothing to chance in communicating with hissubordinates. In Gezon’s words, Stehlik told him “to resume themeetings; that the company policy was unchanged; the risk wasjust as great as it ever had been; and that if our activitieswere discovered, I personally would be dismissed or disciplined[by the company], as well as punished by the government.” SoGezon was left with three choices: to quit, to disobey the directorder of his superior (in which case, he thought, “they mighthave found somebody else to do my job”), or to obey theorder, and thereby violate the antitrust laws, with no immunityagainst the possible consequences. In short, his alternatives werecomparable to those faced by an international spy.
Although Gezon did resume the meetings, he was not indicted,possibly because he had been a relatively minor price-fixer.
General Electric, for its part, demoted him but did not requirehim to resign. Yet it would be a mistake to assume that Gezonwas relatively untouched by his experience. Asked by SenatorKefauver if he did not think that Stehlik’s order had placedhim in an intolerable position, he replied that it had not struckhim that way at the time. Asked whether he thought it unjustthat he had suffered demotion for carrying out the order of asuperior, he replied, “I personally don’t consider it so.” Tojudge by his answers, the impact on Gezon’s heart and mindwould seem to have been heavy indeed.
THE other side of the communication problem—the difficulty thata superior is likely to encounter in understanding what asubordinate tells him—is graphically illustrated by the testimonyof Raymond W. Smith, who was general manager of G.E.’stransformer division from the beginning of 1957 until late in1959, and of Arthur F. Vinson, who in October, 1957, wasappointed vice-president in charge of G.E.’s apparatus group,and also a member of the company’s executive committee.
Smith’s job was the one Ginn had held for the previous twoyears, and when Vinson got his job, he became Smith’simmediate boss. Smith’s highest pay during the period inquestion was roughly $100,000 a year, while Vinson reached abasic salary of $110,000 and also got a variable bonus, rangingfrom $45,000 to $100,000. Smith testified that on January 1,1957, the very day he took charge of the transformerdivision—and a holiday, at that—he met with Chairman Cordinerand Executive Vice-President Paxton, and Cordiner gave himthe familiar admonition about living up to 20.5. However, laterthat year, the competitive going got so rough that transformerswere selling at discounts of as much as 35 percent, and Smithdecided on his own hook that the time had come to beginnegotiating with rival firms in the hope of stabilizing the market.
He felt that he was justified in doing this, he said, because hewas convinced that both in company circles and in the wholeindustry negotiations of this kind were “the order of the day.”
By the time Vinson became his superior, in October, Smithwas regularly attending price-fixing meetings, and he felt that heought to let his new boss know what he was doing.
Accordingly, he told the Subcommittee, on two or threeoccasions when the two men found themselves alone togetherin the normal course of business, he said to Vinson, “I had ameeting with the clan this morning.” Counsel for theSubcommittee asked Smith whether he had ever put the mattermore bluntly—whether, for example, he had ever said anythinglike “We’re meeting with competitors to fix prices. We’re goingto have a little conspiracy here and I don’t want it to get out.”
Smith replied that he had never said anything remotely likethat—had done nothing more than make remarks on the orderof “I had a meeting with the clan this morning.” He did notelaborate on why he did not speak with greater directness, buttwo logical possibilities present themselves. Perhaps he hopedthat he could keep Vinson informed about the situation and atthe same time protect him from the risk of becoming anaccomplice. Or perhaps he had no such intention, and wassimply expressing himself in the oblique, colloquial way thatcharacterized much of his speaking. (Paxton, a close friend ofSmith’s, had once complained to Smith that he was “given tobeing somewhat cryptic” in his remarks.) Anyhow, Vinson,according to his own testimony, had flatly misunderstood whatSmith meant; indeed, he could not recall ever hearing Smithuse the expression “meeting of the clan,” although he did recallhis saying things like “Well, I am going to take this new planon transformers and show it to the boys.” Vinson testified thathe had thought the “boys” meant the G.E. district sales peopleand the company’s customers, and that the “new plan” was anew marketing plan; he said that it had come as a rude shockto him to learn—a couple of years later, after the case hadbroken—that in speaking of the “boys” and the “new plan,”
Smith had been referring to competitors and a price-fixingscheme. “I think Mr. Smith is a sincere man,” Vinson testified.
“I am sure Mr. Smith … thought he was telling me that hewas going to one of these meetings. This meant nothing tome.”
Smith, on the other hand, was confident that his meaning hadgot through to Vinson. “I never got the impression that hemisunderstood me,” he insisted to the Subcommittee.
Questioning Vinson later, Kefauver asked whether an executivein his position, with thirty-odd years’ experience in the electricalindustry, could possibly be so naive as to misunderstand asubordinate on such a substantive matter as grasping who the“boys” were. “I don’t think it is too naive,” replied Vinson. “Wehave a lot of boys.… I may be na?ve, but I am certainly tellingthe truth, and in this kind of thing I am sure I am na?ve.”
SENATOR KEFAUVER: Mr. Vinson, you wouldn’t be a vice-president at$200,000 a year if you were na?ve.
MR. VINSON: I think I could well get there by being na?ve in this area.
It might help.
Here, in a different field altogether, the communicationproblem again comes to the fore. Was Vinson really saying toKefauver what he seemed to be saying—that na?veté aboutantitrust violations might be a help to a man in getting andholding a $200,000-a-year job at General Electric? It seemsunlikely. And yet what else could he have meant? Whatever theanswer, neither the federal antitrust men nor the Senateinvestigators were able to prove that Smith succeeded in hisattempts to communicate to Vinson the fact that he wasengaging in price-fixing. And, lacking such proof, they wereunable to establish what they gave every appearance of goingall out to establish if they could: namely, that at least some oneman at the pinnacle of G.E.’s management—some member ofthe sacred executive committee itself—was implicated. Actually,when the story of the conspiracies first became known, Vinsonnot only concurred in a company decision to punish Smith bydrastically demoting him but personally informed him of thedecision—two acts that, if he had grasped Smith’s meaning backin 1957, would have denoted a remarkable degree of cynicismand hypocrisy. (Smith, by the way, rather than accept thedemotion, quit General Electric and, after being fined threethousand dollars and given a suspended thirty-day prisonsentence by Judge Ganey, found a job elsewhere, at tenthousand dollars a year.)This was not Vinson’s only brush with the case. He was alsoamong those named in one of the grand jury indictments thatprecipitated the court action, this time in connection not withhis comprehension of Smith’s jargon but with the conspiracy inthe switchgear department. On this aspect of the case, fourswitchgear executives—Burens, Stehlik, Clarence E. Burke, andH. Frank Hentschel—testified before the grand jury (and laterbefore the Subcommittee) that at some time in July, August, orSeptember of 1958 (none of them could establish the precisedate) Vinson had had lunch with them in Dining Room B ofG.E.’s switchgear works in Philadelphia, and that during themeal he had instructed them to hold price meetings withcompetitors. As a result of this order, they said, a meetingattended by representatives of G.E., Westinghouse, theAllis-Chalmers Manufacturing Company, the Federal PacificElectric Company, and the I-T-E Circuit Breaker Company washeld at the Hotel Traymore in Atlantic City on November 9,1958, at which sales of switchgear to federal, state, andmunicipal agencies were divvied up, with General Electric to get39 percent of the business, Westinghouse 35 percent, I-T-E 11percent, Allis-Chalmers 8 percent, and Federal Pacific Electric 7percent. At subsequent meetings, agreement was reached onallocating sales of switchgear to private buyers as well, and anelaborate formula was worked out whereby the privilege ofsubmitting the lowest bid to prospective customers was rotatedamong the conspiring companies at two-week intervals. Becauseof its periodic nature, this was called the phase-of-the-moonformula—a designation that in due time led to the followinglyrical exchange between the Subcommittee and L. W. Long, anexecutive of Allis-Chalmers:
SENATOR KEFAUVER: Who were thephasers-of-the-mooners—phase-of-the-mooners?
MR. LONG: AS it developed, this so-called phase-of-the-moon operationwas carried out at a level below me, I think referred to as a workinggroup.…MR. FERRALL [counsel for the Subcommittee]: Did they ever report toyou about it?
MR. LONG: Phase of the moon? No.
Vinson told the Justice Department prosecutors, and repeatedto the Subcommittee, that he had not known about theTraymore meeting, the phase-of-the-mooners, or the existenceof the conspiracy itself until the case broke; as for the lunch inDining Room B, he insisted that it had never taken place. Onthis point, Burens, Stehlik, Burke, and Hentschel submitted tolie-detector tests, administered by the F.B.I., and passed them.
Vinson refused to take a lie-detector test, at first explaining thathe was acting on advice of counsel and against his personalinclination, and later, after hearing how the four other men hadfared, arguing that if the machine had not pronounced themliars, it couldn’t be any good. It was established that on onlyeight business days during July, August, and September hadBurens, Burke, Stehlik, and Hentschel all been together in thePhiladelphia plant at the lunch hour, and Vinson producedsome of his expense accounts, which, he pointed out to theJustice Department, showed that he had been elsewhere oneach of those days. Confronted with this evidence, the JusticeDepartment dropped its case against Vinson, and he stayed onas a vice-president of General Electric. Nothing that theSubcommittee elicited from him cast any substantive doubt onthe defense that had impressed the government prosecutors.
Thus, the uppermost echelon at G.E. came through unscathed;the record showed that participation in the conspiracy wentfairly far down in the organization but not all the way to thetop. Gezon, everybody agreed, had followed orders from Stehlik,and Stehlik had followed orders from Burens, but that was theend of the trail, because although Burens said he had followedorders from Vinson, Vinson denied it and made the denialstick. The government, at the end of its investigation, stated incourt that it could not prove, and did not claim, that eitherChairman Cordiner or President Paxton had authorized, or evenknown about, the conspiracies, and thereby officially ruled outthe possibility that they had resorted to at least a figurativewink. Later, Paxton and Cordiner showed up in Washington totestify before the Subcommittee, and its interrogators weresimilarly unable to establish that they had ever indulged in anyvariety of winking.
AFTER being described by Ginn as General Electric’s stubbornestand most dedicated advocate of free competition, Paxtonexplained to the Subcommittee that his thinking on the subjecthad been influenced not directly by Adam Smith but, rather, byway of a former G.E. boss he had worked under—the lateGerard Swope. Swope, Paxton testified, had always believedfirmly that the ultimate goal of business was to produce moregoods for more people at lower cost. “I bought that then, Ibuy it now,” said Paxton. “I think it is the most marvelousstatement of economic philosophy that any industrialist has everexpressed.” In the course of his testimony, Paxton had anexplanation, philosophical or otherwise, of each of the severalsituations related to price-fixing in which his name had earlierbeen mentioned. For instance, it had been brought out that in1956 or 1957 a young man named Jerry Page, a minoremployee in G.E.’s switchgear division, had written directly toCordiner alleging that the switchgear divisions of G.E. and ofseveral competitor companies were involved in a conspiracy inwhich information about prices was exchanged by means of asecret code based on different colors of letter paper. Cordinerhad turned the matter over to Paxton with orders that he getto the bottom of it, and Paxton had thereupon conducted aninvestigation that led him to conclude that the color-codeconspiracy was “wholly a hallucination on the part of this boy.”
In arriving at that conclusion, Paxton had apparently been right,although it later came out that there had been a conspiracy inthe switchgear division during 1956 and 1957; this, however,was a rather conventional one, based simply on price-fixingmeetings, rather than on anything so gaudy as a color code.
Page could not be called to testify because of ill health.
Paxton conceded that there had been some occasions whenhe “must have been pretty damn dumb.” (Dumb or not, forhis services as the company’s president he was, of course,remunerated on a considerably grander scale thanVinson—receiving a basic annual salary of $125,000, plus annualincentive compensation of about $175,000, plus stock optionsdesigned to enable him to collect much more at low tax rates.)As for Paxton’s attitude toward company communications, heemerges as a pessimist on this score. Upon being asked at thehearings to comment on the Smith-Vinson conversations of1957, he said that, knowing Smith, he just could not “cast theman in the role of a liar,” and went on:
When I was younger, I used to play a good deal of bridge. We playedabout fifty rubbers of bridge, four of us, every winter, and I think weprobably played some rather good bridge. If you gentlemen are bridgeplayers, you know that there is a code of signals that is exchangedbetween partners as the game progresses. It is a stylized form of playing.…Now, as I think about this—and I was particularly impressed when I readSmith’s testimony when he talked about a “meeting of the clan” or“meeting of the boys”—I begin to think that there must have been astylized method of communication between these people who were dealingwith competition. Now, Smith could say, “I told Vinson what I was doing,”
and Vinson wouldn’t have the foggiest idea what was being told to him,and both men could testify under oath, one saying yes and the other mansaying no, and both be telling the truth.… [They] wouldn’t be on the samewavelength. [They] wouldn’t have the same meanings. I think, I believenow that these men did think that they were telling the truth, but theyweren’t communicating between each other with understanding.
Here, certainly, is the gloomiest possible analysis of thecommunications problem.
CHAIRMAN Cordiner’s status, it appears from his testimony, wasapproximately that of the Boston Cabots in the celebrated jingle.
His services to the company, for which he was recompensed intruly handsome style (with, for 1960, a salary of just over$280,000, plus contingent deferred income of about $120,000,plus stock options potentially worth hundreds of thousandsmore), were indubitably many and valuable, but they wereperformed on such an exalted level that, at least in antitrustmatters, he does not seem to have been able to have anyearthly communication at all. When he emphatically told theSubcommittee that at no time had he had so much as aninkling of the network of conspiracies, it could be deduced thathis was a case not of faulty communication but of nocommunication. He did not speak to the Subcommittee ofphilosophy or philosophers, as Ginn and Paxton had done, butfrom his past record of ordering reissues of 20.5 and ofpeppering his speeches and public statements with praise offree enterprise, it seems clear that he was un philosophe sansle savoir—and one on the side of selling the Lord, since noevidence was adduced to suggest that he was given to winkingin any form. Kefauver ran through a long list of antitrustviolations of which General Electric had been accused over thepast half-century, asking Cordiner, who joined the company in1922, how much he knew about each of them; usually, hereplied that he had known about them only after the fact. Incommenting on Ginn’s testimony that Erben hadcountermanded Cordiner’s direct order in 1954, Cordiner saidthat he had read it with “great alarm” and “greatwonderment,” since Erben had always indicated to him “anintense competitive spirit,” rather than any disposition to befriendly with rival companies.
Throughout his testimony, Cordiner used the curiousexpression “be responsive to.” If, for instance, Kefauverinadvertently asked the same question twice, Cordiner wouldsay, “I was responsive to that a moment ago,” or if Kefauverinterrupted him, as he often did, Cordiner would ask politely,“May I be responsive?” This, too, offers a small lead for afoundation grantee, who might want to look into the distinctionbetween being responsive (a passive state) and answering (anact), and their relative effectiveness in the process ofcommunication.
Summing up his position on the case as a whole, in reply toa question of Kefauver’s about whether he thought that G.E.
had incurred “corporate disgrace,” Cordiner said, “No, I am notgoing to be responsive and say that General Electric hadcorporate disgrace. I am going to say that we are deeplygrieved and concerned.… I am not proud of it.”
CHAIRMAN Cordiner, then, had been able to fairly deafen hissubordinate officers with lectures on compliance with the rulesof the company and the laws of the country, but he had notbeen able to get all those officers to comply with either, andPresident Paxton could muse thoughtfully on how it was thattwo of his subordinates who had given radically differentaccounts of a conversation between them could be not liars butmerely poor communicators. Philosophy seems to have reacheda high point at G.E., and communication a low one. Ifexecutives could just learn to understand one another, most ofthe witnesses said or implied, the problem of antitrust violationswould be solved. But perhaps the problem is cultural as well astechnical, and has something to do with a loss of personalidentity that comes from working in a huge organization. Thecartoonist Jules Feiffer, contemplating the communicationproblem in a nonindustrial context, has said, “Actually, thebreakdown is between the person and himself. If you’re notable to communicate successfully between yourself and yourself,how are you supposed to make it with the strangers outside?”
Suppose, purely as a hypothesis, that the owner of a companywho orders his subordinates to obey the antitrust laws hassuch poor communication with himself that he does not reallyknow whether he wants the order to be complied with or not.
If his order is disobeyed, the resulting price-fixing may benefithis company’s coffers; if it is obeyed, then he has done theright thing. In the first instance, he is not personally implicatedin any wrongdoing, while in the second he is positively involvedin right doing. What, after all, can he lose? It is perhapsreasonable to suppose that such an executive mightcommunicate his uncertainty more forcefully than his order.
Possibly yet another foundation grantee should have a look atthe reverse of communication failure, where he might discoverthat messages the sender does not even realize he is sendingsometimes turn out to have got across only too effectively.
Meanwhile, in the first years after the Subcommittee concludedits investigation, the defendant companies were by no meansallowed to forget their transgressions. The law permitscustomers who can prove that they have paid artificially highprices as a result of antitrust violations to sue for damages—inmost cases, triple damages—and suits running into manymillions of dollars piled up so high that Chief Justice Warrenhad to set up a special panel of federal judges to plan howthey should all be handled. Needless to say, Cordiner was notallowed to forget about the matter, either; indeed, it would besurprising if he was allowed a chance to think about muchelse, for, in addition to the suits, he had to contend with activeefforts—unsuccessful, as it turned out—by a minority group ofstockholders to unseat him. Paxton retired as president in April,1961, because of ill health dating back at least to the previousJanuary, when he underwent a major operation. As for theexecutives who pleaded guilty and were fined or imprisoned,most of those who had been employed by companies otherthan G.E. remained with them, either in their old jobs or insimilar ones. Of those who had been employed by G.E., noneremained there. Some retired permanently from business, otherssettled for comparatively small jobs, and a few landed bigones—most spectacularly Ginn, who in June, 1961, becamepresident of Baldwin-Lima-Hamilton, manufacturers of heavymachinery. And as for the future of price-fixing in the electricalindustry, it seems safe to say that what with the JusticeDepartment, Judge Ganey, Senator Kefauver, and thetriple-damage suits, the impact on the philosophers who guidecorporate policy was such that they, and even theirsubordinates, were likely to try to hew scrupulously to the linefor quite some time. Quite a different question, however, iswhether they had made any headway in their ability tocommunicate.
BETWEEN SPRING and midsummer, 1958, the common stock ofthe E. L. Bruce Company, the nation’s leading maker ofhardwood floors, moved from a low of just under $17 a shareto a high of $190 a share. This startling, even alarming, risewas made in an ascending scale that was climaxed by a franticcrescendo in which the price went up a hundred dollars ashare in a single day. Nothing of the sort had happened for ageneration. Furthermore—and even more alarming—the rise didnot seem to have the slightest bit of relation to any suddenhunger on the part of the American public for new hardwoodfloors. To the consternation of almost everyone concerned,conceivably including even some of the holders of Bruce stock,it seemed to be entirely the result of a technical stock-marketsituation called a corner. With the exception of a general panicsuch as occurred in 1929, a corner is the most drastic andspectacular of all developments that can occur in the stockmarket, and more than once in the nineteenth and earlytwentieth centuries, corners had threatened to wreck thenational economy.
The Bruce situation never threatened to do that. For onething, the Bruce Company was so small in relation to theeconomy as a whole that even the wildest gyrations in its stockcould hardly have much national effect. For another, the Bruce“corner” was accidental—the by-product of a fight for corporatecontrol—rather than the result of calculated manipulations, asmost of the historic corners had been. Finally, this oneeventually turned out to be not a true corner at all, but only anear thing; in September, Bruce stock quieted down and settledat a reasonable level. But the incident served to stir upmemories, some of them perhaps tinged with nostalgia, amongthose flinty old Wall Streeters who had been around to see theclassic corners—or at least the last of them.
In June of 1922, the New York Stock Exchange began listingthe shares of a corporation called Piggly Wiggly Stores—a chainof retail self-service markets situated mostly in the South andWest, with headquarters in Memphis—and the stage was set forone of the most dramatic financial battles of that gaudy decadewhen Wall Street, only negligently watched over by the federalgovernment, was frequently sent reeling by the machinations ofoperators seeking to enrich themselves and destroy theirenemies. Among the theatrical aspects of this particular battle—abattle so celebrated in its time that headline writers referred toit simply as the “Piggly Crisis”—was the personality of the hero(or, as some people saw it, the villain), who was a newcomerto Wall Street, a country boy setting out defiantly, amid thecheers of a good part of rural America, to lay the slickmanipulators of New York by the heels. He was ClarenceSaunders, of Memphis, a plump, neat, handsome man offorty-one who was already something of a legend in his hometown, chiefly because of a house he was putting up there forhimself. Called the Pink Palace, it was an enormous structurefaced with pink Georgia marble and built around anawe-inspiring white-marble Roman atrium, and, according toSaunders, it would stand for a thousand years. Unfinishedthough it was, the Pink Palace was like nothing Memphis hadever seen before. Its grounds were to include a private golfcourse, since Saunders liked to do his golfing in seclusion. Eventhe makeshift estate where he and his wife and four childrenwere camping out pending completion of the Palace had itsown golf course. (Some people said that his preference forprivacy was induced by the attitude of the local country clubgovernors, who complained that he had corrupted their entiresupply of caddies by the grandeur of his tips.) Saunders, whohad founded the Piggly Wiggly Stores in 1919, had most of thestandard traits of the flamboyant American promoters—suspectgenerosity, a knack for attracting publicity, love of ostentation,and so on—but he also had some much less common traits,notably a remarkably vivid style, both in speech and writing,and a gift, of which he may or may not have been aware, forcomedy. But like so many great men before him, he had aweakness, a tragic flaw. It was that he insisted on thinking ofhimself as a hick, a boob, and a sucker, and, in doing so, hesometimes became all three.
This unlikely fellow was the man who engineered the last realcorner in a nationally traded stock.
THE game of Corner—for in its heyday it was a game, ahigh-stakes gambling game, pure and simple, embodying a goodmany of the characteristics of poker—was one phase of theendless Wall Street contest between bulls, who want the priceof a stock to go up, and bears, who want it to go down.
When a game of Corner was under way, the bulls’ basicmethod of operation was, of course, to buy stock, and thebears’ was to sell it. Since the average bear didn’t own any ofthe stock issue in contest, he would resort to the commonpractice of selling short. When a short sale is made, thetransaction is consummated with stock that the seller hasborrowed (at a suitable rate of interest) from a broker. Sincebrokers are merely agents, and not outright owners, they, inturn, must borrow the stock themselves. This they do bytapping the “floating supply” of stock that is in constantcirculation among investment houses—stock that privateinvestors have left with one house or another for tradingpurposes, stock that is owned by estates and trusts and hasbeen released for action under certain prescribed conditions,and so on. In essence, the floating supply consists of all thestock in a particular corporation that is available for trading andis not immured in a safe-deposit box or encased in a mattress.
Though the supply floats, it is scrupulously kept track of; theshort seller, borrowing, say, a thousand shares from his broker,knows that he has incurred an immutable debt. What hehopes—the hope that keeps him alive—is that the market priceof the stock will go down, enabling him to buy the thousandshares he owes at a bargain rate, pay off his debt, and pocketthe difference. What he risks is that the lender, for one reasonor another, may demand that he deliver up his thousandborrowed shares at a moment when their market price is at ahigh. Then the grinding truth of the old Wall Street jingle isborne in upon him: “He who sells what isn’t his’n must buy itback or go to prison.” And in the days when corners werepossible, the short seller’s sleep was further disturbed by thefact that he was operating behind blank walls; dealing only withagents, he never knew either the identity of the purchaser ofhis stock (a prospective cornerer?) or the identity of the ownerof the stock he had borrowed (the same prospective cornerer,attacking from the rear?).
Although it is sometimes condemned as being the tool of thespeculator, short selling is still sanctioned, in a severelyrestricted form, on all of the nation’s exchanges. In itsunfettered state, it was the standard gambit in the game ofCorner. The situation would be set up when a group of bearswould go on a well-organized spree of short selling, and wouldoften help their cause along by spreading rumors that thecompany back of the stock in question was on its last legs.
This operation was called a bear raid. The bulls’ mostformidable—but, of course, riskiest—counter-move was to try fora corner. Only a stock that many traders were selling shortcould be cornered; a stock that was in the throes of a realbear raid was ideal. In the latter situation, the would-becornerer would attempt to buy up the investment houses’
floating supply of the stock and enough of the privately heldshares to freeze out the bears; if the attempt succeeded, whenhe called for the short sellers to make good the stock they hadborrowed, they could buy it from no one but him. And theywould have to buy it at any price he chose to ask, their onlyalternatives—at least theoretically—being to go into bankruptcy orto jail for failure to meet their obligations.
In the old days of titanic financial death struggles, when AdamSmith’s ghost still smiled on Wall Street, corners were fairlycommon and were often extremely sanguinary, with hundredsof innocent bystanders, as well as the embattled principals,getting their financial heads lopped off. The most famouscornerer in history was that celebrated old pirate, CommodoreCornelius Vanderbilt, who engineered no less than threesuccessful corners during the eighteen-sixties. Probably hisclassic job was in the stock of the Harlem Railway. By dint ofsecretly buying up all its available shares while simultaneouslycirculating a series of untruthful rumors of imminent bankruptcyto lure the short sellers in, he achieved an airtight trap. Finally,with the air of a man doing them a favor by saving themfrom jail, he offered the cornered shorts at $179 a share thestock he had bought up at a small fraction of that figure. Themost generally disastrous corner was that of 1901 in the stockof Northern Pacific; to raise the huge quantities of cash theyneeded to cover themselves, the Northern Pacific shorts sold somany other stocks as to cause a national panic with world-widerepercussions. The next-to-last great corner occurred in 1920,when Allan A. Ryan, a son of the legendary Thomas FortuneRyan, in order to harass his enemies in the New York StockExchange, sought to corner the stock of the Stutz MotorCompany, makers of the renowned Stutz Bearcat. Ryanachieved his corner and the Stock Exchange short sellers wereduly squeezed. But Ryan, it turned out, had a bearcat by thetail. The Stock Exchange suspended Stutz dealings, lengthylitigation followed, and Ryan came out of the affair financiallyruined.
Then, as at other times, the game of Corner suffered from adifficulty that plagues other games—post-mortem disputes aboutthe rules. The reform legislation of the nineteen-thirties, byoutlawing any short selling that is specifically intended todemoralize a stock, as well as other manipulations leadingtoward corners, virtually ruled the game out of existence. WallStreeters who speak of the Corner these days are referring tothe intersection of Broad and Wall. In U.S. stock markets, onlyan accidental corner (or near-corner, like the Bruce one) isnow possible; Clarence Saunders was the last intentional playerof the game.
SAUNDERS has been variously characterized by people whoknew him well as “a man of limitless imagination and energy,”
“arrogant and conceited as all getout,” “essentially afour-year-old child, playing at things,” and “one of the mostremarkable men of his generation.” But there is no doubt thateven many of the people who lost money on his promotionalschemes believed that he was the soul of honesty. He wasborn in 1881 to a poor family in Amherst County, Virginia, andin his teens was employed by the local grocer at the pittancethat is orthodox for future tycoons taking on their first jobs—inhis case, four dollars a week. Moving ahead fast, he went onto a wholesale grocery company in Clarksville, Tennessee, andthen to one in Memphis, and, while still in his twenties,organized a small retail food chain called United Stores. He soldthat after a few years, did a stint as a wholesale grocer on hisown, and then, in 1919, began to build a chain of retailself-service markets, to which he gave the engaging name ofPiggly Wiggly Stores. (When a Memphis business associate onceasked him why he had chosen that name, he replied, “Sopeople would ask me what you just did.”) The stores flourishedso exuberantly that by the autumn of 1922 there were overtwelve hundred of them. Of these, some six hundred and fiftywere owned outright by Saunders’ Piggly Wiggly Stores, Inc.;the rest were independently owned, but their owners paidroyalties to the parent company for the right to adopt itspatented method of operations. In 1923, an era when agrocery store meant clerks in white aprons and often a thumbon the scale, this method was described by the New YorkTimes with astonishment: “The customer in a Piggly WigglyStore rambles down aisle after aisle, on both sides of which areshelves. The customer collects his purchases and pays as hegoes out.” Although Saunders did not know it, he had inventedthe supermarket.
A natural concomitant of the rapid rise of Piggly WigglyStores, Inc., was the acceptance of its shares for listing on theNew York Stock Exchange, and within six months of that eventPiggly Wiggly stock had become known as a dependable, ifunsensational, dividend-payer—the kind of widows’-and-orphans’
stock that speculators regard with the respectful indifferencethat crap-shooters feel about bridge. This reputation, however,was shortlived. In November, 1922, several small companies thathad been operating grocery stores in New York, New Jersey,and Connecticut under the name Piggly Wiggly failed and wentinto receivership. These companies had scarcely any connectionwith Saunders’ concern; he had merely sold them the right touse his firm’s catchy trade name, leased them some patentedequipment, and washed his hands of them. But when theseindependent Piggly Wigglys failed, a group of stock-marketoperators (whose identities never were revealed, because theydealt through tight-lipped brokers) saw in the situation aheaven-sent opportunity for a bear raid. If individual PigglyWiggly stores were failing, they reasoned, then rumors could bespread that would lead the uninformed public to believe thatthe parent firm was failing, too. To further this belief, theybegan briskly selling Piggly Wiggly short, in order to force theprice down. The stock yielded readily to their pressure, andwithin a few weeks its price, which earlier in the year hadhovered around fifty dollars a share, dropped to below forty.
At this point, Saunders announced to the press that he wasabout to “beat the Wall Street professionals at their own game”
with a buying campaign. He was by no means a professionalhimself; in fact, prior to the listing of Piggly Wiggly he hadnever owned a single share of any stock quoted on the NewYork Stock Exchange. There is little reason to believe that atthe beginning of his buying campaign he had any intention oftrying for a corner; it seems more likely that his announcedmotive—the unassailable one of supporting the price of thestock in order to protect his own investment and that of otherPiggly Wiggly stockholders—was all he had in mind. In anycase, he took on the bears with characteristic zest,supplementing his own funds with a loan of about ten milliondollars from a group of bankers in Memphis, Nashville, NewOrleans, Chattanooga, and St. Louis. Legend has it that hestuffed his ten million-plus, in bills of large denomination, into asuitcase, boarded a train for New York, and, his pocketsbulging with currency that wouldn’t fit in the suitcase, marchedon Wall Street, ready to do battle. He emphatically denied thisin later years, insisting that he had remained in Memphis andmasterminded his campaign by means of telegrams andlong-distance telephone calls to various Wall Street brokers.
Wherever he was at the time, he did round up a corps ofsome twenty brokers, among them Jesse L. Livermore, whoserved as his chief of staff. Livermore, one of the mostcelebrated American speculators of this century, was thenforty-five years old but was still occasionally, and derisively,referred to by the nickname he had earned a couple ofdecades earlier—the Boy Plunger of Wall Street. Since Saundersregarded Wall Streeters in general and speculators in particularas parasitic scoundrels intent only on battering down his stock,it seemed likely that his decision to make an ally of Livermorewas a reluctant one, arrived at simply with the idea of gettingthe enemy chieftain into his own camp.
On the first day of his duel with the bears, Saunders,operating behind his mask of brokers, bought 33,000 shares ofPiggly Wiggly, mostly from the short sellers; within a week hehad brought the total to 105,000—more than half of the200,000 shares outstanding. Meanwhile, ventilating his emotionsat the cost of tipping his hand, he began running a series ofadvertisements in which he vigorously and pungently told thereaders of Southern and Western newspapers what he thoughtof Wall Street. “Shall the gambler rule?” he demanded in oneof these effusions. “On a white horse he rides. Bluff is his coatof mail and thus shielded is a yellow heart. His helmet isdeceit, his spurs clink with treachery, and the hoofbeats of hishorse thunder destruction. Shall good business flee? Shall ittremble with fear? Shall it be the loot of the speculator?” OnWall Street, Livermore went on buying Piggly Wiggly.
The effectiveness of Saunders’ buying campaign was readilyapparent; by late January of 1923 it had driven the price ofthe stock up over 60, or higher than ever before. Then, tointensify the bear raiders’ jitters, reports came in from Chicago,where the stock was also traded, that Piggly Wiggly wascornered—that the short sellers could not replace the stock theyhad borrowed without coming to Saunders for supplies. Thereports were immediately denied by the New York StockExchange, which announced that the floating supply of PigglyWiggly was ample, but they may have put an idea intoSaunders’ head, and this, in turn, may have prompted acurious and—at first glance—mystifying move he made inmid-February, when, in another widely disseminated newspaperadvertisement, he offered to sell fifty thousand shares of PigglyWiggly stock to the public at fifty-five dollars a share. The adpointed out, persuasively enough, that the stock was paying adividend of a dollar four times a year—a return of more than7 percent. “This is to be a quick proposition, subject towithdrawal without prior notice,” the ad went on, calmly buturgently. “To get in on the ground floor of any big propositionis the opportunity that comes to few, and then only once in alifetime.”
Anyone who is even slightly familiar with modern economic lifecan scarcely help wondering what the Securities and ExchangeCommission, which is charged with seeing to it that all financialadvertising is kept factual, impersonal, and unemotional, wouldhave had to say about the hard sell in those last twosentences. But if Saunders’ first stock-offering ad would havecaused an S.E.C. examiner to turn pale, his second, publishedfour days later, might well have induced an apoplectic seizure.
A full-page affair, it cried out, in huge black type:
OPPORTUNITY! OPPORTUNITY!
It Knocks! It Knocks! It Knocks!
Do you hear? Do you listen? Do you understand?
Do you wait? Do you act now?…Has a new Daniel appeared and the lions eat him not?
Has a new Joseph come that riddles may be made plain?
Has a new Moses been born to a new Promised Land?
Why, then, asks the skeptical, can CLARENCE SAUNDERS … be sogenerous to the public?
After finally making it clear that he was selling common stockand not snake oil, Saunders repeated his offer to sell atfifty-five dollars a share, and went on to explain that he wasbeing so generous because, as a farsighted businessman, hewas anxious to have Piggly Wiggly owned by its customers andother small investors, rather than by Wall Street sharks. Tomany people, though, it appeared that Saunders was beinggenerous to the point of folly. The price of Piggly Wiggly onthe New York Stock Exchange was just then pushing 70; itlooked as if Saunders were handing anyone who had fifty-fivedollars in his pocket a chance to make fifteen dollars with norisk. The arrival of a new Daniel, Joseph, or Moses might bedebatable, but opportunity certainly did seem to be knocking, allright.
Actually, as the skeptical must have suspected, there was acatch. In making what sounded like such a costly andunbusinesslike offer, Saunders, a rank novice at Corner, haddevised one of the craftiest dodges ever used in the game. Oneof the great hazards in Corner was always that even though aplayer might defeat his opponents, he would discover that hehad won a Pyrrhic victory. Once the short sellers had beensqueezed dry, that is, the cornerer might find that the reams ofstock he had accumulated in the process were a dead weightaround his neck; by pushing it all back into the market in oneshove, he would drive its price down close to zero. And if, likeSaunders, he had had to borrow heavily to get into the gamein the first place, his creditors could be expected to close in onhim and perhaps not only divest him of his gains but drivehim into bankruptcy. Saunders apparently anticipated thishazard almost as soon as a corner was in sight, andaccordingly made plans to unload some of his stock beforewinning instead of afterward. His problem was to keep thestock he sold from going right back into the floating supply,thus breaking his corner; and his solution was to sell hisfifty-five-dollar shares on the installment plan. In his Februaryadvertisements, he stipulated that the public could buy sharesonly by paying twenty-five dollars down and the balance inthree ten-dollar installments, due June 1st, September 1st, andDecember 1st. In addition—and vastly more important—he saidhe would not turn over the stock certificates to the buyers untilthe final installment had been paid. Since the buyers obviouslycouldn’t sell the certificates until they had them, the stock couldnot be used to replenish the floating supply. Thus Saundershad until December 1st to squeeze the short sellers dry.
Easy as it may be to see through Saunders’ plan byhindsight, his maneuver was then so unorthodox that for awhile neither the governors of the Stock Exchange norLivermore himself could be quite sure what the man inMemphis was up to. The Stock Exchange began making formalinquiries, and Livermore began getting skittish, but he went onbuying for Saunders’ account, and succeeded in pushing PigglyWiggly’s price up well above 70. In Memphis, Saunders satback comfortably; he temporarily ceased singing the praises ofPiggly Wiggly stock in his ads, and devoted them to eulogizingapples, grapefruit, onions, hams, and Lady Baltimore cakes.
Early in March, though, he ran another financial ad, repeatinghis stock offer and inviting any readers who wanted to discussit with him to drop in at his Memphis office. He alsoemphasized that quick action was necessary; time was runningout.
By now, it was apparent that Saunders was trying for acorner, and on Wall Street it was not only the Piggly Wigglybears who were becoming apprehensive. Finally, Livermore,possibly reflecting that in 1908 he had lost almost a milliondollars trying to get a corner in cotton, could stand it nolonger. He demanded that Saunders come to New York andtalk things over. Saunders arrived on the morning of March12th. As he later described the meeting to reporters, there wasa difference of opinion; Livermore, he said—and his tone wasthat of a man rather set up over having made a piker out ofthe Boy Plunger—“gave me the impression that he was a littleafraid of my financial situation and that he did not care to beinvolved in any market crash.” The upshot of the conferencewas that Livermore bowed out of the Piggly Wiggly operation,leaving Saunders to run it by himself. Saunders then boarded atrain for Chicago to attend to some business there. At Albany,he was handed a telegram from a member of the StockExchange who was the nearest thing he had to a friend in thewhite-charger-and-coat-of-mail set. The telegram informed himthat his antics had provoked a great deal of head-shaking inthe councils of the Exchange, and urged him to stop creating asecond market by advertising stock for sale at a price so farbelow the quotation on the Exchange. At the next station,Saunders telegraphed back a rather unresponsive reply. If itwas a possible corner the Exchange was fretting about, he said,he could assure the governors that they could put their fearsaside, since he himself was maintaining the floating supply bydaily offering stock for loan in any amount desired. But hedidn’t say how long he would continue to do so.
A week later, on Monday, March 19th, Saunders ran anewspaper ad stating that his stock offer was about to bewithdrawn; this was the last call. At the time, or so he claimedafterward, he had acquired all but 1,128 of Piggly Wiggly’s200,000 outstanding shares, for a total of 198,872, some ofwhich he owned and the rest of which he “controlled”—areference to the installment-plan shares whose certificates hestill held. Actually, this figure was open to considerableargument (there was one private investor in Providence, forinstance, who alone held eleven hundred shares), but there isno denying that Saunders had in his hands practically everysingle share of Piggly Wiggly then available for trading—and thathe therefore had his corner. On that same Monday, it isbelieved, Saunders telephoned Livermore and asked if he wouldrelent long enough to see the Piggly Wiggly project through bycalling for delivery of all the shares that were owed Saunders;in other words, would Livermore please spring the trap?
Nothing doing, Livermore is supposed to have replied, evidentlyconsidering himself well out of the whole affair. So the followingmorning, Tuesday, March 20th, Saunders sprang the traphimself.
IT turned out to be one of Wall Street’s wilder days. PigglyWiggly opened at 75?, up 5? from the previous days’ closingprice. An hour after the opening, word arrived that Saundershad called for delivery of all his Piggly Wiggly stock. Accordingto the rules of the Exchange, stock called for under suchcircumstances had to be produced by two-fifteen the followingafternoon. But Piggly Wiggly, as Saunders well knew, simplywasn’t to be had—except, of course, from him. To be sure,there were a few shares around that were still held by privateinvestors, and frantic short sellers trying to shake them loosebid their price up and up. But by and large there wasn’t muchactual trading in Piggly Wiggly, because there was so little PigglyWiggly to be traded. The Stock Exchange post where it wasbought and sold became the center of a mob scene astwo-thirds of the brokers on the floor clustered around it, afew of them to bid but most of them just to push, whoop, andotherwise get in on the excitement. Desperate short sellersbought Piggly Wiggly at 90, then at 100, then at 110. Reportsof sensational profits made the rounds. The Providence investor,who had picked up his eleven hundred shares at 39 in theprevious autumn, while the bear raid was in full cry, came totown to be in on the kill, unloaded his holdings at an averageprice of 105, and then caught an afternoon train back home,taking with him a profit of over seventy thousand dollars. As ithappened, he could have done even better if he had bided histime; by noon, or a little after, the price of Piggly Wiggly hadrisen to 124, and it seemed destined to zoom straight throughthe lofty roof above the traders’ heads. But 124 was as high asit went, for that figure had barely been recorded when arumor reached the floor that the governors of the Exchangewere meeting to consider the suspension of further trading inthe stock and the postponement of the short sellers’ deadlinefor delivery. The effect of such action would be to give thebears time to beat the bushes for stock, and thus to weaken, ifnot break, Saunders’ corner. On the basis of the rumor alone,Piggly Wiggly fell to 82 by the time the Exchange’s closing bellended the chaotic session.
The rumor proved to be true. After the close of business, theGoverning Committee of the Exchange announced both thesuspension of trading in Piggly Wiggly and the extension of theshort sellers’ delivery deadline “until further action by thiscommittee.” There was no immediate official reason given forthis decision, but some members of the committee unofficiallylet it be known that they had been afraid of a repetition of theNorthern Pacific panic if the corner were not broken. On theother hand, irreverent side-liners were inclined to wonderwhether the Governing Committee had not been moved by thepitiful plight of the cornered short sellers, many of whom—as inthe Stutz Motor case two years earlier—were believed to bemembers of the Exchange.
Despite all this, Saunders, in Memphis, was in a jubilant,expansive mood that Tuesday evening. After all, his paperprofits at that moment ran to several million dollars. The hitch,of course, was that he could not realize them, but he seems tohave been slow to grasp that fact or to understand the extentto which his position had been undermined. The indications arethat he went to bed convinced that, besides having personallybrought about a first-class mess on the hated Stock Exchange,he had made himself a bundle and had demonstrated how apoor Southern boy could teach the city slickers a lesson. It allmust have added up to a heady sensation. But, like most suchsensations, it didn’t last long. By Wednesday evening, whenSaunders issued his first public utterance on the Piggly Crisis,his mood had changed to an odd mixture of puzzlement,defiance, and a somewhat muted echo of the crowing triumphof the night before. “A razor to my throat, figuratively speaking,is why I suddenly and without warning kicked the pegs fromunder Wall Street and its gang of gamblers and marketmanipulators,” he declared in a press interview. “It was strictlya question of whether I should survive, and likewise mybusiness and the fortunes of my friends, or whether I shouldbe ‘licked’ and pointed to as a boob from Tennessee. And theconsequence was that the boastful and supposedly invulnerableWall Street powers found their methods controverted bywell-laid plans and quick action.” Saunders wound up hisstatement by laying down his terms: the Stock Exchange’sdeadline extension notwithstanding, he would expect settlementin full on all short stock by 3 P.M. the next day—Thursday—at$150 a share; thereafter his price would be $250.
On Thursday, to Saunders’ surprise, very few short sellerscame forward to settle; presumably those who did couldn’tstand the uncertainty. But then the Governing Committee kickedthe pegs from under Saunders by announcing that the stock ofPiggly Wiggly was permanently stricken from its trading list andthat the short sellers would be given a full five days from theoriginal deadline—that is, until two-fifteen the followingMonday—to meet their obligations. In Memphis, Saunders, farremoved from the scene though he was, could not miss theimport of these moves—he was now on the losing end ofthings. Nor could he any longer fail to see that thepostponement of the short sellers’ deadline was the vital issue.
“As I understand it,” he said in another statement, handed toreporters that evening, “the failure of a broker to meet hisclearings through the Stock Exchange at the appointed time isthe same as a bank that would be unable to meet its clearings,and all of us know what would happen to that kind of abank.… The bank examiner would have a sign stuck up on thedoor with the word ‘Closed.’ It is unbelievable to me that theaugust and all-powerful New York Stock Exchange is a welcher.
Therefore I continue to believe that the … shares of stock stilldue me on contracts … will be settled on the proper basis.”
An editorial in the Memphis Commercial Appeal backed upSaunders’ cry of treachery, declaring, “This looks like whatgamblers call welching. We hope the home boy beats them toa frazzle.”
That same Thursday, by a coincidence, the annual financialreport of Piggly Wiggly Stores, Inc., was made public. It was ahighly favorable one—sales, profits, current assets, and all othersignificant figures were up sharply over the year before—butnobody paid any attention to it. For the moment, the realworth of the company was irrelevant; the point was the game.
ON Friday morning, the Piggly Wiggly bubble burst. It burstbecause Saunders, who had said his price would rise to $250a share after 3 P.M. Thursday, made the startlingannouncement that he would settle for a hundred. E. W.
Bradford, Saunders’ New York lawyer, was asked whySaunders had suddenly granted this striking concession.
Saunders had done it out of the generosity of his heart,Bradford replied gamely, but the truth was soon obvious:
Saunders had made the concession because he’d had to. Thepostponement granted by the Stock Exchange had given theshort sellers and their brokers a chance to scan lists of PigglyWiggly stockholders, and from these they had been able tosmoke out small blocks of shares that Saunders had notcornered. Widows and orphans in Albuquerque and Sioux City,who knew nothing about short sellers and corners, were onlytoo happy, when pressed, to dig into their mattresses orsafe-deposit boxes and sell—in the so-called over-the-countermarket, since the stock could no longer be traded on theExchange—their ten or twenty shares of Piggly Wiggly for atleast double what they had paid for them. Consequently, insteadof having to buy stock from Saunders at his price of $250and then hand it back to him in settlement of their loans,many of the short sellers were able to buy it inover-the-counter trading at around a hundred dollars, and thus,with bitter pleasure, pay off their Memphis adversary not incash but in shares of Piggly Wiggly—the very last thing hewanted just then. By nightfall Friday, virtually all the shortsellers were in the clear, having redeemed their indebtednesseither by these over-the-counter purchases or by payingSaunders cash at his own suddenly deflated rate of a hundreddollars a share.
That evening, Saunders released still another statement, andthis one, while still defiant, was unmistakably a howl of anguish.
“Wall Street got licked and then called for ‘mamma,’” it read.
“Of all the institutions in America, the New York StockExchange is the worst menace of all in its power to ruin allwho dare to oppose it. A law unto itself … an association ofmen who claim the right that no king or autocrat ever daredto take: to make a rule that applies one day on contracts andabrogate it the next day to let out a bunch of welchers.… Mywhole life from this day on will be aimed toward the end ofhaving the public protected from a like occurrence.… I am notafraid. Let Wall Street get me if they can.” But it appeared thatWall Street had got him; his corner was broken, leaving himdeeply in debt to the syndicate of Southern bankers andencumbered with a mountain of stock whose immediate futurewas, to say the least, precarious.
SAUNDEES’ fulminations did not go unheeded on Wall Street,and as a result the Exchange felt compelled to justify itself. OnMonday, March 26th, shortly after the Piggly Wiggly shortsellers’ deadline had passed and Saunders’ corner was, for allpractical purposes, a dead issue, the Exchange offered itsapologia, in the form of a lengthy review of the crisis frombeginning to end. In presenting its case, the Exchangeemphasized the public harm that might have been done if thecorner had gone unbroken, explaining, “The enforcementsimultaneously of all contracts for the return of the stock wouldhave forced the stock to any price that might be fixed by Mr.
Saunders, and competitive bidding for the insufficient supplymight have brought about conditions illustrated by othercorners, notably the Northern Pacific corner in 1901.” Then, itssyntax yielding to its sincerity, the Exchange went on to saythat “the demoralizing effects of such a situation are not limitedto those directly affected by the contracts but extends to thewhole market.” Getting down to the two specific actions it hadtaken—the suspension of trading in Piggly Wiggly and theextension of the short sellers’ deadline—the Exchange arguedthat both of them were within the bounds of its ownconstitution and rules, and therefore irreproachable. Arrogant asthis may sound now, the Exchange had a point; in those daysits rules were just about the only controls over stock trading.
The question of whether, even by their own rules, the slickersreally played fair with the boob is still debated among fiscalantiquarians. There is strong presumptive evidence that theslickers themselves later came to have their doubts. Regardingthe right of the Exchange to suspend trading in a stock therecan be no argument, since the right was, as the Exchangeclaimed at the time, specifically granted in its constitution. Butthe right to postpone the deadline for short sellers to honortheir contracts, though also claimed at the time, is anothermatter. In June, 1925, two years after Saunders’ corner, theExchange felt constrained to amend its constitution with anarticle stating that “whenever in the opinion of the GoverningCommittee a corner has been created in a security listed onthe Exchange … the Governing Committee may postpone thetime for deliveries on Exchange contracts therein.” By adoptinga statute authorizing it to do what it had done long before, theExchange would seem, at the very least, to have exposed aguilty conscience.
THE immediate aftermath of the Piggly Crisis was a wave ofsympathy for Saunders. Throughout the hinterland, the publicimage of him became that of a gallant champion of theunderdog who had been ruthlessly crushed. Even in New York,the very lair of the Stock Exchange, the Times conceded in aneditorial that in the minds of many people Saundersrepresented St. George and the Stock Exchange the dragon.
That the dragon triumphed in the end, said the Times, was“bad news for a nation at least 66? per cent ‘sucker,’ whichhad its moment of triumph when it read that a sucker hadtrimmed the interests and had his foot on Wall Street’s neckwhile the vicious manipulators gasped their lives away.”
Not a man to ignore such a host of friendly fellow suckers,Saunders went to work to turn them to account. And heneeded them, for his position was perilous indeed. His biggestproblem was what to do about the ten million dollars that heowed his banker backers—and didn’t have. The basic planbehind his corner—if he had had any plan at all—must havebeen to make such a killing that he could pay back a big sliceof his debt out of the profits, pay back the rest out of theproceeds from his public stock sale, and then walk off with astill huge block of Piggly Wiggly stock free and clear. Eventhough the cut-rate hundred-dollar settlement had netted him akilling by most men’s standards (just how much of a killing isnot known, but it has been reliably estimated at half a millionor so), it was not a fraction of what he might have reasonablyexpected it to be, and because it wasn’t his whole structurebecame an arch without a keystone.
Having paid his bankers what he had received from the shortsellers and from his public stock sale, Saunders found that hestill owed them about five million dollars, half of it dueSeptember 1, 1923, and the balance on January 1, 1924. Hisbest hope of raising the money lay in selling more of the vastbundle of Piggly Wiggly shares he still had on hand. Since hecould no longer sell them on the Exchange, he resorted to hisfavorite form of self-expression—newspaper advertising, this timesupplemented with a mail-order pitch offering Piggly Wigglyagain at fifty-five dollars. It soon became evident, though, thatpublic sympathy was one thing and public willingness totranslate sympathy into cash was quite another. Everyone,whether in New York, Memphis, or Texarkana, knew about therecent speculative shenanigans in Piggly Wiggly and about thedubious state of the president’s finances. Not even Saunders’
fellow suckers would have any part of his deal now, and thecampaign was a bleak failure.
Sadly accepting this fact, Saunders next appealed to the localand regional pride of his Memphis neighbors by turning hisremarkable powers of persuasion to the job of convincing themthat his financial dilemma was a civic issue. If he should gobroke, he argued, it would reflect not only on the characterand business acumen of Memphis but on Southern honor ingeneral. “I do not ask for charity,” he wrote in one of thelarge ads he always seemed able to find the cash for, “and Ido not request any flowers for my financial funeral, but I doask … everybody in Memphis to recognize and know that thisis a serious statement made for the purpose of acquaintingthose who wish to assist in this matter, that they may workwith me, and with other friends and believers in my business,in a Memphis campaign to have every man and woman whopossibly can in this city become one of the partners of thePiggly Wiggly business, because it is a good investment first,and, second, because it is the right thing to do.” Raising hissights in a second ad, he declared, “For Piggly Wiggly to beruined would shame the whole South.”
Just which argument proved the clincher in persuadingMemphis that it should try to pull Saunders’ chestnuts out ofthe fire is hard to say, but some part of his line of reasoningclicked, and soon the Memphis Commercial Appeal was urgingthe town to get behind the embattled local boy. The responseof the city’s business leaders was truly inspiring to Saunders. Awhirlwind three-day campaign was planned, with the object ofselling fifty thousand shares of his stock to the citizens ofMemphis at the old magic figure of fifty-five dollars a share; inorder to give buyers some degree of assurance that they wouldnot later find themselves alone out on a limb, it was stipulatedthat unless the whole block was sold within the three days, allsales would be called off. The Chamber of Commercesponsored the drive; the American Legion, the Civitan Club,and the Exchange Club fell into line; and even the BowersStores and the Arrow Stores, both competitors of Piggly Wigglyin Memphis, agreed to plug the worthy cause. Hundreds ofcivic-minded volunteers signed up to ring doorbells. On May3rd, five days before the scheduled start of the campaign, 250Memphis businessmen assembled at the Gayoso Hotel for akickoff dinner. There were cheers when Saunders, accompaniedby his wife, entered the dining room; one of the manyafter-dinner speakers described him as “the man who has donemore for Memphis than any in the last thousand years”—arousing tribute that put God knew how many Chickasaw chiefsin their place. “Business rivalries and personal differences wereswept away like mists before the sun,” a Commercial Appealreporter wrote of the dinner.
The drive got off to a splendid start. On the openingday—May 8th—society women and Boy Scouts paraded thestreets of Memphis wearing badges that read, “We’re OneHundred Per Cent for Clarence Saunders and Piggly Wiggly.”
Merchants adorned their windows with placards bearing theslogan “A Share of Piggly Wiggly Stock in Every Home.”
Telephones and doorbells rang incessantly. In short order,23,698 of the 50,000 shares had been subscribed for. Yet atthe very moment when most of Memphis had becomemiraculously convinced that the peddling of Piggly Wiggly stockwas an activity fully as uplifting as soliciting for the Red Crossor the Community Chest, ugly doubts were brewing, and somevipers in the home nest suddenly demanded that Saundersconsent to an immediate spot audit of his company’s books.
Saunders, for whatever reasons, refused, but offered to placatethe skeptics by stepping down as president of Piggly Wiggly ifsuch a move “would facilitate the stock-selling campaign.” Hewas not asked to give up the presidency, but on May 9th, thesecond day of the campaign, a watchdog committee offour—three bankers and a businessman—was appointed by thePiggly Wiggly directors to help him run the company for aninterim period, while the dust settled. That same day, Saunderswas confronted with another embarrassing situation: why, thecampaign leaders wanted to know, was he continuing to buildhis million-dollar Pink Palace at a time when the whole townwas working for him for nothing? He replied hastily that hewould have the place boarded up the very next day and thatthere would be no further construction until his financial futurelooked bright again.
The confusion attendant on these two issues brought the driveto a standstill. At the end of the third day, the total number ofshares subscribed for was still under 25,000, and the sales thathad been made were canceled. Saunders had to admit that thedrive had been a failure. “Memphis has fizzled,” he reportedlyadded—although he was at great pains to deny this a fewyears later, when he needed more of Memphis’ money for anew venture. It would not be surprising, though, if he hadmade some such imprudent remark, for he was understandablysuffering from a case of frazzled nerves, and was showing thestrain. Just before the announcement of the campaign’sunhappy end, he went into a closed conference with severalMemphis business leaders and came out of it with a bruisedcheekbone and a torn collar. None of the other men at themeeting showed any marks of violence. It just wasn’t Saunders’
day.
Although it was never established that Saunders had had hishand improperly in the Piggly Wiggly corporate till during hiscornering operation, his first business move after the collapse ofhis attempt to unload stock suggested that he had at least hadgood reason to refuse a spot audit of the company’s books. Inspite of futile grunts of protest from the watchdog committee,he began selling not Piggly Wiggly stock but Piggly Wigglystores—partly liquidating the company, that is—and no oneknew where he would stop. The Chicago stores went first, andthose in Denver and Kansas City soon followed. His announcedintention was to build up the company’s treasury so that itcould buy the stock that the public had spurned, but there wassome suspicion that the treasury desperately needed atransfusion just then—and not of Piggly Wiggly stock, either.
“I’ve got Wall Street and the whole gang licked,” Saundersreported cheerfully in June. But in mid-August, with theSeptember 1st deadline for repayment of two and a half milliondollars on his loan staring him in the face and with nothinglike that amount of cash either on hand or in prospect, heresigned as president of Piggly Wiggly Stores, Inc., and turnedover his assets—his stock in the company, his Pink Palace, andall the rest of his property—to his creditors.
It remained only for the formal stamp of failure to be put onSaunders personally and on Piggly Wiggly under hismanagement. On August 22nd, the New York auction firm ofAdrian H. Muller & Son, which dealt in so manynext-to-worthless stocks that its salesroom was often called “thesecurities graveyard,” knocked down fifteen hundred shares ofPiggly Wiggly at a dollar a share—the traditional price forsecurities that have been run into the ground—and thefollowing spring Saunders went through formal bankruptcyproceedings. But these were anticlimaxes. The real low point ofSaunders’ career was probably the day he was forced out ofhis company’s presidency, and it was then that, in the opinionof many of his admirers, he achieved his rhetorical peak. Whenhe emerged, harassed but still defiant, from a directors’
conference and announced his resignation to reporters, a hushfell. Then Saunders added hoarsely, “They have the body ofPiggly Wiggly, but they cannot have the soul.”
IF by the soul of Piggly Wiggly Saunders meant himself, then itdid remain free—free to go marching on in its own erratic way.
He never ventured to play another game of Corner, but hisspirit was far from broken. Although officially bankrupt, hemanaged to find people of truly rocklike faith who were stillwilling to finance him, and they enabled him to live on a scaleonly slightly less grand than in the past; reduced to playing golfat the Memphis Country Club rather than on his own privatecourse, he handed out caddy tips that the club governorsconsidered as corrupting as ever. To be sure, he no longerowned the Pink Palace, but this was about the only evidencethat served to remind his fellow townsmen of his misfortunes.
Eventually, the unfinished pleasure dome came into the handsof the city of Memphis, which appropriated $150,000 to finishit and turn it into a museum of natural history and industrialarts. As such, it continues to sustain the Saunders legend inMemphis.
After his downfall, Saunders spent the better part of threeyears in seeking redress of the wrongs that he felt he hadsuffered in the Piggly Wiggly fight, and in foiling the efforts ofhis enemies and creditors to make things still more unpleasantfor him. For a while, he kept threatening to sue the StockExchange for conspiracy and breach of contract, but a test suit,brought by some small Piggly Wiggly stockholders, failed, andhe dropped the idea. Then, in January, 1926, he learned that afederal indictment was about to be brought against him forusing the mails to defraud in his mail-order campaign to sellhis Piggly Wiggly stock. He believed, incorrectly, that thegovernment had been egged on to bring the indictment by anold associate of his—John C. Burch, of Memphis, who hadbecome secretary-treasurer of Piggly Wiggly after the shakeup.
His patience once more exhausted, Saunders went around toPiggly Wiggly headquarters and confronted Burch. Thisconference proved far more satisfactory to Saunders than hisboard-room scuffle on the day the Memphis civic stock-sellingdrive failed. Burch, according to Saunders, “undertook in astammering way to deny” the accusation, whereupon Saundersdelivered a right to the jaw, knocking off Burch’s glasses butnot doing much other damage. Burch afterward belittled theblow as “glancing,” and added an alibi that sounded like that ofany outpointed pugilist: “The assault upon me was made sosuddenly that I did not have time or opportunity to strike Mr.
Saunders.” Burch refused to press charges.
About a month later, the mail-fraud indictment was broughtagainst Saunders, but by that time, satisfied that Burch wasinnocent of any dirty work, he was his amiable old self again.
“I have only one thing to regret in this new affair,” heannounced pleasantly, “and that is my fistic encounter withJohn C. Burch.” The new affair didn’t last long; in April theindictment was quashed by the Memphis District Court, andSaunders and Piggly Wiggly were finally quits. By then, thecompany was well on its way back up, and, with a greatlychanged corporate structure, it flourished on into the nineteensixties; housewives continued to ramble down the aisles ofhundreds of Piggly Wiggly stores, now operated under afranchise agreement with the Piggly Wiggly Corporation, ofJacksonville, Florida.
Saunders, too, was well on his way back up. In 1928, hestarted a new grocery chain, which he—but hardly anyoneelse—called the Clarence Saunders, Sole Owner of My Name,Stores, Inc. Its outlets soon came to be known as Sole Ownerstores, which was precisely what they weren’t, for withoutSaunders’ faithful backers they would have existed only in hismind. Saunders’ choice of a corporate title, however, was notdesigned to mislead the public; rather, it was his ironic way ofreminding the world that, after the skinning Wall Street hadgiven him, his name was about the only thing he still had aclear title to. How many Sole Owner customers—or governorsof the Stock Exchange, for that matter—got the point isquestionable. In any case, the new stores caught on so rapidlyand did so well that Saunders leaped back up from bankruptcyto riches, and bought a million-dollar estate just outsideMemphis. He also organized and underwrote a professionalfootball team called the Sole Owner Tigers—an investment thatpaid off handsomely on the fall afternoons when he could hearcries of “Rah! Rah! Rah! Sole Owner! Sole Owner! SoleOwner!” ringing through the Memphis Stadium.
FOR the second time, Saunders’ glory was fleeting. The veryfirst wave of the depression hit Sole Owner Stores such acrushing blow that in 1930 they went bankrupt, and he wasbroke again. But again he pulled himself together and survivedthe debacle. Finding backers, he planned a new chain ofgrocery stores, and thought up a name for it that was moreoutlandish, if possible, than either of its predecessors—Keedoozle.
He never made another killing, however, or bought anothermillion-dollar estate, though it was always clear that he expectedto. His hopes were pinned on the Keedoozle, an electricallyoperated grocery store, and he spent the better part of the lasttwenty years of his life trying to perfect it. In a Keedoozlestore, the merchandise was displayed behind glass panels, eachwith a slot beside it, like the food in an Automat. There thesimilarity ended, for, instead of inserting coins in the slot toopen a panel and lift out a purchase, Keedoozle customersinserted a key that they were given on entering the store.
Moreover, Saunders’ thinking had advanced far beyond theelementary stage of having the key open the panel; each timea Keedoozle key was inserted in a slot, the identity of the itemselected was inscribed in code on a segment of recording tapeembedded in the key itself, and simultaneously the item wasautomatically transferred to a conveyor belt that carried it to anexit gate at the front of the store. When a customer hadfinished his shopping, he would present his key to an attendantat the gate, who would decipher the tape and add up the bill.
As soon as this was paid, the purchases would be catapultedinto the customer’s arms, all bagged and wrapped, by a deviceat the end of the conveyor belt.
A couple of pilot Keedoozle stores were tried out—one inMemphis and the other in Chicago—but it was found that themachinery was too complex and expensive to compete withsupermarket pushcarts. Undeterred, Saunders set to work onan even more intricate mechanism—the Foodelectric, whichwould do everything the Keedoozle could do and add up thebill as well. It will never corner the retail-store-equipmentmarket, though, because it was still unfinished when Saundersdied, in October, 1953, five years too soon for him to see theBruce “corner”, which, in any case, he would have been fullyentitled to scoff at as a mere squabble among ribbon clerks.
DURING Franklin D. Roosevelt’s Presidency, when Wall Streetand Washington tended to be on cat-and-dog terms, perhapsno New Dealer other than That Man himself better typified theNew Deal in the eyes of Wall Street than David Eli Lilienthal.
The explanation of this estimate of him in southern Manhattanlay not in any specific anti-Wall Street acts ofLilienthal’s—indeed, the scattering of financiers, among themWendell L. Willkie, who had personal dealings with himgenerally found him to be a reasonable sort of fellow—but inwhat he had come to symbolize through his association withthe Tennessee Valley Authority, which, as a government-ownedelectric-power concern far larger than any private powercorporation in the country, embodied Wall Street’s notion ofgalloping Socialism. Because Lilienthal was a conspicuous andvigorous member of the T.V.A.’s three-man board of directorsfrom 1933 until 1941, and was its chairman from 1941 until1946, the business community of that period, in his phrase,thought he “wore horns.” In 1946, he became the firstchairman of the United States Atomic Energy Commission, andwhen he gave up that position, in February, 1950, at the ageof fifty, the Times said in a news story that he had been“perhaps the most controversial figure in Washington since theend of the war.”
What has Lilienthal been up to in the years since he left thegovernment? As a matter of public record, he has been up toa number of things, all of them, surprisingly, centered on WallStreet or on private business, or both. For one thing, Lilienthalis listed in any number of business compendiums as theco-founder and the chairman of the board of the Development& Resources Corporation. Several years ago, I phoned D. &R.’s offices, then at 50 Broadway, New York City, anddiscovered it to be a private firm—Wall Street-backed as well as,give or take a block, Wall Street-based—that providesmanagerial, technical, business, and planning services toward thedevelopment of natural resources abroad. That is to say, D. &R.—whose other co-founder, the late Gordon R. Clapp, wasLilienthal’s successor as T.V.A. chairman—is in the business ofhelping governments set up programs more or less similar tothe T.V.A. Since its formation, in 1955, I learned, D. & R. had,at moderate but gratifying profit to itself, planned and managedthe beginnings of a vast scheme for the reclamation ofKhuzistan, an arid and poverty-stricken, though oil-rich, regionof western Iran; advised the government of Italy on thedevelopment of its backward southern provinces; helped theRepublic of Colombia set up a T.V.A.-like authority for itspotentially fertile but flood-plagued Cauca Valley; and offeredadvice to Ghana on water supply, to the Ivory Coast onmineral development, and to Puerto Rico on electric power andatomic energy.
For another thing—and when I found out about this, it struckme as considerably more astonishing, on form, than D. &R.—Lilienthal has made an authentic fortune as a corporateofficer and entrepreneur. In a proxy statement of the Minerals& Chemicals Corporation of America, dated June 24, 1960, thatfell into my hands, I found Lilienthal listed as a director of thefirm and the holder of 41,366 shares of its common stock.
These shares at the time of my investigation were being tradedon the New York Stock Exchange at something overtwenty-five dollars each, and simple multiplication revealed thatthey represented a thumping sum by most men’s standards,certainly including those of a man who had spent most of hislife on government wages, without the help of private resources.
And, for still another thing, in 1953 Harper & Brothersbrought out Lilienthal’s third book, “Big Business: A New Era.”
(His previous books were “T.V.A.: Democracy on the March”
and “This I Do Believe,” which appeared in 1944 and 1949,respectively.) In “Big Business,” Lilienthal argues that not onlythe productive and distributive superiority of the United Statesbut also its national security depends on industrial bigness; thatwe now have adequate public safeguards against abuses of bigbusiness, or know well enough how to fashion them asrequired; that big business does not tend to destroy smallbusiness, as is often supposed, but, rather, tends to promote it;and, finally, that a big-business society does not suppressindividualism, as most intellectuals believe, but actually tends toencourage it by reducing poverty, disease, and physicalinsecurity and increasing the opportunities for leisure and travel.
Fighting words, in short, from an old New Dealer.
Lilienthal is a man whose government career I, as anewspaper reader, had followed fairly closely. My interest inhim as a government official had reached its peak in February,1947, when, in answer to a fierce attack on him by his oldenemy Senator Kenneth D. McKellar, of Tennessee, duringCongressional hearings on his fitness for the A.E.C. job, heuttered a spontaneous statement of personal democratic faiththat for many people still ranks as one of the most stirringattacks on what later came to be known as McCarthyism.
(“One of the tenets of democracy that grow out of this centralcore of a belief that the individual comes first, that all men arethe children of God and their personalities are thereforesacred,” Lilienthal said, among other things, “is a deep belief incivil liberties and their protection; and a repugnance to anyonewho would steal from a human being that which is mostprecious to him, his good name, by imputing things to him, byinnuendo, or by insinuation.”) The fragments of information Ipicked up about his new, private career left me confused.
Wondering how Wall Street and business life had affectedLilienthal, and vice versa, in their belated rapprochement, I gotin touch with him, and a day or so later, at his invitation,drove out to New Jersey to spend the afternoon with him.
LILIENTHAL and his wife, Helen Lamb Lilienthal, lived on BattleRoad, in Princeton, where they had settled in 1957, after sixyears in New York City, at first in a house on Beekman Placeand later in an apartment on Sutton Place. The Princetonhouse, which stands in a plot of less than an acre, is ofGeorgian brick with green shutters. Surrounded by otherhouses of its kind, the place is capacious yet anything butpretentious. Lilienthal, wearing gray slacks and a plaid sportsshirt, met me at the front door. At just past sixty, he was atall, trim man with a receding hairline, a slightly hawklikeprofile, and candid, piercing eyes. He led me into the livingroom, where he introduced Mrs. Lilienthal and then pointed outa couple of household treasures—a large Oriental rug in frontof the fireplace, which he said was a gift from the Shah ofIran, and, hanging on the wall opposite the fireplace, a Chinesescroll of the late nineteenth century showing four rather roguishmen, who, he told me, have a special meaning for him, sincethey are upper-middle-rank civil servants. Pointing to aparticularly enigmatic-looking fellow, he added, with a smile, thathe always thought of that one as his Oriental counterpart.
Mrs. Lilienthal went to get coffee, and while she was gone, Iasked Lilienthal to tell me something of his post-governmentlife, starting at the beginning. “All right,” he said. “Thebeginning: I left the A.E.C. for a number of reasons. In thatkind of work, I feel, a fellow is highly expendable. If you stayedtoo long, you might find yourself placating industry or themilitary, or both—building up what would amount to an atomicpork barrel. Another thing—I wanted to be allowed to speakmy mind more freely than I could as a government official. Ifelt I’d served my term. So I turned in my resignation inNovember, 1949, and it went into effect three months later. Asfor the timing, I resigned then because, for once, I wasn’tunder fire. Originally, I’d planned to do it earlier in 1949, butthen came the last Congressional attack on me—the timeHickenlooper, of Iowa, accused me of ‘incrediblemismanagement.’” I noticed that Lilienthal did not smile inreferring to the Hickenlooper affair. “I entered private life withboth trepidation and relief,” he went on. “The trepidation wasabout my ability to make a living, and it was very real. Oh, I’dbeen a practicing lawyer as a young man, in Chicago, beforegoing into government work, and made quite a lot of money atit, too. But now I didn’t want to practice law. And I wasworried about what else I could do. I was so obsessed withthe subject that I harped on it all the time, and my wife andmy friends began to kid me. That Christmas of 1949, my wifegave me a beggar’s tin cup, and one of my friends gave me aguitar to go with it. The feeling of relief—well, that was amatter of personal privacy and freedom. As a private citizen, Iwouldn’t have to be trailed around by hordes of securityofficers as I had been at the A.E.C. I wouldn’t have to answerthe charges of Congressional committees. And, above all, I’d beable to talk freely to my wife again.”
Mrs. Lilienthal had returned with the coffee as her husbandwas talking, and now she sat down with us. She comes, Iknew, from a family of pioneers who, over several generations,moved westward from New England to Ohio to Indiana toOklahoma, where she was born. She seemed to me to look thepart—that of a woman of dignity, patience, practicality, andgentle strength. “I can tell you that my husband’s resignationwas a relief to me,” she said. “Before he went with the A.E.C.,we’d always talked over all aspects of his work. When he tookthat job, we agreed between us that although we’d indulge inthe discussion of personalities as freely as we pleased, he wouldnever tell me anything about the work of the A.E.C. that Icouldn’t read in the newspapers. It was a terrible constraint tobe under.”
Lilienthal nodded. “I’d come home at night with some frightfulexperience in me,” he said. “No one who so much as touchesthe atom is ever quite the same again. Perhaps I’d have beenin a series of conferences and listened to the kind of talk thatmany military and scientific men go in for—cities full of humanbeings referred to as ‘targets,’ and that sort of thing. I nevergot used to that impersonal jargon. I’d come home sick atheart. But I couldn’t talk about it to Helen. I wasn’t allowed toget it off my chest.”
“And now there wouldn’t be any more hearings,” Mrs.
Lilienthal said. “Those terrible hearings! I’ll never forget oneWashington cocktail party we went to, for our sins. Myhusband had been going through one of the endless series ofCongressional hearings. A woman in a funny hat came gushingup to him and said something like ‘Oh, Mr. Lilienthal, I was soanxious to come to your hearings, but I just couldn’t make it.
I’m so sorry. I just love hearings, don’t you?’”
Husband and wife looked at each other, and this timeLilienthal managed a grin.
LILIENTHAL seemed glad to get on to what happened next. Atabout the time his resignation became effective, he told me, hewas approached by various men from Harvard representing thefields of history, public administration, and law, who asked himto accept an appointment to the faculty. But he decided hedidn’t want to become a professor any more than he wantedto practice law. Within the next few weeks came offers fromnumerous law firms in New York and Washington, and fromsome industrial companies. Reassured by these that he was notgoing to need the tin cup and guitar after all, Lilienthal, aftermulling over the offers, finally turned them all down andsettled, in May, 1950, for a part-time job as a consultant to thecelebrated banking firm of Lazard Frères & Co., whose seniorpartner, André Meyer, he had met through Albert Lasker, amutual friend. Lazard gave him an office in its headquarters at44 Wall, but before he could do much consulting, he was offon a lecture tour across the United States, followed by a tripto Europe that summer, with his wife, on behalf of the lateCollier’s magazine. The trip did not result in any articles,though, and on returning home in the fall he found itnecessary to get back on a full-time income-producing basis;this he did by becoming a consultant to various othercompanies, among them the Carrier Corporation and the RadioCorporation of America. To Carrier he offered advice onmanagerial problems. For R.C.A., he worked on the question ofcolor television, ultimately advising his client to concentrate ontechnical research rather than on law-court squabbles overpatents; he also helped persuade the company to press itscomputer program and to stay out of the construction ofatomic reactors. Early in 1951, he took another trip abroad forCollier’s—to India, Pakistan, Thailand, and Japan. This tripproduced an article—published in Collier’s that August—in whichhe proposed a solution to the dispute between India andPakistan over Kashmir and the headwaters of the Indus River.
Lilienthal’s idea was that the tension between the two countriescould best be lessened by a co?perative program to improveliving conditions in the whole disputed area through economicdevelopment of the Indus Basin. Nine years later, largelythrough the financial backing and moral support of Eugene R.
Black and the World Bank, the Lilienthal plan was essentiallyadopted, and an Indus treaty signed between India andPakistan. But the immediate reaction to his article was generalindifference, and Lilienthal, temporarily stymied and considerablydisillusioned, once more settled down to the humbler problemsof private business.
At this point in Lilienthal’s narrative, the doorbell rang. Mrs.
Lilienthal went to answer it, and I could hear her talking tosomeone—a gardener, evidently—about the pruning of someroses. After listening restlessly for a minute or two, Lilienthalcalled to his wife, “Helen, please tell Domenic to prune thoseroses farther back than he did last year!” Mrs. Lilienthal wentoutside with Domenic, and Lilienthal remarked, “Domenic alwaysprunes too gently, to my way of thinking. It’s a case of ourbackgrounds—Italy versus the Middle West.” Then, resumingwhere he had left off, he said that his association with LazardFrères, and more particularly with Meyer, had led him into anassociation, first as a consultant and later as an executive, witha small company called the Minerals Separation North AmericanCorporation, in which Lazard Frères had a large interest. Itwas in this undertaking that, unexpectedly, he made his fortune.
The company was in trouble, and Meyer’s notion was thatLilienthal might be the man to do something about it.
Subsequently, in the course of a series of mergers, acquisitions,and other maneuvers, the company’s name was changed to,successively, the Attapulgus Minerals & Chemicals Corporation,the Minerals & Chemicals Corporation of America, and, in 1960,the Minerals & Chemicals Philipp Corporation; meanwhile, itsannual receipts rose from about seven hundred and fiftythousand dollars, for 1952, to something over two hundred andseventy-four million, for 1960. For Lilienthal, the acceptance ofMeyer’s commission to look into the company’s affairs was thebeginning of a four-year immersion in the day-to-day problemsof managing a business; the experience, he said decisively,turned out to be one of his life’s richest, and by no meansonly in the literal sense of that word.
I HAVE reconstructed the corporate facts behind Lilienthal’sexperience partly from what he told me in Princeton, partlyfrom a subsequent study of some of the company’s publisheddocuments, and partly from talks with other persons interestedin the firm. Minerals Separation North American, which wasfounded in 1916 as an offshoot of a British firm, was a patentcompany, deriving its chief income from royalties on patents forprocesses used in refining copper ore and the ores of othernonferrous minerals. Its activities were twofold—attempting todevelop new patents in its research laboratory, and offeringtechnical services to the mining and manufacturing companiesthat leased its old ones. By 1950, although it was still netting anice annual profit, it was in a bad way. Under the direction ofits long-time president, Dr. Seth Gregory—who was then overninety but still ruled the company with an iron hand,commuting daily between his midtown apartment hotel and hisoffice, at 11 Broadway, in a regally purple Rolls-Royce—it hadcut down its research activities to almost nothing and was livingon half a dozen old patents, all of which were scheduled to gointo the public domain in from five to eight years. In effect, itwas a still healthy company living under a death sentence.
Lazard Frères, as a large stockholder, was understandablyconcerned. Dr. Gregory was persuaded to retire on ahandsome pension, and in February, 1952, after working withMinerals Separation for some time as a consultant, Lilienthalwas installed as the company’s president and a member of itsboard of directors. His first task was to find a new source ofincome to replace the fast-expiring patents, and he and theother directors agreed that the way to accomplish this wasthrough a merger; it fell to Lilienthal to participate in arrangingone between Minerals Separation and another company inwhich Lazard Frères—along with the Wall Street firm of F.
Eberstadt & Co.—had large holdings: the Attapulgus ClayCompany, of Attapulgus, Georgia, which produced a very rarekind of clay that is useful in purifying petroleum products, andwhich manufactured various household products, among them afloor cleaner called Speedi-Dri.
As a marriage broker between Minerals Separation andAttapulgus, Lilienthal had the touchy job of persuading theexecutives of the Southern company that they were not beingused as pawns by a bunch of rapacious Wall Street bankers.
Being an agent of the bankers was an unaccustomed role forLilienthal, but he evidently carried it off with aplomb, despitethe fact that his presence complicated the emotional problemsstill further by introducing into the situation a whiff of gallopingSocialism. “Dave was very effective in building up the Attapulguspeople’s morale and confidence,” another Wall Streeter has toldme. “He reconciled them to the merger, and showed them itsadvantages for them.” Lilienthal himself told me, “I felt at homein the administrative and technical parts of the job, but thefinancial part had to be done by the people from Lazard andEberstadt. Every time they began talking about spinoffs andexchanges of shares, I was lost. I didn’t even know what aspinoff was.” (As Lilienthal knows now, it is, not to get tootechnical about it, a division of a company into two or morecompanies—the opposite of a merger.) The merger took placein December, 1952, and neither the Attapulgus people nor theMinerals Separation people had any reason to regret it, becauseboth the profits and the stock price of the newly formedcompany—the Attapulgus Minerals & ChemicalsCorporation—soon began to rise. At the time of the merger,Lilienthal was made chairman of the board of directors, at anannual salary of eighteen thousand dollars. Over the next threeyears, while serving first in this position and later as chairmanof the executive committee, he had a large part not only in theconduct of the company’s routine affairs but also in its furthergrowth through a series of new mergers—one in 1954, withEdgar Brothers, a leading producer of kaolin for paper coating,and two in 1955, with a pair of limestone concerns in Ohioand Virginia. The mergers and the increased efficiency thatwent with them were not long in paying off; between 1952 and1955 the company’s net profit per share more than quintupled.
The mechanics of Lilienthal’s own rise from the comparativerags of a public servant to the riches of a successfulentrepreneur are baldly outlined in the company’s proxystatements for its annual and special stockholders’ meetings.
(There are few public documents more indiscreet than proxystatements, in which the precise private stockholdings ofdirectors must be listed.) In November, 1952, MineralsSeparation North American granted Lilienthal, as a supplementto his annual salary, a stock option.* His option entitled him tobuy as many as fifty thousand shares of the firm’s stock fromits treasury at $4.87? per share, then the going rate, any timebefore the end of 1955, and in exchange he signed a contractagreeing to serve the company as an active executivethroughout 1953, 1954, and 1955. The potential financialadvantage to him, of course, as to all other recipients of stockoptions, lay in the fact that if the price of the stock rosesubstantially, he could buy shares at the option price and thushave a holding that would immediately be worth much morethan he paid for it. Furthermore, and more important, if heshould later decide to sell his shares, the proceeds would be acapital gain, taxable at a maximum rate of 25%. Of course, ifthe stock failed to go up, the option would be worthless. But,like so many stocks of the mid-fifties, Lilienthal’s did go up,fantastically. By the end of 1954, according to the proxystatements, Lilienthal had exercised his option to the extent ofbuying twelve thousand seven hundred and fifty shares, whichwere then worth not $4.87? each but about $20. InFebruary, 1955, he sold off four thousand shares at $22.75each, bringing in ninety-one thousand dollars. This sum, lesscapital-gains tax, was then applied against further purchasesunder the option, and in August, 1955, the proxy statementsshow, Lilienthal raised his holdings to almost forty thousandshares, or close to the number he held at the time of my visitto him. By that time, the stock, which had at first been soldover the counter, not only had achieved a listing on the NewYork Stock Exchange but had become one of the Exchange’shighflying speculative favorites; its price had skyrocketed toabout forty dollars a share, and Lilienthal, obviously, was solidlyin the millionaire class. Moreover, the company was now on asound long-term basis, paying an annual cash dividend of fiftycents a share, and the Lilienthal family’s financial worries werepermanently over.
Fiscally speaking, Lilienthal told me, his symbolic moment oftriumph was the day, in June of 1955, when the shares ofMinerals & Chemicals graduated to a listing on the New YorkStock Exchange. In accordance with custom, Lilienthal, as a topofficer, was invited onto the floor to shake hands with thepresident of the Exchange and be shown around generally. “Iwent through it in a daze,” Lilienthal told me. “Until then, I’dnever been inside any stock exchange in my life. It was allmysterious and fascinating. No zoo could have seemed morestrange to me.” How the Stock Exchange felt at this stageabout having the former wearer of horns on its floor is notrecorded.
IN telling me about his experience with the company, Lilienthalhad spoken with zest and had made the whole thing soundmysterious and fascinating. I asked him what, apart from theobvious financial inducement, had led him to devote himself tothe affairs of a small firm, and how it had felt for the formerboss of T.V.A. and A.E.C. to be, in effect, peddling Attapulgite,kaolin, limestone, and Speedi-Dri. Lilienthal leaned back in hischair and stared at the ceiling. “I wanted an entrepreneurialexperience,” he said. “I found a great appeal in the idea oftaking a small and quite crippled company and trying to makesomething of it. Building. That kind of building, I thought, is thecentral thing in American free enterprise, and something I’dmissed in all my government work. I wanted to try my handat it. Now, about how it felt. Well, it felt plenty exciting. It wasfull of intellectual stimulation, and a lot of my old ideaschanged. I conceived a great new respect for financiers—menlike André Meyer. There’s a correctness about them, a certainhigh sense of honor, that I’d never had any conception of. Ifound that business life is full of creative, original minds—alongwith the usual number of second-guessers, of course.
Furthermore, I found it seductive. In fact, I was in danger ofbecoming a slave. Business has its man-eating side, and part ofthe man-eating side is that it’s so absorbing. I found that thethings you read—for instance, that acquiring money for its ownsake can become an addiction if you’re not careful—are literallytrue. Certain good friends helped keep me on the track—menlike Ferdinand Eberstadt, who became my fellow-director afterthe Attapulgus merger, and Nathan Greene, special counsel toLazard Frères, who was on the board for a while. Greene wasa kind of business father confessor to me. I remember hissaying, ‘You think you’ll make your pile and then beindependent. My friend, in Wall Street you don’t just win yourindependence at one stroke. To paraphrase Thomas Jefferson,you have to win your independence over again every day.’ Ifound that he was right about that. Oh, I had my problems. Iquestioned myself at every step. It was exhausting. You see, forso long I’d been associated with two pretty far-reachingthings—institutions. I had a feeling of identity with them; in thatkind of work you are able to lose your sense of self. Now,with myself to worry about—my personal standards as well asmy financial future—I found myself wondering all the timewhether I was making the right move. But that part’s all in myjournal, and you can read it there, if you like.” *I said I certainly would like to read it, and Lilienthal led meto his study, in the basement. It proved to be a good-sizedroom whose windows opened on window wells into whichstrands of ivy were trailing; light came in from outside, andeven a little slanting sunshine, but the tops of the window wellswere too high to permit a view of the garden or theneighborhood. Lilienthal remarked, “My neighbor RobertOppenheimer complained about the enclosed feeling when hefirst saw this room. I told him that was just the feeling Iwanted!” Then he showed me a filing cabinet, standing in acorner; it contained the journal, in rows and rows of loose-leafnotebooks, the earliest of them dating back to its author’shigh-school days. Having invited me to make myself at home,Lilienthal left me alone in his study and went back upstairs.
Taking him at his word, I went for a turn or two around theroom, looking at the pictures on the walls and finding aboutwhat might have been expected: inscribed photographs fromFranklin D. Roosevelt, Harry S. Truman, Senator George Norris,Louis Brandeis; pictures of Lilienthal with Roosevelt, with Willkie,with Fiorello LaGuardia, with Nelson Rockefeller, with Nehru inIndia; a night view of the Fontana Dam, in the TennesseeValley, being built under a blaze of electricity supplied by T.V.A.
power plants. A man’s study reflects himself as he wishes to beseen publicly, but his journal, if he is honest, reflects somethingelse. I had not browsed long in Lilienthal’s journal before Irealized that it was an extraordinary document—not merely ahistorical source of unusual interest but a searching record of apublic man’s thoughts and emotions. I leafed through the yearsof his association with Minerals & Chemicals, and, scatteredamid much about family, Democratic politics, friends, tripsabroad, reflections on national policies, and hopes and fears forthe republic, I came upon the following entries having to dowith business and life in New York:
May 24, 1951: Looks as if I am in the minerals business. In a small way,that could become a big way. [He goes on to explain that he has justhad his first interview with Dr. Gregory, and is apparently acceptable to theold man as the new president of the company.]
May 31, 1951: [Starting in business] is like learning to walk after a longillness.… At first you have to think: move the right foot, move the leftfoot, etc. Then you are walking without thinking, and then walking issomething one does with unconsciousness and utter confidence. This latterstate, as to business, has yet to come, but I had the first touch of ittoday.
July 22, 1951: I recall Wendell Willkie saying to me years ago, “Living inNew York is a great experience. I wouldn’t live anywhere else. It is themost exciting, stimulating, satisfying spot in the world,” etc. I think this wasapropos of some remark I had made on a business visit to NewYork—that I was certainly glad I didn’t have to live in that madhouse ofnoise and dirt. [Last] Thursday was a day in which I shared some ofWillkie’s feeling.… There was a grandeur about the place, and adventure, asense of being in the center of a great achievement, New York City in thefifties.
October 28, 1951: What I am reaching for, perhaps, is to have my cakeand eat it, too, but in a way this is not wholly senseless nor futile. Thatis, I can have enough actual contact with the affairs of business to keep asense of reality, or develop one. How otherwise can I explain the pleasureI get in visiting a copper mine or talking to operators of an electricfurnace, or a coal-research project, or watching how André Meyer works.…But along with that I want to be free enough to think about what thesethings mean, free enough to read outside the immediate field of interest.
This requires keeping out of status (the absence of which I know makesme vaguely unhappy).
December 8, 1952: What is it that investment bankers do for theirmoney? Well, I have certainly had my eyes opened, as to the amount oftoil, sweat, frustrations, problems—yes, and tears—that has to be gonethrough.… If everyone who has something to sell in the market had to beas meticulous and detailed in his statements about what he is selling asthose who offer stock in the market are now, under the Truth inSecurities law, darn little would be sold, in time to be useful, at least.
December 20, 1952: My purpose in this Attapulgus venture is to make agood deal of money in a short time, in a way (i.e., old man capital gains)that enables me to keep three-fourths of it, instead of paying 80% ormore in income taxes.… But there is another purpose: to have had theexperience of business.… The real reason, or the chief reason, is a feelingthat my life wouldn’t be complete, living in a business period—that is, atime dominated by the business of business—unless I had been active inthat area. What I wanted was to be an observer of this fascinating activitythat so colors and affects the world’s life, not … an observer from without(as a writer, teacher) but from the arena itself. I still have this feeling, andwhen I get low and glad to chuck the whole thing (as I have from timeto time), the sustaining part is that even the bumps and sore spots areexperiences, actual experiences within the business world.…Then, too, [I wanted to be able to make] a comparison of the managersof business, the spirit, the tensions, the motivations, etc., with those ofgovernment (something I keep doing anyway)—and that needs doing tounderstand either government or business. This requires actual validexperience in the business world somewhat comparable to my long hiringout in government matters.
I don’t kid myself that I will ever be accepted as a businessman, notafter those long years when I wore horns, for all of them outside theTennessee Valley at least. And I feel less defensive—usually shown by abelligerence—on this score than I did when I rarely saw a tycoon or aWall Streeter, whereas now I live with them.…January 18, 1953: I am now definitely committed [to Minerals &Chemicals] for not less than three more years … and morally committed tosee the thing through. While I can’t conceive that this business will everseem enough, an end of itself, to make up a satisfactory life, yet thebusy-ness, the activity, the crises, the gambles, the management problems Imust face, the judgment about people, all combine to make something farfrom dull. Add to this the good chance of making a good deal of money.…My decision to try business—that seemed to so many people a bit ofromantic moonshine—makes more sense today than it did a year ago.
But there is something missing.…December 2, 1953: Crawford Greenewalt [president of du Pont] …introduced me in a speech (in Philadelphia).… He noted that I had enteredthe chemical business; bearing in mind that I had previously headed thebiggest things in America, bigger than [any] private corporations, he wasnaturally a little nervous about seeing me become a potential competitor. Itwas kidding, but it was good kidding. And it certainly gave little oleAttapulgus quite a notice.
June 30, 1954: I have found a new kind of satisfaction, and in a sense,fulfillment, in a business career. I really never felt that the “consultant”
thing was being a businessman, or engaging in the realities of a life ofbusiness. Too remote from the actual thinking process, the exercise ofjudgment and decision.… In this company, as we are evolving it, there areso many of the elements of fun.… The starting with almost nothing … thecompany depending on patents alone … acquisition, mergers, stock issues,proxy statements, the methods of financing internally and by bank loans …also the way stock prices are made, the silly and almost childlike basisupon which grown men decide that a stock should be bought, and atwhat price … the merger with Edgar, the great [subsequent] rise in theprice of their stock … the review of the price structure. The beginning ofbetter costs. The catalyst idea. The drive and energy and imagination: thenights and days (in the lab until 2 A.M. night after night) and finally thebeginning of a new business.… It is quite a story.
(Later I got a rather different perspective on Lilienthal’sreactions to the transition from government to business bytalking to the man he had described as his “business fatherconfessor,” Nathan Greene. “What happens to a man wholeaves top-level government work and comes to Wall Street asa consultant?” Greene asked me rhetorically. “Well, usually it’s abig letdown. In the government, Dave was used to a sense ofgreat authority and power—tremendous national andinternational responsibility. People wanted to be seen with him.
Foreign dignitaries sought him out. He had all sorts offacilities—rows of buttons on his desk. He pushed them, andlawyers, technicians, accountants appeared to do his bidding. Allright, now he comes to Wall Street. There’s a big welcomingreception, he meets all the partners of his new firm and theirwives, he’s given a nice office with a carpet. But there’s nothingon his desk—only one button, and all it summons is asecretary. He doesn’t have perquisites like limousines.
Furthermore, he really has no responsibility. He says to himself,‘I’m an idea man, I’ve got to have some ideas.’ He has some,but they’re not given much attention by the partners. So theoutward form of his new work is a letdown. The same with itscontent. In Washington, it had been development of naturalresources, atomic energy, or the like—world-shaking things. Nowit turns out to be some little business to make money. It allseems a bit petty.
“Then, there’s the matter of money itself. In the government,our hypothetical man didn’t need it so badly. He had all theseservices and the basic comforts supplied him at no personalcost, and besides he had a great sense of moral superiority.
He was able to sneer at people who were out making money.
He could think of somebody in his law-school class who wasmaking a pile in the Street, and say, ‘He’s sold out.’ Then ourman leaves government and goes to the Wall Street fleshpotshimself, and he says, ‘Boy, am I going to make these guys payfor my services!’ They do pay, too. He gets big fees forconsulting. Then he finds out about big income taxes, how hehas to pay most of his income to the government now insteadof getting his livelihood from it. The shoe is on the other foot.
He may—sometimes he does—begin to scream ‘Confiscation!,’
just like any old Wall Streeter.
“How did Dave handle these problems? Well, he had histroubles—after all, he was starting a second sort of life—but hehandled them just about as well as they can be handled. Hewas never bored, and he never screamed ‘Confiscation!’ Hehas a great capacity for sinking himself in something. Thesubject matter isn’t so important to him. It’s almost as if hewere able to think that what he’s doing is important, whether itis or not, simply because he’s doing it. His ability wasinvaluable to Minerals & Chemicals, and not just as anadministrator. Dave is a lawyer, after all; he knows more aboutcorporate finances than he likes to admit. He enjoys playingthe barefoot boy, but he’s hardly that. Dave is an almostperfect example of somebody who kept his independence whilegetting rich on Wall Street.”)One way and another, then—reading through these ambivalentprotestations in the journal, and later hearing Greene—I seemedto detect under the exuberance and the absorption a naggingsense of dissatisfaction, almost of compromise. For Lilienthal, theobviously genuine thrill of having a new kind of experience, andan almost unimaginably profitable one, had been, I sensed, arose with a worm in it. I went back up to the living room.
There I found Lilienthal fiat on his back on the Shah’s rugunderneath a pile of pre-school-age children. At least, it lookedat first glance like a pile; on closer inspection I found that itconsisted of just two boys. Mrs. Lilienthal, who had returnedfrom the garden, introduced them as Allen and DanielBromberger, sons of the Lilienthals’ daughter, Nancy, andSylvain Bromberger, adding that the Brombergers were livingnearby, since Sylvain was teaching philosophy at the university.
(A few weeks later, Bromberger moved on to the University ofChicago.) The Lilienthals’ only other offspring, David, Jr., livedin Edgartown, Massachusetts, where he had settled down tobecome a writer, as he subsequently did. In response to theurging of the senior Lilienthals, the grandchildren climbed offtheir grandfather and disappeared from the room. When thingswere normal again, I told Lilienthal my reaction to the entries Ihad read in the journal, and he hesitated for a while beforespeaking. “Yes,” he said, finally. “Well, one thing—it wasn’tmaking all that money that worried me. That didn’t make mefeel either good or bad, by itself. In the government years,we’d always paid our bills, and by scrimping we’d been able tosave enough to send the kids to college. We’d never thoughtmuch about money. And then making a lot of it, making amillion—I was surprised, of course. I’d never especially aimed atthat or thought it might happen to me. It’s like when you’re aboy and you try to jump six feet. Then you find you canjump six feet, and you say, ‘Well, so what?’ It’s sort ofirrelevant. Over the past few years, a lot of people have said tome, ‘How does it feel to be rich?’ At first, I was kind ofoffended—there seemed to be an implied criticism in thequestion—but I’m over that. I tell them it doesn’t feel anyspecial way. The way I feel is—But this is going to soundstuffy.”
“No, I don’t think it’s stuffy,” said Mrs. Lilienthal, anticipatingwhat was coming.
“Yes, it is, but I’m going to say it anyway,” said Lilienthal. “Idon’t think money makes much difference, as long as you haveenough.”
“I don’t quite agree,” said Mrs. Lilienthal. “It doesn’t makemuch difference when you’re young. You don’t mind then, aslong as you can struggle along. But as you get older, it ishelpful.”
Lilienthal nodded in deference to that. Then he said that hethought the undertone of dissatisfaction I had noticed in thejournal probably stemmed, at least in part, from the fact thathis career in private business, absorbing though it was, did notbring with it the gratifications of public-service work. True, hehad not been deprived of them entirely, because it was at theheight of his Minerals & Chemicals operations, in 1954, that hefirst went to Colombia, at the request of that country’sgovernment, and, serving as a peso-a-year consultant, startedthe Cauca Valley project that was later continued by theDevelopment & Resources Corporation. But for the most partbeing a top officer of Minerals & Chemicals had kept himpretty well tied down, and he’d had to regard the Colombiawork as a sideline, if not merely a hobby. I found it impossibleto avoid seeing symbolic significance in the fact that theprincipal material with which Lilienthal the businessman hadbeen engaged was—clay.
I thought of something else in Lilienthal’s life at that time thatmight have taken some of the kick out of the process ofbecoming a successful businessman. His “Big Business” bookhad come out when he was in the thick of the Minerals &Chemicals work. I wondered whether, since it is such anuncritical paean to free enterprise, it had been construed bysome people as a rationalization of his new career, and I askedabout this.
“Well, the ideas in the book were rather a shock to some ofmy husband’s New Deal friends, all right,” Mrs. Lilienthal said,a bit dryly.
“They needed shocking, damn it!” Lilienthal burst out. Hespoke with some heat, and I thought of the phrase in hisjournal—used there in an entirely different context but still inreference to himself—about defensiveness shown by belligerence.
After a moment, he went on, in a normal tone, “My wife anddaughter thought I didn’t spend enough time working on thebook, and they were right. I wrote it in too much of a hurry.
My conclusions aren’t supported by enough argument. For onething, I should have spelled out in more detail my opposition tothe way the antitrust laws are administered. But the anti-trustpart wasn’t the real trouble. The thing that really shook upsome of my old friends was what I said about big industry inrelation to individualism, and about the machine in relation toaesthetics. Morris Cooke, who used to be administrator of theRural Electrification Administration—he was one who wasshaken up. He took me apart over the book, and I took himapart back. The anti-bigness dogmatists stopped having anythingto do with me. They simply wrote me off. I wasn’t hurt ordisappointed. Those people are living on nostalgia; they lookbackward, and I try to look forward. Then, of course, therewere the trust busters. They really went after me. But isn’ttrust busting, in the sense of breaking up big companies simplybecause they’re big, pretty much a relic of a past era? Yes, Istill think I was right in the main things I said—perhaps aheadof my time, but right.”
“The trouble was the timing,” Mrs. Lilienthal said. “The bookcame so close to coinciding with my husband’s leaving publicservice and going into private business. Some people thought itrepresented a change in point of view induced by expediency.
Which it didn’t!”
“No,” Lilienthal said. “The book was written mostly in 1952,but all the ideas in it were hatched while I was still in publicservice. For example, my idea that bigness is essential fornational security came in large part out of my experiences inthe A.E.C. The company that had the research andmanufacturing facilities to make the atomic bomb an operationalweapon, so engineered that it wouldn’t require Ph.D.s to use itin the field—Bell Telephone, to be specific—was a big company.
Because it was so big, the Anti-Trust Division of theDepartment of Justice was seeking to break the Bell Systeminto several parts—unsuccessfully, as it turned out—at the verytime we in the A.E.C. were calling on it to do a vital defensejob that required unity. That seemed wrong. More generally,the whole point of view I expressed in the book goes wayback to my quarrel with Arthur Morgan, the first T.V.A.
chairman, in the early thirties. He had great faith in ahandicraft economy, I was for large-scale industry. T.V.A., afterall, was, and is, the biggest power system in the free world. InT.V.A. I always believed in bigness—along with decentralization.
But, you know, the chapter I hoped would produce the mostdiscussion was the one on bigness as a promoter ofindividualism. It did produce discussion, of a sort. I rememberpeople—academic people, mostly—coming up to me withincredulous expressions and saying something that started with‘Do you really believe …’ Well, my answer would start with‘Yes, I really do believe …’”
One other touchy matter that Lilienthal may have questionedhimself about in the process of making his Wall Street fortunewas the fact that in making it he had not really needed toscream “Confiscation,” since he had made it through a taxloophole, the stock option. Possibly there have been liberal,reformist businessmen who have refused to accept stockoptions on principle, although I have never heard of one doingso, and I am not convinced that such a renunciation would bea sensible or useful form of protest. In any event, I didn’t askLilienthal about the matter; in the absence of any acceptedcode of journalism every journalist writes his own, and in mine,such a question would have come close to invasion of moralprivacy. In retrospect, though, I almost wish I had violated mycode that one time. Lilienthal, being Lilienthal, might haveobjected to the question strenuously, but I think he would haveanswered it equally strenuously, and without hedging. As thingswere, after discoursing on the critical reactions to his book, “BigBusiness,” he got up and walked to a window. “I see Domenichas been pretty cautious about his rose-pruning,” he said to hiswife. “Maybe I’ll go out later and cut them back some more.”
His jaw was set in a way that made me feel pretty sure Iknew how the rose-pruning controversy was going to beresolved.
THE triumphant solution to Lilienthal’s problem—the way that heeventually found to have his cake and eat it—was theDevelopment & Resources Corporation. The corporation aroseout of a series of conversations between Lilienthal and Meyerduring the spring of 1955, in the course of which Lilienthalpointed out that he was well acquainted with dozens of foreigndignitaries and technical personnel who had come to visit theT.V.A., and said that their intense interest in that projectseemed to indicate that at least some of their countries wouldbe receptive to the idea of starting similar programs. “Our aimin forming D. & R. was not to try to remold the world, or anylarge part of it, but only to try to help accomplish some ratherspecific things, and, incidentally, make a profit,” Lilienthal toldme. “André was not so sure about the profit—we both knewthere would be a deficit at first—but he liked the idea of doingconstructive things, and Lazard Frères decided to back us, inreturn for a half interest in the corporation.” Clapp, who wasserving at the time as deputy New York City administrator,came in as co-founder of the venture, and the subsequentexecutive appointments made D. & R. virtually a T.V.A. alumniassociation: John Oliver, who became executive vice-president,had been with T.V.A. from 1942 to 1954, ending up as itsgeneral manager; W. L. Voorduin, who became director ofengineering, had been with T.V.A. for a decade and hadplanned its whole system of dams; Walton Seymour, whobecame vice-president for industrial development, had been aT.V.A. consultant on electric-power marketing for thirteen years;and a dozen other former T.V.A. men were scattered on downthrough the ranks.
In July, 1955, D. & R. set up shop at 44 Wall, and set towork finding clients. What was to prove its most important onecame to light during a World Bank meeting in Istanbul thatLilienthal and his wife attended in September of that year. Atthe meeting, Lilienthal fell in with Abolhassan Ebtehaj, thenhead of a seven-year development plan in Iran; as it happened,Iran was just about the ideal D. & R. client, since, for onething, the royalties on its nationalized oil industry gave itconsiderable capital with which to pay for the development ofits resources, and, for another, what it desperately needed wastechnical and professional guidance. The encounter with Ebtehajled to an invitation to Lilienthal and Clapp to visit Iran as theguests of the Shah, and see what they thought could be doneabout Khuzistan. Lilienthal’s employment contract with Minerals& Chemicals ended that December; although he stayed on as adirector, he was now free to devote all his time, or nearly allof it, to D. & R. In February, 1956, he and Clapp went toIran. “Before then, I blush to say, I had never heard ofKhuzistan,” Lilienthal told me. “I’ve learned a lot about it sincethen. It was the heart of the Old Testament Elamite kingdomand later of the Persian Empire. The ruins of Persepolis arenot far away, and those of Susa, where King Darius had hiswinter palace, are in the very center of Khuzistan. In ancienttimes, the whole region had an extensive water-conservationsystem—you can still find the remains of canals that wereprobably built by Darius twenty-five hundred years ago—butafter the decline of the Persian Empire the water system wasruined by invasion and neglect. Lord Curzon described whatthe Khuzistan uplands looked like a century ago—‘a desert overwhich the eye may roam unarrested for miles.’ It was that waywhen we got there. Nowadays, Khuzistan is one of the world’srichest oil fields—the famous Abadan refinery is at its southerntip—but the inhabitants, two and a half million of them, haven’tbenefited from that. The rivers have flowed unused, thefabulously rich soil has lain fallow, and all but a tiny fraction ofthe people have continued to live in desperate poverty. WhenClapp and I first saw the place, we were appalled. Still, for twoold T.V.A. hands like us, it was a dream; it was simply cryingout for development. We looked for sites for dams, likely spotsto hunt for minerals and make soil-fertility studies, and so on.
We saw flares of natural gas rising from oil fields. That waswaste, and it suggested petrochemical plants, to use the gas formaking fertilizer and plastics. In eight days we’d roughed out aplan, and in about two weeks D. & R. had signed a five-yearcontract with the Iranian government.
“That was only the beginning. Bill Voorduin, our chiefengineer, flew out there and spotted a wonderful dam site at aplace just a few miles from the ruins of Susa—a narrowcanyon with walls that rise almost vertically from the bed of theDez River. We found we were going to have to manage theproject as well as advise on it, and so our next job was liningup our managerial group. To give you some idea of the size ofthe project, right now there are about seven hundred peopleworking on it at the professional level—a hundred Americans,three hundred Iranians, and three hundred others, mostlyEuropeans, who work directly for firms under subcontracts.
Besides that, there are about forty-seven hundred Iranianlaborers. Over five thousand people, all told. The entire planincludes fourteen dams, on five different rivers, and will takemany years to finish. D. & R. has just completed its firstcontract, for five years, and signed a new one, for a year anda half, with option to renew for another five years. Quite a bithas been accomplished already. Take the first dam—the Dezone. It’s to be six hundred and twenty feet high, or more thanhalf again as high as the Aswan, in Egypt, and it will eventuallyirrigate three hundred and sixty thousand acres and generatefive hundred and twenty thousand kilowatts of electricity. Itshould be finished early in 1963. Meanwhile, a sugarplantation—the first in Khuzistan in twenty-five centuries—hasbeen started, with irrigation by pumped water; it should yieldits first crop this summer, and a sugar refinery will be readyby the time the sugar is. Another thing: eventually the regionwill supply its own electric power from the dams, but for theinterim period a high-tension line, the first anywhere in Iran,has been put in over the seventy-two miles from Abadan toAhwaz—a city of a hundred and twenty thousand thatpreviously had no power source except half a dozen littlediesels, which seldom worked.”
While the Iranian project was proceeding, D. & R. was alsobusy lining up and carrying out its programs for Italy,Colombia, Ghana, the Ivory Coast, and Puerto Rico, as well asprograms for private business groups in Chile and thePhilippines. A job that D. & R. had just taken on for theUnited States Army Corps of Engineers excited Lilienthalenormously—an investigation of the economic impact of powerfrom a proposed dam on the Alaskan sector of the Yukon,which he described as “the river with the greatest hydroelectricpotential remaining on this continent.” Meanwhile, Lazard Frèresretained its financial interest in the firm and now very happilycollected its share of a substantial annual profit, and Lilienthalhappily took to teasing Meyer about his former skepticism as toD. & R. financial prospects.
Lilienthal’s new career had meant a highly peripatetic life bothfor him and for Mrs. Lilienthal. He showed me hisforeign-travel log for 1960, which he said was a fairly typicalyear, and it read as follows:
January 23-March 26: Honolulu, Tokyo, Manila; Iligan, Mindanao;Manila, Bangkok, Siemreap, Bangkok; Tehran, Ahwaz, Andimeshk, Ahwaz,Tehran; Geneva, Brussels, Madrid; home.
October 11-17: Buenos Aires; Patagonia; home.
November 18-December 5: London, Tehran, Rome, Milan, Paris, home.
Then he went and got the volume of his journal that relatesto those trips. Turning to the pages on his stay in Iran earlylast spring, I was particularly struck by a few excerpts:
Ahwaz, March 5: The cry of the Arab women as the Shah’s big blackChrysler passed them, a solid row along the road from the airport, mademe think of the rebel yell; then I recognized it: it was the Indian yelp, thekind we used to make as kids, moving our hand over our mouths to givethat undulating wail.
Ahwaz, March 11: Our experience in the villagers’ huts on Wednesdaythrew me into a deep pit. I hovered between despair—which is an emotionI consider a sin—and anger, which doesn’t do much good, I suppose.
Andimeshk, March 9: … We have travelled many miles, through dust,mudholes where we got stuck fast, and some of the roughest “roads” Ihave ever known—and we also travelled back to the ninth century, andearlier, visiting villages and going into mud “homes” quite unbelievable—andunforgettable forever and ever. As the Biblical oath has it: Let my righthand wither if I ever forget how some of the most attractive of my fellowhuman beings live—are living tonight, only a few kilometres from here,where we visited them this afternoon.…And yet I am as sure as I am writing these notes that the Ghebli area,of only 45,000 acres, swallowed in the vastness of the Khuzistan, willbecome as well known as, say, the community of Tupelo … became, orNew Harmony or Salt Lake City when it was founded by a handful ofdedicated men in a pass of the great Rockies.
The afternoon shadows were getting long on Battle Road, andit was time for me to be going. Lilienthal walked out to my carwith me, and on the way I asked him whether he ever missedthe rough-and-tumble, and the limelight, of being perhaps themost controversial man in Washington. He grinned, and said,“Sure.” When we reached the car, he went on, “I neverintended to be especially combative, in Washington or in theTennessee Valley. It was just that people kept disagreeing withme. But, all right, I wouldn’t have put myself in controversialsituations so much if I hadn’t wanted to. I guess I wascombative. When I was a kid, I was interested in boxing. Athigh school—in Michigan City, Indiana—I boxed a lot with acousin of mine, and while I was in college, at DePauw, incentral Indiana, I took to boxing during the summers with aman who had been a professional light-heavyweight. TheTacoma Tiger, he’d been called. Working out with him was achallenge. If I made a mistake, I’d be on the floor. I wantedjust once to land on him good. It was my ambition. I neverdid, of course, but I got to be a fairly good boxer. I becameboxing coach at DePauw while I was an undergraduate. Lateron, at Harvard Law, I didn’t have time to keep it up, and Inever boxed seriously again. But I don’t think that for meboxing was an expression of combativeness for its own sake. Ithink I considered competence at defending yourself a means ofpreserving your personal independence. I learned that from myfather. ‘Be your own man,’ he used to say. He’d come fromAustria-Hungary, the part that’s now eastern Czechoslovakia, inthe eighteen-eighties, when he was about twenty, and he spenthis adult life as a storekeeper in various Middle Western towns:
Morton, Illinois, where I was born; Valparaiso, Indiana;Springfield, Missouri; Michigan City and, later, Winamac, Indiana.
He had very pale-blue eyes that reflected the insides of him.
You could tell by looking at him that he wouldn’t tradeindependence for security. He didn’t know how to dissemble,and wouldn’t have wanted to if he had known how. Well, toget back to my being controversial, or combative, or whateveryou call it, in Washington—yes, there’s something missing whenyou don’t have a McKellar laying it on the line any more. Themoral equivalent of that for me now is taking on challenges,different kinds of McKellars or Tacoma Tigers, maybe—theMinerals & Chemicals thing, the D. & R. thing—and trying tomeet them.”
I revisited Lilienthal in early summer, 1968, this time at D. &R.’s third home office, a suite with a splendid harbor view at IWhitehall Street. Both D. & R. and he had moved along in theinterim. In Khuzistan, the Dez Dam had been completed onschedule; water impounding had begun in November, 1962, thefirst power had been delivered in May, 1963, and the regionwas now not only supplying its own power but producingenough surplus to attract foreign industry. Meanwhile,agriculture in the once-barren region was flourishing as a resultof irrigation made possible by the dam, and, asLilienthal—sixty-eight now, and as combative as ever—put it,“The gloomy economists have to be gloomy about some otherunderdeveloped country.” D. & R. had just signed a newfive-year contract with Iran to carry on the work. Otherwise,the firm had expanded its clientele to include fourteencountries; its most controversial undertaking was in Vietnam,where, under contract with the United States government, itwas cooperating with a similar group of South Vietnamese inworking up plans for the postwar development of the MekongValley. (This assignment had led to criticism of Lilienthal bythose who took it to imply that he supported the war; in fact,he told me, he regarded the war as the disastrous outcome ofa series of “horrible miscalculations,” and the planning ofpostwar resources development as a separate matter. It wasclear enough, nevertheless, that the criticism hurt. At the sametime, D. & R. was widening its horizons by beginning to move,unexpectedly, into domestic urban development, having beenengaged by private foundation-sponsored groups in QueensCounty, New York and Oakland County, Michigan to seewhether the T.V.A. approach might have some value in dealingwith those modern deserts, the slums. “Just pretend this isZambia and tell us what you would do,” these groups had said,in effect, to D. & R.—a wildly imaginative idea, surely, theusefulness of which remained to be proved.
As for D. & R. itself and its place in American business,Lilienthal recounted that since I had seen him it had expandedto the extent of opening a second permanent office on theWest Coast, had considerably increased its profits, and becomeessentially employee-owned, with Lazard retaining only a tokeninterest. Most encouraging of all, at a time when old-linebusiness was having serious recruitment problems because itsobsession with profit was repelling high-minded youth, D. & R.
found that its idealistic objectives made it a magnet for themost promising new graduates. And as a result of all thesethings, Lillienthal could at last say what he had not been ableto say on the earlier occasion—that private enterprise was nowaffording him more satisfaction than he had ever derived frompublic service.
Is D. & R., then, a prototype of the free enterprise of thefuture, accountable half to its stockholders and half to the restof humanity? If so, then the irony is complete, and Lilienthal, ofall people, ends up as the prototypical businessman.
* For a detailed discussion of stock options, see p. 101.
* This part of Lilienthal’s journal was eventually published, in 1966.
A FEW YEARS AGO, a European diplomat was quoted in theTimes as saying, “The American economy has become so bigthat it is beyond the imagination to comprehend. But now ontop of size you are getting rapid growth as well. It is asituation of fundamental power unequalled in the history of theworld.” At about the same time, A. A. Berle wrote, in a studyof corporate power, that the five hundred or so corporationsthat dominate that economy “represent a concentration ofpower over economics which makes the medieval feudal systemlook like a Sunday-school party.” As for the power within thosecorporations, it clearly rests, for all practical purposes, with theirdirectors and their professional managers (often not substantialowners), who, Berle goes on to suggest in the same essay,sometimes constitute a self-perpetuating oligarchy. Mostfair-minded observers these days seem to feel that thestewardship of the oligarchs, from a social point of view, isn’tanything like as bad as it might be, and in many cases ispretty good, yet, however that may be, the ultimate powertheoretically does not reside in them at all. According to thecorporate form of organization, it resides in the stockholders, ofwhom, in United States business enterprises of all sizes anddescriptions, there are more than twenty million. Even thoughthe courts have repeatedly ruled that a director does not haveto follow stockholder instructions, any more than acongressman has to follow the instructions of his constituents,stockholders nevertheless do elect directors, on the logical, if notexactly democratic, basis of one share, one vote. Thestockholders are deprived of their real power by a number offactors, among which are their indifference to it in times ofrising profits and dividends, their ignorance of corporate affairs,and their sheer numbers. One way or another, they vote themanagement slate, and the results of most director electionshave a certain Russian ring—ninety-nine per cent or more ofthe votes cast in favor. The chief, and in many cases the only,occasion when stockholders make their presence felt bymanagement is at the annual meeting. Company annualmeetings are customarily held in the spring, and one spring—itwas that of 1966—I made the rounds of a few of them to geta line on what the theoretical holders of all that feudal powerhad to say for themselves, and also on the state of theirrelations with their elected directors.
What particularly commended the 1966 season to me wasthat it promised to be a particularly lively one. Various reportsof a new “hard-line approach” by company managements tostockholders had appeared in the press. (I was charmed by thenotion of a candidate for office announcing his new hard-lineapproach to voters right before an election.) The newapproach, it was reported, was the upshot of events at theprevious year’s meetings, where a new high in stockholderunruliness was reached. The chairman of the CommunicationsSatellite Corporation was forced to call on guards to eject bodilytwo badgering stockholders at his company’s meeting, inWashington. Harland C. Forbes, who was then the chairman ofConsolidated Edison, ordered one heckler off the premises inNew York, and, in Philadelphia, American Telephone &Telegraph Chairman Frederick R. Kappel was goaded intoannouncing abruptly, “This meeting is not being run byRobert’s [Rules of Order]. It’s being run by me.” (Theexecutive director of the American Society of CorporateSecretaries later explained that precise application of Robert’srules would have had the effect not of increasing thestockholders’ freedom of speech but, rather, of restricting it. Mr.
Kappel, the secretary implied, had merely been protectingstockholders from parliamentary tyranny.) In Schenectady,Gerald L. Phillippe, chairman of General Electric, after severalhours of fencing with stockholders, summed up his new hardline by saying, “I should like it to be clear that next year, andin the years to come, the chair may well adopt a morerigorous attitude.” According to Business Week, the GeneralElectric management then assigned a special task force to thejob of seeing what could be done about cracking down onhecklers by changing the annual-meeting pattern, and early in1966 the bible of management, the Harvard Business Review,entered the lists with an article by O. Glenn Saxon, Jr., thehead of a company specializing in investor services tomanagement, in which he recommended crisply that thechairmen of annual meetings “recognize the authority inherentin the role of the chair, and resolve to use it appropriately.”
Apparently, the theoretical holders of fundamental powerunequalled in the history of the world were about to be put intheir place.
ONE thing I couldn’t help noticing as I went over the scheduleof the year’s leading meetings was a trend away from holdingthem in or near New York. Invariably, the official reason givenwas that the move would accommodate stockholders from otherareas who had seldom, if ever, been able to attend in the past;however, most of the noisiest dissident stockholders seem to bebased in the New York area, and the moves were taking placein the year of the new hard line, so I found the likelihood of arelationship between these two facts by no means remote.
United States Steel holders, for example, were to meet inCleveland, making their second foray outside their company’snominal home state of New Jersey since its formation, in 1901.
General Electric was going outside New York State for the thirdtime in recent years—and going all the way to Georgia, a statein which management appeared to have suddenly discoveredfifty-six hundred stockholders (or a bit more than one per centof the firm’s total roll) who were badly in need of a chance toattend an annual meeting. The biggest company of them all,American Telephone & Telegraph, had chosen Detroit, whichwas its third site outside New York City in its eighty-one-yearhistory, the second having been Philadelphia, where the 1965session was held.
To open my own meeting-going season, I tracked A.T.& T. toDetroit. Leafing through some papers on the plane going outthere, I learned that the number of A.T. & T. stockholders hadincreased to an all-time record of almost three million, and Ifell to wondering what would happen in the unlikely event thatall of them, or even half of them, appeared in Detroit anddemanded seats at the meeting. At any rate, each one of themhad received by mail, a few weeks earlier, a notice of themeeting along with a formal invitation to attend, and it seemedto me almost certain that American industry had achievedanother “first”—the first time almost three million individualinvitations had ever been mailed out to any event of any kindanywhere. My fears on the first score were put to rest when Igot to Cobo Hall, a huge riverfront auditorium, where themeeting was to take place. The hall was far from filled; theYankees in their better days would have been disgusted withsuch a turnout on any weekday afternoon. (The papers nextday said the attendance was four thousand and sixteen.)Looking around, I noticed in the crowd several families withsmall children, one woman in a wheelchair, one man with abeard, and just two Negro stockholders—the last observationsuggesting that the trumpeters of “people’s capitalism” mightwell do some coordinating with the civil-rights movement. Theannounced time of the meeting was one-thirty, and ChairmanKappel entered on the dot and marched to a reading stand onthe platform; the eighteen other A.T. & T. directors trooped toa row of seats just behind him, and Mr. Kappel gavelled themeeting to order.
From my reading and from annual meetings that I’d attendedin past years, I knew that the meetings of the biggestcompanies are usually marked by the presence of so-calledprofessional stockholders—persons who make a full-timeoccupation of buying stock in companies or obtaining theproxies of other stockholders, then informing themselves moreor less intimately about the corporations’ affairs and attendingannual meetings to raise questions or propose resolutions—andthat the most celebrated members of this breed were Mrs.
Wilma Soss, of New York, who heads an organization ofwomen stockholders and votes the proxies of its members aswell as her own shares, and Lewis D. Gilbert, also of NewYork, who represents his own holdings and those of hisfamily—a considerable total. Something I did not know, andlearned at the A.T. & T. meeting (and at others I attendedsubsequently), was that, apart from the prepared speeches ofmanagement, a good many big-company meetings really consistof a dialogue—in some cases it’s more of a duel—between thechairman and the few professional stockholders. Thecontributions of non-professionals run strongly to ill-informed ortame questions and windy encomiums of management, andthus the task of making cogent criticisms or askingembarrassing questions falls to the professionals. Though largelyself-appointed, they become, by default, the sole representativesof a huge constituency that may badly need representing. Someof them are not very good representatives, and a few are sobad that their conduct raises a problem in American manners;these few repeatedly say things at annual meetings—boorish,silly, insulting, or abusive things—that are apparently permissibleby corporate rules but are certainly impermissible bydrawing-room rules, and sometimes succeed in giving theannual meetings of mighty companies the general air ofbarnyard squabbles. Mrs. Soss, a former public-relations womanwho has been a tireless professional stockholder since 1947, isusually a good many cuts above this level. True, she is notbeyond playing to the gallery by wearing bizarre costumes tomeetings; she tries, with occasional success, to taunt recalcitrantchairmen into throwing her out; she is often scolding andoccasionally abusive; and nobody could accuse her of beingunduly concise. I confess that her customary tone and mannerset my teeth on edge, but I can’t help recognizing that,because she does her homework, she usually has a point. Mr.
Gilbert, who has been at it since 1933 and is the dean ofthem all, almost invariably has a point, and by comparison withhis colleagues he is the soul of brevity and punctilio as well asof dedication and diligence. Despised as professionalstockholders are by most company managements, Mrs. Sossand Mr. Gilbert are widely enough recognized to be listed inWho’s Who in America; furthermore, for what satisfaction itmay bring them, they are the nameless Agamemnons andAjaxes, invariably called “individuals,” in some of the prose epicsproduced by the business Establishment itself. (“The greaterportion of the discussion period was taken up by questions andstatements of a few individuals on matters that can scarcely bedeemed relevant.… Two individuals interrupted the openingstatement of the chairman.… The chairman advised theindividuals who had interrupted to choose between ceasing theirinterruption or leaving the meeting.…” So reads, in part, theofficial report of the 1965 A.T. & T. annual meeting.) Andalthough Mr. Saxon’s piece in the Harvard Business Reviewwas entirely about professional stockholders and how to dealwith them, the author’s corporate dignity did not permit him tomention the name of even one of them. Avoiding this wasquite a trick, but Mr. Saxon pulled it off.
Both Mrs. Soss and Mr. Gilbert were present at Cobo Hall.
Indeed, the meeting had barely got under way before Mr.
Gilbert was on his feet complaining that several resolutions hehad asked the company to include in the proxy statement andthe meeting agenda had been omitted from both. Mr. Kappel—astern-looking man with steel-rimmed spectacles, who wasunmistakably cast in the old-fashioned, aloof corporate mold,rather than the new, more permissive one—replied shortly thatthe Gilbert proposals had referred to matters that were notproper for stockholder consideration, and had been submittedtoo late, anyhow. Mr. Kappel then announced that he wasabout to report on company operations, whereupon theeighteen other directors filed off the platform. Evidently, theyhad been there only to be introduced, not to field questionsfrom stockholders. Exactly where they went I don’t know; theyvanished from my field of vision, and I wasn’t enlightenedwhen, later on in the meeting, Mr. Kappel responded to astockholder’s question as to their whereabouts with the laconicstatement “They’re here.” Going it alone, Mr. Kappel said in hisreport that “business is booming, earnings are good, and theprospect ahead is for more of the same,” declared that A.T. &T. was eager for the Federal Communications Commission toget on with its investigation of telephone rates, since thecompany had “no skeletons in the closet,” and then painted apicture of a bright telephonic future in which “picture phones”
will be commonplace and light beams will carry messages.
When Mr. Kappel’s address was over and themanagement-sponsored slate of directors for the coming yearhad been duly nominated, Mrs. Soss rose to make anomination of her own—Dr. Frances Arkin, a psychoanalyst. Inexplanation, Mrs. Soss said that she felt A.T. & T. ought tohave a woman on its board, and that, furthermore, shesometimes felt some of the company’s executives would bebenefited by occasional psychiatric examinations. (This remarkseemed to me gratuitous, but the balance of manners betweenbosses and stockholders was subsequently redressed, at least tomy mind, at another meeting, when the chairman suggestedthat some of his firm’s stockholders ought to see apsychiatrist.) The nomination of Dr. Arkin was seconded by Mr.
Gilbert, although not until Mrs. Soss, who was sitting a coupleof seats from him, had reached over and nudged himvigorously in the ribs. Presently, a professional stockholdernamed Evelyn Y. Davis protested the venue of the meeting,complaining that she had been forced to come all the wayfrom New York by bus. Mrs. Davis, a brunette, was theyoungest and perhaps the best-looking of the professionalstockholders but, on the basis of what I saw at the A.T. & T.
meeting and others, not the best informed or the mosttemperate, serious-minded, or worldly-wise. On this occasion,she was greeted by thunderous boos, and when Mr. Kappelanswered her by saying, “You’re out of order. You’re justtalking to the wind,” he was loudly cheered. It was only thenthat I understood the nature of the advantage that thecompany had gained by moving its meeting away from NewYork: it had not succeeded in shaking off the gadflies, but ithad succeeded in putting them in a climate where they weresubject to the rigors of that great American emotion, regionalpride. A lady in a flowered hat who said she was from DesPlaines, Illinois, emphasized the point by rising to say, “I wishsome of the people here would behave like intelligent adults,rather than two-year-olds.” (Prolonged applause.)Even so, the sniping from the East went on, and bythree-thirty, when the meeting had been in session for twohours, Mr. Kappel was clearly getting testy; he began pacingimpatiently around the platform, and his answers got shorterand shorter. “O.K., O.K.” was all he replied to one complaintthat he was dictatorial. The climax came in a wrangle betweenhim and Mrs. Soss about the fact that A.T. & T., although ithad listed the business affiliations of its nominees for director ina pamphlet that was handed out at the meeting, had failed tolist them in the material mailed out to the stockholders, theoverwhelming majority of whom were not at the meeting andhad done their voting by proxy. Most other big companiesmake such disclosures in their mailed proxy statements, so thestockholders were apparently entitled to a reasonableexplanation of why A.T. & T. had failed to do so, butsomewhere along the way reason was left behind. As theexchange progressed, Mrs. Soss adopted a scolding tone andMr. Kappel an icy one; as for the crowd, it was having a finetime booing the Christian, if that is what Mrs. Soss represented,and cheering the lion, if that is what Mr. Kappel represented.
“I can’t hear you, sir,” Mrs. Soss said at one point. “Well, ifyou’d just listen instead of talking—” Mr. Kappel returned. ThenMrs. Soss said something I didn’t catch, and it must have beena telling bit of chairman-baiting, because Mr. Kappel’s mannerchanged completely, from ice to fire; he began shaking hisfinger and saying he wouldn’t stand for any more abuse, andthe floor microphone that Mrs. Soss had been using wasabruptly turned off. Followed at a distance of ten or fifteen feetby a uniformed security guard, and to the accompaniment ofdeafening booing and stamping, Mrs. Soss marched up the aisleand took a stand in front of the platform, facing Mr. Kappel,who informed her that he knew she wanted him to have herthrown out and that he declined to comply.
Eventually, Mrs. Soss went back to her seat and everybodycalmed down. The rest of the meeting, given over largely toquestions and comments from amateur stockholders, ratherthan professional ones, was certainly less lively than what hadgone before, and not noticeably higher in intellectual content.
Stockholders from Grand Rapids, Detroit, and Ann Arbor allexpressed the view that it would be best to let the directorsrun the company, although the Grand Rapids man objectedmildly that the “Bell Telephone Hour” couldn’t be received ontelevision in his locality anymore. A man from Pleasant Ridge,Michigan, spoke up for retired stockholders who would like A.T.
& T. to plow less of its earnings back into expansion, so that itcould pay higher dividends. A stockholder from rural Louisianastated that when he picked up his telephone lately, the operatordidn’t answer for five or ten minutes. “Ah brang it to yourattention,” the Louisiana man said, and Mr. Kappel promised tohave somebody look into the matter. Mrs. Davis raised acomplaint about A.T. & T.’s contributions to charity, giving Mr.
Kappel the opportunity to reply that he was glad the worldcontained people more charitable than she. (Tax-exemptapplause.) A Detroit man said, “I hope you won’t let the abuseyou’ve been subjected to by a few malcontents keep you frombringing the meeting back to the great Midwest again.” It wasannounced that Dr. Arkin had been defeated for a seat on theboard, since she had received a vote of only 19,106 sharesagainst some four hundred million, proxy votes included, foreach candidate on the management slate. (By approving themanagement slate, a proxy voter can, in effect, oppose a floornomination, even though he knows nothing about it.) And thatwas how the 1966 annual meeting of the world’s largestcompany went—or how it went until five-thirty, when all but afew hundred stockholders had left, and when I headed for theairport to catch a plane back to New York.
THE A.T. & T. meeting left me in a thoughtful mood. Annualmeetings, I reflected, can be times to try the soul of anadmirer of representative democratic government, especiallywhen he finds himself guiltily sympathizing with the chairmanwho is being badgered from the floor. The professionalstockholders, in their wilder moments, are management’s secretweapon; a Mrs. Soss and a Mrs. Davis at their most stridentcould have made Commodore Vanderbilt and Pierpont Morganseem like affable old gentlemen, and they can make a latter-daymagnate like Mr. Kappel seem like a henpecked husband, if notactually a champion of stockholders’ rights. At such moments,the professional stockholders become, from a practicalstandpoint, enemies of intelligent dissent. On the other hand, Ithought, they deserve sympathy, too, whether or not onebelieves they have right on their side, because they are in theposition of representing a constituency that doesn’t want to berepresented. It’s hard to imagine anyone more reluctant toclaim his democratic rights, or more suspicious of anyone whotries to claim them for him, than a dividend-fattenedstockholder—and, of course, most stockholders are thoroughlydividend-fattened these days. Berle speaks of the estate ofstockholding as being by its nature “passive-receptive,” ratherthan “managing and creating;” most of the A.T. & T.
stockholders in Detroit, it seemed to me, were so deeplydevoted to the notion of the company as Santa Claus that theywent beyond passive receptivity to active cupboard love. Andthe professional stockholders, I felt, had taken on anassignment almost as thankless as that of recruiting for theYoung Communist League among the junior executives of theChase Manhattan Bank.
In view of Chairman Phillippe’s warning to General Electricstockholders at Schenectady in 1965, and of the report aboutthe company’s hard-line task force, it was with a sense ofbeing engaged in hot pursuit that I boarded a southboundPullman for the General Electric annual meeting. This one washeld in Atlanta’s Municipal Auditorium, a snappy hall, the rearof which was brightened by an interior garden complete withtrees and a lawn, and in spite of the fact that it was held ona languorous, rainy Southern spring morning, more than athousand G.E. stockholders turned out. As far as I could see,three of them were Negroes, and it was not long before I sawthat another of them was Mrs. Soss.
However exasperated he may have become the previous yearin Schenectady, Mr. Phillippe, who also conducted the 1966meeting, was in perfect control of himself and of the situationthis time around. Whether he was expatiating on the wondersof G.E.’s balance sheet and its laboratory discoveries or sparringwith the professional stockholders, he spoke in the samesingsong way, delicately treading the thin line between patient,careful exposition and irony. Mr. Saxon, in his HarvardBusiness Review article, had written, “Top executives arefinding it necessary to learn how to lessen the adverse impactof the few disrupters on the majority of shareowners, whilesimultaneously enhancing the positive effects of the good thingswhich do take place in the annual meeting,” and, havinglearned sometime earlier that the same Mr. Saxon had beenengaged by G.E. as an adviser on stockholder relations, Icouldn’t help suspecting that Mr. Philippe’s performance was ademonstration of Saxonism in action. The professionalstockholders, for their part, responded by adopting precisely thesame ambiguous style, and the resulting dialogue had thegeneral air of a conversation between two people who havequarrelled and then decided, not quite wholeheartedly, to makeit up. (The professional stockholders might have demanded toknow how much money G.E. had spent in the interest ofkeeping them under control, but they missed the chance.) Oneof the exchanges in this vein achieved a touch of wit. Mrs.
Soss, speaking in her sweetest tone, called attention to the factthat one of the board-of-directors candidates—Frederick L.
Hovde, President of Purdue University and former chairman ofthe Army Scientific Advisory Panel—owned only ten shares ofG.E. stock, and said she felt that the board should be madeup of more substantial holders, whereupon Mr. Philippe pointedout, just as sweetly, that the company had many thousands ofholders of ten or fewer shares, Mrs. Soss among them, andsuggested that perhaps these small holders were deserving ofrepresentation on the board by one of their number. Mrs. Sosshad to concede a fine stroke of chairmanship, and she did. Onanother matter, although decorum was stringently maintained byboth sides, outward accord was less complete. Severalstockholders, Mrs. Soss among them, had formally proposedthat the company adopt for its director elections the systemcalled cumulative voting, under which a stockholder mayconcentrate all the votes he is entitled to on a single candidaterather than spread them over the whole slate, and whichtherefore gives a minority group of stockholders a much betterchance of electing one representative to the board. Cumulativevoting, though a subject of controversy in big-business circles,for obvious reasons, is nevertheless a perfectly respectable idea;indeed, it is mandatory for companies incorporated in morethan twenty states, and it is used by some four hundredcompanies listed on the New York Stock Exchange.
Nevertheless, Mr. Phillippe did not find it necessary to answerMrs. Soss’s argument for cumulative voting; he chose instead tostand on a brief company statement on this subject that hadbeen previously mailed out to stockholders, the main point ofwhich was that the presence on the G.E. board, as a result ofcumulative voting, of representatives of special-interest groupsmight have a “divisive and disruptive effect.” Of course, Mr.
Phillippe did not say he knew, as he doubtless did know, thatthe company had in hand more than enough proxies to defeatthe proposal.
Some companies, like some animals, have their private, highlyspecialized gadflies, who harass them and nobody else, andGeneral Electric is one. In this instance, the gadfly was Louis A.
Brusati, of Chicago, who at the company’s meetings over thepast thirteen years had advanced thirty-one proposals, all ofwhich had been defeated by a vote of at least ninety-seven percent to three per cent. In Atlanta, Mr. Brusati, a gray-hairedman built like a football player, was at it again—not withproposals this time but with questions. For one thing, hewanted to know why Mr. Phillippe’s personal holdings of G.E.
stock, listed in the proxy statement, now were four hundredand twenty-three shares fewer than they had been a year ago.
Mr. Phillippe replied that the difference represented shares thathe had contributed to family trust funds, and added, mildly butwith emphasis, “I could say it’s none of your business. I believeI have a right to the privacy of my affairs.” There was morereason for the mildness than for the emphasis, as Mr. Brusatidid not fail to point out, in an impeccably unemotionalmonotone; many of Mr. Phillippe’s shares had been acquiredunder options at preferential prices not available to others, and,moreover, the fact that Mr. Phillippe’s precise holdings hadbeen included in the proxy statement clearly showed that in theopinion of the Securities and Exchange Commission his holdingswere Mr. Brusati’s business. Going on to the matter of the feespaid directors, Mr. Brusati elicited from Mr. Phillippe theinformation that over the past seven years these had beenraised from twenty-five hundred dollars per annum first to fivethousand dollars and then to seventy-five hundred. The ensuingdialogue between the two men went like this:
“By the way, who establishes those fees?”
“Those fees are established by the board of directors.”
“The board of directors establish their own fees?”
“Yes.”
“Thank you.”
“Thank you, Mr. Brusati.”
Later on in the morning, there were several lengthy andeloquent orations by stockholders on the virtues of GeneralElectric and of the South, but this rather elegantly ellipticalexchange between Mr. Brusati and Mr. Phillippe stuck in mymind, for it seemed to sum up the spirit of the meeting. Onlyafter adjournment—which came at twelve-thirty, following Mr.
Phillippe’s announcement that the unopposed slate of directorshad been elected and that cumulative voting had lost by 97.51per cent to 2.49 per cent—did I realize that not only had therebeen no stamping, booing, or shouting, as there had been inDetroit, but regional pride had not had to be invoked againstthe professional stockholders. It had been General Electric’s holecard, I felt, but General Electric had won on the board, withoutneeding to turn it up.
EACH meeting I attended had its easily discernible characteristictone, and that of Chas. Pfizer & Co., the diversifiedpharmaceutical and chemical firm, was amicability. Pfizer, whichin previous years had customarily held its annual meeting at itsheadquarters in Brooklyn, reversed the trend by moving thisyear’s meeting right into the lair of the most vocal dissenters,midtown Manhattan, but everything that I saw and heardconvinced me that the motivation behind this move had beennot a brash resolve on the company’s part to beard the lionsin their den but a highly unfashionable desire to get themaximum possible turnout. Pfizer seemed to feel self-confidentenough to meet its stockholders with its guard down. Forinstance, in contrast with the other meetings I attended, nostockholder tickets were collected or credentials checked at theentrance to the Grand Ballroom of the Commodore Hotel,where the Pfizer meeting was held; Fidel Castro himself, whoseoratorical style I have occasionally felt that the professionalstockholders were using as a model, could presumably havewalked in and said whatever he chose. Some seventeenhundred persons, or nearly enough to fill the ballroom, showedup, and all the members of the Pfizer board of directors saton the platform from start to finish and answered anyquestions addressed to them individually.
Speaking, appropriately, with a faint trace of a Brooklynaccent, Chairman John E. McKeen welcomed the stockholdersas “my dear and cherished friends” (I tried to imagine Mr.
Kappel and Mr. Phillippe addressing their stockholders that way,and couldn’t, but then their companies are bigger), and saidthat on the way out everyone present would be given a bigfree-sample kit of Pfizer consumer products, such as Barbasol,Desitin, and Imprévu. Wooed thus by endearments and thepromise of gifts, and further softened up by the report ofPresident John J. Powers, Jr., on current operations (recordsall around) and immediate prospects (more records expected),the most intransigent professional stockholder would have beenhard put to it to mount much of a rebellion at this particularmeeting, and, as it happened, the only professional presentseemed to be John Gilbert, brother of Lewis. (I learned laterthat Lewis Gilbert and Mrs. Davis were in Cleveland that day,attending the U.S. Steel meeting.) John Gilbert is the sort ofprofessional stockholder the Pfizer management deserves, orwould like to think it does. With an easygoing manner and ahabit of punctuating his words with self-deprecating little laughs,he is the most ingratiating gadfly imaginable (or was on thisoccasion; I’m told he isn’t always), and as he ran throughwhat seemed to be the standard Gilbert-family repertoire ofquestions—on the reliability of the firm’s auditors, the salaries ofits officers, the fees of its directors—he seemed almostapologetic that duty called on him to commit the indelicacy ofasking such things. As for the amateur stockholders present,their questions and comments were about like those at theother meetings I’d attended, but this time their attitude towardthe role of the professional stockholder was noticeably different.
Instead of being overwhelmingly opposed, they appeared to besplit; to judge from the volume of clapping and of discreetgroaning, about half of those present considered Gilbert anuisance and half considered him a help. Powers left no doubtabout how he felt; before adjourning the meeting he said,without irony, that he had welcomed Gilbert’s questions, andmade a point of inviting him to come again next year. And,indeed, during the later stages of the Pfizer meeting, whenGilbert, in a conversational way, was praising the company forsome things and criticizing it for others, and the variousmembers of the board were replying to his comments just asinformally, I got for the first time a fleeting sense of genuinecommunication between stockholders and managers.
THE Radio Corporation of America, which had held its last twomeetings far from its New York headquarters—in Los Angelesin 1964, in Chicago in 1965—reserved the current trend evenmore decisively than Pfizer by convening this time in CarnegieHall. The entire orchestra and the two tiers of boxes werecompletely filled with stockholders—about twenty-three hundredof them, of whom a strikingly larger proportion than at any ofmy other meetings was male. Mrs. Soss and Mrs. Davis wereon hand, though, along with Lewis Gilbert and someprofessional stockholders I hadn’t seen before, and, as withPfizer, the company’s whole board of directors sat on theplatform, where the chief centers of attraction in R.C.A.’s casewere David Sarnoff, the company’s seventy-five-year-oldchairman, and his forty-eight-year-old son, Robert W. Sarnoff,who had been its president since the beginning of the year.
For me, two aspects of the R.C.A. meeting stood out: theevident respect, amounting almost to veneration, of thestockholders for their celebrated chairman, and anunaccustomed disposition of the amateur stockholders to speakup for themselves. The elder Mr. Sarnoff, looking hale andready for anything, conducted the meeting, and he and severalother R.C.A. executives gave reports on company operationsand prospects, in the course of which the words “record” and“growth” recurred so monotonously that I, not being an R.C.A.
stockholder, began to nod. I was brought wide awake with ajolt on one occasion, though, when I heard Walter D. Scott,chairman of R.C.A.’s subsidiary the National BroadcastingCompany, say in connection with his network’s televisionprogramming that “creative resources are always running aheadof demand.”
No one objected to that statement or to anything else in theglowing reports, but when they were over the stockholders hadtheir say on other matters. Mr. Gilbert raised some favoritequestions of his about accounting procedures, and arepresentative of R.C.A.’s accountants, Arthur Young & Co.,made replies that seemed to satisfy Mr. Gilbert. A Dickensianelderly lady, who identified herself as Mrs. Martha Brand andsaid she held “many thousands” of shares of R.C.A. stock,expressed the view that the accounting procedures of thecompany should not even be questioned. I have since learnedthat Mrs. Brand is a professional stockholder who is ananomaly within the profession, in that she leans strongly towardthe management view of things. Mr. Gilbert then advanced aproposal for the adoption of cumulative voting, supporting itwith about the same arguments that Mrs. Soss had used atthe G.E. meeting. Mr. Sarnoff opposed the motion, and so didMrs. Brand, who explained that she was sure the presentdirectors always worked tirelessly for the welfare of thecorporation, and added this time that she was the holder of“many, many thousands” of shares. Two or three otherstockholders spoke up in favor of cumulative voting—the onlyoccasion at any meeting on which I saw stockholders not easilyidentifiable as professionals speak in dissent on a matter ofsubstance. (Cumulative voting was defeated, 95.3 per cent to4.7 per cent.) Mrs. Soss, still in as mild a mood as in Atlanta,said she was delighted to see a woman, Mrs. Josephine YoungCase, sitting on the stage as a member of the R.C.A. board,but deplored the fact that Mrs. Case’s principal occupation wasgiven on the proxy statement as “housewife.” Couldn’t awoman who was chairman of the board of Skidmore College atleast be called a “home executive”? Another lady stockholderset off a round of applause by delivering a paean to ChairmanSarnoff, whom she called “the marvellous Cinderella man of thetwentieth century.”
Mrs. Davis—who had earlier objected to the site of themeeting on the ground, which I found dumfounding, thatCarnegie Hall was “too unsophisticated” for R.C.A.—advanced aresolution calling for company action “to insure that hereafterno person shall serve as a director after he shall have attainedthe age of seventy-two.” Even though similar rulings are ineffect in many companies, and even though the proposal, notbeing retroactive, would have no effect upon Mr. Sarnoff’sstatus, it seemed to be aimed at him, and thus Mrs. Davisdemonstrated again her uncanny knack of playing intomanagement’s hands. Nor did she appear to help her cause byputting on a Batman mask (the symbolism of which I didn’tgrasp) when she made it. At all events, the proposal gave riseto several impassioned defenses of Mr. Sarnoff, and one of thespeakers went on to complain bitterly that Mrs. Davis wasinsulting the intelligence of everyone present. At this, theserious-minded Mr. Gilbert leaped up to say, “I quite agreeabout the silliness of her costume, but there is a valid principlein her proposal.” In making this Voltairian distinction, Mr.
Gilbert, to judge from his evident state of agitation, wasachieving a triumph of reason over inclination that was costinghim plenty. Mrs. Davis’s resolution was defeated overwhelmingly;the margin against it served to end the meeting with whatamounted to a rousing vote of confidence in the Cinderellaman.
CLASSIC farce, with elements of slapstick, was the dominantmood of the meeting of the Communications SatelliteCorporation, with which I wound up my meeting-going season.
Comsat is, of course, the glamorous space-age communicationscompany that was set up by the government in 1963 andturned over to public ownership in a celebrated stock sale in1964. Upon arriving at the meeting site—the Shoreham Hotel, inWashington—I was scarcely startled to discover Mrs. Davis, Mrs.
Soss, and Lewis Gilbert among the thousand or so stockholderspresent. Mrs. Davis, decked out in stage makeup, an orangepith helmet, a short red skirt, white boots, and a black sweaterbearing in white letters the legend “I Was Born to Raise Hell,”
had planted herself squarely in front of a battery of televisioncameras. Mrs. Soss, as I had learned by now was her custom,had taken a place at the opposite side of the room from Mrs.
Davis, and this meant that she was now as far as possiblefrom the television cameras. Considering that Mrs. Soss doesnot ordinarily seem to be averse to being photographed, Icould write down this choice of seat only as a hard-wontriumph of conscience akin to Mr. Gilbert’s at Carnegie Hall. Asfor Mr. Gilbert, he took a place not far from Mrs. Soss, andthus, of course, a long way from Mrs. Davis.
Since the previous year, Leo D. Welch, the man who hadconducted the 1965 Comsat meeting with such a firm hand,has been replaced as chairman of the company by JamesMcCormack, a West Point graduate, former Rhodes Scholar,and retired Air Force general with an impeccably polishedmanner, who bears a certain resemblance to the Duke ofWindsor, and Mr. McCormack was conducting this year’ssession. He warmed up with some preliminary remarks in thecourse of which he noted—-smoothly, but not withoutemphasis—that as for the subject of any intervention that astockholder might choose to make, “the field of relevance isquite narrow.” When Mr. McCormack had finished his warmup,Mrs. Soss made a brief speech that may or may not havecome within the field of relevance; I missed most of it, becausethe floor microphone supplied to her wasn’t working right. Mrs.
Davis then claimed the floor, and her mike was working all toowell; as the cameras ground, she launched into an earsplittingtirade against the company and its directors because there hadbeen a special door to the meeting room reserved for theentrance of “distinguished guests.” Mrs. Davis, in a good manywords, said she considered this procedure undemocratic. “Weapologize, and when you go out, please go by any door youwant,” Mr. McCormack said, but Mrs. Davis, clearlyunappeased, went on speaking. And now the mood of farcewas heightened when it became clear that the Soss-Gilbertfaction had decided to abandon all efforts to keep ranks closedwith Mrs. Davis. Near the height of her oration, Mr. Gilbert,looking as outraged as a boy whose ball game is being spoiledby a player who doesn’t know the rules or care about thegame, got up and began shouting, “Point of order! Point oforder!” But Mr. McCormack spurned this offer of parliamentaryhelp; he ruled Mr. Gilbert’s point of order out of order, andbade Mrs. Davis proceed. I had no trouble deducing why hedid this. There were unmistakable signs that he, unlike anyother corporate chairman I had seen in action, was enjoyingevery minute of the goings on. Through most of the meeting,and especially when the professional stockholders had the floor,Mr. McCormack wore the dreamy smile of a wholly bemusedspectator.
Eventually, Mrs. Davis’s speech built up to a peak of bothvolume and content at which she began making specificallegations against individual Comsat directors, and at this pointthree security guards—two beefy men and a determined-lookingwoman, all dressed in gaudy bottle-green uniforms that mighthave been costumes for “The Pirates of Penzance”—appeared atthe rear, marched with brisk yet stately tread up the centeraisle, and assumed the position of parade rest in the aislewithin handy reach of Mrs. Davis, whereupon she abruptlyconcluded her speech and sat down. “All right,” Mr.
McCormack said, still grinning. “Everything’s cool now.”
The guards retired, and the meeting proceeded. Mr.
McCormack and the Comsat president, Joseph V. Charyk, gavethe sort of glowing report on the company that I had grownaccustomed to, Mr. McCormack going so far as to say thatComsat might start showing its first profit the following yearrather than in 1969, as originally forecast. (It did.) Mr. Gilbertasked what fee, apart from his regular salary, Mr. McCormackreceived for attending directors’ meetings. Mr. McCormackreplied that he got no fee, and when Mr. Gilbert said, “I’mglad you get nothing, I approve of that,” everybody laughedand Mr. McCormack grinned more broadly than ever. (Mr.
Gilbert was clearly trying to make what he considered to be aserious point, but this didn’t seem to be the day for that sortof thing.) Mrs. Soss took a dig at Mrs. Davis by sayingpointedly that anyone who opposed Mr. McCormack ascompany chairman was “lacking in perspicacity;” she did note,however, that she couldn’t quite bring herself to vote for Mr.
Welch, the former chairman, who was now a candidate for theboard, inasmuch as he had ordered her thrown out last year.
A peppy old gentleman said that he thought the company wasdoing fine and everyone should have faith in it. Once, whenMr. Gilbert said something that Mrs. Davis didn’t like and Mrs.
Davis, without waiting to be recognized, began shouting herobjection across the room, Mr. McCormack gave a shortirrepressible giggle. That single falsetto syllable, magnificentlyamplified by the chairman’s microphone, was the motif of theComsat meeting.
On the plane returning from Washington, as I was musing onthe meetings I had attended, it occurred to me that if therehad been no professional stockholders at them I wouldprobably have learned almost as much as I did about thecompanies’ affairs but that I would have learned a good dealless about their chief executives’ personalities. It had, after all,been the questions, interruptions, and speeches of theprofessional stockholders that brought the companies to life, ina sense, by forcing each chairman to shed his officialportrait-by-Bachrach mask and engage in a human relationship.
More often than not, this had been the hardly satisfactoryhuman relationship of nagger and nagged, but anyone lookingfor humanity in high corporate affairs can’t afford to pick andchoose. Still, some doubts remained. Being thirty thousand feetup in the air is conducive to taking the broader view, and,doing so as we winged over Philadelphia, I concluded that, onthe basis of what I had seen and heard, both companymanagements and stockholders might well consider a lessonKing Lear learned—that when the role of dissenter is left to theFool, there may be trouble ahead for everybody.
AMONG THE THOUSANDS of young scientists who were doingvery well in the research-and-development programs ofAmerican companies in the fall of 1962 was one named DonaldW. Wohlgemuth, who was working for the B. F. GoodrichCompany, in Akron, Ohio. A 1954 graduate of the University ofMichigan, where he had taken the degree of Bachelor ofScience in chemical engineering, he had gone directly from theuniversity to a job in the chemical laboratories of Goodrich, ata starting salary of three hundred and sixty-five dollars amonth. Since then, except for two years spent in the Army, hehad worked continuously for Goodrich, in various engineeringand research capacities, and had received a total of fifteensalary increases over the six and a half years. In November,1962, as he approached his thirty-first birthday, he was earning$10,644 a year. A tall, self-contained, serious-looking man ofGerman ancestry, whose horn-rimmed glasses gave him anowlish expression, Wohlgemuth lived in a ranch house inWadsworth, a suburb of Akron, with his wife and theirfifteen-month-old daughter. All in all, he seemed to be theyoung American homme moyen réussi to the point ofboredom. What was decidedly not routine about him, though,was the nature of his job; he was the manager of Goodrich’sdepartment of space-suit engineering, and over the past years,in the process of working his way up to that position, he hadhad a considerable part in the designing and construction ofthe suits worn by our Mercury astronauts on their orbital andsuborbital flights.
Then, in the first week of November, Wohlgemuth got aphone call from an employment agent in New York, whoinformed him that the executives of a large company in Dover,Delaware, were most anxious to talk to him about thepossibility of his taking a job with them. Despite the caller’sreticence—a trait common among employment agents makingfirst approaches to prospective employees—Wohlgemuth instantlyknew the identity of the large company. The International LatexCorporation, which is best known to the public as a maker ofgirdles and brassiéres, but which Wohlgemuth knew to be alsoone of Goodrich’s three major competitors in the space-suitfield, is situated in Dover. He knew, further, that Latex hadrecently been awarded a subcontract, amounting to somethree-quarters of a million dollars, to do research anddevelopment on space suits for the Apollo, orman-on-the-moon, project. As a matter of fact, Latex had wonthis contract in competition with Goodrich, among others, andwas thus for the moment much the hottest company in thespace-suit field. On top of that, Wohlgemuth was somewhatdiscontented with his situation at Goodrich; for one thing, hissalary, however bountiful it might seem to many thirty-year-olds,was considerably below the average for Goodrich employees ofhis rank, and, for another, he had been turned down not longbefore by the company authorities when he asked forair-conditioning or filtering to keep dust out of the plant areaallocated to space-suit work. Accordingly, after makingarrangements by phone with the executives mentioned by theemployment agent—and they did indeed prove to be Latexmen—Wohlgemuth went to Dover the following Sunday.
He stayed there a day and a half, borrowing Monday fromvacation time that was due him from Goodrich, and gettingwhat he subsequently described as “a real red-carpettreatment.” He was taken on a tour of the Latexspace-suit-development facilities by Leonard Shepard, director ofthe company’s Industrial Products Division. He was entertainedat the home of Max Feller, a Latex vice-president. He wasshown the Dover housing situation by another companyexecutive. Finally, before lunch on Monday, he had a talk withall three of the Latex executives, following which—asWohlgemuth later described the scene in court—the three“removed themselves to another room for approximately tenminutes.” When they reappeared, one of them offeredWohlgemuth the position of manager of engineering for theIndustrial Products Division, which included responsibility forspace-suit development, at an annual salary of $13,700, effectiveat the beginning of December. After getting his wife’s approvalby telephone—and it was not hard to get, since she wasoriginally from Baltimore and was delighted at the prospect ofmoving back to her own part of the world—Wohlgemuthaccepted. He flew back to Akron that night. First thing Tuesdaymorning, Wohlgemuth confronted Carl Effler, his immediate bossat Goodrich, with the news that he was quitting at the end ofthe month to take another job.
“Are you kidding?” Effler asked.
“No, I am not,” Wohlgemuth replied.
Following this crisp exchange, which Wohlgemuth laterreported in court, Effler, in the time-honored tradition ofbereaved bosses, grumbled a bit about the difficulty of finding aqualified replacement before the end of the month. Wohlgemuthspent the rest of the day putting his department’s papers inorder and clearing his desk of unfinished business, and thenext morning he went to see Wayne Galloway, a Goodrichspace-suit executive with whom he had worked closely and hadbeen on the friendliest of terms for a long time; he said laterthat he felt he owed it to Galloway “to explain to him my sideof the picture” in person, even though at the moment he wasnot under Galloway’s supervision in the company chain ofcommand. Wohlgemuth began this interview by rathermelodramatically handing Galloway a lapel pin in the form of aMercury capsule, which had been awarded to him for his workon the Mercury space suits; now, he said, he felt he was nolonger entitled to wear it. Why, then, Galloway asked, was heleaving? Simple enough, Wohlgemuth said—he considered theLatex offer a step up both in salary and in responsibility.
Galloway replied that in making the move Wohlgemuth wouldbe taking to Latex certain things that did not belong tohim—specifically, knowledge of the processes that Goodrich usedin making space suits. In the course of the conversation,Wohlgemuth asked Galloway what he would do if he were toreceive a similar offer. Galloway replied that he didn’t know; forthat matter, he added, he didn’t know what he would do if hewere approached by a group who had a foolproof plan forrobbing a bank. Wohlgemuth had to base his decision onloyalty and ethics, Galloway said—a remark that Wohlgemuthtook as an accusation of bad faith. He lost his temper, he laterexplained, and gave Galloway a rash answer. “Loyalty andethics have their price, and International Latex has paid it,” hesaid.
After that, the fat was in the fire. Later in the morning, Efflercalled Wohlgemuth into his office and told him it had beendecided that he should leave the Goodrich premises as soon aspossible, staying around only long enough to make a list ofprojects that were pending and to go through certain otherformalities. In mid-afternoon, while Wohlgemuth was occupiedwith these tasks, Galloway called him and told him that theGoodrich legal department wanted to see him. In the legaldepartment, he was asked whether he intended to useconfidential information belonging to Goodrich on behalf ofLatex. According to the subsequent affidavit of a Goodrichlawyer, he replied—again rashly—“How are you going to proveit?” He was then advised that he was not legally free to makethe move to Latex. While he was not bound to Goodrich bythe kind of contract, common in American industry, in whichan employee agrees not to do similar work for any competingcompany for a stated period of time, he had, on his returnfrom the Army, signed a routine paper agreeing “to keepconfidential all information, records, and documents of thecompany of which I may have knowledge because of myemployment”—something Wohlgemuth had entirely forgotten untilthe Goodrich lawyer reminded him. Even if he had not madethat agreement, the lawyer told him now, he would beprevented from going to work on space suits for Latex byestablished principles of trade-secrets law. Moreover, if hepersisted in his plan, Goodrich might sue him.
Wohlgemuth returned to his office and put in a call to Feller,the Latex vice-president he had met in Dover. While he waswaiting for the call to be completed, he talked with Effler, whohad come in to see him, and whose attitude toward hisdefection seemed to have stiffened considerably. Wohlgemuthcomplained that he felt at the mercy of Goodrich, which, itseemed to him, was unreasonably blocking his freedom ofaction, and Effler upset him further by saying that what hadhappened during the past forty-eight hours could not beforgotten and might well affect his future with Goodrich.
Wohlgemuth, it appeared, might be sued if he left and scornedif he didn’t leave. When the Dover call came through,Wohlgemuth told Feller that in view of the new situation hewould be unable to go to work for Latex.
That evening, however, Wohlgemuth’s prospects seemed totake a turn for the better. Home in Wadsworth, he called thefamily dentist, and the dentist recommended a local lawyer.
Wohlgemuth told his story to the lawyer, who thereuponconsulted another lawyer by phone. The two counsellors agreedthat Goodrich was probably bluffing and would not really sueWohlgemuth if he went to Latex. The nextmorning—Thursday—officials of Latex called him back to assurehim that their firm would bear his legal expenses in the eventof a lawsuit, and, furthermore, would indemnify him against anysalary losses. Thus emboldened, Wohlgemuth delivered twomessages within the next couple of hours—one in person andone by phone. He told Effler what the two lawyers had toldhim, and he called the legal department to report that he hadnow changed his mind and was going to work at InternationalLatex after all. Later that day, after completing the cleanup jobin his office, he left the Goodrich premises for good, taking withhim no documents.
The following day—Friday—R. G. Jeter, general counsel ofGoodrich, telephoned Emerson P. Barrett, director of industrialrelations for Latex, and spoke of Goodrich’s concern for itstrade secrets if Wohlgemuth went to work there. Barrett repliedthat although “the work for which Wohlgemuth was hired wasdesign and construction of space suits,” Latex was notinterested in learning any Goodrich trade secrets but was “onlyinterested in securing the general professional abilities of Mr.
Wohlgemuth.” That this answer did not satisfy Jeter, orGoodrich, became manifest the following Monday. That evening,while Wohlgemuth was in an Akron restaurant called theBrown Derby, attending a farewell dinner in his honor given byforty or fifty of his friends, a waitress told him that there wasa man outside who wanted to see him. The man was adeputy sheriff of Summit County, of which Akron is the seat,and when Wohlgemuth came out, the man handed him twopapers. One was a summons to appear in the Court ofCommon Pleas on a date a week or so off. The other was acopy of a petition that had been filed in the same court thatday by Goodrich, praying that Wohlgemuth be permanentlyenjoined from, among other things, disclosing to anyunauthorized person any trade secrets belonging to Goodrich,and “performing any work for any corporation … other thanplaintiff, relating to the design, manufacture and/or sale ofhigh-altitude pressure suits, space suits and/or similar protectivegarments.”
THE need for the protection of trade secrets was fullyrecognized in the Middle Ages, when they were so jealouslyguarded by the craft guilds that the guilds’ employees wererigorously prevented from changing jobs. Laissez-faire industrialsociety, since it emphasizes the principle that the individual isentitled to rise in the world by taking the best opportunity heis offered, has been far more lenient about job-jumping, butthe right of an organization to keep its secrets has survived. InAmerican law, the basic commandment on the subject was laiddown by Justice Oliver Wendell Holmes in connection with a1905 Chicago case. Holmes wrote, “The plaintiff has the right tokeep the work which it has done, or paid for doing, to itself.
The fact that others might do similar work, if they wished, doesnot authorize them to steal plaintiff’s.” This admirably downright,if not highly sophisticated, ukase has been cited in almost everytrade-secrets case that has come up since, but over the years,as both scientific research and industrial organization havebecome infinitely more complex, so have the questions of what,exactly, constitutes a trade secret, and what constitutes stealingit. The American Law Institute’s “Restatement of the Law ofTorts,” an authoritative text issued in 1939, grapples manfullywith the first question by stating, or restating, that “a tradesecret may consist of any formula, pattern, device, orcompilation of information which is used in one’s business, andwhich gives him an opportunity to obtain an advantage overcompetitors who do not know or use it.” But in a case heardin 1952 an Ohio court decided that the Arthur Murray methodof teaching dancing, though it was unique and was presumablyhelpful in luring customers away from competitors, was not atrade secret. “All of us have ‘our method’ of doing a millionthings—our method of combing our hair, shining our shoes,mowing our lawn,” the court mused, and concluded that atrade secret must not only be unique and commercially helpfulbut also have inherent value. As for what constitutes thievery oftrade secrets, in a proceeding heard in Michigan in 1939, inwhich the Dutch Cookie Machine Company complained that oneof its former employees was threatening to use its highlyclassified methods to make cookie machines on his own, thetrial court decided that there were no fewer than three secretprocesses by which Dutch Cookie machines were made, andenjoined the former employee from using them in any manner;however, the Michigan Supreme Court, on appeal, found thatthe defendant, although he knew the three secrets, did not planto use them in his own operations, and, accordingly, it reversedthe lower court’s decision and vacated the injunction.
And so on. Outraged dancing teachers, cookie-machinemanufacturers, and others have made their way throughAmerican courts, and the principles of law regarding theprotection of trade secrets have become well established; anydifficulty arises chiefly in the application of these principles toindividual cases. The number of such cases has been risingsharply in recent years, as research and development by privateindustry have expanded, and a good index to the rate of suchexpansion is the fact that eleven and a half billion dollars wasspent in this work in 1962, more than three times the figurefor 1953. No company wants to see the discoveries producedby all that money go out of its doors in the attaché cases, oreven in the heads, of young scientists bound for greenerpastures. In nineteenth-century America, the builder of a bettermousetrap was supposed to have been a cynosure—provided,of course, that the mousetrap was properly patented. In thosedays of comparatively simple technology, patents covered mostproprietary rights in business, so trade-secrets cases were rare.
The better mousetraps of today, however, like the processesinvolved in outfitting a man to go into orbit or to the moon,are often unpatentable.
Since thousands of scientists and billions of dollars might beaffected by the results of the trial of Goodrich v. Wohlgemuth,it naturally attracted an unusual amount of public attention. InAkron, the court proceedings were much discussed both in thelocal paper, the Beacon Journal, and in conversation. Goodrichis an old-line company, with a strong streak of paternalism inits relations with its employees, and with strong feelings aboutwhat it regards as business ethics. “We were exceptionally upsetby what Wohlgemuth did,” a Goodrich executive of longstanding said recently. “In my judgment, the episode causedmore concern to the company than anything that hashappened in years. In fact, in the ninety-three years thatGoodrich has been in business, we had never before entered asuit to restrain a former employee from disclosing trade secrets.
Of course, many employees in sensitive positions have left us.
But in those cases the companies doing the hiring haverecognized their responsibilities. On one occasion, a Goodrichchemist went to work for another company undercircumstances that made it appear to us that he was going touse our methods. We talked to the man, and to his newemployer, too. The upshot was that the competing companynever brought out the product it had hired our man to workon. That was responsible conduct on the part of both employeeand company. As for the Wohlgemuth case, the localcommunity and our employees were a bit hostile toward us atfirst—a big company suing a little guy, and so on. But theygradually came around to our point of view.”
Interest outside Akron, which was evidenced by a small floodof letters of inquiry about the case, addressed to the Goodrichlegal department, made it clear that Goodrich v. Wohlgemuthwas being watched as a bellwether. Some inquiries were fromcompanies that had similar problems, or anticipated havingthem, and a surprising number were from relatives of youngscientists, asking, “Does this mean my boy is stuck in hispresent job for the rest of his life?” In truth, an importantissue was at stake, and pitfalls awaited the judge who heardthe case, no matter which way he decided. On one side wasthe danger that discoveries made in the course of corporateresearch might become unprotectable—a situation that wouldeventually lead to the drying up of private research funds. Onthe other side was the danger that thousands of scientistsmight, through their very ability and ingenuity, find themselvespermanently locked in a deplorable, and possiblyunconstitutional, kind of intellectual servitude—they would bebarred from changing jobs because they knew too much.
THE trial—held in Akron, presided over by Judge Frank H.
Harvey, and conducted, like all proceedings of its type, withouta jury—began on November 26th and continued throughDecember 12th, with a week’s recess in the middle;Wohlgemuth, who was supposed to have started work at Latexon December 3rd, remained in Akron under a voluntaryagreement with the court, and testified extensively in his owndefense. Injunction, the form of relief that was sought byGoodrich and the chief form of relief that is available to anyonewhose secrets have been stolen, is a remedy that originated inRoman law; it was anciently called “interdict,” and is still socalled in Scotland. What Goodrich was asking, in effect, wasthat the court issue a direct order to Wohlgemuth not onlyforbidding him to reveal Goodrich secrets but also forbiddinghim to take employment in any other company’s space-suitdepartment. Any violation of such an order would be contemptof court, punishable by a fine, or imprisonment, or both. Justhow seriously Goodrich viewed the case became clear when itsteam of lawyers proved to be headed by Jeter himself, who, asvice-president, secretary, the company’s ultimate authority onpatent law, general law, employee relations, union relations, andworkmen’s compensation, and Lord High Practically EverythingElse, had not found time to try a case in court himself for tenyears. The chief defense counsel was Richard A. Chenoweth, ofthe Akron law firm of Buckingham, Doolittle & Burroughs,which Latex, though it was not a defendant in the action, hadretained to handle the case, in fulfillment of its promise toWohlgemuth.
From the outset, the two sides recognized that if Goodrichwas to prevail, it had to prove, first, that it possessed tradesecrets; second, that Wohlgemuth also possessed them, and thata substantial peril of disclosure existed; and, third, that it wouldsuffer irreparable injury if injunctive relief was not granted. Onthe first point, Goodrich attorneys, through their questioning ofEffler, Galloway, and one other company employee, set out toestablish that Goodrich had a number of unassailable space-suitsecrets, among them a way of making the hard shell of aspace helmet, a way of making the visor seal, a way of makinga sock ending, a way of making the inner liner of gloves, away of fastening the helmet onto the rest of the suit, and away of applying a wear-resistant material called neoprene totwo-way-stretch fabric. Wohlgemuth, through his counsel’scross-examinations, sought to show that none of theseprocesses were secrets at all; for example, in the case of theneoprene process, which Effler had described as “a very criticaltrade secret” of Goodrich, defense counsel brought out evidencethat a Latex product that is neither secret nor intended to beworn in outer space—the Playtex Golden Girdle—was made oftwo-way-stretch fabric with neoprene applied to it, and, toemphasize the point, Chenoweth introduced a Playtex GoldenGirdle for all to see. Nor did either side neglect to bring intocourt a space suit, in each instance inhabited. The Goodrichsuit, a 1961 model, was intended to demonstrate what thecompany had achieved by means of research—research that itdid not want to see compromised through the loss of itssecrets. The Latex suit, also a 1961 model, was intended toshow that Latex was already ahead of Goodrich in space-suitdevelopment and would therefore have no interest in stealingGoodrich secrets. The Latex suit was particularly bizarre-looking,and the Latex employee who wore it in court looked almostexcruciatingly uncomfortable, as if he were unaccustomed to theair of earth, or of Akron. “His air tubes weren’t hooked up,and he was hot,” the Beacon Journal explained next day. Atany rate, after he had sat suffering for ten or fifteen minuteswhile defense counsel questioned a witness about his costume,he suddenly pointed in an agonized way to his head, and thecourt record of what followed, probably unique in the annals ofjurisprudence, reads like this:
MAN IN THE SPACE SUIT: May I take this off? (Helmet).…THE COURT: All right.
The second element in Goodrich’s burden of proof—thatWohlgemuth was privy to Goodrich secrets—was fairly quicklydealt with, because Wohlgemuth’s lawyers conceded that hardlyanything the company knew about space suits had been keptfrom him; they based their defense on, first, the unquestionedfact that he had taken no papers away with him and, second,the unlikelihood that he would be able to remember the detailsof complex scientific processes, even if he wanted to. On thethird element—the matter of irreparable injury—Jeter pointedout that Goodrich, which had made the first full-pressure flyingsuit in history, for the late Wiley Post’s high-altitude experimentsin 1934, and which had since poured vast sums into space-suitresearch and development, was the unquestioned pioneer andhad up to then been considered the leader in the field; hetried to paint Latex, which had been making full-pressure suitsonly since the mid-fifties, as a parvenu with the nefarious planof cashing in on Goodrich’s years of research by hiringWohlgemuth. Even if the intentions of Latex and Wohlgemuthwere the best in the world, Jeter contended, Wohlgemuthwould inevitably reveal Goodrich secrets in the course ofworking in Latex’s space-suit department. In any event, Jeterwas unwilling to assume good intentions. As evidence of badones, there was, on the part of Latex, the fact that the firmhad deliberately sought out Wohlgemuth, and, on the part ofWohlgemuth, the statement he had made to Galloway about theprice of loyalty and ethics. The defense disputed the contentionthat a disclosure of secrets would be inevitable, and, of course,denied evil intentions on anyone’s part. It rounded out its casewith a statement made in court under oath by Wohlgemuth: “Iwill not reveal [to International Latex] any items which in myown mind I would consider to be trade secrets of the B. F.
Goodrich Company.” This, of course, was cold comfort toGoodrich.
Having heard the evidence and the lawyers’ summations,Judge Harvey reserved decision until a later date and issuedan order temporarily forbidding Wohlgemuth to reveal thealleged secrets or to work in the Latex space-suit program; hecould go on the Latex payroll, but he had to stay out of spacesuits until the court’s decision was handed down. Inmid-December, Wohlgemuth, leaving his family behind, went toDover and began working for Latex on other products; early inJanuary, by which time he had succeeded in selling his housein Wadsworth and buying one in Dover, his family joined himat his new stand.
IN Akron, meanwhile, the lawyers had at each other in briefsintended to sway Judge Harvey. Various fine points of lawwere debated, learnedly but inconclusively; yet as the briefswore on, it became increasingly clear that the essence of thecase was quite simple. For all practical purposes, there was nocontroversy over the facts. What remained in controversy wasthe answers to two questions: First, should a man be formallyrestrained from revealing trade secrets when he has not yetcommitted any such act, and when it is not clear that heintends to? And, secondly, should a man be prevented fromtaking a job simply because the job presents him with uniquetemptations to break the law? Having scoured the lawbooks,counsel for the defense found exactly the text quotation theywanted in support of the argument that both questions shouldbe answered in the negative. (Unlike the decisions of othercourts, the general statements of the authors of law textbookshave no official standing in any court, but by using themjudiciously an advocate can express his own opinions insomeone else’s words and buttress them with bibliographicalreferences.) The quotation was from a text entitled “TradeSecrets,” which was written by a lawyer named Ridsdale Ellisand published in 1953, and it read, in part, “Usually it is notuntil there is evidence that the employee [who has changedjobs] has not lived up to his contract, expressed or implied, tomaintain secrecy, that the former employer can take action. Inthe law of torts there is the maxim: Every dog has one freebite. A dog cannot be presumed to be vicious until he hasproved that he is by biting someone. As with a dog, theformer employer may have to wait for a former employee tocommit some overt act before he can act.” To counter thisdoctrine—which, besides being picturesque, appeared to have acrushingly exact applicability to the case underdispute—Goodrich’s lawyers came up with a quotation of theirown from the very same book. (“Ellis on trade secrets,” as thelawyers referred to it in their briefs, was repeatedly used bythe two sides to belabor each other, for the good reason thatit was the only text on the subject available in the SummitCounty law library, where both sides did the bulk of theirresearch.) In support of their cause, Goodrich counsel foundthat Ellis had said, in connection with trade-secrets cases inwhich the defendant was a company accused of luring awayanother company’s confidential employee: “Where theconfidential employee left to enter defendant’s employment, aninference can be drawn to supplement other circumstantialevidence that the latter employment was stimulated by a desireby the defendant to learn plaintiff’s secrets.”
In other words, Ellis apparently felt that when thecircumstances look suspicious, one free bite is not permitted.
Whether he contradicted himself or merely refined his positionis a nice question; Ellis himself had died several years earlier,so it was not possible to consult him on the matter.
On February 20th, 1963, having studied the briefs anddeliberated on them, Judge Harvey delivered his decision, in theform of a nine-page essay fraught with suspense. To beginwith, the Judge wrote, he was convinced that Goodrich didhave trade secrets relative to space suits, and that Wohlgemuthmight be able to remember and therefore be able to disclosesome of them to Latex, to the irreparable injury of Goodrich.
He declared, further, that “there isn’t any doubt that the Latexcompany was attempting to gain [Wohlgemuth’s] valuableexperience in this particular specialized field for the reason thatthey had this so-called ‘Apollo’ contract with the government,and there isn’t any doubt that if he is permitted to work inthe space-suit division of the Latex company … he would havean opportunity to disclose confidential information of the B. F.
Goodrich Company.” Still further, Judge Harvey was convincedby the attitude of Latex, as this was evidenced by the conductof its representatives in court, that the company intended to tryto get Wohlgemuth to give it “the benefit of every kind ofinformation he had.” At this point in the opinion, thingscertainly looked black for the defense. However—and the Judgewas well down page 6 before he got to the “however”—whathe had concluded after studying the one-free-bite controversyamong the lawyers was that an injunction cannot be issuedagainst disclosure of trade secrets before such disclosure hasoccurred unless there is clear and substantial evidence of evilintent on the part of the defendant. The defendant in this case,the Judge pointed out, was Wohlgemuth, and if any evil intentwas involved, it appeared to be attributable to Latex ratherthan to him. For this reason, along with some technical ones,he wound up, “It is the view and the Order of this Court thatInjunction be denied against the defendant.”
Goodrich promptly appealed the decision, and the SummitCounty Court of Appeals, pending its own decision on the case,issued another restraining order, which differed from JudgeHarvey’s in that it permitted Wohlgemuth to do space-suit workfor Latex, but still forbade him to disclose Goodrich’s allegedtrade secrets. Accordingly, Wohlgemuth, with an initial victoryunder his belt but with a new legal struggle on his behalfahead, went to work in the Latex moon-suit shop.
Jeter and his colleagues, in their brief to the Court of Appeals,stated unequivocally that Judge Harvey had been wrong notonly in some of the technical aspects of his decision but in hisfinding that there must be evidence of bad faith on thedefendant’s part before an injunction can be granted. “Thequestion to be decided is not one of good or bad faith, but,rather, whether there is a threat or a likelihood that tradesecrets will be disclosed,” the Goodrich brief declaredroundly—and a little inconsistently, in view of all the time andeffort the company had expended on attempts to pin bad faithon both Latex and Wohlgemuth. Wohlgemuth’s lawyers, ofcourse, did not fail to point out the inconsistency. “It seemsstrange indeed that Goodrich should find fault with this findingof Judge Harvey,” they remarked in their brief. Quite clearly,they had conceived for Judge Harvey feelings so tender as toborder on the protective.
The decision of the Court of Appeals was handed down onMay 22nd. Written by Judge Arthur W. Doyle, with his twocolleagues of the court concurring, it was a partial reversal ofJudge Harvey. Finding that “there exists a present real threatof disclosure, even without actual disclosure,” and that “aninjunction may … prevent a future wrong,” the court grantedan injunction that restrained Wohlgemuth from disclosing toLatex any of the processes and information claimed as tradesecrets by Goodrich. On the other hand, Judge Doyle wrote,“We have no doubt that Wohlgemuth had the right to takeemployment in a competitive business, and to use hisknowledge (other than trade secrets) and experience for thebenefit of his new employer.” Plainly put, Wohlgemuth was atlast free to accept a permanent job doing space-suit work forLatex, provided only that he refrained from disclosing Goodrichsecrets in the course of his work.
NEITHER side carried the case above the Summit County Courtof Appeals—to the Ohio Supreme Court and, beyond that, tothe United States Supreme Court—so with the decision of theAppeals Court the Wohlgemuth case was settled. Public interestin it subsided soon after the trial was over, but professionalinterest continued to mount, and, of course, it mounted stillmore after the Appeals Court decision in May. In March, theNew York City Bar Association, in collaboration with theAmerican Bar Association, had presented a symposium on tradesecrets, with the Wohlgemuth case as its focus. In the latermonths of that year, employers worried about loss of tradesecrets brought numerous suits against former employees,presumably relying on the Wohlgemuth decision as a precedent.
A year later there were more than two dozen trade-secretscases pending in the courts, the most publicized of them beingthe effort of E. I. du Pont de Nemours & Co. to prevent oneof its former research engineers from taking part in theproduction of certain rare pigments for the American Potash &Chemical Corporation.
It would be logical to suppose that Jeter might be worriedabout enforcement of the Appeals Court’s order—might beafraid that Wohlgemuth, working behind the locked door of theLatex laboratory, and perhaps nursing a grudge againstGoodrich, would take his one free bite in spite of the order, onthe assumption that he would not be caught. However, Jeterdidn’t look at things that way. “Until and unless we learnotherwise, we assume that Wohlgemuth and International Latex,both having knowledge of the court order, will comply with thelaw,” Jeter said after the case was concluded. “No specific stepsby Goodrich to police the enforcement of the order have beentaken, or are contemplated. However, it if should be violated,there are various ways in which we would be likely to find out.
Wohlgemuth, after all, is working with others, who come andgo. Out of perhaps twenty-five employees in constant touchwith him, it’s likely that one or two will leave Latex within acouple of years. Furthermore, you can learn quite a lot fromsuppliers who deal with both Latex and Goodrich; and alsofrom customers. However, I do not feel that the order will beviolated. Wohlgemuth has been through a lawsuit. It was quitean experience for him. He now knows his responsibilities underthe law, which he may not have known before.”
Wohlgemuth himself said late in 1963 that since the conclusionof the case he had received a great many inquiries from otherscientists working in industry, the gist of their questions being,“Does your case mean that I’m married to my job?” He toldthem that they would have to draw their own conclusions.
Wohlgemuth also said that the court order had had no effecton his work in the Latex space-suit department. “Precisely whatthe Goodrich secrets are is not spelled out in the order, andtherefore I have acted as if all the things they alleged to besecrets actually are secrets,” he said. “Nevertheless, myefficiency is not impaired by my avoiding disclosure of thosethings. Take, for example, the use of polyurethane as an innerliner—a process that Goodrich claimed as a trade secret. Thatwas something Latex had tried previously and foundunsatisfactory. Therefore, it wasn’t planning to investigate furtheralong those lines, and it still isn’t, I am just as effective forLatex as if there had never been an injunction. However, I willsay this. If I were to get a better offer from some othercompany now, I’m sure I would evaluate the question verycarefully—which is what I didn’t do the last time.”
Wohlgemuth—the new, post-trial Wohlgemuth—spoke in anoticeably slow, tense way, with long pauses for thought, as ifthe wrong word might bring lightning down on his head. Hewas a young man with a strong sense of belonging to thefuture, and he looked forward to making, if he could, amaterial contribution to putting man on the moon. At the sametime, Jeter may have been right; he was also a man who hadrecently spent almost six months in the toils of the law, andwho worked, and would continue to work, in the knowledgethat a slip of the tongue might mean a fine, imprisonment, andprofessional ruin.
THE FEDERAL RESERVE BANK of New York stands on the blockbounded by Liberty, Nassau, and William Streets and MaidenLane, on the slope of one of the few noticeable hillocksremaining in the bulldozed, skyscraper-flattened earth ofdowntown Manhattan. Its entrance faces Liberty, and its mienis dignified and grim. Its arched ground-floor windows, designedin imitation of those of the Pitti and Riccardi Palaces inFlorence, are protected by iron grilles made of bars as thick asa boy’s wrist, and above them are rows of small rectangularwindows set in a blufflike fourteen-story wall of sandstone andlimestone, the blocks of which once varied in color from brownthrough gray to blue, but which soot has reduced to acommon gray; the fa?ade’s austerity is relieved only at the levelof the twelfth floor, by a Florentine loggia. Two giant ironlanterns—near-replicas of lanterns that adorn the Strozzi Palacein Florence—flank the main entrance, but they seem to bethere less to please or illuminate the entrant than to intimidatehim. Nor is the building’s interior much more cheery orhospitable; the ground floor features cavernous groin vaultingand high ironwork partitions in intricate geometric, floral, andanimal designs, and it is guarded by hordes of bank securitymen, whose dark-blue uniforms make them look much likepolicemen.
Huge and dour as it is, the Federal Reserve Bank, as abuilding, arouses varied feelings in its beholders. To admirers ofthe debonair new Chase Manhattan Bank across Liberty Street,which is notable for huge windows, bright-colored tiled walls,and stylish Abstract Expressionist paintings, it is an epitome ofnineteenth-century heavy-footedness in bank architecture, eventhough it was actually completed in 1924. To an awestruckwriter for the magazine Architecture in 1927, it seemed “asinviolable as the Rock of Gibraltar and no less inspiring ofone’s reverent obeisance,” and possessed of “a quality which,for lack of a better word, I can best describe as ‘epic’” To themothers of young girls who work in it as secretaries or pages,it looks like a particularly sinister sort of prison. Bank robbersare apparently equally respectful of its inviolability; there hasnever been the slightest hint of an attempt on it. To theMunicipal Art Society of New York, which now rates it as afull-fledged landmark, it was until 1967 only a second-classlandmark, being assigned to Category II, “Structures of GreatLocal or Regional Importance Which Should Be Preserved,”
rather than Category I, “Structures of National ImportanceWhich Should Be Preserved at All Costs.” On the other hand,it has one indisputable edge on the Pitti, Riccardi, and StrozziPalaces: It is bigger than any of them. In fact, it is a biggerFlorentine palace than has ever stood in Florence.
The Federal Reserve Bank of New York is set apart from theother banks of Wall Street in purpose and function as well asin appearance. As by far the largest and most important of thetwelve regional Federal Reserve Banks—which, together with theFederal Reserve Board in Washington and the sixty-twohundred commercial banks that are members, make up theFederal Reserve System—it is the chief operating arm of theUnited States’ central-banking institution. Most other countrieshave only one central bank—the Bank of England, the Bank ofFrance, and so on—rather than a network of such banks, butthe central banks of all countries have the same dual purpose:
to keep the national currency in a healthy state by regulatingits supply, partly through the degree of ease or difficulty withwhich it may be borrowed, and, when necessary, to defend itsvalue in relation to that of other national currencies. Toaccomplish the first objective, the New York bank co?perateswith its parent board and its eleven brother banks inperiodically adjusting a number of monetary throttles, of whichthe most visible (although not necessarily the most important) isthe rate of interest at which it lends money to other banks. Asto the second objective, by virtue of tradition and of itssituation in the nation’s and the world’s greatest financial center,the Federal Reserve Bank of New York is the sole agent of theFederal Reserve System and of the United States Treasury indealings with other countries. Thus, on its shoulders falls thechief responsibility for operations in defense of the dollar. Thoseresponsibilities were weighing heavily during the great monetarycrisis of 1968—and, indeed, since the defense of the dollarsometimes involves the defense of other currencies as well, overthe preceding three and a half years.
Charged as it is with acting in the national interest—in facthaving no other purpose—the Federal Reserve Bank of NewYork, together with its brother banks, obviously is an arm ofgovernment. Yet it has a foot in the free-enterprise camp; inwhat some might call characteristic American fashion, it standssquarely astride the chalk line between government andbusiness. Although it functions as a government agency, itsstock is privately owned by the member banks throughout thecountry, to which it pays annual dividends limited by law to sixper cent per year. Although its top officers take a federal oath,they are not appointed by the President of the United States,or even by the Federal Reserve Board, but are elected by thebank’s own board of directors, and their salaries are paid notout of the federal till but out of the bank’s own income. Yetthat income—though, happily, always forthcoming—is entirelyincidental to the bank’s purpose, and if it rises above expensesand dividends the excess is automatically paid into the UnitedStates Treasury. A bank that considers profits incidental isscarcely the norm in Wall Street, and this attitude puts FederalReserve Bank men in a uniquely advantageous social position.
Because their bank is a bank, after all, and a privately owned,profitable one at that, they can’t be dismissed as meregovernment bureaucrats; conversely, having their gaze fixedsteadily above the mire of cupidity entitles them to be calledthe intellectuals, if not actually the aristocrats, of Wall Streetbanking.
Under them lies gold—still the bedrock on which all moneynominally rests, though in recent times a bedrock that hasbeen shuddering ominously under the force of variousmonetary earthquakes. As of March, 1968, more than thirteenthousand tons of the stuff, worth more than thirteen billiondollars and amounting to more than a quarter of all themonetary gold in the free world, reposed on actual bedrockseventy-six feet below the Liberty Street level and fifty belowsea level, in a vault that would be inundated if a system ofsump pumps did not divert a stream that originally wanderedthrough Maiden Lane. The famous nineteenth-century Britisheconomist Walter Bagehot once told a friend that when hisspirits were low it used to cheer him to go down to his bankand “dabble my hand in a heap of sovereigns.” Although it is,to say the least, a stimulating experience to go down and lookat the gold in the Federal Reserve Bank vault, which is in theform not of sovereigns but of dully gleaming bars about thesize and shape of building bricks, not even the best-accreditedvisitor is allowed to dabble his hands in it; for one thing, thebars weigh about twenty-eight pounds each and are thereforeill-adapted to dabbling, and, for another, none of the goldbelongs to either the Federal Reserve Bank or the UnitedStates. All United States gold is kept at Fort Knox, at the NewYork Assay Office, or at the various mints; the gold depositedat the Federal Reserve Bank belongs to some seventy othercountries—the largest depositors being European—which find itconvenient to store a good part of their gold reserves there.
Originally, most of them put gold there for safekeeping duringthe Second World War. After the war, the Europeannations—with the exception of France—not only left it in NewYork but greatly increased its quantity as their economiesrecovered.
Nor does the gold represent anything like all the foreigndeposits at Liberty Street; investments of various sorts broughtthe March ’68 total to more than twenty-eight billion. As abanker for most of the central banks of the non-Communistworld, and as the central bank representing the world’s leadingcurrency, the Federal Reserve Bank of New York is theundisputed chief citadel of world currency. By virtue of thisposition, it is afforded a kind of fluoroscopic vision of theinsides of international finance, enabling it to detect at a glancean incipiently diseased currency here, a faltering economy there.
If, for example, Great Britain is running a deficit in her foreigndealings, this instantly shows up in the Federal Reserve Bank’sbooks in the form of a decline in the Bank of England’sbalance. In the fall of 1964, precisely such a decline wasoccurring, and it marked the beginning of a long, gallant,intermittently hair-raising, and ultimately losing struggle by anumber of countries and their central banks, led by the UnitedStates and the Federal Reserve, to safeguard the existing orderof world finance by preserving the integrity of the poundsterling. One trouble with imposing buildings is that they have atendency to belittle the people and activities they enclose, andmost of the time it is reasonably accurate to think of theFederal Reserve Bank as a place where often bored peoplepush around workaday slips of paper quite similar to thosepushed around in other banks. But since 1964 some of theevents there, if they have scarcely been capable of inspiringreverent obeisance, have had a certain epic quality.
EARLY in 1964, it began to be clear that Britain, which forseveral years had maintained an approximate equilibrium in herinternational balance of payments—that is, the amount of moneyshe had annually sent outside her borders had been aboutequal to the amount she had taken in—was running asubstantial deficit. Far from being the result of domesticdepression in Britain, this situation was the result ofoverexuberant domestic expansion; business was booming, andnewly affluent Britons were ordering bales and bales of costlygoods from abroad without increasing the exports of Britishgoods on anything like the same scale. In short, Britain wasliving beyond her means. A substantial balance-of-paymentsdeficit is a worry to a relatively self-sufficient country like theUnited States (indeed, the United States was having that veryworry at that very time, and it would for years to come), butto a trading nation like Britain, about a quarter of whose entireeconomy is dependent on foreign trade, it constitutes a gravedanger.
The situation was cause for growing concern at the FederalReserve Bank, and the focal point of the concern was theoffice, on the tenth floor, of Charles A. Coombs, the bank’svice-president in charge of foreign operations. All summer long,the fluoroscope showed a sick and worsening pound sterling.
From the research section of the foreign department, Coombsdaily got reports that a torrent of money was leaving Britain.
From underground, word rose that the pile of gold bars in thelocker assigned to Britain was shrinking appreciably—notthrough any foul play in the vault but because so many of thebars were being transferred to other lockers in settlement ofBritain’s international debts. From the foreign-exchange tradingdesk, on the seventh floor, the news almost every afternoonwas that the open-market quotations on the pound in terms ofdollars had sunk again that day. During July and August, asthe quotation dropped from $2.79 to $2.7890, and then to$2.7875, the situation was regarded on Liberty Street as soserious that Coombs, who would normally handleforeign-exchange matters himself, only making routine reports tothose higher up, was constantly conferring about it with hisboss, the Federal Reserve Bank’s president, a tall, cool,soft-spoken man named Alfred Hayes.
Mystifyingly complex though it may appear, what actuallyhappens in international financial dealings is essentially whathappens in private domestic transactions. The money worries ofa nation, like those of a family, are the consequence of havingtoo much money go out and not enough come in. The foreignsellers of goods to Britain cannot spend the pounds they arepaid in their own countries, and therefore they convert theminto their own currencies; this they do by selling the pounds inthe foreign-exchange markets, just as if they were sellingsecurities on a stock exchange. The market price of the poundfluctuates in response to supply and demand, and so do theprices of all other currencies—all, that is, except the dollar, thesun in the planetary system of currencies, inasmuch as theUnited States has, since 1934, stood pledged to exchange goldin any quantity for dollars at the pleasure of any nation at thefixed price of thirty-five dollars per ounce.
Under the pressure of selling, the price of the pound goesdown. But its fluctuations are severely restricted. The influenceof market forces cannot be allowed to lower or raise the pricemore than a couple of cents below or above the pound’s parvalue; if such wild swings should occur unchecked, bankers andbusinessmen everywhere who traded with Britain would findthemselves involuntarily engaged in a kind of roulette game,and would be inclined to stop trading with Britain. Accordingly,under international monetary rules agreed upon at BrettonWoods, New Hampshire, in 1944, and elaborated at variousother places at later times, the pound in 1964, nominally valuedat $2.80, was allowed to fluctuate only between $2.78 and$2.82, and the enforcer of this abridgment of the law of supplyand demand was the Bank of England. On a day when thingswere going smoothly, the pound might be quoted on theexchange markets at, say, $2.7990, a rise of $.0015 from theprevious day’s closing. (Fifteen-hundredths of a cent doesn’tsound like much, but on a round million dollars, which isgenerally the basic unit in international monetary dealings, itamounts to fifteen hundred dollars.) When that happened, theBank of England needed to do nothing. If, however, the poundwas strong in the markets and rose to $2.82 (something itshowed absolutely no tendency to do in 1964), the Bank ofEngland was pledged to—and would have been very happyto—accept gold or dollars in exchange for pounds at that price,thereby preventing a further increase in the price and at thesame time increasing its own reserve of gold and dollars, whichserve as the pound’s backing. If, on the other hand (and thiswas a more realistic hypothesis), the pound was weak andsank to $2.78, the Bank of England’s sworn duty was tointervene in the market and buy with gold or dollars allpounds offered for sale at that price, however deeply this mighthave cut into its own reserves. Thus, the central bank of aspendthrift country, like the father of a spendthrift family, iseventually forced to pay the bills out of capital. But in times ofserious currency weakness the central bank loses even more ofits reserves than this would suggest, because of the vagaries ofmarket psychology. Prudent importers and exporters seeking toprotect their capital and profits reduce to a minimum the sumthey hold in pounds and the length of time they hold it.
Currency speculators, whose noses have been trained to sniffout weakness, pounce on a falling pound and make enormousshort sales, in the expectation of turning a profit on a furtherdrop, and the Bank of England must absorb the speculativesales along with the straightforward ones.
The ultimate consequence of unchecked currency weakness issomething that may be incomparably more disastrous in itseffects than family bankruptcy. This is devaluation, anddevaluation of a key world currency like the pound is therecurrent nightmare of all central bankers, whether in London,New York, Frankfurt, Zurich, or Tokyo. If at any time thedrain on Britain’s reserves became so great that the Bank ofEngland was unable, or unwilling, to fulfill its obligation tomaintain the pound at $2.78, the necessary result would bedevaluation. That is, the $2.78-to-$2.82 limitation would beabruptly abrogated; by simple government decree the par valueof the pound would be reduced to some lower figure, and anew set of limits established around the new parity. The heartof the danger was the possibility that what followed might bechaos not confined to Britain. Devaluation, as the most heroicand most dangerous of remedies for a sick currency, is rightlyfeared. By making the devaluing country’s goods cheaper toothers, it boosts exports, and thus reduces or eliminates adeficit in international accounts, but at the same time it makesboth imports and domestic goods more expensive at home, andthus reduces the country’s standard of living. It is radicalsurgery, curing a disease at the expense of some of thepatient’s strength and well-being—and, in many cases, some ofhis pride and prestige as well. Worst of all, if the devaluedcurrency is one that, like the pound, is widely used ininternational dealings, the disease—or, more precisely, thecure—is likely to prove contagious. To nations holding largeamounts of that particular currency in their reserve vaults, theeffects of the devaluation is the same as if the vaults had beenburglarized. Such nations and others, finding themselves at anunacceptable trading disadvantage as a result of the devaluation,may have to resort to competitive devaluation of their owncurrencies. A downward spiral develops: Rumors of furtherdevaluations are constantly in the wind; the loss of confidencein other people’s money leads to a disinclination to do businessacross national borders; and international trade, upon whichdepend the food and shelter of hundreds of millions of peoplearound the world, tends to decline. Just such a disasterfollowed the classic devaluation of all time, the departure of thepound from the old gold standard in 1931—an event that is stillgenerally considered a major cause of the worldwide Depressionof the thirties.
The process works similarly in respect to the currencies of allthe hundred-odd countries that are members of theInternational Monetary Fund, an organization that originated atBretton Woods. For any country, a favorable balance ofpayments means an accumulation of dollars, either directly orindirectly, which are freely convertible into gold, in the country’scentral bank; if the demand for its currency is great enough,the country may revalue it upward—the reverse of adevaluation—as both Germany and the Netherlands did in 1961.
Conversely, an unfavorable balance of payments starts thesequence of events that may end in forced devaluation. Thedegree of disruption of world trade that devaluation of acurrency causes depends on that currency’s internationalimportance. (A large devaluation of the Indian rupee in June,1966, although it was a serious matter to India, created scarcelya ripple in the international markets.) And—to round out thisbrief outline of the rules of an intricate game of whicheverybody everywhere is an inadvertent player—even the lordlydollar is far from immune to the effects of an unfavorablebalance of payments or of speculation. Because of the dollar’spledged relation to gold, it serves as the standard for all othercurrencies, so its price does, not fluctuate in the markets.
However, it can suffer weakness of a less visible but equallyominous sort. When the United States sends out substantiallymore money (whether payment for imports, foreign aid,investments, loans, tourist expenses, or military costs) than ittakes in, the recipients freely buy their own currencies with thenewly acquired dollars, thereby raising the dollar prices of theirown currencies; the rise in price enables their central banks totake in still more dollars, which they can sell back to theUnited States for gold. Thus, when the dollar is weak theUnited States loses gold. France alone—a country with a strongcurrency and no particular official love of the dollar—requiredthirty million dollars or more in United States gold regularlyevery month for several years prior to the autumn of 1966,and between 1958, when the United States began running aserious deficit in its international accounts, and the middle ofMarch 1968, our gold reserve was halved—from twenty-twobillion eight hundred million to eleven billion four hundredmillion dollars. If the reserve ever dropped to an unacceptablylow level, the United States would be forced to break its wordand lower the gold value of the dollar, or even to stop sellinggold entirely. Either action would in effect be a devaluation—theone devaluation, because of the dollar’s preeminent position,that would be more disruptive to world monetary order than adevaluation of the pound.
HAYES and Coombs, neither of whom is old enough to haveexperienced the events of 1931 at first hand as a banker butboth of whom are such diligent and sensitive students ofinternational banking that they might as well have done so,found that as the hot days of 1964 dragged on they hadoccasion to be in almost daily contact by transatlantic telephonewith their Bank of England counterparts—the Earl of Cromer,governor of the bank at that time, and Roy A. O. Bridge, thegovernor’s adviser on foreign exchange. It became clear tothem from these conversations and from other sources that theimbalance in Britain’s international accounts was far from thewhole trouble. A crisis of confidence in the soundness of thepound was developing, and the main cause of it seemed to bethe election that Britain’s Conservative Government was facingon October 15th. The one thing that international financialmarkets hate and fear above all others is uncertainty. Anyelection represents uncertainty, so the pound always has thejitters just before Britons go to the polls, but to the peoplewho deal in currencies this election looked particularly menacing,because of their estimate of the character of the LabourGovernment that might come into power. The conservativefinanciers of London, not to mention those of ContinentalEurope, looked with almost irrational suspicion on HaroldWilson, the Labour choice for Prime Minister; further, some ofMr. Wilson’s economic advisers had explicitly extolled the virtuesof devaluation of the pound in their earlier theoretical writings;and, finally, there was an all too pat analogy to be drawn fromthe fact that the last previous term of the British Labour Partyin power had been conspicuously marked, in 1949, by adevaluation of sterling from the rate of $4.03 to $2.80.
In these circumstances, almost all the dealers in the worldmoney markets, whether they were ordinary internationalbusinessmen or out-and-out currency speculators, were anxiousto get rid of pounds—at least until after the election. Like allspeculative attacks, this one fed on itself. Each small drop inthe pound’s price resulted in further loss of confidence, anddown, down went the pound in the international markets—anoddly diffused sort of exchange, which does not operate in anycentral building but, rather, is conducted by telephone and cablebetween the trading desks of banks in the world’s major cities.
Simultaneously, down, down went British reserves, as the Bankof England struggled to support the pound. Early in September,Hayes went to Tokyo for the annual meeting of the membersof the International Monetary Fund. In the corridors of thebuilding where participants in the Fund met, he heard oneEuropean central banker after another express misgivings aboutthe state of the British economy and the outlook for the Britishcurrency. Why didn’t the British government take steps athome to check its outlay and to improve the balance ofpayments, they asked each other. Why didn’t it raise the Bankof England’s lending rate—the so-called bank rate—from itscurrent five per cent, since this move would have the effect ofraising British interest rates all up and down the line, andwould thus serve the double purpose of damping downdomestic inflation and attracting investment dollars to Londonfrom other financial centers, with the result that sterling wouldgain a sounder footing?
Doubtless the Continental bankers also put such questions tothe Bank of England men in Tokyo; in any event, the Bank ofEngland men and their counterparts in the British Exchequerhad not failed to put the questions to themselves. But theproposed measures would certainly be unpopular with theBritish electorate, as unmistakable harbingers of austerity, andthe Conservative Government, like many governments before it,appeared to be paralyzed by fear of the imminent election. Soit did nothing. In a strictly monetary way, however, Britain didtake defensive measures during September. The Bank ofEngland had for several years had a standing agreement withthe Federal Reserve that either institution could borrow fivehundred million dollars from the other, over a short term, atany time, with virtually no formalities; now the Bank of Englandaccepted this standby loan and made arrangements tosupplement it with another five hundred million dollars inshort-term credit from various European central banks and theBank of Canada. This total of a billion dollars, together withBritain’s last-ditch reserves in gold and dollars, amounting toabout two billion six hundred million, constituted a sizable storeof ammunition. If the speculative assault on the pound shouldcontinue or intensify, answering fire would come from the Bankof England in the form of dollar investments in sterling madeon the battlefield of the free market, and presumably theattackers would be put to rout.
As might have been expected, the assault did intensify afterLabour came out the victor in the October election. The newBritish government realized at the outset that it was faced witha grave crisis, and that immediate and drastic action was inorder. It has since been said that summary devaluation of thepound was seriously considered by the newly elected PrimeMinister and his advisers on finance—George Brown, Secretaryof State for Economic Affairs, and James Callaghan, Chancellorof the Exchequer. The idea was rejected, though, and themeasures they actually took, in October and early November,were a fifteen-percent emergency surcharge on British imports(in effect, a blanket raising of tariffs), an increased fuel tax, andstiff new capital-gains and corporation taxes. These weredeflationary, currency-strengthening measures, to be sure, butthe world markets were not reassured. The specific nature ofthe new taxes seems to have disconcerted, and even enraged,many financiers, in and out of Britain, particularly in view ofthe fact that under the new budget British governmentspending on welfare benefits was actually to be increased,rather than cut back, as deflationary policy would normallyrequire. One way and another, then, the sellers—or bears, inmarket jargon—continued to be in charge of the market for thepound in the weeks after the election, and the Bank ofEngland was kept busy potting away at them with preciousshells from its borrowed-billion-dollar arsenal. By the end ofOctober, nearly half the billion was gone, and the bears werestill inexorably advancing on the pound, a hundredth of a centat a time.
Hayes, Coombs, and their foreign-department colleagues onLiberty Street, watching with mounting anxiety, were as galledas the British by the fact that a central bank defending itscurrency against attack can have only the vaguest idea ofwhere the attack is coming from. Speculation is inherent inforeign trade, and by its nature is almost impossible to isolate,identify, or even define. There are degrees of speculation; theword itself, like “selfishness” or “greed,” denotes a judgment,and yet every exchange of currencies might be called aspeculation in favor of the currency being acquired and againstthe one being disposed of. At one end of the scale areperfectly legitimate business transactions that have specificspeculative effects. A British importer ordering Americanmerchandise may legitimately pay up in pounds in advance ofdelivery; if he does, he is speculating against the pound. AnAmerican importer who has contracted to pay for British goodsat a price set in pounds may legitimately insist that hispurchase of the pounds he needs to settle his debt be deferredfor a certain period; he, too, is speculating against the pound.
(The staggering importance to Britain of these commoncommercial operations, which are called “leads” and “lags,”
respectively, is shown by the fact that if in normal times theworld’s buyers of British goods were all to withhold theirpayments for as short a period as two and a half months theBank of England’s gold and dollar reserves would vanish.) Atthe other end of the scale is the dealer in money who borrowspounds and then converts the loan into dollars. Such a dealer,instead of merely protecting his business interests, is engagingin an out-and-out speculative move called a short sale; hopingto buy back the pounds he owes more cheaply later on, he issimply trying to make a profit on the decrease in value heanticipates—and, what with the low commissions prevailing inthe international money market, the maneuver provides one ofthe world’s most attractive forms of high-stakes gambling.
Gambling of this sort, although in fact it probably contributedfar less to the sterling crisis than the self-protective measurestaken by nervous importers and exporters, was being widelyblamed for all the pound’s troubles of October and November,1964. Particularly in the British Parliament, there were angryreferences to speculative activity by “the gnomes ofZurich”—Zurich being singled out because Switzerland, whosebanking laws rigidly protect the anonymity of depositors, is theblind pig of international banking, and consequently muchcurrency speculation, originating in many parts of the world, isfunnelled through Zurich. Besides low commissions andanonymity, currency speculation has another attraction. Thanksto time differentials and good telephone service, the worldmoney market, unlike stock exchanges, race tracks, andgambling casinos, practically never closes. London opens anhour after the Continent (or did until February 1968, whenBritain adopted Continental time), New York five (now six)hours after that, San Francisco three hours after that, andthen Tokyo gets under way about the time San Franciscocloses. Only a need for sleep or a lack of money need halt theoperations of a really hopelessly addicted plunger anywhere.
“It was not the gnomes of Zurich who were beating downthe pound,” a leading Zurich banker subsequentlymaintained—stopping short of claiming that there were nognomes there. Nonetheless, organized short selling—what traderscall a bear raid—was certainly in progress, and the defenders ofthe pound in London and their sympathizers in New Yorkwould have given plenty to catch a glimpse of the invisibleenemy.
IT was in this atmosphere, then, that on the weekend beginningNovember 7th the leading central bankers of the world heldtheir regular monthly gathering in Basel, Switzerland. Theoccasion for such gatherings, which have been held regularlysince the nineteen-thirties except during the Second World War,is the monthly meeting of the board of directors of the Bankfor International Settlements, which was established in Basel in1930 primarily as a clearing house for the handling ofreparations payments arising out of the First World War buthas come to serve as an agency of international monetaryco?peration and, incidentally, a kind of central bankers’ club. Assuch, it is considerably more limited in resources and restrictedas to membership than the International Monetary Fund, but,like other exclusive clubs, it is often the scene of greatdecisions. Represented on its board of directors are Britain,France, West Germany, Italy, Belgium, the Netherlands, Sweden,and Switzerland—in short, the economic powers of WesternEurope—while the United States is a regular monthly guestwhose presence is counted on, and Canada and Japan are lessfrequent visitors. The Federal Reserve is almost alwaysrepresented by Coombs, and sometimes by Hayes and otherNew York officers as well.
In the nature of things, the interests of the different centralbanks conflict; their faces are set against each other almost asif they were players in a poker game. Even so, in view of thefact that international troubles with money at their root havealmost as long a history as similarly caused troubles betweenindividuals, the most surprising thing about internationalmonetary co?peration is that it is so new. Through all the agesprior to the First World War, it cannot be said to have existedat all. In the nineteen-twenties, it existed chiefly through closepersonal ties between individual central bankers, oftenmaintained in spite of the indifference of their governments. Onan official level, it got off to a halting start through theFinancial Committee of the League of Nations, which wassupposed to encourage joint action to prevent monetarycatastrophes. The sterling collapse of 1931 and its grim sequelwere ample proof of the committee’s failure. But better dayswere ahead. The 1944 international financial conference atBretton Woods—out of which emerged not only theInternational Monetary Fund but also the whole structure ofpostwar monetary rules designed to help establish and maintainfixed exchange rates, as well as the World Bank, designed toease the flow of money from rich countries to poor orwar-devastated ones—stands as a milestone in economicco?peration comparable to the formation of the United Nationsin political affairs. To cite just one of the conference’s fruits, acredit of more than a billion dollars extended to Britain by theInternational Monetary Fund during the Suez affair in 1956prevented a major international financial crisis then.
In subsequent years, economic changes, like other changes,tended to come more and more quickly; after 1958, monetarycrises began springing up virtually overnight, and theInternational Monetary Fund, which is hindered by slow-movingmachinery, sometimes proved inadequate to meet such crisesalone. Again the new spirit of co?peration rose to the occasion,this time with the richest of nations, the United States, takingthe lead. Starting in 1961, the Federal Reserve Bank, with theapproval of the Federal Reserve Board and the Treasury inWashington, joined the other leading central banks in setting upa system of ever-ready revolving credits, which soon came tobe called the “swap network.” The purpose of the network wasto complement the International Monetary Fund’s longer-termcredit facilities by giving central banks instant access to fundsthey might need for a short period in order to move fast andvigorously in defense of their currencies. Its effectiveness wasnot long in being put to the test. Between its initiation in 1961and the autumn of 1964, the swap network had played amajor part in the triumphant defense against sudden andviolent speculative attacks on at least three currencies: thepound, late in 1961; the Canadian dollar, in June, 1961; andthe Italian lira, in March, 1964. By the autumn of 1964, theswap agreements (“L’accord de swap” to the French, “dieSwap-Verpflichtungen” to the Germans) had come to be thevery cornerstone of international monetary co?peration. Indeed,the five hundred million American dollars that the Bank ofEngland was finding it necessary to draw on at the verymoment the bank’s top officers were heading for Basel thatNovember weekend represented part of the swap network,greatly expanded from its comparatively modest beginnings.
As for the Bank for International Settlements, in its capacityas a banking institution it was a relatively minor cog in all thismachinery, but in its capacity as a club it had over the yearscome to play a far from unimportant role. Its monthly boardmeetings served (and still serve) as a chance for the centralbankers to talk in an informal atmosphere—to exchange gossip,views, and hunches such as could not comfortably be indulgedin either by mail or over the international telephone circuits.
Basel, a medieval Rhenish city that is dominated by the spiresof its twelfth-century Gothic cathedral and has long been athriving center of the chemical industry, was originally chosenas the site of the Bank for International Settlements because itwas a nodal point for European railways. Now that mostinternational bankers habitually travel by plane, that asset hasbecome a liability, for there is no long-distance air service toBasel; delegates must deplane at Zurich and continue by trainor car. On the other hand, Basel has several first-raterestaurants, and it may be that in the view of the central-bankdelegates this advantage outweighs the travel inconvenience, forcentral banking—or at least European central banking—has afirmly established association with good living. A governor of theNational Bank of Belgium once remarked to a visitor, without asmile, that he considered one of his duties to be that of leavingthe institution’s wine cellar better than he had found it. Aluncheon guest at the Bank of France is generally toldapologetically, “In the tradition of the bank, we serve onlysimple fare,” but what follows is a repast during which theconstant discussion of vintages makes any discussion of bankingawkward, if not impossible, and at which the tradition ofsimplicity is honored, apparently, by the serving of only onewine before the cognac. The table of the Bank of Italy isequally elegant (some say the best in Rome), and itssurroundings are enhanced by the priceless Renaissancepaintings, acquired as defaulted security on bad loans over theyears, that hang on the walls. As for the Federal Reserve Bankof New York, alcohol in any form is hardly ever served there,banking is habitually discussed at meals, and the mistress of thekitchen appears almost pathetically grateful whenever one of theofficers makes any sort of comment, even a critical one, on thefare. But then Liberty Street isn’t Europe.
In these democratic times, central banking in Europe isthought of as the last stronghold of the aristocratic bankingtradition, in which wit, grace, and culture coexist easily withcommercial astuteness, and even ruthlessness. The Europeancounterparts of the security guards on Liberty Street are apt tobe attendants in morning coats. Until less than a generationago, formality of address between central bankers was the rule.
Some think that the first to break it were the British, duringthe Second World War, when, it is alleged, a secret order wentout that British government and military authorities were toaddress their American counterparts by their first names; inany event, first names are frequently exchanged betweenEuropean and American central bankers now, and one reasonfor this, unquestionably, is the postwar rise in influence of thedollar. (Another reason is that, in the emerging era ofco?peration, the central bankers see more of each other thanthey used to—not just in Basel but in Washington, Paris, andBrussels, at regular meetings of perhaps half a dozen specialbanking committees of various international organizations. Thesame handful of top bankers parades so regularly through thehotel lobbies of those cities that one of them thinks they mustgive the impression of being hundreds strong, like the spearcarriers who cross the stage again and again in the triumphalscene of “Aida.”) And language, like the manner of its use, hastended to follow economic power. European central bankershave always used French (“bad French,” some say) in talkingwith each other, but during the long period in which the poundwas the world’s leading currency English came to be the firstlanguage of central banking at large, and under the rule of thedollar it continues to be. It is spoken fluently and willingly byall the top officers of every central bank except the Bank ofFrance, and even the Bank of France officers are forced tokeep translators at hand, in consideration of the seemingintractable inability or unwillingness of most Britons andAmericans to become competent in any language but their own.
(Lord Cromer, flouting tradition, speaks French with completeauthority.)At Basel, good food and convenience come before splendor;many of the delegates favor an outwardly humble restaurant inthe main railroad station, and the Bank for InternationalSettlements itself is modestly situated between a tea shop and ahairdressing establishment. On that November weekend in 1964,Vice-President Coombs was the only representative of theFederal Reserve System on hand, and, indeed, he was to bethe key banking representative of the United States through theearly and middle phases of the crisis that was then mounting.
In an abstracted way, Coombs ate and drank heartily with theothers—true to his institution’s traditions, he is less than agourmet—but his real interest was in getting the sense of themeeting and the private feelings of its participants. He was theperfect man for this task, inasmuch as he has theunquestioning trust and respect of all his foreign colleagues. Theother leading central bankers habitually call him by his firstname—less, it seems, in deference to changed custom than outof deep affection and admiration. They also use it in speakingof him among themselves; the name “Charliecoombs” (runtogether thus out of long habituation) is a word to conjurewith in central-banking circles. Charliecoombs, they will tell you,is the kind of New Englander (he is from Newton,Massachusetts) who, although his clipped speech and drymanner make him seem a bit cool and detached, is reallywarm and intuitive. Charliecoombs, although a Harvard graduate(Class of 1940), is the kind of unpretentious gray-haired manwith half-rimmed spectacles and a precise manner whom youmight easily take for a standard American small-town bankpresident, rather than a master of one of the world’s mostcomplex skills. It is generally conceded that if any one manwas the genius behind the swap network, the man was theNew England swapper Charliecoombs.
At Basel, there was, as usual, a series of formal sessions, eachwith its agenda, but there was also, as usual, much informalpalaver in rump sessions held in hotel rooms and offices andat a formal Sunday-night dinner at which there was no agendabut instead a free discussion of what Coombs has sincereferred to as “the hottest topic of the moment.” There couldbe no question about what that was; it was the condition ofthe pound—and, indeed, Coombs had heard little discussion ofanything else all weekend. “It was clear to me from what Iheard that confidence in sterling was deteriorating,” he has said.
Two questions were on most of the bankers’ minds. One waswhether the Bank of England proposed to take some of thepressure off the pound by raising its lending rate. Bank ofEngland men were present, but getting an answer was not asimple matter of asking them their intentions; even if they hadbeen willing to say, they would not have been able to, becausethe Bank of England is not empowered to change its ratewithout the approval—which in practice often comes closer tomeaning the instruction—of the British government, and electedgovernments have a natural dislike for measures that makemoney tight. The other question was whether Britain hadenough gold and dollars to throw into the breach if thespeculative assault should continue. Apart from what was left ofthe billion dollars from the expanded swap network and whatremained of its drawing rights on the International MonetaryFund, Britain had only its official reserves, which had droppedin the previous week to something under two and a half billiondollars—their lowest point in several years. Worse than that wasthe frightful rate at which the reserves were dwindling away;on a single bad day during the previous week, according to theguesses of experts, they had dropped by eighty-seven milliondollars. A month of days like that and they would be gone.
Even so, Coombs has said, nobody at Basel that weekenddreamed that the pressure on sterling could become as intenseas it actually did become later in the month. He returned toNew York worried but resolute. It was not to New York,however, that the main scene of the battle for sterling shiftedafter the Basel meeting; it was to London. The big immediatequestion was whether or not Britain would raise its bank ratethat week, and the day the answer would be known wasThursday, November 12th. In the matter of the bank rate, asin so many other things, the British customarily follow a ritual.
If there is to be a change, at noon on Thursday—then andthen only—a sign appears in the ground-floor lobby of theBank of England announcing the new rate, and, simultaneously,a functionary called the Government Broker, decked out in apink coat and top hat, hurries down Throgmorton Street to theLondon Stock Exchange and ceremonially announces the newrate from a rostrum. Noon on Thursday the twelfth passedwith no change; evidently the Labour Government was havingas much trouble deciding on a bank-rate rise after the electionas the Conservatives had had before. The speculators, whereverthey were, reacted to such pusillanimity as one man. On Fridaythe thirteenth, the pound, which had been moderately buoyantall week precisely because speculators had been anticipating abank-rate rise, underwent a fearful battering, which sent itdown to a closing price of $2.7829—barely more than aquarter of a cent above the official minimum—and the Bank ofEngland, intervening frequently to hold it even at that level, losttwenty-eight million dollars more from its reserves. Next day,the financial commentator of the London Times, under thebyline Our City Editor, let himself go. “The pound,” he wrote,“is not looking as firm as might be hoped.”
THE following week saw the pattern repeated, but inexaggerated form. On Monday, Prime Minister Wilson, taking aleaf out of Winston Churchill’s book, tried rhetoric as a weapon.
Speaking at a pomp-and-circumstance banquet at the Guildhallin the City of London before an audience that included, amongmany other dignitaries, the Archbishop of Canterbury, the LordChancellor, the Lord President of the Council, the Lord PrivySeal, the Lord Mayor of London, and their wives, Wilsonringingly proclaimed “not only our faith but our determinationto keep sterling strong and to see it riding high,” and assertedthat the Government would not hesitate to take whatever stepsmight become necessary to accomplish this purpose. Whileelaborately avoiding the dread word “devaluation,” just as allother British officials had avoided it all summer, Wilson soughtto make it unmistakable that the Government now consideredsuch a move out of the question. To emphasize this point, heincluded a warning to speculators: “If anyone at home orabroad doubts the firmness of [our] resolve, let them beprepared to pay the price for their lack of faith in Britain.”
Perhaps the speculators were daunted by this verbal volley, orperhaps they were again moved to let up in their assault onthe pound by the prospect of a bank-rate rise on Thursday; inany case, on Tuesday and Wednesday the pound, though ithardly rode high in the marketplace, managed to ride a littleless low than it had on the previous Friday, and to do sowithout the help of the Bank of England.
By Thursday, according to subsequent reports, a sharp privatedispute had erupted between the Bank of England and theBritish government on the bank-rate question—Lord Cromerarguing, for the bank, that a rise of at least one per cent, andperhaps two per cent, was absolutely essential, and Wilson,Brown, and Callaghan still demurring. The upshot was nobank-rate rise on Thursday, and the effect of the inaction wasa swift intensification of the crisis. Friday the twentieth was ablack day in the City of London. The Stock Exchange, itsinvestors moving in time with sterling, had a terrible session.
The Bank of England had by now resolved to establish itslast-line trench on the pound at $2.7825—a quarter of a centabove the bottom limit. The pound opened on Friday atprecisely that level and remained there all day, firmly pinneddown by the speculators’ hail of offers to sell; meanwhile, thebank met all offers at $2.7825 and, in doing so, used up moreof Britain’s reserves. Now the offers were coming so fast thatlittle attempt was made to disguise their places of origin; it wasevident that they were coming from everywhere—chiefly fromthe financial centers of Europe, but also from New York, andeven from London itself. Rumors of imminent devaluation weresweeping the bourses of the Continent. And in London itself anominous sign of cracking morale appeared: devaluation wasnow being mentioned openly even there. The Swedisheconomist and sociologist Gunnar Myrdal, in a luncheon speechin London on Thursday, had suggested that a slight devaluationmight now be the only possible solution to Britain’s problems;once this exogenous comment had broken the ice, Britons alsobegan using the dread word, and, in the next morning’s Times, Our City Editor himself was to say, in the tone of acommander preparing the garrison for possible surrender,“Indiscriminate gossip about devaluation of the pound can doharm. But it would be even worse to regard use of that wordas taboo.”
When nightfall at last brought the pound and its defenders aweekend breather, the Bank of England had a chance toassess its situation. What it found was anything but reassuring.
All but a fraction of the billion dollars it had arranged toborrow in September under the expanded swap agreementshad gone into the battle. The right that remained to it ofdrawing on the International Monetary Fund was virtuallyworthless, since the transaction would take weeks to complete,and matters turned on days and hours. What the bank stillhad—and all that it had—was the British reserves, which hadgone down by fifty-six million dollars that day and now stoodat around two billion. More than one commentator has sincesuggested that this sum could in a way be likened to the fewsquadrons of fighter planes to which the same dogged nationhad been reduced twenty-four years earlier at the worst pointin the Battle of Britain.
THE analogy is extravagant, and yet, in the light of what thepound means, and has meant, to the British, it is notirrelevant. In a materialistic age, the pound has almost thesymbolic importance that was once accorded to the Crown; thestate of sterling almost is the state of Britain. The pound is theoldest of modern currencies. The term “pound sterling” isbelieved to have originated well before the Norman Conquest,when the Saxon kings issued silver pennies—called “sterlings” or“starlings” because they sometimes had stars inscribed onthem—of which two hundred and forty equalled one pound ofpure silver. (The shilling, representing twelve sterlings, orone-twentieth of a pound, did not appear on the scene untilafter the Conquest.) Thus, sizable payments in Britain havebeen reckoned in pounds from its beginnings. The pound,however, was by no means an unassailably sound currencyduring its first few centuries, chiefly because of the early kings’
unfortunate habit of relieving their chronic financialembarrassment by debasing the coinage. By melting down aquantity of sterlings, adding to the brew some base metal andno more silver, and then minting new coins, an irresponsibleking could magically convert a hundred pounds into, say, ahundred and ten, just like that. Queen Elizabeth I put a stopto the practice when, in a carefully planned surprise move in1561, she recalled from circulation all the debased coins issuedby her predecessors. The result, combined with the growth ofBritish trade, was a rapid and spectacular rise in the prestigeof the pound, and less than a century after Elizabeth’s coupthe word “sterling” had assumed the adjectival meaning that itstill has—“thoroughly excellent, capable of standing every test.”
By the end of the seventeenth century, when the Bank ofEngland was founded to handle the government’s finances,paper money was beginning to be trusted for general use, andit had come to be backed by gold as well as silver. As timewent on, the monetary prestige of gold rose steadily in relationto that of silver (in the modern world silver has no standing asa monetary reserve metal, and only in some half-dozencountries does it now serve as the principal metal in subsidiarycoinage), but it was not until 1816 that Britain adopted a goldstandard—that is, pledged itself to redeem paper currency withgold coins or bars at any time. The gold sovereign, worth onepound, which came to symbolize stability, affluence, and evenjoy to more Victorians than Bagehot, made its first appearancein 1817.
Prosperity begat emulation. Seeing how Britain flourished, andbelieving the gold standard to be at least partly responsible,other nations adopted it one after another: Germany in 1871;Sweden, Norway, and Denmark in 1873; France, Belgium,Switzerland, Italy, and Greece in 1874; the Netherlands in 1875;and the United States in 1879. The results were disappointing;hardly any of the newcomers found themselves immediatelygetting rich, and Britain, which in retrospect appears to haveflourished as much in spite of the gold standard as because ofit, continued to be the undisputed monarch of world trade. Inthe half century preceding the First World War, London wasthe middleman in international finance, and the pound was itsquasi-official medium. As David Lloyd George was later to writenostalgically, prior to 1914 “the crackle of a bill onLondon”—that is, of a bill of credit in pounds sterling bearingthe signature of a London bank—“was as good as the ring ofgold in any port throughout the civilized world.” The war endedthis idyll by disrupting the delicate balance of forces that hadmade it possible and by bringing to the fore a challenger tothe pound’s supremacy—the United States dollar. In 1914,Britain, hard pressed to finance its fighting forces, adoptedmeasures to discourage demands for gold, thereby abandoningthe gold standard in everything but name; meanwhile, the valueof a pound in dollars sank from $4.86 to a 1920 low of$3.20. In an effort to recoup its lost glory, Britain resumed afull gold standard in 1925, tying the pound to gold at a ratethat restored its old $4.86 relation to the dollar. The cost ofthis gallant overvaluation, however, was chronic depression athome, not to mention the political eclipse for some fifteen yearsof the Chancellor of the Exchequer who ordered it, WinstonChurchill.
The general collapse of currencies during the nineteen-thirtiesactually began not in London but on the Continent, when, inthe summer of 1931, a sudden run on the leading bank ofAustria, the Creditanstalt, resulted in its failure. The dominoprinciple of bank failures—if such a thing can be said toexist—then came into play. German losses arising from thisrelatively minor disaster resulted in a banking crisis in Germany,and then, because huge quantities of British funds were nowfrozen in bankrupt institutions on the Continent, the paniccrossed the English Channel and invaded the home of theimperial pound itself. Demands for gold in exchange for poundsquickly became too heavy for the Bank of England to meet,even with the help of loans from France and the United States.
Britain was faced with the bleak alternatives of setting analmost usurious bank rate—between eight and ten per cent—inorder to hold funds in London and check the gold outflow, orabandoning the gold standard; the first choice, which wouldhave further depressed the domestic economy, in which therewere now more than two and a half million unemployed, wasconsidered unconscionable, and accordingly, on September 21,1931, the Bank of England announced suspension of itsresponsibility to sell gold.
The move hit the financial world like a thunderbolt. So greatwas the prestige of the pound in 1931 that John MaynardKeynes, the already famous British economist, could say, notwholly in irony, that sterling hadn’t left gold, gold had leftsterling. In either case, the mooring of the old system wasgone, and chaos was the result. Within a few weeks, all thecountries on the vast portion of the globe then under Britishpolitical or economic domination had left the gold standard,most of the other leading currencies had either left gold orbeen drastically devalued in relation to it, and in the freemarket the value of the pound in terms of dollars had droppedfrom $4.86 to around $3.50. Then the dollar itself—thepotential new mooring—came loose. In 1933, the United States,compelled by the worst depression in its history, abandoned thegold standard. A year later, it resumed it in a modified formcalled the gold-exchange standard, under which gold coinagewas ended and the Federal Reserve was pledged to sell gold inbar form to other central banks but to no one else—and to sellit at a drastic devaluation of forty-one per cent from the oldprice. The United States devaluation restored the pound to itsold dollar parity, but Britain found it small comfort to be tiedsecurely to a mooring that was now shaky itself. Even so, overthe next five years, while beggar-my-neighbor came to be therule in international finance, the pound did not lose much moreground in relation to other currencies, and when the SecondWorld War broke out, the British government boldly pegged itat $4.03 and imposed controls to keep it there in defiance ofthe free market. There, for a decade, it remained—but onlyofficially. In the free market of neutral Switzerland, it fluctuatedall through the war in reflection of Britain’s military fortunes,sinking at the darkest moments to as low as $2.
In the postwar era, the pound has been almost continuouslyin trouble. The new rules of the game of international financethat were agreed upon at Bretton Woods recognized that theold gold standard had been far too rigid and the virtual paperstandard of the nineteen-thirties far too unstable; a compromiseaccordingly emerged, under which the dollar—the new king ofcurrencies—remained tied to gold under the gold-exchangestandard, and the pound, along with the other leadingcurrencies, became tied not to gold but to the dollar, at ratesfixed within stated limits. Indeed, the postwar era was virtuallyushered in by a devaluation of the pound that was about asdrastic in amount as that of 1931, though far less so in itsconsequences. The pound, like most European currencies, hademerged from Bretton Woods flagrantly overvalued in relationto the shattered economy it represented, and had been keptthat way only by government-imposed controls. In the autumnof 1949, therefore, after a year and a half of devaluationrumors, burgeoning black markets in sterling, and gold lossesthat had reduced the British reserves to a dangerously lowlevel, the pound was devalued from $4.03 to $2.80. With theisolated exceptions of the United States dollar and the Swissfranc, every important non-Communist currency almost instantlyfollowed the pound’s example, but this time no drying up oftrade, or other chaos, ensued, because the 1949 devaluations,unlike those of 1931 and the years following, were not theuncontrolled attempts of countries riddled by depression to gaina competitive advantage at any cost but merely representedrecognition by the war-devastated countries that they hadrecovered to the point where they could survive relatively freeinternational competition without artificial props. In fact, worldtrade, instead of drying up, picked up sharply. But even at thenew, more rational evaluation the pound continued its career ofhairbreadth escapes. Sterling crises of varying magnitudes wereweathered in 1952, 1955, 1957, and 1961. In its unsentimentaland tactless way, the pound—just as by its gyrations in thepast it had accurately charted Britain’s rise and fall as thegreatest of world powers—now, with its nagging recurrentweakness, seemed to be hinting that even such retrenchmentas the British had undertaken in 1949 was not enough to suittheir reduced circumstances.
And in November, 1964, these hints, with their humiliatingimplications, were not lost on the British people. The emotionalterms in which many of them were thinking about the poundwere well illustrated by an exchange that took place in thatcelebrated forum the letters column of the Times when thecrisis was at its height. A reader named I. M. D. Little wrotedeploring all the breast-beating about the pound and particularlythe uneasy whispering about devaluation—a matter that hedeclared to be an economic rather than a moral issue. Quickas a flash came a reply from a C. S. Hadfield, among others.
Was there ever a clearer sign of soulless times, Hadfielddemanded, than Little’s letter? Devaluation not a moral issue?
“Repudiation—for that is what devaluation is, neither more norless—has become respectable!” Hadfield groaned, in theunmistakable tone, as old in Britain as the pound itself, of theoutraged patriot.
IN the ten days following the Basel meeting, the first concern ofthe men at the Federal Reserve Bank of New York was notthe pound but the dollar. The American balance-of-paymentsdeficit had now crept up to the alarming rate of almost sixbillion dollars a year, and it was becoming clear that a rise inthe British bank rate, if it should be unmatched by Americanaction, might merely shift some of the speculative attack fromthe pound to the dollar. Hayes and Coombs and theWashington monetary authorities—William McChesney Martin,chairman of the Federal Reserve Board, Secretary of theTreasury Douglas Dillon, and Under-Secretary of the TreasuryRobert Roosa—came to agree that if the British should raisetheir rate the Federal Reserve would be compelled, inself-defense, to competitively raise its rate above the currentlevel of three and a half per cent. Hayes had numeroustelephone conversations on this delicate point with his Londoncounterpart, Lord Cromer. A deep-dyed aristocrat—a godson ofKing George V and a grandson of Sir Evelyn Baring, later thefirst Earl of Cromer (who, as the British agent in Egypt, wasChinese Gordon’s nemesis in 1884-85)—Lord Cromer was alsoa banker of universally acknowledged brilliance and, atforty-three, the youngest man, as far as anyone couldremember, ever to direct the fortunes of the Bank of England;he and Hayes, in the course of their frequent meetings at Baseland elsewhere, had become warm friends.
During the afternoon of Friday the twentieth, at any rate, theFederal Reserve Bank had a chance to show its goodintentions by doing some front-line fighting for the pound. Thebreather provided by the London closing proved to be illusory;five o’clock in London was only noon in New York, andinsatiable speculators were able to go on selling pounds forseveral more hours in the New York market, with the resultthat the trading room of the Federal Reserve Bank temporarilyreplaced that of the Bank of England as the command post forthe defense. Using as their ammunition British dollars—or, moreprecisely, United States dollars lent to Britain under the swapagreements—the Federal Reserve’s traders staunchly held thepound at or above $2.7825, at ever-increasing cost, of course,to the British reserves. Mercifully, after the New York closingthe battle did not follow the sun to San Francisco and onaround the world to Tokyo. Evidently, the attackers had hadtheir fill, at least for the time being.
What followed was one of those strange modern weekends inwhich weighty matters are discussed and weighty decisionstaken among men who are ostensibly sitting around relaxing invarious parts of the world. Wilson, Brown, and Callaghan wereat Chequers, the Prime Minister’s country estate, taking part ina conference that had originally been scheduled to cover thesubject of national-defense policy. Lord Cromer was at hiscountry place in Westerham, Kent. Martin, Dillon, and Roosawere at their offices or their homes, in and aroundWashington. Coombs was at his home, in Green Village, NewJersey, and Hayes was visiting friends of his elsewhere in NewJersey. At Chequers, Wilson and his two financial ministers,leaving the military brass to confer about defense policy witheach other, adjourned to an upstairs gallery to tackle thesterling crisis; in order to bring Lord Cromer into theirdeliberations, they kept a telephone circuit open to him in Kent,using a scrambler system when they talked on it, so as toavoid interception of their words by their unseen enemies thespeculators. Sometime on Saturday, the British reached theirdecision. Not only would they raise the bank rate, and raise ittwo per cent above its current level—to seven per cent—but, indefiance of custom, they would do so the first thing Mondaymorning, rather than wait for another Thursday to roll around.
For one thing, they reasoned, to postpone action until Thursdaywould mean three and a half more business days during whichthe deadly drain of British reserves would almost certainlycontinue and might well accelerate; for another, the sheer shockof the deliberate violation of custom would serve to dramatizethe government’s determination. The decision, once taken, wascommunicated by British intermediaries in Washington to theAmerican monetary officials there, and relayed to Hayes andCoombs in New Jersey. Those two, knowing that theagreed-upon plan for a concomitant rise in the New York bankrate would now have to be put into effect as quickly aspossible, got to work on the telephone lining up aMonday-afternoon meeting of the Federal Reserve Bank’s boardof directors, without whose initiative the rate could not bechanged. Hayes, a man who sets great store by politeness, hassince said, with considerable chagrin, that he fears he was thedespair of his hostess that weekend; not only was he on thetelephone most of the time but he was prevented by thecircumstances from giving the slightest explanation of hisunseemly behavior.
What had been done—or, rather, was about to be done—inBritain was plenty to flutter the dovecotes of internationalfinance. Since the beginning of the First World War, the bankrate there had never gone higher than seven per cent and hadonly occasionally gone that high; as for a bank-rate change ona day other than Thursday, the last time that had occurred,ominously enough, was in 1931. Anticipating lively action at theLondon opening, which would take place at about 5 A.M. NewYork time, Coombs went to Liberty Street on Sunday afternoonin order to spend the night at the bank and be on handwhen the transatlantic doings began. As an overnightcompanion he had a man who found it advisable to sleep atthe bank so often that he habitually kept a packed suitcase inhis office—Thomas J. Roche, at that time the seniorforeign-exchange officer. Roche welcomed his boss to thesleeping quarters—a row of small, motel-like rooms on theeleventh floor, each equipped with maple furniture, Old NewYork prints, a telephone, a clock radio, a bathrobe, and ashaving kit—and the two men discussed the weekend’sdevelopments for a while before turning in. Shortly before fivein the morning, their radios woke them, and, after a breakfastprovided by the night staff, they repaired to theforeign-exchange trading room, on the seventh floor, to mantheir fluoroscope.
At five-ten, they were on the phone to the Bank of England,getting the news. The bank-rate rise had been announcedpromptly at the opening of the London markets, to theaccompaniment of great excitement; later Coombs was to learnthat the Government Broker’s entrance into the StockExchange, which is usually the occasion for a certain hush, hadthis time been greeted with such an uproar that he had haddifficulty making his news known. As for the first marketreaction of the pound, it was (one commentator said later) likethat of a race horse to dope; in the ten minutes following thebank-rate announcement it shot up to $2.7869, far above itsFriday closing. A few minutes later, the early-rising NewYorkers were on the phone to the Deutsche Bundesbank, thecentral bank of West Germany, in Frankfurt, and the SwissNational Bank, in Zurich, sounding out Continental reaction. Itwas equally good. Then they were back in touch with the Bankof England, where things were looking better and better. Thespeculators against the pound were on the run, rushing now tocover their short sales, and by the time the first gray lightbegan to show in the windows on Liberty Street, Coombs hadheard that the pound was being quoted in London at$2.79—its best price since July, when the crisis started.
It went on that way all day. “Seven per cent will drag moneyfrom the moon,” a Swiss banker commented, paraphrasing thegreat Bagehot, who had said, in his earthbound, Victorian way,“Seven per cent will pull gold out of the ground.” In London,the sense of security was so strong that it allowed a return topolitical bickering as usual; in Parliament, Reginald Maudling, thechief economic authority of the out-of-office Conservatives, tookthe occasion to remark that there wouldn’t have been a crisisin the first place but for the actions of the Labour Government,and Chancellor of the Exchequer Callaghan replied, with deadlypoliteness, “I must remind the honorable gentleman that he toldus [recently] we had inherited his problems.” Everybody wasclearly breathing easier. As for the Bank of England, so greatwas the sudden clamor for pounds that it saw a chance toreplenish its depleted supply of dollars, and for a time thatafternoon it actually felt confident enough to switch sides in themarket, buying dollars with pounds at just below $2.79. In NewYork, the mood persisted after the London closing. It was witha clear conscience about the pound that the directors of theFederal Reserve Bank of New York could—and, that afternoon,did—carry out their plan to raise their lending rate from threeand a half per cent to four per cent. Coombs has since said,“The feeling here on Monday afternoon was: They’ve doneit—they’ve pulled through again. There was a general sigh ofrelief. The sterling crisis seemed to be over.”
It wasn’t, though. “I remember that the situation changed veryfast on Tuesday the twenty-fourth,” Hayes has said. That day’sopening found the pound looking firm at $2.7875. Substantialbuying orders for pounds were coming in now from Germany,and the day ahead looked satisfactory. So things continued until6 A.M. in New York—noon on the Continent. It is around thenthat the various bourses of Europe—including the mostimportant ones, in Paris and Frankfurt—hold the meetings atwhich they set the day’s rate for each currency, for thepurpose of settling transactions in stocks and bonds that involveforeign currency, and these price-fixing sessions are bound toinfluence the money markets, since they give a clear indicationof the most influential Continental sentiment in regard to eachcurrency. The bourse rates set for the pound that day weresuch as to show a renewed, and pronounced, lack ofconfidence. At the same time, it appeared subsequently, moneydealers everywhere, and particularly in Europe, were havingsecond thoughts about the manner of the bank-rate rise theprevious day. At first, taken by surprise, they had reactedenthusiastically, but now, it seemed, they had belatedly decidedthat the making of the announcement on Monday indicatedthat Britain was losing its grip. “What would it connote if theBritish were to play a Cup final on Sunday?” a Europeanbanker is said to have asked a colleague. The only possibleanswer was that it would connote panic in Albion.
The effect of these second thoughts was an astonishinglydrastic turnabout in market action. In New York between eightand nine, Coombs, in the trading room, watched with a sinkingheart as a tranquil pound market collapsed into a rout. Sellingorders in unheard-of quantities were coming from everywhere.
The Bank of England, with the courage of desperation,advanced its last-line trench from $2.7825 to $2.7860, and, byconstant intervention, held the pound there. But it was clearthat the cost would soon become too high; a few minutes after9 A.M. New York time, Coombs calculated that Britain waslosing reserves at the unprecedented, and unsupportable, rate ofa million dollars a minute.
Hayes, arriving at the bank shortly after nine, had hardly satdown at his desk before this unsettling news reached him fromthe seventh floor. “We’re in for a hurricane,” Coombs told him,and went on to say that the pressure on sterling was nowmounting so fast that there was a real likelihood that Britainmight be forced either to devalue or to impose asweeping—and, for many reasons, unacceptable—system ofexchange controls before the week was out. Hayes immediatelytelephoned the governors of the leading European centralbanks—some of whom, because not all the national marketshad yet felt the full weight of the crisis, were startled to hearexactly how grave the situation was—and pleaded with themnot to exacerbate the pressure on both the pound and thedollar by raising their own bank rates. (His job was scarcelymade easier by the fact that he had to admit that his ownbank had just raised its rate.) Then he asked Coombs tocome up to his office. The pound, the two men agreed, nowhad its back to the wall; the British bank-rate rise hadobviously failed of its purpose, and at the million-a-minute rateof loss Britain’s well of reserves would be dry in less than fivebusiness days. The one hope now lay in amassing, within amatter of hours, or within a day or so at the most, a hugebundle of credit from outside Britain to enable the Bank ofEngland to survive the attack and beat it back. Such rescuebundles had been assembled just a handful of times before—forCanada in 1962, for Italy earlier in 1964, and for Britain in1961—but this time, it was clear, a much bigger bundle thanany of those would be needed. The central-banking world wasfaced not so much with an opportunity for building a milestonein the short history of international monetary co?peration aswith the necessity for doing so.
Two other things were clear—that, in view of the dollar’stroubles, the United States could not hope to rescue the poundunassisted, and that, the dollar’s troubles notwithstanding, theUnited States, with all its economic might, would have to jointhe Bank of England in initiating any rescue operation. As afirst step, Coombs suggested that the Federal Reserve standbycredit to the Bank of England ought to be increased forthwithfrom five hundred million dollars to seven hundred and fiftymillion. Unfortunately, fast action on this proposal washampered by the fact that, under the Federal Reserve Act, anysuch move could be made only by decision of a FederalReserve System committee, whose members were scattered allover the country. Hayes conferred by long-distance telephone(all around the world, wires were now humming with news ofthe pound’s extremity) with the Washington monetarycontingent, Martin, Dillon, and Roosa, none of whom disagreedwith Coombs’ view of what had to be done, and as a result ofthese discussions a call went out from Martin’s office tomembers of the key committee, called the Open MarketCommittee, for a meeting by telephone at three o’clock thatafternoon. Roosa, at the Treasury, suggested that the UnitedStates’ contribution to the kitty could be further increased byarranging for a two-hundred-and-fifty-million-dollar loan fromthe Export-Import Bank, a Treasury-owned andTreasury-financed institution in Washington. Hayes and Coombswere naturally in favor of this, and Roosa set in motion thebureaucratic machinery to unlock that particular vault—a processthat, he warned, would certainly take until evening.
As the early afternoon passed in New York, with the millionsof dollars continuing to drain, minute by minute, from Britain’sreserves, Hayes and Coombs, along with their Washingtoncolleagues, were busy planning the next step. If the swapincrease and the Export-Import Bank loan should comethrough, the United States credits would amount to a billiondollars all told; now, in consultation with the beleagueredgarrison at the Bank of England, the Federal Reserve Bankmen began to believe that, in order to make the operationeffective, the other leading central banks—spoken of incentral-banking shorthand as “the Continent,” even though theyinclude the Banks of Canada and Japan—would have to beasked to put up additional credits on the order of one and ahalf billion dollars, or possibly even more. Such a sum wouldmake the Continent, collectively, a bigger contributor to thecause than the United States—a fact that Hayes and Coombsrealized might not sit too well with the Continental bankers andtheir governments.
At three o’clock, the Open Market Committee held itstelephone meeting—twelve men sitting at their desks in six cities,from New York to San Francisco. The members heardCoombs’ dry, unemotional voice describing the situation andmaking his recommendation. They were quickly convinced. Inno more than fifteen minutes, they had voted unanimously toincrease the swap credit to seven hundred and fifty milliondollars, on condition that proportional credit assistance could beobtained from other central banks.
By late afternoon, tentative word had come from Washingtonthat prospects for the Export-Import Bank loan looked good,and that more definite word could be expected before midnight.
So the one billion dollars in United States credits appeared tobe virtually in the bag. It remained to tackle the Continent. Itwas night now in Europe, so nobody there could be tackled;the zero hour, then, was Continental opening time the nextday, and the crucial period for the fate of the pound would bethe few hours after that. Hayes, after leaving instructions for abank car to pick him up at his home, in New Canaan,Connecticut, at four o’clock in the morning, took his usualcommuting train from Grand Central shortly after five. He hassince expressed a certain regret that he proceeded in such aroutine way at such a dramatic moment. “I left the bankrather reluctantly,” he says. “In retrospect, I guess I wish Ihadn’t. I don’t mean as a practical matter—I was just as usefulat home, and, as a matter of fact, I ended up spending mostof the evening on the phone with Charlie Coombs, who stayedat the bank—but just because something like that doesn’thappen every day in a banker’s life. I’m a creature of habit, Iguess. Besides, it’s something of a tenet of mine to insist onkeeping a proper balance between private and professional life.”
Although Hayes does not say so, he may have been thinkingof something else, too. It can safely be said to be something ofa tenet of central-bank presidents or governors not to sleep attheir places of business. If word were ever to get out that themethodical Hayes was doing so at a time like this, he mayhave reasoned, it might well be considered just as much a signof panic as a British bank-rate rise on a Monday.
Meanwhile, Coombs was making another night of it on LibertyStreet; he had gone home the previous night because theworst had momentarily appeared to be over, but now hestayed on after regular work hours with Roche, who hadn’tbeen home since the previous weekend. Toward midnight,Coombs received confirmation of the Export-Import Bank’stwo-hundred-and-fifty-million-dollar credit, which had arrivedfrom Washington during the evening, as promised. So noweverything was braced for the morning’s effort. Coombs againinstalled himself in one of the uninspiring eleventh-floor cubicles,and, after a final marshalling of the facts that would be neededfor the job of persuading the Continental bankers, set his clockradio for three-thirty and went to bed. A Federal Reserve manwith a literary bent and a romantic temperament was latermoved to draw a parallel between the Federal Reserve Bankthat night and the British camp on the eve of the Battle ofAgincourt in Shakespeare’s version, in which King Henry musedso eloquently on how participation in the coming action wouldserve to ennoble even the vilest of the troops, and howgentlemen safe in bed at home would later think themselvesaccursed that they had not been at the battle scene. Coombs,a practical man, had no such high-flown opinion of hissituation; even so, as he dozed fitfully, waiting for morning toreach Europe, he was well aware that the events he was takingpart in were like nothing that had ever happened in bankingbefore.
IISo that evening, Tuesday, November 24, 1964, Hayes arrived athis home, in New Canaan, Connecticut, at about six-thirty,exactly as usual, having inexorably taken his usual 5:09 fromGrand Central. Hayes was a tall, slim, soft-spoken man offifty-four with keen eyes framed by owlish round spectacles,with a slightly schoolmasterish air and a reputation forunflappability. By so methodically going through familiar motionsat such a time, he realized with amusement, he must seem tohis colleagues to be living up to his reputation ratherspectacularly. At his house, a former caretaker’s cottage of circa1840 that the Hayeses had bought and remodelled twelve yearsearlier, he was greeted, as usual, by his wife, a pretty andvivacious woman of Anglo-Italian descent named Vilma butalways called Bebba, who loves to travel, has almost no interestin banking, and is the daughter of the late Metropolitan Operabaritone Thomas Chalmers. Since at that time of year it wascompletely dark when Hayes got home, he decided to forgo afavorite early-evening unwinding activity of his—walking to thetop of a grassy slope beside the house which commands a fineview across the Sound to Long Island. Anyway, he was notreally in a mood to unwind; instead, he felt keyed up, anddecided he might as well stay that way overnight, since the carfrom the bank was scheduled to call at his door so early thenext morning to take him to work.
During dinner, Hayes and his wife discussed subjects like thefact that their son, Tom, who was a senior at Harvard, wouldbe arriving home the following day for his Thanksgiving recess.
Afterward, Hayes settled down in an armchair to read for awhile. In banking circles, he is thought of as a scholarly,intellectual type, and, indeed, he is scholarly and intellectual incomparison with most bankers; even so, his extra-bankingreading tends to be not constant and all-embracing, as hiswife’s is, but sporadic, capricious, and intensive—everythingabout Napoleon for a while, perhaps, then a dry period, then abinge on, say, the Civil War. Just then, he was concentratingon the island of Corfu, where he and Mrs. Hayes wereplanning to spend some time. But before he had got very farinto his latest Corfu book he was called to the telephone. Thecall was from the bank. There were new developments, whichCoombs thought President Hayes ought to be kept abreast of.
To recapitulate in brief: drastic action to save the pound,which the Federal Reserve Bank not only would be intimatelyinvolved in but would actually join in initiating, was going to betaken by the government banks—or central banks, as they aremore commonly called—of the non-Communist world’s leadingnations as soon as possible after the next morning’s opening ofthe London and Continental financial markets, which wouldoccur between 4 and 5 A.M. New York time. Britain was faceto face with bankruptcy, the reasons being that a huge deficitin its international accounts over the previous months hadresulted in concomitant losses in the gold and dollar reservesheld by the Bank of England; that worldwide fear lest thenewly elected Labour Government decide, or be forced, to easethe situation by devaluing the pound from its dollar parity ofabout $2.80 to some substantially lower figure had caused aflood of selling of pounds by hedgers and speculators in theinternational money markets; that the Bank of England, fulfillingan international obligation to sustain the pound at a free-marketprice no lower than $2.78, had been losing millions of dollars aday from its reserves, which now stood at about two billiondollars, their lowest point in many years.
The remaining hope lay in amassing, in a matter of hoursbefore it would be too late, an unheard-of sum in short-termdollar credits to Britain from the central banks of the world’srich nations. With such credits at its disposal, the Bank ofEngland would presumably be able to buy up pounds soaggressively that the speculative attack could be absorbed,contained, and finally beaten back, giving Britain time to set itseconomic affairs in order. Just what the sum necessary forrescue should be was an open question, but earlier that daythe monetary authorities of the United States and Britain hadconcluded that it would have to be at least two billion dollars,and perhaps even more. The United States, through theFederal Reserve Bank of New York and the Treasury-ownedExport-Import Bank, in Washington, had that day committeditself to one billion; the task that remained was to persuade theother leading central banks—habitually spoken of in thecentral-banking world as “the Continent,” even though theyinclude the Banks of Canada and Japan—to lend more than abillion in addition.
Nothing of the kind had ever been asked of the Continentbefore, through the swap network or any other way. InSeptember, 1964, the Continent had come through with itsbiggest collective emergency credit so far—half a billion dollarsto the Bank of England for use in defending the pound,already embattled then. Now, with this half-billion loan stilloutstanding and the pound in far worse straits, the Continentwas about to be called upon for more than twice thatsum—perhaps five times that sum. Obviously, the spirit ofco?peration, if not the quality of mercy, was about to bestrained. So Hayes’ musings that evening may well have run.
With such portentous matters churning around in his head,Hayes found it hard to keep his mind on Corfu. Besides, theprospect of the bank car’s arrival at four o’clock made him feelthat he should go to bed early. As he prepared to do so, Mrs.
Hayes commented that since he would have to get up in themiddle of the night, she supposed she ought to feel sorry forhim but since he was obviously looking forward with keenanticipation to whatever it was that would get him up at thathour, she envied him instead.
DOWN on Liberty Street, Coombs slept fitfully until he wasawakened by the clock radio in his room at about three-thirtyNew York time—that is to say, eight-thirty London time andnine-thirty farther east on the European Continent. A series offoreign-exchange crises involving Europe had so accustomedhim to the time differential that he was inclined to think interms of the European day, referring casually to 8 A.M. in NewYork as “lunchtime,” and 9 A.M. as “midafternoon.” So whenhe got up it was, in his terms, “morning,” despite the starsthat were shining over Liberty Street. Coombs got dressed,went to his office, on the tenth floor, where he had somebreakfast provided by the bank’s regular night kitchen staff,and began placing telephone calls to the various leading centralbanks of the non-Communist world. All the calls were putthrough by one telephone operator, who handles the FederalReserve Bank’s switchboard during off hours, and all of themwere eligible for a special government-emergency priority thatthe bank’s officers are entitled to claim, but on this occasion itdid not have to be used, because at four-fifteen, when Coombsbegan his telephoning, the transatlantic circuits were almostentirely clear.
The calls were made essentially to lay the groundwork forwhat was to come. The morning news from the Bank ofEngland, obtained in one of the first calls from Liberty Street,was that conditions were unchanged from the previous day: thespeculative attack on the pound was continuing unabated, andthe Bank of England was sustaining the pound’s price at$2.7860 by throwing still more of its reserves on the market.
Coombs had reason to believe that when the New Yorkforeign-exchange market opened, some five hours later, vastadditional quantities of pounds would be thrown on the marketon this side of the Atlantic, and more British dollars and goldwould have to be spent. He conveyed this alarming intelligenceto his counterparts at such institutions as the DeutscheBundesbank, in Frankfurt; the Banque de France, in Paris; theBanca d’Italia, in Rome; and the Bank of Japan, in Tokyo. (Inthe last case, the officers had to be reached at their homes, forthe fourteen-hour time difference made it already past 6 P.M. inthe Orient.) Then, coming to the crux of the matter, Coombsinformed the representatives of the various banks that theywere soon to be asked, in behalf of the Bank of England, fora loan far bigger than any they had ever been asked forbefore. “Without going into specific figures, I tried to make thepoint that it was a crisis of the first magnitude, which many ofthem still didn’t realize,” Coombs has said. An officer of theBundesbank, who knew as much about the extent of the crisisas anyone outside London, Washington, and New York, hassaid that in Frankfurt they were “mentally prepared”—or“braced” might be a better word—for the huge touch that wasabout to be put on them, but that right up to the time ofCoombs’ call they had been hoping the speculative attack onthe pound would subside of its own accord, and even after thecall they had no idea how much they might be asked for. Inany event, as soon as Coombs was off the wire theBundesbank’s governor called a board of managers’ meeting,and, as things turned out, the meeting was to remain insession all day long.
Still, all this was preparatory. Actual requests, in specificamounts, had to be made by the head of one central bank ofthe head of another. At the time Coombs was making hissoftening-up calls, the head of the Federal Reserve Bank was inthe bank’s limousine, somewhere between New Canaan andLiberty Street, and the bank’s limousine, in flagrantnonconformity with the James Bond style of high-levelinternational dealings, was not equipped with a telephone.
HAYES, the man being awaited, had been president of theFederal Reserve Bank of New York for a little over eight years,having been chosen for the job, to his own and almosteveryone else’s bewilderment, not from some position ofcomparable eminence or from the Federal Reserve’s own ranksbut from among the swarming legions of New Yorkcommercial-bank vice-presidents. Unorthodox as the appointmentseemed at the time, in retrospect it seems providential. A studyof Hayes’ early life and youthful career gives the impressionthat everything was somehow intended to prepare him fordealing with this sort of international monetary crisis, just asthe life of a writer or a painter sometimes seems to haveconsisted primarily of preparation for the execution of a singlework of art. If Divine Providence, or perhaps its financialdepartment, when the huge sterling crisis was imminent, hadneeded an assessment of Hayes’ qualifications for coping withthis task and had hired the celestial equivalent of an executiverecruiter to report on him, the dossier might have readsomething like this:
“Born in Ithaca, New York, on July 4, 1910; grew up mostlyin New York City. Father a professor of Constitutional law atCornell, later a Manhattan investment counsellor; mother aformer schoolteacher, enthusiastic suffragette, settlement-houseworker, and political liberal. Both parents birdwatchers. Familyatmosphere intellectual, freethinking, and public-spirited. Attendedprivate schools in New York City and Massachusetts and wasusually his school’s top-ranking student. Then went to Harvard(freshman year only) and Yale (three years: mathematicsmajor, Phi Beta Kappa in junior year, ineffectual oar on classcrew, graduated 1930 as top B.A. of class). Studied at NewCollege, Oxford, as Rhodes Scholar 1931-33; there became firmAnglophile, and wrote thesis on ‘Federal Reserve Policy and theWorking of the Gold Standard in the Years 1923-30,’ althoughhe had no thought of ever joining the Federal Reserve. Wishesnow he had the thesis, in case it contains blinding youthfulilluminations, but neither he nor New College can find it.
Entered New York commercial banking in 1933, and roseslowly but steadily (1938 annual salary twenty-seven hundreddollars). Attained title (albeit feeble title) of assistant secretary atNew York Trust Company in 1942; after a Navy stint, in 1947became an assistant vice-president and two years later head ofNew York Trust’s foreign department despite total lack ofprevious experience in foreign banking. Apparently learned fast;astounded his colleagues and superiors, and gained reputationamong them as foreign-exchange wizard by predicting preciseamount of 1949 pound devaluation ($4.03 to $2.80) a fewweeks before it occurred.
“Was appointed president of Federal Reserve Bank of NewYork in 1956, to his utter astonishment and that of New Yorkbanking community, most of which had never heard of thisrather shy man. Reacted calmly by taking his family on atwo-month vacation in Europe. The consensus now is thatFederal Reserve Bank’s directors had almost implausibleprescience, or luck, in picking a foreign-exchange expert justwhen the dollar was weakening and international monetaryco?peration becoming crucially important. Is liked by Europeancentral bankers, who call him Al (which often comes outsounding more like All). Earns seventy-five thousand dollars ayear, making him the second-highest-paid federal official afterthe President of the United States, Federal Reserve Banksalaries being intended to be more or less competitive inbanking terms rather than in government-employee terms. Isvery tall and very thin. Tries to observe regular commutinghours and keep his private life sacrosanct, as a matter ofprinciple; considers regular evening work at an office‘outrageous.’ Complains that his son has a low opinion ofbusiness; attributes this to ‘reverse snobbery’—but even thenremains calm.
“Conclusion: this is the very man for the job of representingthe United States’ central bank in a sterling crisis.”
And, indeed, Hayes readily fits the picture of a perfectlyplanned and perfectly tooled piece of machinery to perform acertain complex task, but there are other sides to him, and hischaracter contains as many paradoxes as the next man’s.
Although hardly anyone in banking ever tries to describe Hayeswithout using the words “scholarly” and “intellectual,” Hayestends to think of himself as an indifferent scholar andintellectual but an effective man of action, and on the latterscore the events of November 25, 1964, seem to bear him out.
Although in some ways he is the complete banker—inconformity with H. G. Wells’ notion of such a banker, heseems to “take money for granted as a terrier takes rats,” andto be devoid of philosophical curiosity about it—he has adistinctly unbankerlike philosophical curiosity about almosteverything else. And although casual acquaintances sometimespronounce him dull, his close friends speak of a rare capacityfor enjoyment and an inner serenity that seem to make himimmune to the tensions and distractions that fragment the livesof so many of his contemporaries. Doubtless the inner serenitywas put to a severe test as Hayes rode in the bank cartoward Liberty Street. When he arrived at his desk at aboutfive-thirty, Hayes’ first act was to punch Coombs’ button on hisinteroffice phone and get the foreign-department chief’s latestappraisal of the situation. He learned that, as he had expected,the Bank of England’s sickening dollar drain was continuingunabated. Worse than that, though; Coombs said his contactswith local bankers who were also on emergency early-morningvigil (men in the foreign departments of the huge commercialbanks like the Chase Manhattan and the First National City)indicated that overnight there had accumulated a fantastic pileof orders to unload pounds on the New York market as soonas it opened. The Bank of England, already almost inundated,could expect a new tidal wave from New York to hit in fourhours. The need for haste thus became even more urgent.
Hayes and Coombs agreed that the project of putting togetheran international package of credits to Britain should beannounced as soon as possible after the New Yorkopening—perhaps as early as ten o’clock. So that the bankwould have a single center for all its foreign communications,Hayes decided to forsake his own office—a spacious one withpanelled walls and comfortable chairs grouped around afireplace—and let Coombs’ quarters, down the hall, which weremuch smaller and more austere but more efficiently arranged,serve as the command post. Once there, he picked up one ofthree telephones and asked the operator to get him LordCromer, at the Bank of England. When the connection wasmade, the two men—the key figures in the proposed rescueoperation—reviewed their plans a final time, checking the sumsthey had tentatively decided to ask of each central bank andagreeing on who would call whom first.
In the eyes of some people, Hayes and Lord Cromer makean oddly assorted pair. Besides being a deep-dyed aristocrat,George Rowland Stanley Baring, third Earl of Cromer, is adeep-dyed banker. A scion of the famous London merchantbank of Baring Brothers, the third Earl and godson of amonarch went to Eton and Trinity College, Cambridge, andspent twelve years as a managing director of his family’s bankand then two years—from 1959 to 1961—as Britain’s economicminister and chief representative of his country’s Treasury inWashington. If Hayes had acquired his mastery of the arcanaof international banking by patient study, Lord Cromer, who isno scholar, acquired his by heredity, instinct, or osmosis. IfHayes, despite his unusual physical stature, could easily beoverlooked in a crowd, Lord Cromer, who is of average heightbut debonair and dashing, would cut a figure anywhere. IfHayes is inclined to be a bit hesitant about casual intimacies,Lord Cromer is known for his hearty manner, andhas—doubtless unintentionally—both flattered and obscurelydisappointed many American bankers who have been awed byhis title by quickly encouraging them to call him Rowley.
“Rowley is very self-confident and decisive,” an Americanbanker has said. “He’s never afraid to barge in, because he’sconvinced of the reasonableness of his own position. But thenhe’s a reasonable man. He’s the kind of man who in a crisiswould be able to grab the telephone and do something aboutit.” This banker confesses that until November 25, 1964, hehad not thought Hayes was that kind of man.
Beginning at about six o’clock that morning, Hayes did grabthe phone, right along with Lord Cromer. One after another,the leading central bankers of the world—among them PresidentKarl Blessing, of the Deutsche Bundesbank; Dr. Guido Carli, ofthe Bank of Italy; Governor Jacques Brunet, of the Bank ofFrance; Dr. Walter Schwegler, of the Swiss National Bank; andGovernor Per ?sbrink, of the Swedish Riksbank—picked uptheir phones and discovered, some of them with considerablesurprise, the degree of gravity that the sterling crisis hadreached in the past day, the fact that the United States hadcommitted itself to a short-term loan of one billion dollars, andthat they were being asked to dig deep into their own nations’
reserves to help tide sterling over. Some first heard all thisfrom Hayes, some from Lord Cromer; in either case, theyheard it not from a casual or official acquaintance but from afellow-member of that esoteric fraternity the Basel club. Hayes,whose position as representative of the one country that hadalready pledged a huge sum cast him almost automatically asthe leader of the operation, was careful to make it clear ineach of his calls that his part in the proceedings was to putthe weight of the Federal Reserve behind a request thatformally came from the Bank of England. “The pound’ssituation is critical, and I understand the Bank of England isrequesting a credit line of two hundred and fifty million dollarsfrom you,” he would say, in his calm way, to one Continentalcentral-bank governor or another. “I’m sure you understandthat this is a situation where we all have to stand together.”
(He and Coombs always spoke English, of course. Despite thefact that he had recently been taking French refresher lessons,and that at Yale he made one of the most impressive academicrecords in memory, Hayes doggedly remained a dub atlanguages and still did not trust himself to carry on animportant business conversation in anything but English.) Inthose cases in which he was on particularly close terms withhis Continental counterpart, he spoke more informally, using acentral-bankers’ jargon in which the conventional numerical unitis a million dollars. Hayes would say smoothly in such cases,“Do you think you can come in for, say, a hundred and fifty?”
Regardless of the degree of formality of the approach Hayesmade, the first response, he says, was generally cageyness, notunmixed with shock. “Is it really as bad as all that, Al? Wewere still hoping that the pound would recover on its own” isthe kind of thing he recalls having heard several times. WhenHayes assured them that it was indeed as bad as all that, andthat the pound would certainly not recover on its own, theusual response was something like “We’ll have to see what wecan do and then call you back.” Some of the Continentalcentral bankers have said that what impressed them mostabout Hayes’ first call was not so much what he said as whenhe said it. Realizing that it was still well before dawn in NewYork, and knowing Hayes’ addiction to what are commonlythought of as bankers’ hours, these Europeans perceived thatthings must be grave the moment they heard his voice. Assoon as Hayes had broken the ice at each Continental bank,Coombs would take over and get down to details with hiscounterparts.
The first round of calls left Hayes, Lord Cromer, and theirassociates on Liberty and Threadneedle Streets relatively hopeful.
Not one bank had given them a flat no—not even, to theirdelight, the Bank of France, although French policy had alreadybegun moving sharply away from co?peration with Britain andthe United States in monetary matters, among others.
Furthermore, several governors had surprised them bysuggesting that their countries’ subscriptions to the loan mightactually be bigger than those suggested. With thisencouragement, Hayes and Lord Cromer decided to raise theirsights. They had originally been aiming for credits of two and ahalf billion dollars; now, on reconsideration, they saw that therewas a chance for three billion. “We decided to up the ante alittle here and there,” Hayes says. “There was no way ofknowing precisely what sum would be the least that would dothe job of turning the tide. We knew we would be relying to alarge extent on the psychological effect of ourannouncement—assuming we would be able to make theannouncement. Three seemed to us a good, round figure.”
But difficulties lay ahead, and the biggest difficulty, it becameclear as the return calls from the various banks began to comein, was to get the thing done quickly. The hardest point toconvey, Hayes and Coombs found, was that each passingminute meant a further loss of a million dollars or more to theBritish reserves, and that if normal channels were followed theloans would unquestionably come too late to avert devaluationof the pound. Some of the central banks were required by lawto consult their governments before making a commitment andsome were not, but even those that were not insisted on doingso, as a courtesy; this took time, especially since more thanone Finance Minister, unaware that he was being sought toapprove an enormous loan on an instant’s notice, with littleevidence of the necessity for it beyond the assurance of LordCromer and Hayes, was temporarily unavailable. (One happenedto be engaged in debate in his country’s parliament.) And evenin cases where the Finance Minister was at hand, he wassometimes reluctant to act in such a shotgun way.
Governments move more deliberately in money matters thancentral bankers do. Some of the Finance Ministers said, ineffect, that upon proper submission of a balance sheet of theBank of England, along with a formal written application for theemergency credit, they would gladly consider the matter.
Furthermore, some of the central banks themselves showed amaddening inclination to stand on ceremony. Theforeign-exchange chief of one bank is said to have replied tothe request by saying, “Well, isn’t this convenient! We happento have a board meeting scheduled for tomorrow. We’ll takethe matter up then, and afterward we’ll get in touch with you.”
The reply of Coombs, who happened to be the man on thewire in New York, is not recorded in substance, but its manneris reported to have been uncharacteristically vehement. EvenHayes’ celebrated imperturbability was shaken a time or two, orso those who were present have said; his tone remained ascalm and even as ever, but its volume rose far above theusual level.
The problems that the Continental central banks faced inmeeting the challenge are well exemplified by the situation atthe richest and most powerful of them, the DeutscheBundesbank. Its board of managers was already sitting inemergency session as a result of Coombs’ early call whenanother New York call—this one from Hayes to PresidentBlessing—gave the Bundesbank its first indication of exactly howmuch it was being asked to put up. The amounts the variouscentral banks were asked for that morning have never beenmade public, but, on the basis of what has become known, itis reasonable to assume that the Bundesbank was asked forhalf a billion dollars—the highest quota of the lot, and certainlythe largest sum that any central bank other than the FederalReserve had ever been called upon to supply to another on afew hours’ notice. Hard on the heels of Hayes’ call conveyingthis jarring information, Blessing heard from Lord Cromer, inLondon, who confirmed everything that Hayes had said aboutthe seriousness of the crisis and repeated the request. Wincinga bit, perhaps, the Bundesbank managers agreed in principlethat the thing had to be done. But right there their problemsbegan. Proper procedure must be adhered to, Blessing and hisaides decided. Before taking any action, they must consult withtheir economic partners in the European Common Market andthe Bank for International Settlements, and the key man to beconsulted, since he was then serving as president of the Bankfor International Settlements, was Dr. Marius W. Holtrop,governor of the Bank of the Netherlands, which, of course, wasalso being asked to contribute. A rush person-to-person callwas put through from Frankfurt to Amsterdam. Dr. Holtrop,the Bundesbank managers were informed, wasn’t inAmsterdam; by chance, he had taken a train that morning toThe Hague to meet his country’s Finance Minister forconsultation on other matters. For the Bank of the Netherlandsto make any such important commitment without theknowledge of its governor was out of the question, and,similarly, the Bank of Belgium, a nation whose monetary policiesare linked inextricably with the Netherlands’, was reluctant toact until Amsterdam had given its O.K. So for an hour ormore, as millions of dollars continued to drain out of the Bankof England and the world monetary order stood in jeopardy,the whole rescue operation was hung up while Dr. Holtrop,crossing the Dutch lowlands by train, or perhaps already inThe Hague and tied up in a traffic jam, could not be found.
ALL this, of course, meant agonizing frustration in New York.
As morning began here at last, Hayes’ and Coombs’ campaigngot a boost from Washington. The leading governmentmonetary authorities—Martin at the Federal Reserve Board,Dillon and Roosa at the Treasury—had all been intimatelyinvolved in the previous day’s planning for the rescue, and ofcourse part of the planning had been the decision to let theNew York bank, as the Federal Reserve System’s and theTreasury’s normal operating arm in international monetarydealings, serve as campaign headquarters. So the members ofthe Washington contingent had slept at home and come totheir offices at the normal hour. Now, having learned fromHayes of the difficulties that were developing, Martin, Dillon,and Roosa pitched in with transatlantic calls of their own toemphasize the extent of America’s concern over the matter. Butno number of calls from anywhere could hold back theclock—or, for that matter, find Dr. Holtrop—and Hayes andCoombs finally had to abandon their idea of having a creditbundle ready in time for an announcement to the world at ornear 10 A.M. in New York. And there were other reasons, too,for a fading of the early hopes. As the New York marketsopened, the extent of the alarm that had spread around thefinancial world overnight was only too clearly revealed. Thebank’s foreign-exchange trading desk, on the seventh floor,reported that the assault on the pound at the New Yorkopening had been fully as terrifying as they had expected, andthat the atmosphere in the local exchange market had reacheda state not far from panic. From the bank’s securitiesdepartment came an alarming report that the market forUnited States government bonds was coming under the heaviestpressure in years, reflecting an ominous lack of confidence inthe dollar on the part of bond traders. This intelligence servedas a grim reminder to Hayes and Coombs of something theyknew already—that a fall of the pound in relation to the dollarcould quite possibly be followed, in a kind of chain reaction, bya forced devaluation of the dollar in relation to gold, whichmight cause monetary chaos everywhere. If Hayes and Coombshad been permitting themselves any moments of idle reverie inwhich to picture themselves simply as good Samaritans, thiswas just the news to bring them back to reality. And thenword arrived that the wild tales flying around Wall Streetshowed signs of crystallizing into a single tale, demoralizinglycredible because it was so specific. The British government, itwas being said, would announce a sterling devaluation ataround noon New York time. Here was something that couldbe authoritatively refuted, at least in respect to timing, sinceBritain would obviously not devalue while the credit negotiationswere under way. Torn between the desire to quell a destructiverumor and the need to keep the negotiations secret until theywere concluded, Hayes compromised. He had one of hisassociates call a few key Wall Street bankers and traders tosay, as emphatically as possible, that the latest devaluationrumor was, to his firm knowledge, false. “Can you be morespecific?” the associate was asked, and he replied, becausethere was nothing else he could reply, “No, I can’t.”
This unsupported word was something, but it was notenough; the foreign-exchange and bond markets were onlymomentarily reassured. There were times that morning, Hayesand Coombs now admit, when they put down their telephones,looked at each other across the table in Coombs’ office, andwordlessly exchanged the thought: It isn’t going to be done intime. But—in the best tradition of melodrama, which sometimesseems to survive stubbornly in nature at a time when it isdead in art—just when things looked darkest, good news beganto arrive. Dr. Holtrop had been tracked down in a restaurantin The Hague, where he was having lunch with theNetherlands’ Minister of Finance, Dr. J. W. Witteveen;moreover, Dr. Holtrop had endorsed the rescue operation, andas for the matter of consulting his government, that was noproblem, since the responsible representative of his governmentwas sitting across the table from him. The chief obstacle wasthus overcome, and after Dr. Holtrop had been reached thedifficulties began narrowing down to annoyances like thenecessity for continually apologizing to the Japanese for routingthem out of bed as midnight arrived and passed in Tokyo. Thetide had turned. Before noon in New York, Hayes andCoombs, and Lord Cromer and his deputies in London as well,knew that they had agreement in principle from ten Continentalcentral banks—those in West Germany, Italy, France, theNetherlands, Belgium, Switzerland, Canada, Sweden, Austria, andJapan—and also from the Bank for International Settlements.
There remained the wait while each central bank wentthrough the painfully slow process of completing whateverformalities were required to make its action legal and proper.
The epitome of orderliness, the Bundesbank, could not act untilit had obtained ratification from the members of its board ofdirectors, most of whom were in provincial outposts scatteredaround Germany. The two leading Bundesbank deputies dividedup the job of calling the absent directors and persuading themto go along—a job that was made more delicate by the factthat the absent directors were being asked to approvesomething that, in effect, the bank’s home office had alreadyundertaken to do. At midafternoon by Continental time, whilethe two deputies were busy at this exercise in doubletalk,Frankfurt got a new call from London. It was Lord Cromer,no doubt sounding as exasperated as his situation permitted,and what he had to say was that the rate of British reserveloss had become so rapid that the pound could not surviveanother day. Formalities notwithstanding, it was a case of nowor never. (The Bank of England’s reserve loss that day hasnever been announced. The Economist later passed along aguess that it may have run to five hundred million dollars, orabout a quarter of all that remained in Britain’s reservecoffers.) After Lord Cromer’s call, the Bundesbank deputiestempered their tact with brevity; they got unanimous approvalfrom the directors, and shortly after five o’clock Frankfurt timethey were ready to tell Lord Cromer and Hayes that theBundesbank was in for the requested half-billion dollars.
Other central banks were coming in, or were already in.
Canada and Italy put up two hundred million dollars each, anddoubtless were glad to do it, inasmuch as their own currencieshad been the beneficiaries of much smaller but otherwisesimilar international bailout operations in 1962 and earlier in1964, respectively. If a subsequent report in the London Timesis to be accepted, France, Belgium, and the Netherlands, noone of which ever announced the amount of its participation,each contributed two hundred million dollars, too. Switzerland isknown to have come through with a hundred and sixty milliondollars and Sweden with a hundred million dollars, whileAustria, Japan, and the Bank for International Settlementsrounded out the bundle with still undisclosed amounts. Bylunchtime in New York, it was all over but the shouting, andthe last part of the task was to make the shouting as effectiveas possible to give it the fastest and most forcible impact onthe market.
The task brought to the fore another Federal Reserve Bankman, its vice-president in charge of public information, ThomasOlaf Waage. Waage (his name rhymes with “saga”) had beenpresent and active in Coombs’ office almost all morning,constantly on the phone as liaison man with Washington. Aborn-and-bred New Yorker, the son of a Norwegian-born localtug pilot and fishing-boat captain, Waage is a man of broadand unfeigned outside interests—among them opera,Shakespeare, Trollope, and his ancestral heritage, sailing—andone consuming passion, which is striving to convey not only thefacts but also the drama, suspense, and excitement of centralbanking to a skeptical and often glassy-eyed public. In short, abanker who is a hopeless romantic. So now he was overjoyedwhen Hayes assigned to him the job of preparing a newsrelease that would inform the world, as emphatically as possible,about the rescue operation. While Hayes and Coombs struggledto tie up the loose ends of their package, Waage was busyco?rdinating timing with his counterparts at the Federal ReserveBoard and the Treasury Department in Washington, whichwould share in the issuing of the American announcement, andat the Bank of England, which, Hayes and Lord Cromer hadagreed, would issue a simultaneous announcement of its own.
“Two o’clock in the afternoon New York time was the hour weagreed upon for the announcements, when it began to look asif we’d have something to announce by that time,” Waagerecalls. “That was too late to catch the Continental and Londonmarkets that day, of course, but it left the whole afternoonahead until the New York markets closed, at around five, andif the sterling market could be dramatically reversed here beforeclosing time, chances were the recovery would continue on theContinent and in London next day, when the Americanmarkets would be closed for Thanksgiving. As for the amountof the combined credit we were planning to announce, it stillstood at three billion dollars. But I remember that a last-minutesnag of a particularly embarrassing sort developed. Very late inthe game, when we thought the whole package was in hand,Charlie Coombs and I counted up what had been pledged, justto make sure, and we got only two billion eight hundred andfifty million. Apparently, we’d mislaid a hundred and fifty milliondollars somewhere. That’s just what we’d done—we’dmiscalculated. So it was all right.”
The package was assembled in time to meet the newschedule, and statements from the Federal Reserve, theTreasury, and the Bank of England duly went out to the newsmedia simultaneously, at 2 P.M. in New York and 7 P.M. inLondon. As a result of Waage’s influence, the American version,though it fell somewhat short of the mood of, say, the lastscene of “Die Meistersinger,” was nevertheless exceptionallystirring as bank utterances go, speaking with a certain subduedflamboyance of the unprecedented nature of the sum involvedand of how the central banks had “moved quickly to mobilizea massive counterattack on speculative selling of the pound.”
The London release had a different kind of distinction,achieving something of the quintessential Britishness that seemsto be reserved for moments of high crisis. It read simply, “TheBank of England have made arrangements under which$3,000M. are made available for the support of sterling.”
APPARENTLY, the secrecy of the operation had been successfullypreserved and the announcement struck the New Yorkforeign-exchange market all of a heap, because the reaction wasas swift and as electric as anyone could have wished.
Speculators against the pound decided instantly and with nohesitation that their game was up. Immediately after theannouncement, the Federal Reserve Bank put in a bid forpounds at $2.7868—a figure slightly above the level at whichthe pound had been forcibly maintained all day by the Bank ofEngland. So great was the rush of speculators to get free oftheir speculative positions by buying pounds that the FederalReserve Bank found very few pounds for sale at that price.
Around two-fifteen, there were a strange and heartening fewminutes in which no sterling was available in New York at anyprice. Pounds were eventually offered for sale again at a higherprice, and were immediately gobbled up, and thus the pricewent on climbing all afternoon, to a closing of just above $2.79.
Triumph! The pound was out of immediate danger; the thinghad worked. Tributes to the success of the operation began topour in from everywhere. Even the magisterial Economist wasto declare shortly, “Whatever other networks break down, itseems, the central bankers [have an] astonishing capacity forinstant results. And if theirs is not the most desirable possiblemechanism, geared always to short-term support of the statusquo, it happens to be the only working one.”
So, with the pound riding reasonably high again, the FederalReserve Bank shut up for Thanksgiving, and the bankers wenthome. Coombs recalls having drunk a Martini unaccustomedlyfast. Hayes, home in New Canaan, found that his son, Tom,had arrived from Harvard. Both his wife and his son noticedthat he seemed to be in an unusual state of excitement, andwhen they asked about it he replied that he had just beenthrough the most completely satisfying day of his entire workingcareer. Pressed for details, he gave them a condensed andsimplified account of the rescue operation, keeping constantly inmind the fact that his audience consisted of a wife who had nointerest in banking and a son who had a low opinion ofbusiness. The reaction he got when his recital was concludedwas of a sort that might warm the heart of a Waage, or ofany earnest explicator of banking derring-do to theunsympathetic layman. “It was a little confusing at first,” Mrs.
Hayes has said, “but before you were finished you had us onthe edge of our chairs.”
Waage, home in Douglaston, told his wife of the day’s eventsin his characteristic way. “It was St. Crispin’s Day,” heexclaimed as he burst through his doorway, “and I was withHarry!”
IIIHAVING first become interested in the pound and its perils atthe time of the 1964 crisis, I found myself hooked by thesubject. Through the subsequent three and a half years, Ifollowed its ups and downs in the American and British press,and at intervals went down to the Federal Reserve Bank torenew my acquaintance with its officers and see what additionalenlightenment I could garner. The whole experience was aresounding vindication of Waage’s thesis that central bankingcan be suspenseful.
The pound wouldn’t stay saved. A month after the big 1964crisis, the speculators resumed their assaults, and by the end ofthat year the Bank of England had used up more than half abillion of its new three-billion-dollar credit. Nor did the comingof the new year bring surcease. In 1965, after a relativelybuoyant January, the pound came under pressure again inFebruary. The November credit had been for a term of threemonths; now, as the term ran out, the nations that had madeit decided to extend it for another three months, so that Britainwould have more time to put its economy in order. But late inMarch the British economy was still shaky, the pound wasback below $2.79, and the Bank of England was back in themarket. In April, Britain announced a tougher budget, and arally followed, but the rally proved to be short-lived. By earlysummer, the Bank of England had drawn, and committed tothe battle against the speculators, more than a third of thewhole three billion. Heartened, the speculators pressed theirattack. Late in June, high British officials, let it be known thatthey now considered the sterling crisis over, but they werewhistling in the dark; in July the pound sank again, despitefurther belt-tightening in the British domestic economy. By theend of July, the world foreign-exchange market had becomeconvinced that a new crisis was shaping up. By late August,the crisis had arrived, and in some ways it was a moredangerous one than that of the previous November. Thetrouble was the market seemed to believe that the centralbanks were tired of pouring money into the battle and wouldnow let sterling fall, regardless of the consequences. About thattime, I telephoned a leading local foreign-exchange man I knowto ask him what he thought of the situation, and he replied,“To my knowledge, the New York market is one hundred percent convinced that devaluation of sterling is coming thisfall—and I don’t mean ninety-five per cent, I mean onehundred per cent.” Then, on September 11th, I read in thepapers that the same group of central banks, this time with theexception of France, had come through with another last-minuterescue package, the amount not being announced at thetime—it was subsequently reported to have been around onebillion—and over the next few days I watched the market priceof the pound rise, little by little, until by the end of the monthit was above $2.80 for the first time in sixteen months.
The central banks had done it again, and somewhat later Iwent down to the Federal Reserve Bank to learn the details. Itwas Coombs I saw, and I found him in a sanguine andextraordinarily talkative mood. “This year’s operation wasentirely different from last year’s,” he told me. “It was anaggressive move on our part, rather than a last-ditch-defensiveone. You see, early this September we came to the conclusionthat the pound was grossly oversold—that is, the amount ofspeculation against it was way out of proportion to what wasjustified by the economic facts. Actually, during the first eightmonths of the year, British exports had risen more than fiveper cent over the corresponding period in 1964, and Britain’s1964 balance-of-payments deficit seemed likely to be cut in halfin 1965. Very promising economic progress, and the bearishspeculators seemed not to have taken account of it. They hadgone right on selling the pound short, on the basis of technicalmarket factors. They were the ones who were in an exposedposition now. We decided the time was ripe for an officialcounterattack.”
The counterattack, Coombs went on to explain, was plotted inleisurely fashion this time—not on the telephone but face toface, over the weekend of September 5th in Basel. The FederalReserve Bank was represented by Coombs, as usual, and alsoby Hayes, who cut short his long-planned vacation on Corfu tobe there. The coup was planned with military precision. It wasdecided not to announce the amount of the credit package thistime, in order to further confuse and disconcert the enemy, thespeculators. The place chosen for the launching was the tradingroom of the Federal Reserve Bank, and the hour chosen was9 A.M. New York time—early enough for London and theContinent to be still conducting business—on September 10th. Atzero hour, the Bank of England fired a preliminary salvo byannouncing that new central-bank arrangements would shortlyenable “appropriate action” to be taken in the exchangemarkets. After allowing fifteen minutes for the import of thisdemurely menacing message to sink in, the Federal ReserveBank struck. Using, with British concurrence, the new bundle ofinternational credit as its ammunition, it simultaneously placedwith all the major banks operating in the New York exchangemarket bids for sterling totalling nearly thirty million dollars, atthe then prevailing rate of $2.7918. Under this pressure, themarket immediately moved upward, and the Federal ReserveBank pursued the movement, raising its bid price step by step.
At $2.7934, the bank temporarily ceased operations—partly tosee what the market would do on its own, partly just toconfuse things. The market held steady, showing that at thatlevel there were now as many independent buyers of sterlingas there were sellers, and that the bears—speculators—werelosing their nerve. But the bank was far from satisfied;returning vigorously to the market, it bid the price on up to$2.7945 in the course of the day. And then the snowball beganto roll by itself—with the results I had read about in mynewspapers. “It was a successful bear squeeze,” Coombs toldme with a certain grim relish, which was easy to sympathizewith; I found myself musing that for a banker to rout hisopponents, to smite them hip and thigh and drive them tocover, and not for personal or institutional profit but, rather, forthe public good, must be a source of rare, unalloyedsatisfaction.
I later learned from another banker just how painfully thebears had been squeezed. Margins of credit on currencyspeculation being what they are—for example, to commit amillion dollars against the pound a speculator might need toput up only thirty or forty thousand dollars in cash—mostdealers had made commitments running into the tens ofmillions. When a dealer’s commitment was ten million pounds,or twenty-eight million dollars, each change of one-hundredth ofa cent in the price of the pound meant a change of athousand dollars in the value of his account. Between the$2.7918 on September 10th, then, and the $2.8010 that thepound reached on September 29th, such a dealer on the shortside of the pound would have lost ninety-two thousanddollars—enough, one might suppose, to make him think twicebefore selling sterling short again.
An extended period of calm followed. The air of impendingcrisis that had hung over the exchanges during most of thepreceding year disappeared, and for more than six months theworld sterling market was sunnier than it had been at anytime in recent years. “The battle for the pound sterling is nowended,” high British officials (anonymous, and wisely so)announced in November, on the first anniversary of the 1964rescue. Now, the officials said, “we’re fighting the battle for theeconomy.” Apparently, they were winning that battle, too,because when Britain’s balance-of-payments position for 1965was finally calculated, it showed that the deficit had been notmerely halved, according to predictions, but more than halved.
And meanwhile the pound’s strength enabled the Bank ofEngland not merely to pay off all its short-term debts to othercentral banks but also to accumulate in the open market, inexchange for its newly desirable pounds, more than a billionfresh dollars to add to its precious reserves. Thus, betweenSeptember, 1965, and March, 1966, those reserves rose fromtwo billion six hundred million dollars to three billion sixhundred million—a fairly safe figure. And then the poundbreezed nicely through a national election campaign—as always,a stormy time for the currency. When I saw Coombs in thespring of 1966, he seemed as cocky and blasé about sterling asan old-time New York Yankee rooter about his team.
I had all but concluded that following the fortunes of thepound was no longer any fun when a new crisis exploded. Aseamen’s strike contributed to a recurrence of Britain’s tradedeficit, and in early June of 1966 the quotation was back below$2.79 and the Bank of England was reported to be back inthe market spending its reserves on the defense. On June 13th,with something of the insouciance of veteran firemen respondingto a routine call, back came the central banks with a newbundle of short-term credits. But these helped only temporarily,and toward the end of July, in an effort to get at the root ofthe pound’s troubles by curing the deficit once and for all,Prime Minister Wilson imposed on the British people the moststringent set of economic restraints ever applied in his countryin peacetime—high taxes, a merciless squeeze on credit, a freezeon wages and prices, a cut in government welfare spending,and a limit of a hundred and forty dollars on the annualamount that each Briton could spend on travel abroad. TheFederal Reserve, Coombs told me later, helped by moving intothe sterling market immediately after the British announcementof the austerity program, and the pound reacted satisfactorily tothis prodding. In September, for good measure, the FederalReserve increased its swap line with the Bank of England fromseven hundred and fifty million to one billion three hundredand fifty million dollars. I saw Waage in September, and hespoke warmly of all the dollars that the Bank of England wasagain accumulating. “Sterling crises have become a bore,” theEconomist remarked at about this time, with the mostreassuring sort of British phlegm.
Calm again—and again for just a little more than six months.
In April of 1967, Britain was free of short-term debt and hadample reserves. But within a month or so came the first of aseries of heartbreaking setbacks. Two consequences of the briefArab-Israeli war—a huge flow of Arab funds out of sterling intoother currencies, and the closing of the Suez Canal, one ofBritain’s main trade arteries—brought on a new crisis almostovernight. In June, the Bank of England (under new leadershipnow, for in 1966 Lord Cromer had been succeeded asgovernor by Sir Leslie O’Brien) had to draw heavily on itsswap line with the Federal Reserve, and in July the Britishgovernment found itself forced to renew the painful economicrestraints of the previous year; even so, in September thepound slipped down to $2.7830, its lowest point since the 1964crisis. I called my foreign-exchange expert to ask why the Bankof England—which in November, 1964, had set its last-linetrench at $2.7860, and which, according to its latest statement,now had on hand reserves amounting to more than two and ahalf billion dollars—was letting the price slide so dangerouslynear the absolute bottom (short of devaluation) of $2.78. “Well,the situation isn’t quite as desperate as the figure suggests,” hereplied. “The speculative pressure so far isn’t anything like asstrong as it was in 1964. And the fundamental economicposition this year—up to now, at least—is much better. Despitethe Middle East war, the austerity program has taken hold. Forthe first eight months of 1967, Britain’s international paymentshave been nearly in balance. The Bank of England is evidentlyhoping that this period of weakness of the pound will passwithout its intervention.”
At about that time, however, I became aware of a disturbingportent in the air—the apparent abandonment by the British oftheir long-standing taboo against bandying about the word“devaluation.” Like other taboos, this one seemed to have beenbased on a combination of practical logic (talk about devaluationcould easily start a speculative stampede and thereby bring iton) and superstition. But now I found devaluation being freelyand frequently discussed in the British press, and, in severalrespected journals, actually advocated. Nor was that all. PrimeMinister Wilson, it is true, continued to follow a careful patharound the word, even in the very act of pledging, as he didover and over, that his government would abstain from thedeed; there would be “no change in existing policy” as to“overseas monetary matters,” he said, delicately, on oneoccasion. On July 24th, though, Chancellor of the ExchequerJames Callaghan spoke openly in the House of Commonsabout devaluation, complaining that advocacy of it as a nationalpolicy had become fashionable, declaring that such a policywould represent a breach of faith with other nations and theirpeople and also pledging that his government would neverresort to it. His sentiments were familiar and reassuring; hisstraightforward expression of them was just the opposite. In thedarkest days of 1964, no one had said “devaluation” inParliament.
All through the autumn, I had a feeling that Britain was beingovertaken by a fiendish concatenation of cruel mischances,some specifically damaging to the pound and others merelycrushing to British morale. The previous spring, oil from awrecked, and wretched, tanker had defiled the beaches ofCornwall; now an epidemic was destroying tens, and ultimatelyhundreds, of thousands of head of cattle. The economicstraitjacket that Britain had worn for more than a year hadswelled unemployment to the highest level in years and madethe Labour Government the most unpopular government in thepostwar era. (Six months later, in a poll sponsored by theSunday Times, Britons would vote Wilson the fourth mostvillainous man of the century, after Hitler, de Gaulle, and Stalin,in that order.) A dock strike in London and Liverpool thatbegan in mid-September and was to drag on for more thantwo months decreased still further the already hobbled exporttrade, and put an abrupt end to Britain’s remaining hope ofending the year with its international accounts in balance. Earlyin November, 1967, the pound stood at $2.7822, its lowestpoint in a decade. And then things went downhill fast. On theevening of Monday the thirteenth, Wilson took the occasion ofhis annual appearance at the Lord Mayor of London’sbanquet—the very platform he had used for his fierycommitment to the defense of sterling in the crisis three yearsearlier—to implore the country and the world to disregard, asdistorted by temporary factors, his nation’s latest foreign-tradestatistics, which would be released the next day. On Tuesdaythe fourteenth, Britain’s foreign-trade figures, duly released,showed an October deficit of over a hundred millionpounds—the worst ever reported. The Cabinet met at lunch onThursday the sixteenth, and that afternoon, in the House ofCommons, Chancellor Callaghan, upon being asked to confirmor deny rumors of an enormous new central-bank credit thatwould be contingent upon still further unemployment-breedingausterity measures, replied with heat, and with what was latercalled a lack of discretion, “The Government will take whatdecisions are appropriate in the light of our understanding ofthe needs of the British economy, and no one else’s. And that,at this stage, does not include the creation of any additionalunemployment.”
With one accord, the exchange markets decided that thedecision to devalue had been taken and that Callaghan hadinadvertently let the cat out of the bag. Friday the seventeenthwas the wildest day in the history of the exchange markets,and the blackest in the thousand-year history of sterling. Inholding it at $2.7825—the price decided on this time as thelast-line trench—the Bank of England spent a quantity ofreserve dollars that it may never see fit to reveal; Wall Streetcommercial bankers who have reason to know have estimatedthe amount at somewhere around a billion dollars, which wouldmean a continuous, day-long reserve drain of over two millionper minute. Doubtless the British reserves dropped below thetwo-billion-dollar mark, and perhaps far below it. Late on aSaturday—November 18th—full of confused alarms, Britainannounced its capitulation. I heard about it from Waage, whotelephoned me that afternoon at five-thirty New York time. “Asof an hour ago, the pound was devalued to two dollars andforty cents, and the British bank rate went to eight per cent,”
he said. His voice was shaking a little.
ON Saturday night, bearing in mind that scarcely anything but amajor war upsets world financial arrangements more thandevaluation of a major currency, I went down to the capital ofworld finance, Wall Street, to look around. A nasty wind waswhipping papers through empty streets, and there was theusual rather intimidating off-hours stillness in that part-time city.
There was something unusual, though: the presence of rows oflighted windows in the otherwise dark buildings—for the mostpart, one lighted row per building. Some of the rows I couldidentify as the foreign departments of the big banks. The heavydoors of the banks were locked and barred; foreign-departmentmen evidently ring to gain entrance on weekends, or useinvisible side or rear entrances. Turning up my coat collar, Iheaded up Nassau Street toward Liberty to take a look at theFederal Reserve Bank. I found it lighted not in a single linebut—more hospitably, somehow—in an irregular pattern over itsentire Florentine fa?ade, yet it, too, presented to the street aformidably closed front door. As I looked at it, a gust of windbrought an incongruous burst of organ music—perhaps fromTrinity Church, a few blocks away—and I realized that in tenor fifteen minutes I hadn’t seen anyone. The scene seemed tome to epitomize one of the two faces of central banking—thecold and hostile face, suggesting men in arrogant secrecymaking decisions that affect all the rest of us but that we canneither influence nor even comprehend, rather than the morecongenial face of elegant and learned men of affairs beneficentlysaving faltering currencies over their truffles and wine at Basel.
This was not the night for the latter face.
On Sunday afternoon, Waage held a press conference in aroom on the tenth floor of the bank, and I attended it, alongwith a dozen other reporters, mostly regulars on the FederalReserve beat. Waage discoursed generally on the devaluation,parrying questions he didn’t want to answer, sometimes byreplying to them, like the teacher he once was, with questionsof his own. It was still far too early, he said, to tell how greatthe danger was that the devaluation might lead to “another1931.” Almost any prediction, he said, would be a matter oftrying to outguess millions of people and thousands of banksaround the world. The next few days would tell the story.
Waage seemed stimulated rather than depressed; his attitudewas clearly one of apprehension but also of resolution. On theway out, I asked him whether he had been up all night. “No,last evening I went to ‘The Birthday Party,’ and I must sayPinter’s world makes more sense than mine does, these days,”
he replied.
The outlines of what had happened Thursday and Fridaybegan to emerge during the next few days. Most of therumors that had been abroad turned out to have been moreor less true. Britain had been negotiating for another hugecredit to forestall devaluation—a credit of the order ofmagnitude of the three-billion-dollar 1964 package, with theUnited States again planning to provide the largest share.
Whether Britain had devalued from choice or necessityremained debatable. Wilson, in explaining the devaluation to hispeople in a television address, said that “it would have beenpossible to ride out this present tide of foreign speculationagainst the pound by borrowing from central banks andgovernments,” but that such action this time would have been“irresponsible,” because “our creditors abroad might well insiston guarantees about this or that aspect of our nationalpolicies”; he did not say explicitly that they had done so. Inany event, the British Cabinet had—with what grim reluctancemay be imagined—decided in principle on devaluation as earlyas the previous weekend, and then determined the exactamount of the devaluation at its Thursday-noon meeting. Atthat time, the Cabinet had also resolved to help insure theeffectiveness of the devaluation by imposing new austeritymeasures on the nation, among them higher corporate taxes, acutback in defense spending, and the highest bank rate in fiftyyears. As for the two-day delay in putting the devaluation intoeffect, which had been so costly to British reserves, officialsnow explained that the time had been necessary forconferences with the other leading monetary powers. Suchconferences were required by international monetary rulesbefore a devaluation, and, besides, Britain had urgently neededassurances from its leading competitors in world trade that theydid not plan to vitiate the effect of the British devaluation withmatching devaluations of their own. Some light was now shed,too, on the sources of the panic selling of pounds on Friday.
By no means all of it had been wanton speculation by thosefamous—although invisible and perhaps nonexistent—gnomes ofZurich. On the contrary, much of it had been a form ofself-protection, called hedging, by large international corporations,many of them American, that made short sales of sterlingequivalent to what they were due to be paid in sterling weeksor months later. The evidence of this was supplied by thecorporations themselves, some of them being quick to assuretheir stockholders that through their foresight they hadcontrived to lose little or nothing on the devaluation.
International Telephone & Telegraph, for example, announcedon Sunday that the devaluation would not affect its 1967earnings, because “management anticipated the possibility ofdevaluation for some time.” International Harvester and TexasInstruments reported that they had protected themselves bymaking what amounted to short sales of sterling. The SingerCompany said it might even have accidentally made a profit onthe deal. Other American companies let it be known that theyhad come out all right, but declined to elaborate, on theground that if they revealed the methods they had used theymight be accused of taking advantage of Britain in its extremity.
“Let’s just say we were smart” was the way a spokesman forone company put it. And perhaps that, if lacking in grace andelegance, was fair enough. In the jungle of internationalbusiness, hedging on a weak foreign currency is considered awholly legitimate use of claws for self-defense. Selling short forspeculative purposes enjoys less respectability, and it isinteresting to note that the ranks of those who speculatedagainst sterling on Friday, and talked about it afterward,included some who were far from Zurich. A group ofprofessional men in Youngstown, Ohio—veteran stock-marketplayers, but never before international currencyplungers—decided on Friday that sterling was about to bedevalued, and sold short seventy thousand pounds, netting aprofit of almost twenty-five thousand dollars over the weekend.
The pounds sold had, of course, ultimately been bought withdollars by the Bank of England, thus adding a minuscule dropto Britain’s reserve loss. Reading about the little coup in theWall Street Journal, to which the group’s broker hadreported it, presumably with pride, I hoped the apprenticegnomes of Youngstown had at least grasped the implications ofwhat they were doing.
So much for Sunday and moral speculation. On Monday, thefinancial world, or most of it, went back to work, and thedevaluation began to be put to its test. The test consisted oftwo questions. Question One: Would the devaluation accomplishits purpose for Britain—that is, stimulate exports and reduceimports sufficiently to cure the international deficit and put anend to speculation against the pound? Question Two: Would it,as in 1931, be followed by a string of competitive devaluationsof other currencies, leading ultimately to a devaluation of thedollar in relation to gold, worldwide monetary chaos, andperhaps a world depression? I watched the answers beginningto take shape.
On Monday, the banks and exchanges in London remainedfirmly closed, by government order, and all but a few traderselsewhere avoided taking positions in sterling in the Bank ofEngland’s absence from the market, so the answer to thequestion of the pound’s strength or weakness at its newvaluation was postponed; On Threadneedle and ThrogmortonStreets, crowds of brokers, jobbers, and clerks milled aroundand talked excitedly—but made no trades—in a city where theunion Jack was flying from all flagstaffs because it happened tobe the Queen’s wedding anniversary. The New York stockmarket opened sharply lower, then recovered. (There was noreally rational explanation for the initial drop; securities menpointed out that devaluation just generally sounds depressing.)By nightfall on Monday, it had been announced that elevenother currencies—those of Spain, Denmark, Israel, Hong Kong,Malta, Guyana, Malawi, Jamaica, Fiji, Bermuda, andIreland—were also being devalued. That wasn’t so bad, becausethe disruptive effect of a currency devaluation is in directproportion to the importance of that currency in world trade,and none of those currencies were of great importance. Themost ominous move was Denmark’s, because Denmark mighteasily be followed by its close economic allies Norway, Sweden,and the Netherlands, and that would be pretty serious. Egypt,which was an instant loser of thirty-eight million dollars onpounds held in its reserves at the time of devaluation, heldfirm, and so did Kuwait, which lost eighteen million.
On Tuesday, the markets everywhere were going full blast.
The Bank of England, back in business, set the new tradinglimits of the pound at a floor of $2.38 and a ceiling of $2.42,whereupon the pound went straight to the ceiling, like a balloonslipped from a child’s hand, and stayed there all day; indeed,for obscure reasons inapplicable to balloons, it spent much ofthe day slightly above the ceiling. Now, instead of paying dollarsfor pounds, the Bank of England was supplying pounds fordollars, and thereby beginning the process of rebuilding itsreserves. I called Waage to share what I thought would be hisjubilation, but found him taking it all calmly. The pound’sstrength, he said, was “technical”—that is, it was caused by theprevious week’s short sellers’ buying pounds back to cash intheir profits—and the first objective test of the new poundwould not come until Friday. Seven more small governmentsannounced devaluations during the day. In Malaysia, which haddevalued its old sterling-backed pound but not its new dollar,based on gold, and which continued to keep both currencies incirculation, the injustice of the situation led to riots, and overthe next two weeks more than twenty-seven people were killedin them—the first casualties of devaluation. Apart from thispainful reminder that the counters in the engrossing game ofinternational finance are people’s livelihoods, and even theirlives, so far so good.
But on Wednesday the twenty-second a less localized portentof trouble appeared. The speculative attack that had so longbattered and at last crushed the pound now turned, aseveryone had feared it might, on the dollar. As the one nationthat is committed to sell gold in any quantity to the centralbank of any other nation at the fixed price of thirty-five dollarsan ounce, the United States is the keystone of the worldmonetary arch, and the gold in its Treasury—which on thatWednesday amounted to not quite thirteen billion dollars’
worth—is the foundation. Federal Reserve Board ChairmanMartin had said repeatedly that the United States would underany condition continue to sell it on demand, if necessary downto the last bar. Despite this pledge, and despite PresidentJohnson’s reiteration of it immediately after Britain’s devaluation,speculators now began buying gold with dollars in hugequantities, expressing the same sort of skepticism toward officialassurances that was shown at about the same time by NewYorkers who took to accumulating and hoarding subway tokens.
Gold was suddenly in unusual demand in Paris, Zurich, andother financial centers, and most particularly in London, theworld’s leading gold market, where people immediately began totalk about the London Gold Rush. The day’s orders for gold,which some authorities estimated at over fifty million dollars’
worth, seemed to come in from everywhere—except,presumably, from citizens of the United States or Britain, whoare forbidden by law to buy or own monetary gold. And whowas to sell the stuff to these invisible multitudes so suddenlyrepossessed by the age-old lust for it? Not the United StatesTreasury, which, through the Federal Reserve, sold gold only tocentral banks, and not other central banks, which did notpromise to sell it at all. To fill this vacuum, still anotherco?perative international group, the London gold pool, had beenestablished in 1961. Provided by its members—the United States,Britain, Italy, the Netherlands, Switzerland, West Germany,Belgium, and, originally, France—with gold ingots in quantitiesthat might dazzle a Croesus (fifty-nine per cent of the totalcoming from the United States), the pool was intended to quellmoney panics by supplying gold to non-governmental buyers inany quantity demanded, at a price effectively the same as theFederal Reserve’s, and thereby to protect the stability of thedollar and the system.
And that is what the pool did on Wednesday. Thursday,though, was much worse, with the gold-buying frenzy in bothParis and London breaking even the records set during theCuban missile crisis of 1962, and many people, high British andAmerican officials among them, became convinced of somethingthey had suspected from the first—that the gold rush was partof a plot by General de Gaulle and France to humble first thepound and now the dollar. The evidence, to be sure, was allcircumstantial, but it was persuasive. De Gaulle and hisMinisters had long been on record as wishing to relegate thepound and the dollar to international roles far smaller thantheir current ones. A suspicious amount of the gold buying,even in London, was traceable to France. On Monday evening,thirty-six hours before the start of the gold rush, France’sgovernment had let slip, through a press leak, that it intendedto withdraw from the gold pool (according to subsequentinformation, France hadn’t contributed anything to the poolsince the previous June anyhow), and the French governmentwas also accused of having had a hand in spreading falserumors that Belgium and Italy were about to withdraw, too.
And now it was coming out, bit by bit, that in the days justbefore the devaluation France had been by far the mostreluctant nation to join in another credit package to rescuesterling, and that, for good measure, France had withheld untilthe very last minute its assurance that it would maintain itsown exchange rate if Britain devalued. All in all, there was agood case for the allegation that de Gaulle & Co. had beenplaying a mischievous part, and, whether it was true or not, Icouldn’t help feeling that the accusations against them wereadding a good deal of spice to the devaluation crisis—spice thatwould become more piquant a few months later, when thefranc would be in dire straits, and the United States forced bycircumstances to come to its aid.
ON Friday, in London, the pound spent the whole day tight upagainst its ceiling, and thus came through its first reallysignificant post-devaluation test with colors flying. Only a fewsmall governments had announced devaluations since Monday,and it was now evident that Norway, Sweden, and theNetherlands were going to hold firm. But on the dollar frontthings looked worse than ever. Friday’s gold buying in Londonand Paris had far exceeded the previous day’s record, andestimates were that gold sales in all markets over the precedingthree days added up to something not far under thebillion-dollar mark; there was near pandemonium all day inJohannesburg as speculators scrambled to get their hands onshares in gold-mining companies; and all over Europe peoplewere trading in dollars not only for gold but for othercurrencies as well. If the dollar was hardly in the position thatthe pound had occupied a week earlier, at least there wereuncomfortable parallels. Subsequently, it was reported that inthe first days after devaluation the Federal Reserve, soaccustomed to lending support to other currencies, had beenforced to borrow various foreign currencies, amounting toalmost two billion dollars’ worth, in order to defend its own.
Late Friday, having attended a conference at which Waagewas in an unaccustomed mood of nervous jocularity that mademe nervous, too, I left the Federal Reserve Bank half believingthat devaluation of the dollar was going to be announced overthe weekend. Nothing of the sort happened; on the contrary,the worst was temporarily over. On Sunday, it was announcedthat central-bank representatives of the gold-pool countries,Hayes and Coombs among them, had met in Frankfurt andformally agreed to continue maintaining the dollar at its presentgold-exchange rate with their combined resources. This seemedto remove any doubt that the dollar was backed not only bythe United States’ thirteen-billion-dollar gold hoard but also bythe additional fourteen billion dollars’ worth of gold in thecoffers of Belgium, Britain, Italy, the Netherland, Switzerland,and West Germany. The speculators were apparently impressed.
On Monday, gold buying was much lower in London andZurich, continuing at a record pace only in Paris—and this inspite of a sulphurous press audience granted that day by deGaulle himself, who, along with bemusing opinions on variousother matters, hazarded the view that the trend of events wastoward the decline of the dollar’s international importance. OnTuesday, gold sales dropped sharply everywhere, even in Paris.
“A good day today,” Waage told me on the phone thatafternoon. “A better day tomorrow, we hope.” On Wednesday,the gold markets were back to normal, but, as a result of theweek’s doings, the Treasury had lost some four hundred andfifty tons of gold—almost half a billion dollars’ worth—in fulfillingits obligations to the gold pool and meeting the demands offoreign central banks.
Ten days after devaluation, everything was quiet. But it wasonly a trough between succeeding shock waves. FromDecember 8th to 18th, there came a new spell of wildspeculation against the dollar, leaching another four hundredtons or so of gold out of the pool; this, like the previous wave,was eventually calmed by reiterations on the part of the UnitedStates and its gold-pool partners of their determination tomaintain the status quo. By the end of the year, the Treasuryhad lost almost a billion dollars’ worth of gold since Britain’sdevaluation, reducing its gold stock to below thetwelve-billion-dollar mark for the first time since 1937. PresidentJohnson’s balance-of-payments program, announced January1st, 1968 and based chiefly on restrictions on American banklending and industrial investments abroad, helped keepspeculation down for two months. But the gold rush was notto be quelled so simply. All pledges notwithstanding, it hadpowerful economic and psychological forces behind it. In alarger sense, it was an expression of an age-old tendency todistrust all paper currencies in times of crisis, but morespecifically it was the long-feared sequel to sterling devaluation,and—perhaps most specifically of all—it was a vote of noconfidence in the determination of the United States to keep itseconomic affairs in order, with particular reference to a level ofcivilian consumption beyond the dreams of avarice at a timewhen ever-increasing billions were being sent abroad to supporta war with no end in sight. The money in which the worldwas supposed to be putting its trust looked to the goldspeculators like that of the most reckless and improvidentspendthrift.
When they returned to the attack, on February29th—choosing that day for no assignable reason except that asingle United States senator, Jacob Javits, had just remarked,with either deadly seriousness or casual indiscretion, that hethought his country might do well to suspend temporarily allgold payments to foreign countries—it was with such ferocitythat the situation quickly got out of hand. On March 1st, thegold pool dispensed an estimated forty to fifty tons in London(as against three or four tons on a normal day); on March5th and 6th, forty tons per day; on March 8th, overseventy-five tons; and on March 13th, a total that could not beaccurately estimated but ran well over one hundred tons.
Meanwhile, the pound, which could not possibly escape afurther devaluation if the dollar were to be devalued in relationto gold, slipped below its par of $2.40 for the first time. Stillanother reiteration of the now-familiar pledges, this time fromthe central-bankers’ club at Basel on March 10th, seemed tohave no effect at all. The market was in the classic state ofchaos, distrustful of every public assurance and at the mercy ofevery passing rumor. A leading Swiss banker grimly called thesituation “the most dangerous since 1931.” A member of theBasel club, tempering desperation with charity, said that thegold speculators apparently didn’t realize their actions wereimperilling the world’s money. The New York Times, in aneditorial, said, “It is quite clear that the international paymentssystem … is eroding.”
On Thursday, March 14th, panic was added to chaos. Londongold dealers, in describing the day’s action, used the un-Britishwords “stampede,” “catastrophe,” and “nightmare.” The exactvolume of gold sold that day was unannounced, asusual—probably it could not have been precisely counted, in anycase—but everyone agreed that it had been an all-time record;most estimates put the total at around two hundred tons, ortwo hundred and twenty million dollars’ worth, while the WallStreet Journal put it twice that high. If the former estimatewas right, during the trading day the United States Treasuryhad paid out through its share of the gold pool alone onemillion dollars in gold every three minutes and forty-twoseconds; if the Journal figure was right (as a subsequentTreasury announcement made it appear to be), a million everyone minute and fifty-one seconds. Clearly, this wouldn’t do.
Like Britain in 1964, at this rate the United States would havea bare cupboard in a matter of days. That afternoon, theFederal Reserve System raised its discount rate from four anda half to five per cent—a defensive measure so timid andinadequate that one New York banker compared it to apopgun, and the Federal Reserve Bank of New York, as theSystem’s foreign-exchange arm, was moved to protest byrefusing to go along with the token raise. Late in the day inNew York, and toward midnight in London, the United Statesasked Britain to keep the gold market closed the next day,Friday, to prevent further catastrophe and clear the way to theweekend, when face-to-face international consultations could beheld. The bewildered American public, largely unaware of thegold pool’s existence, probably first sensed the general shape ofthings when it learned on Friday morning that Queen ElizabethII had met with her Ministers on the crisis between midnightand 1 A.M.
On Friday, a day of nervous waiting, the London marketswere closed, and so were foreign-exchange desks nearlyeverywhere else, but gold shot up to a big premium in theParis market—a sort of black market, from the Americanstandpoint—and in New York sterling, unsupported by thefirmly locked Bank of England, briefly fell below its officialbottom price of $2.38 before rallying. Over the weekend, thecentral bankers of the gold-pool nations (the United States,Britain, West Germany, Switzerland, Italy, the Netherlands, andBelgium, with France still conspicuously missing and, indeed,uninvited this time) met in Washington, with Coombsparticipating for the Federal Reserve along with ChairmanMartin. After two full days of rigidly secret discussions, whilethe world of money waited with bated breath, they announcedtheir decisions late on Sunday afternoon. Thethirty-five-dollar-an-ounce official monetary price of gold wouldbe kept for use in all dealings among central banks; the goldpool would be disbanded, and the central banks would supplyno more gold to the London market, where privately tradedgold would be allowed to find its own price; sanctions would betaken against any central bank seeking to profit from the pricedifferential between the central-bank price and the free-marketprice; and the London gold market would remain closed for acouple of weeks, until the dust settled. During the first fewmarket days under the new arrangements, the pound ralliedstrongly, and the free-market price of gold settled at betweentwo and five dollars above the central-bank price—a differentialconsiderably smaller than many had expected.
The crisis had passed, or that crisis had. The dollar hadescaped devaluation, and the international monetary mechanismwas intact. Nor was the solution a particularly radical one; afterall, gold had been on a two-price basis in 1960, before thegold pool had been formed. But the solution was a temporary,stopgap one, and the curtain was not down on the drama yet.
Like Hamlet’s ghost, the pound, which had started the action,was offstage now. The principal actors onstage as summerapproached were the Federal Reserve and the United StatesTreasury, doing what they could in a technical way to keepthings on an even keel; the Congress, complacent withprosperity, preoccupied with coming elections, and thereforeresistant to higher taxes and other uncomfortable retrenchingmeasures (on the very afternoon of the London panic, theSenate Finance Committee had voted down an income-taxsurcharge); and, finally, the President, calling for “a program ofnational austerity” to defend the dollar, yet at the same timecarrying on at ever-increasing expense the Vietnam war, whichhad become as menacing to the health of America’s money as,in the view of many, it was to that of America’s soul.
Ultimately, it appeared, the nation had just three possibleeconomic courses: to somehow end the Vietnam war, root ofthe payments problem and therefore heart of the matter; toadopt a full wartime economy, with sky-high taxes, wage andprice controls, and perhaps rationing; or to face forceddevaluation of the dollar and perhaps a depression-breedingworld monetary mess.
Looking beyond the Vietnam war and its incredibly broadworldwide monetary implications, the central bankers went onplugging away. Two weeks after the stopgap solution of thedollar crisis, those of the ten most powerful industrial countriesmet in Stockholm and agreed, with only France dissenting, onthe gradual creation of a new international monetary unit tosupplement gold as the bedrock underlying all currencies. It willconsist (if action follows on resolution) of special drawing rightson the International Monetary Fund, available to nations inproportion to their existing reserve holdings. In bankers’ jargonthe rights will be called S.D.R.’s; in popular jargon they were atonce called paper gold. The success of the plan in achieving itsends—averting dollar devaluation, overcoming the worldshortage of monetary gold, and thus postponing indefinitely thethreatened mess—will depend on whether or not men andnations can somehow at last, in a triumph of reason, achievewhat they have failed to achieve in almost four centuries ofpaper money: that is, to overcome one of the oldest and leastrational of human traits, the lust for the look and feel of golditself, and come to give truly equal value to a pledge written ona piece of paper. The answer to that question will come in thelast act, and the outlook for a happy ending is not bright.
AS the last act was beginning to unfold—after the sterlingdevaluation but before the gold panic—I went down to LibertyStreet and saw Coombs and Hayes. I found Coombs lookingbone-tired but not sounding disheartened about three yearsspent largely in a losing cause. “I don’t see the fight for thepound as all having been in vain,” he said. “We gained thosethree years, and during that time the British put through a lotof internal measures to strengthen themselves. If they’d beenforced to devalue in 1964, there’s a good chance thatwage-and-price inflation would have eaten up any benefit theyderived and put them back in the same old box. Also, overthose three years there have been further gains in internationalmonetary co?peration. Goodness knows what would havehappened to the whole system with devaluation in 1964.
Without that three-year international effort—that rearguardaction, you might say—sterling might have collapsed in muchgreater disorder, with far more damaging repercussions thanwe’ve seen even now. Remember that, after all, our effort andthe effort of the other central-banks wasn’t to hold up sterlingfor its own sake. It was to hold it up for the sake ofpreserving the system. And the system has survived.”
Hayes, on the surface, seemed exactly as he had when I lastsaw him, a year and a half earlier—as placid and unruffled asif he had been spending all that time studying up on Corfu. Iasked him whether he was still living up to his principle ofkeeping bankers’ hours, and he replied, smiling very slightly,that the principle had long since yielded to expediency—that, asa time consumer, the 1967 sterling crisis had made the 1964crisis seem like child’s play, and that the subsequent dollarcrisis was turning out to be more of the same. A side benefitof the whole three-and-a-half-year affair, he said, was that itsfrequently excruciating melodrama had contributed something toMrs. Hayes’ interest in banking, and even something, if not somuch, to the position of business in Tom’s scale of values.
When Hayes spoke of the devaluation, however, I saw thathis placidity was a mask. “Oh, I was disappointed, all right,” hesaid quietly. “After all, we worked like the devil to prevent it.
And we nearly did. In my opinion, Britain could have gotenough assistance from abroad to hold the rate. It could havebeen done without France. Britain chose to devalue. I thinkthere’s a good chance that the devaluation will eventually be asuccess. And the gain for international co?peration is beyondquestion. Charlie Coombs and I could feel that at Frankfurt inNovember, at the gold-pool meeting—a sense everyone therehad that now is the time to lock arms. But still …” Hayespaused, and when he spoke again his voice was full of suchquiet force that I saw the devaluation through his eyes—not asjust a severe professional reverse but as an ideal lost and anidol fallen. He said, “That day in November, here at the bank,when a courier brought me the top-secret British documentinforming us of the decision to devalue, I felt physically sick.
Sterling would not be the same. It would never again commandthe same amount of faith around the world.”
The End