61. Kindleberger (1986) summarizes many of the proposals for tariffs, public works, and currency stabilization. The discussion shows disagreements on major issues that were unlikely to be resolved by a multinational conference. War debts were ruled out of the discussion, but they were important to Congress and to the United States public, so the United States delegation was unwilling to consider any of the proposals calling for additional international lending.
Four days later, Norman told Harrison that the Bank of England and the Bank of France had agreed on a joint reply to the United States. They favored a return to gold. In an indirect reference to uncertainty about United States monetary policy, he urged that the three governments “should make each other aware as to what policy they intended to follow in monetary matters” before agreement could be reached (Harrison Papers, Memo, Crane to Files, file 3115.4, May 22, 1933, 1). Norman insisted there was no point discussing Warburg’s proposal or any other technical details until the three countries agreed on a policy.62
The problem for the United States delegation was that Roosevelt had not yet decided what to do. Devaluation and rising prices were politically popular. By June 2 the Board’s weekly wholesale price index was five points higher (8.5 percent) than when the administration took office. The weekly price memo referred to “substantial increases” in several prices and no large declines.63 Wallace, Tugwell, and the planners claimed credit for the price increases, as did the proponents of devaluation. Under the Agricultural Adjustment Act, approved on May 12, the Agriculture Department paid farmers to reduce supply by plowing under cotton and wheat and slaughtering pigs. Slaughtering little pigs proved politically unpopular, strengthening the proponents of devaluation as a means of raising prices (Pearson, Myers, and Gans 1957, 5623).
Roosevelt is often accused of scuttling the London conference and ending monetary cooperation working toward currency stabilization (Kindleberger 1986, 220–21; Beckhart 1972, 306). The truth to this charge is that Roosevelt’s message to the conference, on July 3, rejected an agreement to return to an international gold standard. The agreement specified neither the time nor the parity at which countries would rejoin because the conference could not agree on exchange rates. Chart 6.1 suggests the principal difficulty—the depreciation of the real dollar exchange rates for the pound and the French franc in 1933. France and Britain would not accept the 1933 rate; Roosevelt would not restore the earlier nominal rate and accept the implied deflation that would follow.64
62. Warburg’s proposal probably refers to the proposal drafted by James Warburg and Oliver Sprague, calling for a return to a gold standard with different rules. Gold would not circulate but would be held only by central banks and governments. Gold reserve ratios supporting currency would be adjustable, not fixed. Silver would supplement gold as a reserve metal.
63. Cotton and wheat prices were back to levels not seen since 1930 or 1931 (Kindleberger 1986, table 16).
In April, after floating the dollar, Roosevelt had offered to stabilize at a 15 percent devaluation against gold provided Britain and France would agree to a stabilization fund to keep exchange rates at the proposed levels. They refused. The British and French had been favorable to stabilization in the winter of 1933, before devaluation of the dollar brought the franc to a peak and the pound back to its traditional range, $4.86 per pound. By the time of the conference, the principal concern for Britain and France was that the dollar would continue to depreciate against the pound and the franc.
Harrison’s notes record the jockeying for relative advantage of the British, French, and United States delegations to a conference called from June 9 to June 16 at the Bank of England to resolve trilateral issues outside the main London conference. James Warburg, representing the State Department, Oliver Sprague, representing the Treasury, and Harrison were members of the United States delegation. All three favored a return to the gold standard, and two of them resigned later in the year when Roosevelt forced further dollar devaluation. This agreement aside, the United States delegation did not have a common viewpoint. Harrison favored “de facto stabilization as soon as possible” but does not mention an exchange rate (Harrison Papers, Diary of Trip to London, file 3010.2, June 1933, 1). Hereports Sprague as not favoring any definite arrangement until exchange rates stabilized, perhaps in three months, but willing to consider an interim agreement. Warburg worried about the domestic political consequences of stabilization, almost certainly a reference to congressional and agricultural interests and perhaps to Warren and Morgenthau also. By June 10 Warburg had changed his mind, at least to the extent of tactically favoring stabilization. He cabled the president that he would support gold exports to make stabilization effective, but he did not expect the British to agree. The onus for failure would then be on them (ibid., 2).
64. Real exchange rates are obtained using relative wholesale price indexes to adjust for differences in inflation. Eichengreen (1992, 318) agrees that Roosevelt was not wholly to blame for the failure. He blames differences in analysis of the problem and domestic political considerations. The latter have a role, but I believe there was a common view about the gold standard and fixed exchange rates. The hard issues were where new exchange rates would be set and whether prosperity could best be restored by reflation or further deflation.
Norman refused to negotiate any agreements until Treasury and government officials agreed on the policies of the respective governments.65 The governments agreed on the desirability of fixed exchange rates, but they could not agree on a policy. The French wanted a permanent agreement, based on gold. They considered an interim agreement useless or worse. Speculators would bet on the next step. Sprague said that “a permanent stabilization commitment was now entirely out of the question so far as the United States is concerned” (ibid., 3). The question to be considered was whether there should be a temporary agreement. He offered to forgo use of the Thomas amendment during the period of the agreement if the United States recovery continued. He favored stabilization but argued that it was impossible as long as unstable economic conditions persisted. Norman agreed with Sprague, but he viewed the pound as the weak currency. The United States and France had large stocks of gold; Britain did not: “He foresaw great difficulties and many quarrels” in a tripartite agreement (ibid., 7).
At the central bankers’ meeting, Norman suggested an interim program under which the pound and dollar would be fixed to gold with settlement in gold. The commitment would be limited to the specific amount of gold committed. If a country paid out its entire commitment, a new agreement could be reached at adjusted gold parities. This process could continue until the countries reached stable parities.66 Émile Moret preferred this plan to Harrison’s proposal to stabilize exchange rates, because the franc remained convertible into gold and the Bank of France was not allowed to buy foreign exchange. Harrison was skeptical because Washington favored stabilizing exchange rates, not the gold price. He considered daily or weekly announcements of gold movements a source of instability, so he wanted to avoid them. Exchange rate stabilization with gold settlement would show only net movements over a period. Further, he explained, the United States Treasury was unwilling to promise not to devalue after the London conference ended.
65. The French Treasury delegation included Émile Moret, governor of the Bank of France, and Jacques Rueff, a strong proponent of the gold standard. In the 1960s, Rueff, as an adviser to President Charles de Gaulle, took positions similar to those he had taken in the 1930s. At London, government officials met separately to work out a government position, then met with the central bankers.
66. The working assumption was that they would. Chart 6.1 suggests that starting in 1933 might have required large changes in the relative price levels of the three countries.
Moret rejected Harrison’s proposal. Central banks could stabilize exchange rates without an agreement. What was needed was a statement about monetary policy, current and future. Announcing and maintaining a gold price would provide the in
formation.
On June 15 the central bankers’ meeting reached a modest, partial agreement to fix the dollar-pound rate within a 3 percent (12 cent) band around $4 per pound for a two-week period. The British government reserved the right to change the rate after two weeks, and the United States reserved the right to reject any British devaluation. Otherwise the contract would remain in force. The French would continue pegging to gold at a rate that equaled $0.04662 per franc. The United States promised not to invoke the Thomas amendment.
Financial markets greeted the announcements as a halt to reflation and recovery. Stock and commodity prices began to fall on June 12 as rumors of an agreement spread. Between June 12 and June 17 commodity and stock prices fell 3.5 and 8 percent, and the dollar appreciated against gold. Burgess told Harrison that even temporary stabilization was unacceptable. The delegation to the main London conference announced that “measures of temporary stabilization now would be untimely” (State Department files, quoted in Eichengreen 1992, 333). Roosevelt went on a sailing trip. The dollar fell, and commodity and stock prices resumed their rise.
That seemed to put an end to the main business of the London conference, but the conference continued. Roosevelt seems not yet to have made a final decision. Instead he sent one of his principal advisers, Raymond Moley, to London with instructions calling for a return to “stability in the international monetary field . . . as quickly as practicable,” with gold “reestablished as the international measure of exchange values” (Moley 1939, app. F). Gold would not circulate but would be held by central banks or governments. Currencies would be subject to a uniform minimum gold reserve ratio. Silver could substitute partially for gold as a central bank reserve.
Based on these instructions, Moley negotiated a new agreement with Britain and France to limit speculation and restore the gold standard, but the agreement did not specify either the date or the gold price at which countries would return to gold. This was left to the future.
The June experience helped to convince Roosevelt about the difficulty of reaching a meaningful agreement. The market response to the June 15 agreement seemed to confirm Warren’s view that stabilization would bring back deflation. Morgenthau, who joined the president on his vacation, reinforced the latter view by showing Roosevelt Warren’s charts of weekly changes in gold and commodity prices.67
On July 3 Roosevelt reversed direction, threw out the instructions given to Moley, and rejected Moley’s agreement. In a strongly worded message to the conference favoring domestic over international action, the president said:
The world will not long be lulled by a specious fallacy of achieving a temporary and probably an artificial stability in foreign exchange on the part of a few countries only. The sound internal economic system of a nation is a greater factor in its well-being than the price of its currency in terms of the currencies of other nations. . . . Our broad purpose is permanent stabilization of every nation’s currency. Gold or gold and silver can well continue to be a metallic reserve behind currencies, but this is not the time to dissipate gold reserves. When the world works out concerted policies in the majority of nations to produce balanced budgets and living within their means, then we can properly discuss a better distribution of the world’s gold and silver supply to act as a reserve base of national currencies. (Quoted in Crabbe 1989, 437–38)
Roosevelt had at last made up his mind to emphasize domestic over international considerations as many in Congress wanted. Reflation of the domestic commodity price level became a key element in a policy of domestic recovery.
The world, Roosevelt said, faced catastrophe if the conference limited its concerns to exchange rate stabilization. There was no visible prospect of successful international cooperation to restore prosperity. The British hesitated to enter more than a temporary agreement that gave them a temporary advantage. The Harrison diaries make clear that agreement with the French was possible only on their terms. By law France could not engage in expansive open market operations. By choice they would not do so, because French officials continued to believe that the only proper solution was for each country to force its prices down to the level implied by its gold holdings. If this policy forced deflation on other countries, they must restrict money growth and deflate also. Harrison, Black, Miller, and others at the Federal Reserve, and Acheson, Warburg, and Sprague at the Treasury, favored a gold standard policy for the United States. The Federal Reserve made open market purchases at the time, but mainly out of fear of the administration and congressional “inflationists.” A commitment to restore the gold standard would soon end these purchases and restore deflationary policy.
67. Morgenthau gives credit to Louis Howe and Eleanor Roosevelt (Blum 1959, 65).
By rejecting the London agreement, Roosevelt freed policy from the gold standard and kept the Federal Reserve in the backseat. He had moved, hesitantly, toward the policy of reflation advocated by Warren, Fisher, and Morgenthau. He did not decide to forever abandon the gold standard, as Fisher and Warren proposed. Long-term commitments had no special attraction and surely were not his concern at the time. The decision was to raise agricultural and commodity prices, to experiment, and to see where the experiment led.
Roosevelt’s decision to choose domestic expansion over stabilization of the gold price was correct in the circumstances. Starting from the low levels of 1933, the income effect of domestic United States expansion would more than offset any effect on foreigners of a United States devaluation. Further, a return to the gold standard would have brought back deflation in those countries that lost gold. Even if the technicians could have adjusted exchange rates appropriately—an unlikely event—fixed exchange rates would again be misaligned as countries moved toward full employment at different rates and with different price changes. The London meetings show that policymakers could not agree on exchange rate changes. They were unlikely to pay the costs of maintaining fixed rates during the long period of adjustment that lay ahead.
Unilateral Action
Markets greeted Roosevelt’s “bombshell,” as it is often called, enthusiastically. They anticipated reflation, rising output, and a vigorous policy of domestic expansion. On July 3 the daily indexes of commodity and stock prices rose 2 and 3 percent respectively, and the dollar depreciated against the pound. The daily price indexes continued to rise until July 18, when the NIRA announced its first codes. The following day, the Dow Jones industrial average fell almost 5 percent. The cumulative decline in the next few days reached 18 percent for stocks and 10 percent for Moody’s daily index of commodity prices. The dollar appreciated.
The president did not want the dollar to go above $4.86 per pound, the nominal rate prevailing before the 1931 British devaluation. On July 11 he asked the Federal Reserve to earmark $20 million in gold for the Bank of England, to be released two weeks later. Harrison explained to Norman that the intervention was intended to slow the dollar’s appreciation; it was not an attempt to fix the dollar at the old rate. As chart 6.1 above suggests, the dollar had appreciated strongly in real terms since April; it reached a peak in July, then declined (Board Minutes, July 13, 1933, 1–3; Harrison Papers, file 2210.3, July 14, 1933).68
A week after his July 3 message to London, Roosevelt asked Morgenthau to invite Warren, Fisher, and Professor James Rogers of Yale for tea. Warren and Fisher met with Roosevelt at his home in Hyde Park, New York, on August 8. Roosevelt asked whether he should increase the price of gold to $29 an ounce. Warren urged at least $32 to $37. He showed Roosevelt charts showing the recent increases in prices of commodities, stocks, and gold and the level of employment (Pearson, Myers, and Gans 1957, 5626–27). Fisher, of course, agreed with Warren that buying gold would raise the price level (Barber 1996, 47, paraphrasing a letter from Fisher to his wife). Roosevelt was convinced and apparently pleased. He called a news conference the next day to show the press some of Warren’s charts.
Warren divided the determinants of commodity prices into national and international factors. Wo
rld supply and demand for gold determined a world price level. Domestic price levels depended on the world price level and the domestic price of gold. By changing the latter, the domestic price level could be made to rise or fall (Pearson, Myers, and Gans 1957, 5601).
Warren’s conclusion was attractive to Roosevelt, since the charts showed that the effects occurred quickly (ibid., 5664). Farm prices had declined 64 percent from February 1929 to February 1933, while prices paid by farmers declined 36 percent. Devaluation, Warren concluded, would reverse this change in the price level and the relative price of farm products (5670–71). This was what Roosevelt wanted to accomplish for political as well as economic benefits.69
Roosevelt did not want the higher gold price to reward gold speculators and foreigners. On August 28 he used the emergency powers in the Trading with the Enemy Act and the Emergency Banking Act to extend the embargo on gold exports and call all outstanding gold into the Federal Reserve banks. The resolution abolished the domestic market for gold, hampering efforts to raise the gold price without making foreign purchases, contrary to Roosevelt’s intention. The next day the president authorized the Treasury to purchase all newly mined gold at a price set by the secretary. Ten days later, the Treasury set the price for newly mined gold at $29.62 an ounce. This decision formally abandoned the $20.67 price of gold.70 By late October, the gold price had increased only to $29.80 (Pearson, Myers, and Gans 1957, 5632).
68. The authorization to intervene was for two weeks, ending July 28. By that time the dollar had fallen, so the authorization ended.
69. Warren recorded Viner as favoring a return to the gold standard following an international conference to fix the price of gold. Strangely, Warren did not believe that central banks could fix the price of gold by joint action (Pearson, Myers, and Gans 1957, 5628–29).
A History of the Federal Reserve, Volume 1 Page 65
