The major banking crisis began with the near bankruptcy in 1929 of the Boden-Kredit-Anstalt of Vienna, the major bank in Austria, which had never recovered from its dismemberment at Versailles. Desperate attempts by J.P. Morgan, the House of Rothschild, and later the New York Fed, to shore up the bank only succeeded in a temporary rescue which committed more financial resources to an unsound bank and thereby made its ultimate failure in May 1931 all the more catastrophic. Rather than permit the outright liquidation of their banking systems, Austria, followed by Germany and other European countries, went off the gold standard during 1931.12
But the key to the international monetary situation was Great Britain, the nub and the base for the world’s gold-exchange standard. British inflation and cheap money, and the standard that had made Britain the base of the world’s money, put enormous pressure on the pound sterling, as foreign holders of sterling balances became increasingly panicky and called on the British to redeem their sterling in either gold or dollars. The heavy loans by British banks to Germany during the 1920s made the pressure after the German monetary collapse still more severe. But Britain could have saved the day by using the classical gold-standard medicine in such crises: by raising bank interest rates sharply, thereby attracting funds to Britain from other countries. In such monetary crises, furthermore, such temporary tight money and checks to inflation give foreigners confidence that the pound will be sustained, and they then continue to hold sterling without calling on the country for redemption. In earlier crises, for example, Britain had raised its bank rate as high as 10 percent early in the proceedings, and temporarily contracted the money supply to put a stringent check to inflation. But by 1931 deflation and hard money had become unthinkable in the British political climate. And so Britain stunned the financial world by keeping its bank rate very low, never raising it above 4.5 percent, and in fact continuing to inflate sterling still further to offset gold losses abroad. As the run on sterling inevitably intensified, Great Britain cynically repudiated its own gold-exchange standard, the very monetary standard that it had forced and cajoled Europe to adopt, by coolly going off the gold standard in September 1931. Its own international monetary system was sacrificed on the altar of continued domestic inflation.13
The European monetary system was thereby broken up into separate and even warring currency blocs, replete with fluctuating exchange rates, exchange control, and trade restrictions. The major countries followed Britain off the gold standard, with the exception of Belgium, Holland, France, Italy, Switzerland, and the United States. Currency blocs formed with the British Empire forming a sterling bloc, with parities mutually fixed in relation to the pound. It is particularly ironic that one of the earliest effects of Britain’s going off gold was that the overvalued pound, now free to fluctuate, fell to its genuine economic value, at or below $3.40 to the pound. And so Britain’s grand experiment in returning to a form of gold at an overvalued par had ended in disaster, for herself as well as for the rest of the world.
In the last weeks of the Hoover administration, a desperate attempt was made by the U.S. to restore an international monetary system; this time the offer was made to Britain to return to the gold standard at the current, eminently more sensible par, in exchange for substantial reduction of the British war debt. No longer would Britain be forced by overvaluation to be in a chronic state of depression of its export industries. But Britain now had the nationalist bit in its teeth; and it insisted on outright “reflation” of prices back up to the pre-depression, 1929 levels. It had become increasingly clear that the powerful “price stabilizationists” were interested not so much in stabilization as in high prices, and now they would only be satisfied with an inflationary return to boom prices. Britain’s rejection of the American offer proved to be fatal for any hopes of international monetary stability.14
The world’s monetary fate finally rested with the United States, the major gold-standard country still remaining. Federal Reserve attempts to inflate the money supply and to lower interest rates during the depression further weakened confidence in the dollar, and gold outflows combined with runs and failures of the banks to put increasing pressure on the American banking system. Finally, during the interregnum between the Hoover and Roosevelt administrations, the nation’s banks began to collapse in earnest. The general bank collapse meant that the banking system, always unsound and incapable of paying more than a fraction of its liabilities on demand, could only go in either of two opposite directions. A truly laissez-faire policy would have allowed the failing banks to collapse, and thereby to engage in a swift, sharp surgical operation that would have transformed the nation’s monetary system from an unsound, inflationary one to a truly “hard” and stable currency. The other pole was for the government to declare massive “bank holidays,” that is, to relieve the banks of the obligation to pay their debts, and then move on to the repudiation of the gold standard and its replacement by inflated fiat paper issued by the government. It is important to realize that neither the Hoover nor the Roosevelt administrations had any intention of taking the first route. While there was a considerable split on whether or not to stay on the gold standard, no one endorsed the rigorous laissez-faire route.15
The new Roosevelt administration was now faced with the choice of retaining or going off the gold standard. While almost everyone supported the temporary “bank holidays,” there was a severe split on the longer-run question of the monetary standard.
While the bulk of the nation’s academic economists stood staunchly behind the gold standard, the indefatigable Irving Fisher redoubled his agitation for inflation, spurred onward by his personal desire to reinflate stock prices. Since the Stable Money Association had been supposedly dedicated to price stabilization, and what Fisher and the inflationists wanted was a drastic raising of prices, the association liquidated its assets into the new and frankly inflationist Committee for the Nation to Rebuild Prices and Purchasing Power. The Committee for the Nation, founded in January 1933, stood squarely for the “reflation” of prices back to their pre-1929 levels; stabilization of the price level was to proceed only after that point had been achieved. The Committee for the Nation, which was to prove crucially influential on Roosevelt’s decision, was composed largely of prominent businessmen. The committee was originated by Vincent Bendix, president of Bendix Aviation, and General Robert E. Wood, head of Sears, Roebuck and Company. They were soon joined, in the fall of 1932, by Frank A. Vanderlip, long close to Fisher and former president of the National City Bank of New York, by James H. Rand, Jr., of Remington Rand, and by Magnus W. Alexander, head of the National Industrial Conference Board.
Other members of the Committee for the Nation included: Fred H. Sexauer, president of the Dairymen’s League Cooperative Association; Frederic H. Frazier, chairman of the board of the General Baking Company; automobile magnate E.L. Cord; Lessing J. Rosenwald, chairman, Sears, Roebuck; Samuel S. Fels of Fels and Company; Philip K. Wrigley, president of William Wrigley Company; John Henry Hammond, chairman of the board of Bangor and Aroostook Railroad; Edward A. O’Neal, head of the American Farm Bureau Federation; L.J. Taber, head of the National Grange; F.R. Wurlitzer, vice president of Rudolph Wurlitzer Manufacturing Company; William J. McAveeny, president of Hudson Motor Company; Frank E. Gannett of the Gannett Newspapers; and Indiana banker William A. Wirt. Interestingly enough, this same group of highly conservative industrialists was later to become the Committee for Constitutional Government, the major anti–New Deal propaganda group of the late 1930s and 1940s. Yet the committee was the major proponent of the inflationist policy of the early New Deal in reflating and abandoning the gold standard.
Also associated with the Committee for the Nation was another great influence on Franklin Roosevelt’s decision: agricultural economist George F. Warren of Cornell, who, along with his colleague Frank A. Pearson, was the inspiration for the reflationist Roosevelt program of continually raising the buying price of gold.
The Committee for the Nat
ion at first included several hundred industrial and agricultural leaders, and within a year its membership reached over two thousand. Its recommendations, beginning with going off gold and embargoing gold exports, and continuing through devaluing the dollar and raising the price of gold, were fairly closely followed by the Roosevelt administration.16 For his part, Irving Fisher, in response to a request for advice by President-elect Roosevelt, had strongly urged at the end of February a frankly inflationist policy of reflation, devaluation, and leaving the gold standard without delay.17 By April 19, when Roosevelt had cast the die for this policy, Fisher exulted, “Now I am sure—as far as we ever can be sure of anything—that we are going to snap out of this depression fast. I am now one of the happiest men in the world.” In the same letter to his wife, an heiress of the substantial Hazard family fortune, Fisher added,
My next big job is to raise money for ourselves. Probably we’ll have to go to Sister [his wife’s sister Caroline] again.... I have defaulted payments the last few weeks, because I did not think it was fair to ask Sister for money when there was a real chance that I could never pay it back. I mean that if F.D.R. had followed Glass we would have been pretty surely ruined. So would Allied Chemical [in which much of his wife’s family fortune was invested], and the U.S. Govt.... Now I can go to Sister with a clean conscience.18
If Irving Fisher’s interest was personal as well as ideological, economic interests also underlay the concern of the Committee for the Nation. The farm groups wanted farm prices driven up, including farm export prices, which necessarily increase in terms of other currencies whenever a currency is devalued. As for the rest of the committee and other inflationists, Herbert Feis notes:
By the spring of 1933 diverse organizations and groups were crying aloud for some kind of monetary inflation or devaluation, or both. Most effective, probably, was the Committee for the Nation. Among its members were prominent merchants, such as the head of Sears, Roebuck, some journalists, some Wall Street operators and some foreign exchange speculators. Their purpose was to get the United States off the gold standard and to bring about devaluation of the dollar from which they would profit either as speculators in foreign exchange or as businessmen. Another group, more conservative, who stood to gain by devaluation were those who had already exported gold or otherwise acquired liquid deposits in foreign banks. They conceived that they were merely protecting the value of their capital.... Then there were the exporters—especially of farm products—who had been at a disadvantage ever since Great Britain had gone off the gold standard and the value of sterling had fallen much below its previous parity with the dollar.19
Also advocating and endorsing the decision to inflate and leave the gold standard were such conservative bankers as James P. Warburg of Kuhn, Loeb and Company, one of Roosevelt’s leading monetary advisers; Chicago banker and former Vice President Charles G. Dawes; Melvin A. Traylor, president of the First National Bank of Chicago; Frank Altschul of the international banking house of Lazard Frères; and Russell C. Leffingwell, partner of J.P. Morgan and Company. Leffingwell told Roosevelt that his action “was vitally necessary and the most important of all the helpful things you have done.”20 Morgan himself hailed Roosevelt’s decision to leave the gold standard:
I welcome the reported action of the President and the Secretary of the Treasury in placing an embargo on gold exports. It has become evident that the effort to maintain the exchange value of the dollar at a premium as against depreciated foreign currencies was having a deflationary effect upon already severely deflated American prices and wages and employment. It seems to me clear that the way out of the depression is to combat and overcome the deflationary forces. Therefore I regard the action now taken as being the best possible course under the circumstances.21
Other prominent advocates of going off gold were publishers J. David Stern and William Randolph Hearst, financier James H.R. Cromwell, and Dean Wallace Donham of the Harvard Business School. Conservative Republican senators such as David A. Reed of Pennsylvania and Minority Leader Charles L. McNary of Oregon also approved the decision, and Senator Arthur Vandenberg (R-Mich.) happily declared that Americans could now compete in the export trade “for the first time in many, many months.” Vandenberg concluded that “abandonment of the dollar externally may prove to be a complete answer to our problem, so far as the currency factor is concerned.”22
Amidst this chorus of approval from leading financiers and industrialists, there was still determined opposition to going off gold. Aside from the bulk of the nation’s economists, the lead in opposition was again taken by two economists with close ties to the banking community who had been major opponents of the Strong-Morgan policies during the 1920s: Dr. Benjamin M. Anderson of the Rockefeller-oriented Chase National Bank, and Dr. H. Parker Willis, editor of the Journal of Commerce and chief adviser to Senator Carter Glass (D-Va.), who had been secretary of the Treasury under Wilson. The Chamber of Commerce of the United States also vigorously attacked the abandonment of gold as well as price-level stabilization, and the Chamber of Commerce of New York State called for prompt return to gold.23 From the financial community, leading opponents of Roosevelt’s decision were Winthrop W. Aldrich, a Rockefeller kinsman and head of Chase National Bank, and Roosevelt’s budget director, Lewis W. Douglas, of the Arizona mining family, who was related to the J. Henry Schröder international bankers and was eventually to become head of Mutual Life Insurance Company and ambassador to England. Douglas fought valiantly but in vain within the administration against going off gold and against the remainder of the New Deal program.24
By the end of April 1933, the United States was clearly off the gold standard, and the dollar quickly began to depreciate relative to gold and the gold-standard currencies. Britain, which a few weeks earlier had loftily rejected the idea of international stabilization, now became frightened: currency blocs and a depreciating pound to aid British exports were one thing; depreciation of the dollar to spur American exports and injure British exports was quite another. The British had the presumption to scold the United States for going off gold; they now rested their final hope for a restored international monetary system on the World Economic Conference scheduled for London in June 1933.25
Preparations for the conference had been under way for a year, under the guidance of the League of Nations, in a desperate attempt to aid the world economic and financial crisis by attempting the “restoring [of] the currencies on a healthy basis.”26 The Hoover administration was planning to urge the restoration of the international gold standard, but the abandonment of gold by the Roosevelt administration in March and April 1933 changed the American position radically. As the conference loomed ahead, it was clear that there were three fundamental positions: the gold bloc—the countries still on the gold standard, headed by France—which desired immediate return to a full international gold standard with fixed exchange rates between the major currencies and gold; the United States, which now placed greatest stress on domestic inflation of the price level; and the British, supported by their Dominions, who wished some form of combination of the two. What was still unclear was whether a satisfactory compromise between these divergent views could be worked out.
At the invitation of President Roosevelt, Prime Minister Ramsay MacDonald of Great Britain and leading statesmen of the other major countries journeyed to Washington for individual talks with the president. All that emerged from these conversations were vague agreements of intent; but the most interesting aspect of the talks was an American proposal, originated by William C. Bullitt and rejected by the French, to establish a coordinated worldwide inflation and devaluation of currencies.
[T]here was serious discussions of a proposal, sponsored by the United States and vigorously opposed by the gold countries, that the whole world should embark upon a “cheaper money” policy, not only through a vigorous and concerted program of credit expansion and the stimulation of business enterprise by means of public works, but also through a simultaneous dev
aluation, by a fixed percentage, of all currencies which were still at their pre-depression parities.27
The American delegation to London was a mixed bag, but the conservative gold-standard forces could take heart from the fact that staff economic adviser was James P. Warburg, who had been working eagerly on a plan for international currency stabilization based on gold at new and realistic parities. Furthermore, conservative Professor Oliver M.W. Sprague and George L. Harrison, governor of the New York Fed, were sent to discuss proposals for temporary stabilization of the major currencies. In contrast, the president paid no attention to the petition of 85 congressmen, including ten senators, that he appoint as his economic advisor to the conference the radical inflationist and antigold priest, Father Charles E. Coughlin.28
The World Economic Conference, attended by delegates from 64 major nations, opened in London on June 12. The first crisis occurred over the French suggestion for a temporary “currency truce”—a de facto stabilization of exchange rates between the franc, dollar, and pound for the duration of the conference. Surely eminently reasonable, the plan was also a clever device for an entering wedge toward a hopefully permanent stabilization of exchange rates on a full gold basis. The British were amenable, provided that the pound remained fairly cheap in relation to the dollar, so that their export advantage gained since 1931 would not be lost. On June 16, Sprague and Harrison concluded an agreement with the British and French for temporary stabilization of the three currencies, setting the dollar-sterling rate at about $4.00 per pound, and pledging the United States not to engage in massive inflation of the currency for the duration of the agreement.
A History of Money and Banking in the United States: The Colonial Era to World War II Page 39
