“The bankers went to their friends in high places and urged that our government not oppose OPEC’s staggering price increases. They got their way.”
He could have said the same thing about OPEC in general.
Our political leaders are well aware of the Arabs’ strength and of their willingness to use it. Fresh in their minds is the humbling experience of Joe Clark, who, when he became prime minister of Canada briefly in 1979, said that he intended to move Canada’s embassy in Israel from Tel Aviv to Jerusalem — a gesture that pleased Jewish voters. But it enraged the Arabs, who threatened to withdraw their money from Canadian banks, dump their Canadian money holdings, and cancel proposed investment in Canadian industry. Clark backed down.
If Canada, where the Middle Eastern oil producers have invested a relatively trifling amount, is vulnerable to such blackmail, we are much more vulnerable.
Here’s how we got into this unpleasant predicament. When the OPEC nations, under the guidance of the major oil companies, raised prices 400 percent between 1973 and 1974, money began to flood into those backward nations so fast that they didn’t know what to do with it all. Their oil income jumped from $29 billion in 1973 to $100 billion in 1974. Oil that was selling for $2.59 a barrel in 1973 sold for $10.95 a barrel in 1974. (Today the same oil sells for more than $30 a barrel.) Except for Iran the producing countries had no industrial base on which to build. The only thing they could do with the money was to take it to the bank or buy property in the major industrial nations, particularly the United States.
Naturally, American bankers were overjoyed to have these new billions to play with. And they lusted for more. A confidential study by the World Bank predicted that the Arab oil-producing bloc might have more than $1,000 billion — $1 trillion — to invest in the United States and other countries by 1985. That would be ten times the total book value of U.S. investments overseas as of 1973, and it would be 100. times the value of all the gold held by the U.S. government.
The bait was too tempting. The bankers went to their friends in high places and urged that our government not oppose OPEC’s staggering price increases. They got their way.
For our government to allow consumers to be looted for the mutual benefit of oil producers and bankers was bad enough. But in terms of long-range harm, the even more troublesome development was that the greed was allowed to be so concentrated. Concentration was, and continues to be, the truly dangerous element in the bankers’ scheme.
If there were hundreds of big Arab investors and if they had invested their money in dozens of U.S. banks — really spread it around — there would be no threat. For one thing, successful conspiracies are difficult to achieve among many participants. But, most important, if the money were widely dispersed among many banks, then an avalanche of withdrawals could not affect any one bank in a devastating way. But that isn’t the way things turned out. What we have is a very few OPEC depositors whose deposits are concentrated in a handful of very large New York banks whose financial health, in turn, is crucial to the U.S. banking system. One of Chase Manhattan’s top officials admitted, “You really have the problem of a very small number of banks, a relatively small number of [oil] countries, and a relatively small number of depositors in those countries. In Saudi Arabia you are talking about one or two or three depositors. You are talking about ten banks or probably twenty, and probably the first five represent way more than half of it.”
Some experts, in fact, believe that most of the OPEC money is in only three New York banks-First” National City Bank (Citicorp), Chase Manhattan, and Morgan Guaranty. A top staff member of the Senate Foreign Relations Committee says: “I think you will probably catch seventy-five percent of the money right there. You’ll probably catch seventy-five percent of the funds in those three banks.”
If you count in the Chemical Bank of New York, Manufacturers Hanover, and the Bank of America, you will have the six banks that handle 90 percent of the OPEC booty. The other 10 percent of the OPEC deposits would be found, according to Federal Reserve Board member Philip E. Coldwell, in the next six largest banks, but since their total share is so insignificant, no single share is worth mentioning. So long as that situation exists, the great danger of what one or two Arab depositors might do to our banking system by destroying a keystone bank is both psychological and real.
The psychological danger surfaced in the fall of 1978 when Kuwait — a piece of sand about the size of Connecticut with a population less than that of Baltimore — came close to shattering our monetary bubble. On the last day of October of that year, rumor spread along Wall Street that the tiny oil kingdom had withdrawn a huge deposit from Morgan Guaranty Bank of New York City. The rumor was that the withdrawal was for some amount between $1 billion and $2 billion. On the world monetary market, the dollar was already looked upon as a soggy piece of merchandise. International bankers were dumping it in large quantities and turning to harder and more stable currencies. The rumor of the Kuwait pullout triggered a new wave of dumping — a wave that finally reached such monstrous proportions that it had the effect of a run on the currency, and for a moment the nation’s econo — my teetered on the edge of what the Wall Street Journal later called “a nineteenth-century type of financial panic.”
We did not fall over that edge only because the administration rushed in desperately and bought $30 billion worth of dying dollars on the world market, there — by making it seem that our currency was worth having. The price of the dollar stabilized for the moment, and the panic was past.
Memories of that episode still send a chill through U. S. financial circles. What made it all the more frightening was that the rumor was only a rumor — Kuwait had not withdrawn a large bundle from Morgan Guaranty. If a mere rumor could have such devastating results, what would an actual withdrawal of billions of dollars do to the banks involved?