A History of Money and Banking in the United States: The Colonial Era to World War II (66 page)

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 19Herbert Feis, “1933: Characters in Crisis,” in Schwarz, ed.,
1933:
Roosevelt’s Decision
, pp. 150–51. Feis was a leading economist for the State Department.

The New Deal and the

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International Monetary System

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 20Arthur M. Schlesinger, Jr.,
The Coming of the New Deal
(Boston: Houghton Mifflin, 1959), p. 202.

21
New York Times
, April 19, 1933; quoted in Joseph E. Reeve,
Monetary
Reform Movements
(Washington, D.C.: American Council on Public Affairs, 1943), p. 275.

22Schwarz, ed.,
1933: Roosevelt’s Decision
, p. xx.

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A History of Money and Banking in the United States:
The Colonial Era to World War II

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 23Fisher,
Stabilised Money
, pp. 355–56.

24On Douglas, see Schwarz, ed.,
1933: Roosevelt’s Decision
, pp. 135–36, 143–44, 154–58; and Schlesinger,
Coming of the New Deal
, pp. 196–97, and passim. Douglas resigned as budget director in 1934; his critical assessment of the New Deal can be found in his Lewis W. Douglas,
The Liberal
Tradition: A Free People and Free Economy
(New York: D. Van Nostrand, 1935).

The New Deal and the

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International Monetary System

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 conversa-tions 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.

25Robbins,
The Great Depression
, p. 123; and Schwarz ed.,
1933:
Roosevelt’s Decision
, p. 144.

26Leo Pasvolsky,
Current Monetary Issues
(Washington, D.C.: Brookings Institution, 1933), p. 14.

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A History of Money and Banking in the United States:
The Colonial Era to World War II

[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 devaluation, 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 27Ibid, p. 59.

28Robert H. Ferrell,
American Diplomacy in the Great Depression
(New York: W.W. Norton, 1957), pp. 263–64.

The New Deal and the

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International Monetary System

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.

The American representatives urged Roosevelt to accept the agreement, with Sprague warning that “a failure now would be most disastrous,” and Warburg declaring that without stabilization “it would be practically impossible to assume a leading role in attempting [to] bring about a lasting economic peace.” But Roosevelt quickly rejected the agreement on June 17, giving two reasons: that the pound must be stabilized at no cheaper than $4.25, and that he could not accept any restraint on his freedom of action to inflate in order to raise domestic prices.

Roosevelt ominously concluded that, “it is my personal view that far too much importance is being placed on existing and temporary fluctuations.” And lest the American delegation take his reasoning as a stimulus to renegotiate the agreement, Roosevelt reminded Hull on June 20: “Remember that far too much influence is attached to exchange stability by banker-influenced cabinets.” Upon receiving the presidential veto, the British and French were indignant, and George Harrison quit and returned home in disgust; but the American delegation went ahead and issued its official statement on temporary currency stabilization on June 22. It declared temporary stabilization impermissible,

“because the American government feels that its efforts to raise prices are the most important contribution it can make.”29

With temporary stabilization scuttled, the conference settled down to long-range discussions, the most important being centered in the subcommission on “immediate measures of financial reconstruction” of the Monetary and Financial Commission of the conference. The British delegation began by introducing a draft resolution, (1) emphasizing the importance of “cheap and plentiful credit” in order to raise the 29Pasvolsky,
Current Monetary Issues
, p. 70. See also Schlesinger,
Coming
of the New Deal
, pp. 213–16; and Ferrell,
American Diplomacy
, p. 266.

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A History of Money and Banking in the United States:
The Colonial Era to World War II

world level of commodity prices, and (2) stating that “the central banks of the principal countries should undertake to cooperate with a view to securing these conditions and should announce their intention of pursuing vigorously a policy of cheap and plentiful money by open market operations.”30 The British thus laid stress on coordinated inflation, but said nothing about the sticking point: exchange-rate stabilization. The Dutch, the Czechoslovaks, the Japanese, and the Swiss criticized the British advocacy of inflation, and the Italian delegate warned that

to put one’s faith in immediate measures for augmenting the volume of money and credit might lead to a speculative boom followed by an even worse slump. . . . A hasty and unregulated flood [of credit] would lead to destructive results.

And the French delegate stressed that no genuine recovery could occur without a sense of economic and financial security: Who would be prepared to lend, with the fear of being repaid in depreciated currency always before his eyes? Who would find the capital for financing vast programs of economic recovery and abolition of unemployment, as long as there is a possibility that economic struggles would be transported to the monetary field? . . . In a word, without stable currency there can be no lasting confidence; while the hoarding of capital continues, there can be no solution.31

The American delegation then submitted its own draft proposal, which was similar to the British, ignored currency stability, and advocated close cooperation between all governments and central banks for “the carrying out of a policy of making credit abundantly and readily available to sound enterprise,” especially by open market operations that expanded the money supply.

Also government expenditures and deficits should be synchro-nized between the different nations.

30Pasvolsky,
Current Monetary Issues
, pp. 71–72.

31Ibid., pp. 72–74.

The New Deal and the

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International Monetary System

The difference of views between the nations on inflation and prices, however, precluded any agreement in this area at the conference. On the gold question, Great Britain submitted a policy declaration and the U.S. a draft resolution which looked forward to eventual restoration of the gold standard—but again, nothing was spelled out on exchange rates, or on the crucial question of whether restoration of price inflation should come first. In both the American and British proposals, however, even the eventual gold standard would be considerably more inflationary than it had been in the 1920s: for all domestic gold circulation, whether coin or bullion, would be abolished, and gold used only as a medium for settling international balances of payment; and all gold reserves ratios to currency would be lowered.32