Behind the Currency Curtain: Meet a Real Gnome

WHEN money tremors shake men and nations, heads of state often rush to blame international speculators, who are often pictured as latter-day Rasputins driving the values of currencies up and down by ruthless manipulation. British Laborite George Brown once contemptuously dubbed speculators "the gnomes of Zurich." President Nixon last year damned them for "waging an all-out war on the American dollar." Who are the speculators? And how much clout do they wield in world money markets?

By far the most important dabblers in foreign exchange are not slick and selfish private operators but the sober-sided officers of banks and multinational corporations. Occasionally they try to turn a quick profit by capitalizing on oscillations in the value of one currency or another. But usually they are merely trying to protect a routine sale, loan or investment from loss due to an unexpected dip in some currency. Volkswagen, for example, takes in billions of dollars each year from U.S. sales. When the dollar quivered at the start of last summer's currency crisis, VW executives reportedly transferred as much as $500 million into more stable German marks. The move was only prudent; the dollar's value relative to the mark eventually slipped 12%, and VW may have saved up to $60 million.

Cash-rich oil companies like Jersey Standard and Royal Dutch/Shell keep hundreds of millions of dollars' worth of different currencies and move in and out of them on a day-to-day basis. So does the Anglo-Dutch giant Unilever. When a currency seems weak, Unilever's finance managers may send orders to many banks telling them to get rid of it and buy a strong currency. Ernest Woodroofe, Unilever's chairman, concluded recently that the company occasionally "accelerates" international monetary crises by shifting its weight around.

Corporate financial managers relay their wishes to professional currency dealers, who decide where to dump weak currencies, where to pick up strong ones, and at what price to buy or sell. The dealers are the real gnomes, but not many reside in Zurich. Most are found at commercial banks in London, Manhattan and Frankfurt, and some are in Tokyo, Sydney, San Francisco and Los Angeles.

One of them is Reginald Barham, 47, a portly Englishman who is chief foreign-exchange dealer of the Morgan Guaranty bank in London. Barham commands a team of nine dealers in a small office crammed with telephones and Teletype machines that connect with other dealers. On an average day, Barham and his men buy and sell about $260 million worth of foreign money, and lend and borrow nearly $1 billion more, largely in Eurodollars. Corporations and banks use the borrowings to finance their speculative short selling of weak currencies.

Money dealers often send currencies on dizzying round-the-world telephonic journeys in order to take advantage of minute exchange-rate differences. Barham described one recent deal for TIME Correspondent Friedel Ungeheuer: Dealers in London got on the phone to Frankfurt and sold a huge quantity of British pounds for dollars; then they exchanged the dollars for marks; finally they sold the marks in exchange for pounds back in London. The profit was only a microscopic $0.00085 on each dollar. But if the transaction had involved 10 million dollars, the profit would have come to $8,500--for just a few minutes' work on the telephone. The potential rewards and the risks have been much greater since last December, when the Smithsonian agreement widened the margins within which currencies can bob up or down.

Few currency dealers in Britain earn more than $25,000 a year, yet generous bonuses draw top talent to currency trading. The game requires strong nerves, sound judgment, a thorough acquaintance with arithmetic, and the patience to learn the intricate details of currency dealing. In searching for new men, Barham says, he looks "for a gambling instinct hedged by a conservative outlook, free and unencumbered with personal likes and dislikes." A dealer's first obligation is to act quickly to protect his customer.

Finance Ministers and central bankers may set exchange rates, but the marketplace determines whether they will stick. Money dealers run the marketplace. Yet for their part, dealers usually can only aggravate swings in currency values, not create them. What really causes them are public crises of confidence, which are incited by political events, trade imbalances, interest rates and inflation. Says Barham: "All the economic indicators that I need I see around me: property prices zooming by 40% in a year, auto workers getting wage raises of ten pounds, newspapers that cost three times as much as a short while ago. You don't have to look further to know that the pound would eventually be in trouble."

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