The Power of Gold: The History of an Obsession
Page 34
Despite the disparities of price levels between Britain and its major trading partners, Norman was convinced that he could manage to get the pound back to $4.86 without "quasi-catastrophic effects" but that Britain must look forward to "a long period of dear money.""' "Dear money" means high interest rates; high interest rates in turn tend to produce subdued business activity, which in turn means higher unemployment. The high unemployment keeps wages in check, which keeps price increases in check, which tends to strengthen the foreign exchange value of the currency and bring gold to the nation's shores. The human consequences of this inevitable sequence of events did not disturb Norman. When he jacked up interest rates in 1920 in order to squelch a budding boom, nearly a million men were laid off within twelve months, an outcome that was fully to be expected. According to Norman, the human pain was a matter for the government to worry about, not the Bank of England, whose primary responsibility was to add to the precious collection of gold bricks accumulated in its vaults below the ground.
The final sequence of events leading to the return to gold at $4.86 in April 1925 would make a wonderful scene in grand opera. The voluble dramatic actor Winston Churchill, Chancellor of the Exchequer with ultimate responsibility for the fatal decision, would be the heroic tenor, wandering in a dark and unmapped forest. Montagu Norman, cool, commanding, and expecting to be Churchill's guide, would sing the baritone role; Benjamin Strong, Norman's close friend and President of the Federal Reserve Bank of New York, would provide a kind of baritone obbligato under Norman's arias, and both Norman and Strong would be costumed as druids.* Continually distracting Norman would be the peasant-born President of the Bank of France, Emile Moreau, sharpened scythe in hand and singing contrabasso in a language that none of the others chose to understand. The eminent economist John Maynard Keynes would appear with a voice close to castrato, costumed like a nervous monkey and singing piercing high notes as a lonely but articulate critic of Churchill's decision. There would be a chorus of City financiers in top hats and morning coats. The finale of the opera would be an encounter between Norman and Moreau on a field of cloth of gold, evoking the historic meeting between Henry VIII and Francis I almost exactly four hundred years earlier.
To initiate the process up to the April 1925 deadline for restoration of the gold standard, Norman crossed the Atlantic in late December 1924 to consult with the eponymous Strong, who, although in theory subject to the control of the Federal Reserve Board in Washington, was prepared to act independently at the helm of the New York Federal Reserve Bank when the circumstances suited him. Strong shared all of Norman's values and prejudices. Norman also took the occasion to sound out J. P. Morgan, Secretary of the Treasury Mellon, as well as other Federal Reserve officials. Norman would report back that they all agreed that the moment for resumption in Britain had arrived. He added that Strong in particular had assured him that there would be no Federal Reserve policy aimed at a "deliberate policy of deflation" and would attempt to lean on the expansionist side, to the extent that they could influence prices." Strong's own report of the meetings concluded that failure to resume the gold standard in Britain would lead to "a long period of unsettled conditions too serious really to contemplate.... It would prove an incentive to all those who were advancing novel ideas for nostrums and expedients other than the gold standard to sell their wares."1'
Strong did warn Norman that his wishes would not necessarily prevail against a national mood opposed to international financial commitments and, in particular, the provincial attitude of most members of the Board in Washington. The most ominous possibility suggested by Strong was that the Federal Reserve might at some point have no choice but to raise interest rates in the United States to discourage stock market speculation-referred to in our day as "irrational exuberance"at which point domestic considerations would have to come first. This was all too accurate a prediction, although Strong was already dead by the time it was fulfilled.
Encouraged by Norman's report, Churchill notified the Prime Minister that "It will be easy to attain the gold standard, and indeed almost impossible to avoid making the decision." But it was not so easy to make the decision. Between the end of December and the deadline at the end of April, Churchill would spend a miserable four months trying to come to grips with the matter. "When I held other offices under the Crown," he complained to a friend, "I could always find out where I was. Here I'm lost and reduced to groping."1" He also grumbled that "The Governor [Norman] shows himself perfectly happy in the spectacle of Britain possessing the finest credit in the world simultaneously with a million and a quarter unemployed."14 A senior advisor, Otto Niemeyer of the Treasury, observed that "None of the witch-doctors see eye to eye and Winston cannot make up his mind from day to day whether he is a gold bug or a pure inflationist."15
Niemeyer and Montagu Norman were in fact two witch doctors who did see eye-to-eye. Together, they probably had the most influence in locking Churchill into the decision for $4.86 by April 1925. Niemeyer insisted that any other route or continuation of the prohibition against the circulation of gold would prove that Britain had never "meant business" about the gold standard in the first place, that Britain's nerve had failed, that foreigners and Britons themselves would withdraw capital to foreign shores, and that an inflationary spiral was the inevitable consequence of a currency unsupported by a gold standard. There appeared to him to be little risk of unemployment by restoring the gold standard. On the contrary, this was the only sure step to the revival of trade and British exports. Norman's accompanying memorandum wrapped up the matter by concluding that a gold reserve and the gold standard "were as necessary, and as dangerous to do without, as a police force and a tax collector."16 Those were strong words for a Chancellor to oppose.
The decision was reached on March 20 and announced in Parliament on April 25; on May 14, the king's signature made it official. The gold reserve at the Bank stood at 0153 million. Strong had arranged for a $200 million standby credit from the Federal Reserve, and Morgan joined in for an additional $100 million-a moment of fulfillment for the Morgan partners. As early as 1923, Russell Leffingwell, a senior Morgan partner, had declared that he would "sell his shirt to help England out of this mess.... Could anything be more heartening than for England and America to lock arms for honest money?" When Norman had visited J. P. Morgan himself in December 1924, Morgan warned him that centuries of moral authority would go down the tube if Britain failed to carry out the return to gold. The Morgan decision was also a source of satisfaction to Strong, because it provided political cover to his alliance with Norman."
Churchill went before Parliament on May 4 to defend the decision. "I do not pose as a currency expert," he began. "It would be absurd if I did: no one would believe me." But he claimed to have had experience with weighing the arguments of experts and he gave great weight to the judgments of "the men who have managed the currency so well" and who told him it would have been impossible to manage it up to this point if they had not had the return to gold as their goal. He emphasized that the decision was essential "for the revival of international trade and inter-Imperial trade [and] for the financial center of the world." And then, in a fine Churchillian flourish, he finished with these ringing words: "If the English pound is not to be the standard which everyone knows and can trust ... the business not only of the British Empire but of Europe as well might have to be transacted in dollars instead of pounds sterling. I think that would be a great mis- fortune."18
The Gold Standard Act of 1925 did not completely restore the old arrangements. Bank notes remained legal tender but were no longer convertible into gold coin at the Bank. In other words, the ancient right to bring gold to the bank for minting into coin was abolished. Nevertheless, the Bank would continue to sell gold on demand in the form of fourhundred-ounce bars-heavy things weighing 33.33 pounds-at the tra ditional price of £3 17s 10% d--or about £1700 a bar.* Keynes drew a sad moral from this step. Looking back from the vantage point of 1930, he eloquently pointed ou
t that
[Gold] no longer passes from hand to hand, and the touch of the metal has been taken away from men's greedy palms. The little household gods, who dwelt in purses and stockings and tin boxes, have been swallowed by a single golden image in each country, which lives underground and is not seen. Gold is out of sight-gone back again into the soil. But when gods are no longer seen in a yellow panoply walking the earth, we begin to rationalize them; and it is not long before there is nothing left.19
Keynes was a bit ahead of his time, but his prophecy would echo loudly down through the years since 1930.
A week after Parliament had acted, The Economist of May 2, 1925, claimed that an important landmark in Britain's financial history had been reached and that it was "the crowning achievement of Mr. Montagu Norman." And then The Economist (pp. 844-846) went on to proclaim with pride that "Great Britain has made its gesture to the world in the grand manner: We have the honour to pay in our accustomed manner if it so be that your account is in credit on our ledgers." The Times would echo these sentiments a few days later, pointing to the need "to face the dollar in the eye," an expression that immediately caught on throughout the British press. The Times went on to attack complaints by Labour members of Parliament by telling them that "You worry about the immediate present in neglecting the long-run future."20 Some wag's comment a year earlier about "The Norman Conquest of $4.86" had come true.21
The moment was less propitious than the majestic statements made it appear. The Times had got it wrong: there was enough to worry about in the "immediate present" to overwhelm whatever benefits might have developed over "the long-run future." True, the markets had pushed the value of the pound up toward the old parity, but in large part because the decision was widely expected. Over seven million men were unemployed at the beginning of the year, and the number would mount rapidly. Even The Economist, in its issue of December 19, 1925, admitted that the gap between prices in the United States and Britain was by no means closed, though it had narrowed. Meanwhile, prices on the Continent had fallen further and faster than Britain's, with the result that British prices were now more out of line with European competitors than with American prices.22
Finally, Keynes had pointed out a few months earlier that a return to gold would be "a dangerous proceeding," because it would put postwar Britain at the mercy of the Federal Reserve authorities in the United States. The U.S. gold stock was six times the size of Britain's, he pointed out, which meant that Americans could absorb swings up and down in their gold stock that would ricochet back onto Britain with six times the impact. In addition, Britain was now in debt to the United States instead of being one of the Americans' largest creditors." This perceptive argument was not an immediate problem, because both economic conditions and policy in the United States were congenial in the short run. Ultimately, however, Keynes's warning would turn out to be the most serious of all.
The grimmest problem was the failure of the vaunted revival of international trade to make its appearance on schedule. The pressures on the domestic economy were intense. At the end ofJuly, the coal-mining industry, with costs too high to be competitive in export markets, demanded that the miners either take a cut in wages or face losing their jobs. There had already been a sharp drop in coal exports, and the industry was losing L1 million a month .24 Meanwhile the miners, still smarting from bitter struggles against the employers in 1921 and 1922, flatly refused to accept the pay cut. Protracted negotiations continued into spring 1926, including threats of strike and a lockout, a temporary government subsidy, and a court of inquiry. One well-known member of this tribunal saw little alternative to a firm stand by the industry; the strike threat, he said, could be explained "only by the immediate and necessary effects of the return to gold. 1125
Prime Minister Baldwin agreed. It was precisely the kind of situation that Bryan had warned against when he cried, "You shall not crucify mankind upon a cross of gold!" Baldwin summed up the position of the employers by demanding that "All workers of this country have got to take a reduction in wages to get this country on its feet." On May 1, when the leader of the miners, A. J. Cook, declared, "Not a penny off the pay, not a minute on the day," the owners proceeded to lock out a million men.26 The central organization of British unions, the Trades Union Congress, declared a national strike in support of the mine workers. The General Strike of 1926, as it came to be called, paralyzed large parts of the country, but it also brought out countless numbers of volunteers who kept supplies moving and essential services operating. The General Strike petered out, but the unpleasantness at the coal mines dragged on until November. At that point, the miners were on the verge of starvation. They folded up their protests and accepted the lower wage rates. The more liberal and leftist members of British society were convinced that the miners had been betrayed by stupid and venal leaders. The famous sociologist (and socialist) Beatrice Webb referred to them as "mental defectives."27 Distrust by the Left and Labour toward politicians, financiers, and foreigners grew both vocal and unyielding.
Blame for all the bad news soon landed on poor Churchill. The situation at the mines was dreadful enough, but there were more profound and distressing developments. Quite contrary to widespread hopes and expectations, world prices failed to move upward and, in fact, were drifting downward in most countries, including the United States, on which so much depended.
Keynes lost no time in leading the outcry. He mounted a spiteful but eloquent and powerfully constructed attack on the decision in three articles that appeared before the general public in the Evening Standard and were republished later under the title of "The Economic Consequences of Mr. Churchill." The title was a play on words. As a high-ranking Treasury official, Keynes had been Lloyd George's chief economic advisor at the Versailles Peace Conference. Horrified at the unmanageable and cruel Carthaginian terms being imposed on the Germans, he resigned in disgust and produced a remarkable polemic on the subject called The Economic Consequences of the Peace. The book was an immediate best-seller and established a high influential public reputation for Keynes that he would use to advantage all through the Great Depression and right up into World War II and the process of reconstruction that followed.
Emphasizing that his arguments were not "against the gold standard as such," Keynes nevertheless insisted that Churchill was `just asking for trouble [by] committing himself to force down money wages and all money values without any idea of how it was to be done. Why did he do such a silly thing? Partly, perhaps because he has no instinctive judgement to prevent him from making mistakes. ";s After that unkind personal cut at the man who one day would lead Britain into "her finest hour" against the Nazis, Keynes goes on to admit that Churchill was "deafened by the clamorous voices of conventional finance; and, most of all, because he was gravely misled by his experts"-primarily Niemeyer and Norman.
Keynes gives Churchill no credit for having pushed his experts to the limit to assure himself that he would be doing the right thing. In February, three months before the fatal day, Churchill had circulated to Norman, Niemeyer, and other experts an elaborate memorandum referred to in the Treasury files as "Mr. Churchill's Exercise"-an effort that was a clear reflection of Keynes's views. The document listed six powerful objections against making the move back to gold, including the remarkable observation that "A Gold Reserve and the Gold Standard are in fact survivals of rudimentary and transitional stages in the evolution of finance and credit." Another radical suggestion was to renounce efforts to restore the gold standard and instead ship 0100 million of gold to New York to pay war debts, thereby provoking inflation in America and leading to a significant improvement in the value of the pound in foreign exchange markets.29 This was the document that led to the reasoning submitted to Churchill by Norman and Niemeyer, cited above, that convinced him to proceed as planned.
The French return to gold made a striking contrast with what had transpired in Britain, fulfilling all the stereotypes of the 1920s about the difference between the two nat
ions: the cold-blooded English leaders quietly discussing matters in extended deliberations with professors and monetary experts, while the hot-headed French politicians made so much noise shouting at one another that the voices of the experts were drowned by the sound and fury. The French experience was a mixture of farce, tragedy, vacillation, unrealistic expectations, and unremitting anxiety, as operatic in every way as the British experience had been.
The French lurched from one crisis to another in the search for enough breathing space to make any kind of resolution at all-although there was never any doubt that France would rejoin the gold standard club at some point. In fact, when all the shouting was over, the French turned out to have made a wiser and more realistic decision than the British and were a great deal happier with where they ended up. Once the franc was stabilized, a flood of foreign gold and capital rushed toward Paris. That these repercussions would cause serious problems for London was more of a source of satisfaction than of concern.
The French predicament was clear enough: a government splattered with red ink. In the wake of the war, the demands for rebuilding France's shattered industry, housing, and infrastructure appeared insatiable, but so were the insistent appeals of the millions of veterans for social assistance. At the same time, revenues accruing to the Treasury were depressed by the slow rate of economic recovery, to say nothing of the French habits and skills at dodging taxes. Up to 1926, taxes covered less than half of government outlays.
The French parliamentary system produced much weaker governments than in Britain; in times of crisis, the deep ideological rift between the squabbling parties led on most occasions to paralysis or meaningless measures. The Left fought for capital levies and higher income taxes on the wealthy, while the Right demanded reductions in social spending. With hard choices almost impossible to arrive at, premiers and finance ministers went in and out of office as through a revolving door. There were ten Ministers of Finance between September 1924 and July 1926.