On March 15, when the New York Stock Exchange reopened after being closed for ten days, the Dow jumped 15 percent, the largest move in a single day in its history. By the end of the first week, a total of $1 billion in cash—half of everything that had been pulled out in the previous six weeks—had been redeposited in banks. By the end of March, two-thirds of the banks in the country, twelve thousand in total, had been permitted to resume business and the currency hoard in the hands of the public had dropped by $1.5 billion.
This was one more bitter pill for Hoover to swallow. A bank rescue plan introduced by Roosevelt, a man he despised, drafted by Hoover’s own people on principles he had originally proposed, had in the space of a week restored confidence that had eluded poor old Hoover in three years of fighting the Depression.
Raymond Moley would later write of that week, “Capitalism was saved in eight days.” He was only half right. The rescue plan may have saved the banking system. But the tasks of getting the factories across the country producing once again and of putting average Americans back to work still remained.
Over the next three months—the celebrated “first hundred days”—Roosevelt bombarded Congress and the country with new legislation. On March 20, Congress passed the Economy Act, which cut the salaries of public employees by 15 percent, slashed department budgets by 25 percent, and cut almost a billion dollars in public expenditures. At the end of March, it approved the creation of the Civilian Conservation Corps to employ young men in flood control, fire prevention, and the building of fences, roads, and bridges in rural areas. In the middle of May came the Emergency Relief Act and that same day Congress passed the Agricultural Adjustment Act, designed to push agricultural prices higher by controlling production and reducing acreage. The Tennessee Valley Authority was set up to build dams and construct public power plants. The National Industrial Recovery Act was passed in the middle of June to permit price fixing. It also authorized $3.5 billion in public works programs. The Glass-Steagall Act, also passed in the middle of June, divorced commercial and investment banking and guaranteed bank deposits up to a maximum of $2,500, while the Truth-in-Securities Act established disclosure provisions to govern the issue of new securities.
The string of measures was a strange mixture of well-meaning steps at social reform, half-baked schemes for quasi-socialist industrial planning, regulation to protect consumers, welfare programs to help the hardest hit, government support for the cartelization of industry, higher wages for some, lower wages for others, on the one hand government pump priming, on the other public economy. Few elements were well thought out, some were contradictory, large parts were ineffectual. While much of the legislation was very laudable, aimed as it was at improving social justice and bringing a modicum of economic security to people who had none, it had little to do with boosting the economy. Tucked away, however, in this whole motley baggage, as a last-minute amendment to the Agricultural Adjustment Act, was one step that succeeded beyond anyone’s wildest expectations in getting the economy moving again. This was the temporary abandonment of the gold standard and the devaluation of the dollar.
The rescue of the banks had been brought about by one of the oddest partnerships in the history of economic policy making—between a Democratic treasury secretary and his Republican predecessor. Devaluation involved one of the strangest confrontations in that history. On one side stood the top echelon of presidential economic advisers, a brilliant group of young men, most of them new to government, the “hard money” men, as they were colloquially referred to in the press. At Treasury was Woodin’s undersecretary, the polished and urbane forty-year-old Dean Acheson, son of the Protestant Episcopal bishop of Connecticut, a graduate of Groton, Yale, and Harvard Law School, a protégé of Felix Frankfurter and clerk for Justice Louis Brandeis at the Supreme Court. Though he knew little about economics—and with his British colonel’s mustache and his tweed bespoke suits, he looked like an old fogy—Acheson had a reputation as an outstanding corporate lawyer, a pragmatist with an incisive brain and a talent for crafting solutions to complex problems.
The adviser to the president on monetary affairs was the thirty-seven-year-old James Warburg, son of Paul Warburg, the father of the Federal Reserve System. After graduating from Harvard, the debonair Warburg embarked upon a stellar career in banking, becoming the youngest chief executive on Wall Street while still finding time to publish his poetry in the Atlantic Monthly and write the lyrics to a Broadway musical, Fine and Dandy. He had turned down Acheson’s job as undersecretary of the treasury, preferring to exert his influence as an unpaid and untitled adviser to the president, who liked to refer to him as “the white sheep of Wall Street.”
And finally, the hardest-currency man of them all was the thirty-eight-year-old budget director, Lewis W. Douglas. Scion of an Arizona mining family, Douglas had taught at Amherst and since 1927 had been in Congress, where he had championed the cause of government economy and balanced budgets during the Depression.
The spokesman for Wall Street should have been the head of the Federal Reserve Board, Eugene Meyer. But he found himself completely out of sympathy with the new administration and submitted his resignation at the end of March. As a consequence, Harrison of the New York Fed acted as the primary go-between for bankers and the White House.
Every one of Roosevelt’s advisers, including Harrison, believed that having stabilized the banking system, they could rely on the traditional levers—expanding credit, undertaking open market operations—to get the economy moving again. Most important, none of them could see any reason for breaking with gold.
Pitted against this array of economic expertise was one man—the president himself. Roosevelt did not even pretend to grasp fully the subtleties of international finance; but unlike Churchill, he refused to allow himself to be in the least bit intimidated by the subject’s technicalities—when told by one of his advisers that something was impossible, his response was “Poppycock!” Instead, he approached the subject with a sort of casual insouciance that his economic advisers found unnerving but which nevertheless allowed him to cut through the complications and go to the heart of the matter.
His simplistic view was that since the Depression had been associated with falling prices, recovery could only come about when prices began going the other way. His advisers patiently tried to explain to him that he had the causality backward—that rising prices would be the result of recovery, not its cause. They were themselves only half right. For in an economy where everything is connected, there is often no clear distinction between cause and effect. True, in the initial stages of the Depression the collapse in economic activity had driven prices downward. But once in motion, falling prices created their own dynamic. By raising the real cost of borrowing, they had discouraged investment and thus caused economic activity to weaken further. Effect became cause and cause became effect. Roosevelt would have been unable to articulate all the linkages very clearly. But he had an intuitive understanding that the key was to reverse the process of deflation and kept insisting that the solution to the Depression was to get prices moving upward.
There still remained a chicken-and-egg problem. How to get prices up without first having to wait for economic recovery? Several years before when Roosevelt needed help with the trees on his estate in Hyde Park, his Hudson Valley neighbor and friend Henry Morgenthau introduced him to an obscure fifty-nine-year-old economist, George Warren, professor of farm management at Cornell, under whom Morgenthau had studied as an undergraduate.
The short and stocky professor, with his owlish spectacles, Quaker-like earnest demeanor and a bunch of pencils protruding from his top pocket, had none of the earthiness that one might associate with an expert in farming. He had in fact grown up herding sheep on a Nebraska ranch and still lived firmly rooted to the soil on a five-hundred-acre working farm outside Ithaca, New York, where he raised cash crops and a large herd of Holstein cows. He had published a variety of books and pamphlets on agriculture, including a
monograph titled Alfalfa and another, An Apple Orchard Survey of Wayne and Orleans County, New York, which exhaustively documented the various techniques for growing apples in upstate New York, down to which manures worked the best; a standard textbook, Dairy Farming; and two seminal works, The Elements of Agriculture and Farm Management. He had also devised a system for inducing chickens to lay more eggs. As a teacher, he was known to be dismissive of theories and made a point of taking his students out to working farms. His quaint pastoral homilies on these visits had become part of the Cornell folklore—“You paint a barn roof to preserve it. You paint a house to sell it. And you paint the sides of barn to look at”—although none of his students were quite sure what they meant.
During the 1920s, as agricultural prices kept falling, this expert on cows, trees, and chickens had also spent a decade researching the determinants of commodity price trends. In 1932, he and a colleague published their work in an exhaustive monograph titled Wholesale Prices for 213 Years: 1720- 1932, which created enough of a stir that, in 1933, it was issued as a book. Warren was able to document how trends in commodity prices correlated strongly with the balance between the global supply and demand for gold. When large gold discoveries came onto the world market and supply out-paced demand, commodity prices tended to rise. By contrast, when new supply lagged behind, this showed up in declining prices for commodities. It was easy to quibble with some of the details of the thesis—the correlation was not perfect because a variety of other factors, not least of which were wars, intervened to blur the link. Nevertheless, it was hard to argue with the general conclusion. After all, under the gold standard, there was supposed to be a direct connection between bank credit and gold reserves—thus when gold was plentiful, so was credit, which in turn caused prices to rise.
It was Warren’s policy conclusions, however, that generated the most controversy. If commodity prices fell because of a shortage of gold, he argued, then one way to raise them was to raise the price of gold—in other words, to devalue the dollar. An increase of 50 percent in the price of bullion was no different in its effects from suddenly discovering 50 percent more of the metal. Both brought about a higher value of gold within the credit system and both would therefore stimulate higher commodity prices.
It sounded simple, but to most of Roosevelt’s economic advisers, talk of devaluation was plain blasphemy, smacking of the worst forms of repudiation. How was this different from the practice of clipping and debasing coins adopted by insolvent monarchs in the Middle Ages? Given its vast gold reserves, the United States had little reason to resort to this currency manipulation, which might threaten confidence in the credit standing of the U.S. government and even endanger rather than promote recovery.
During the first few weeks of the administration, following the proclamation suspending gold exports on Roosevelt’s first day in office, the currency situation remained in limbo. Secretary Woodin tried to reassure everyone that the United States had not left the gold standard, but the president was not so unequivocal. At his first press conference, on March 8, he joked with reporters, “As long as nobody asks me whether we are off the gold standard or gold basis, that is all right, because nobody knows what the gold basis or gold standard really is.”
On the evening of April 18, he gathered his economic advisers in the Red Room at the White House to discuss preparations for the forthcoming World Economic Conference in London. With a chuckle, Roosevelt casually turned to his aides and said “Congratulate me. We are off the gold standard.” Displaying the Thomas amendment to the Agricultural Adjustment Act, which gave the president the authority to devalue the dollar against gold by up to 50 percent and to issue $3 billion in greenbacks without gold backing, he announced that he had agreed to support the measure.
“At that moment hell broke lose in the room,” remembered Raymond Moley. Herbert Feis, the economic adviser to the State Department, looked as if he were about to throw up. Warburg and Douglas were so horrified that they began to argue with the president, scolding him as if “he were a perverse and particularly backward schoolboy.” Warburg declared that the legislation was “completely hare-brained and irresponsible” and would lead to “uncontrolled inflation and complete chaos.” Imperturbable as ever, Roosevelt bantered good-naturedly with them, insisting that going off gold was the best way to lift prices and that unless they did something to reflate, Congress would take matters in its own hands.
The discussion continued until midnight. Leaving the White House, a group of aides—Warburg, Douglas, Moley, and William Bullitt, a special assistant to the secretary of state—having just been presented with what many of them viewed as the most fateful step since the war, were unable to sleep and continued the discussion in Moley’s hotel room. They talked for half the night, analyzing the impact on the credibility of the whole New Deal program, the value of the dollar, capital flows, and relations with other countries. Finally, Douglas announced, “Well, this is the end of western civilization.”
ROOSEVELT’S DECISION To take the dollar off gold rocked the financial world. Most people could not understand why a country with the largest gold reserves in the world should have to devalue. It seemed so perverse. Indignant bankers lamented the loss of the one anchor that could keep governments honest. Bernard Baruch, the noted financier, went a little overboard though when he said that the move, “can’t be defended except as mob rule. Maybe the country doesn’t know it yet, but I think we may find that we’ve been in a revolution more drastic than the French Revolution.”
But in the days after the Roosevelt decision, as the dollar fell against gold, the stock market soared by 15 percent. Financial markets gave the move an overwhelming vote of confidence. Even the Morgan bankers, historically among the most staunch defenders of the gold standard, could not resist cheering. “Your action in going off gold saved the country from complete collapse,” wrote Russell Leffingwell to the president.
Taking the dollar off gold provided the second leg to the dramatic change in sentiment, which had begun with the bank rescue plan, that coursed through the economy that spring. Harrison, spurred into action by the threat that the government might issue unsecured currency, injected some $400 million into the banking system during the following six months. The combination of the renewed confidence in banks, a newly activist Fed, and a government that seemed intent on driving prices higher broke the psychology of deflation, a change reflected in almost every indicator. During the following three months, wholesale prices jumped by 45 percent and stock prices doubled. With prices rising, the real cost of borrowing money plummeted. New orders for heavy machinery soared by 100 percent, auto sales doubled, and overall industrial production shot up 50 percent.
If the decision to take the dollar off gold split the U.S. banking community, it unified European bankers—provoking another quip from Will Rogers: that it was obviously the best thing to do if both Britain and France were against it.
After the pound had been so humiliatingly ejected from the gold standard, Montagu Norman seemed to lose his bearings. He found himself on a road without familiar guideposts, and all his old certainties had gone. As he confessed at his annual Mansion House Speech in October 1932, “The difficulties are so great, the forces are so unlimited, precedents are so lacking, that I approach the whole subject in ignorance. . . . It is too great for me—I will admit that for the moment the way, to me, is not clear.”
Though the press still continued to be oddly fascinated by him, the tone of the coverage had changed—it was now tinged with a hint of mockery. When he came to the United States in August 1932, Time magazine described him as “a handsome, fox-bearded gentleman with a black slouch hat and the mysterious manner of the Chief Conspirator in an Italian opera.” The New York Times scolded him for his “penchant for mysterious comings and goings, his acceptance of the alias ‘Professor Clarence Skinner’ to mask what purported to be a simple vacation,” and “his affectation of the role of international man of mystery.”
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p; When, he dropped the pseudonym on his visit to the United States the next year, the New York Post could not help poking fun:Deport The Blighter:
We have a bone to pick with Montagu Norman, governor of the Bank of England. He has enjoyed American hospitality for several summers, and his visits have provided copy for the press during the doldrums. Not because the American public is interested in the Bank of England but because Mr. Norman had the bright idea of traveling incognito as Professor Skinner.
Mr. Norman, governor of the Bank of England, is worth a paragraph. But Mr. Norman, governor of the Bank of England, traveling as Professor Skinner, commanded reams of copy. It suggested plots. It conjured up visions of international cabals. . . .
We regard “Montagu C. Norman Lands in New York Under His Own Name” as a threat to an established American institution. . . . How much longer must we suffer the machinations of international bankers?
Though Norman no longer dominated the stage of international finance, most of his colleagues remarked on how much easier he was to deal with. The reason was revealed on January 20, 1933. The press uncovered that he had applied to the Chelsea Registry Office for a marriage license. The next day, to the great bemusement of all London, he was married at the age of sixty-one to the thirty-three-year old Priscilla Worsthorne. Born into an old aristocratic Roman Catholic family, she had been married once to a rich and indolent Belgian émigré, Alexander Koch de Gooreynd, who had adopted the anglicized name of Worsthorne. They had two sons but were now divorced. Norman had hoped for a small private ceremony. Instead the Chelsea Registry Office was mobbed by reporters and the newly married couple had to make a getaway by the back door and through an almshouse. Later that afternoon to avoid the paparazzi, they escaped Thorpe Lodge by climbing over the back garden wall.
Lords of Finance Page 48
