A History of Money and Banking in the United States: The Colonial Era to World War II (67 page)

As could have been predicted before the conference, there were three sets of views on gold and currency stabilization. The United States, backed only by Sweden, favored cheap money in order to raise domestic prices, with currency stabilization to be deferred until a sufficient price rise had occurred. Whatever international cooperation was envisaged would stress joint inflationary action to raise price levels in some coordinated manner. The United States, moreover, went further even than Sweden in calling for reflating wholesale prices back to 1926 levels. The gold bloc attacked currency and price inflation, pointed to the early postwar experience of severe inflation and currency depreciation, and hence insisted on stabilization of exchanges and the avoidance of depreciation. In the confused middle were the British and the sterling bloc, who wanted price reflation and cheap credit, but also wanted eventual return to the gold standard and temporary stabilization of the key currencies.

As the London conference foundered on its severe disagreements, the gold-bloc countries began to panic. For on the one hand the dollar was failing in the exchange markets, thus making American goods and currency more competitive. And what 32Ibid., pp. 74–76, 158–60, 163–66.

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

is more, the general gloom at the conference gave international speculators the idea that in the near future many of these countries would themselves be forced to go off gold. In consequence, money began to flow out of these countries during June, and Holland and Switzerland lost more than 10 percent of their gold reserves during that month alone. In consequence, the gold countries launched a final attempt to draft a compromise resolution. The proposed resolution was a surprisingly mild one. It committed the signatory countries to reestablishing the gold standard and stable exchange rates, but it deliberately emphasized that the parity and date for each country to return to gold was strictly up to each individual country. The existing gold-standard countries were pledged to remain on gold, which was not difficult since that was their fervent hope. The nongold countries were to reaffirm their ultimate objective to return to gold, to try their best to limit exchange speculation in the meanwhile, and to cooperate with other central banks in these two endeavors. The innocuousness of the proposed declaration comes from the fact that it committed the United States to very little more than its own resolution of over a week earlier to return eventually to the gold standard, coupled with a vague agreement to cooperate in limiting exchange speculation in the major currencies.

The joint declaration was agreed upon by Sprague and Warburg; by James M. Cox, head of the Monetary Commission of the conference; and by Raymond Moley, who had taken charge of the delegation as a freewheeling White House adviser. Moley was assistant secretary of state and had been a monetary nationalist. Moley, however, sent the declaration to Roosevelt on June 30, urging the president to accept it, especially since Roosevelt had been willing a few weeks earlier to stabilize at a $4.25 pound while the depreciation of the dollar during June had now brought the market rate up to $4.40. Across the Atlantic, Undersecretary of the Treasury Dean G. Acheson, influential Wall Street financier Bernard M. Baruch, and Lewis W. Douglas also strongly endorsed the London declaration.

The New Deal and the

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Not hearing immediately from the president, Moley franti-cally wired Roosevelt the next morning that “success even continuance of the conference depends upon United States agreement.”33 Roosevelt cabled his rejection on July 1, declaring that

“a sufficient interval should be allowed the United States to permit . . . a demonstration of the value of price lifting efforts which we have well in hand.” Roosevelt’s rejection of the innocuous agreement was in itself startling enough; but he felt that he had to add insult to injury, to slash away at the London conference so that no danger might exist of currency stabilization or of the reconstruction of an international monetary order.

Hence he sent on July 3 an arrogant and contemptuous public message to the London conference, the famous “bombshell” message, so named for its impact on the conference.

Roosevelt began by lambasting the idea of temporary currency stabilization, which he termed a “specious fallacy,” an

“artificial and temporary . . . diversion.” Instead, Roosevelt declared that the emphasis must be placed on “the sound internal economic system of a nation.” In particular, old fetishes of so-called international bankers are being replaced by efforts to plan national currencies with the objective of giving to those currencies a continuing purchasing power which . . . a generation hence will have the same purchasing and debt-paying power as the dollar value we hope to attain in the near future. That objective means more to the good of other nations than a fixed ratio for a month or two in terms of the pound or franc.

In short, the president was now totally committed to the nationalist Fisher–Committee for the Nation program for paper money, currency inflation and very steep reflation of prices, and then stabilization of the higher internal price level. The idea of stable exchange rates and an international monetary order 33Schlesinger,
Coming of the New Deal
, pp. 218–21; Pasvolsky,
Current
Monetary Issues
, pp. 80–82.

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

could fade into limbo.34 The World Economic Conference limped along aimlessly for a few more weeks, but the Roosevelt bombshell message effectively killed the conference, and the hope for a restored international monetary order was dead for a fateful decade. From here on in the 1930s, monetary nationalism, currency blocs, and commercial and financial warfare would be the order of the day.

The French were bitter and the English stricken at the Roosevelt message. The chagrined James P. Warburg promptly resigned as financial adviser to the delegation, and this was to be the beginning of the exit of this highly placed economic adviser from the Roosevelt administration. A similar fate was in store for Oliver Sprague and Dean Acheson. As for Raymond Moley, who had been repudiated by the president’s action, he tried to restore himself in Roosevelt’s graces by a fawning and obviously insincere telegram, only to be ousted from office shortly after his return to the States. Playing an ambivalent role in the entire affair, Bernard Baruch, who was privately in favor of the old gold standard, praised Roosevelt fulsomely for his message. “Until each nation puts its house in order by the same Herculean efforts that you are performing,” Baruch wrote the president, “there can be no common denominators by which we can endeavor to solve the problems. . . . There seems to be one common ground that all nations can take, and that is the one outlined by you.”35

Expressions of enthusiastic support for the president’s decision came, as might be expected, from Irving Fisher and George F. Warren, who urged Roosevelt to avoid any possible agreement that might limit “our freedom to change the dollar 34The full text of Roosevelt’s message can be found in Pasvolsky,
Current Monetary Issues
, pp. 83–84, or Ferrell,
American Diplomacy
, pp.

270–72.

35Schlesinger,
Coming of the New Deal
, p. 224. For Baruch’s private views, see Margaret Coit,
Mr. Baruch
(Boston: Houghton Mifflin, 1957), pp. 432–34.

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International Monetary System

any day.” James A. Farley has recorded in his memoirs that Roosevelt was prompted to send his angry message by coming to suspect a plot to influence Moley in favor of stabilization by Thomas W. Lamont, partner of J.P. Morgan and Company, working through Moley’s conference aide and White House adviser, Herbert Bayard Swope, who was close to the Morgans and also a longtime confidant of Baruch. This might well account for Roosevelt’s bitter reference to the “so-called international bankers.” The situation is curious, however, since Swope was firmly on the antistabilizationist side, and Roosevelt’s London message was greeted enthusiastically by Russell Leffingwell of Morgans, who apparently took little notice of its attack on international bankers. Leffingwell wrote to the president: “You were very right not to enter into any temporary or permanent arrangements to peg the dollar in relation to sterling or any other currency.”36

From the date of the torpedoing of the London Economic Conference, monetary nationalism prevailed for the remainder of the 1930s. The United States finally fixed the dollar at $35 an ounce in January 1934, amounting to a two-thirds increase in the gold price of the dollar from its original moor-ings less than a year before, and to a 40-percent devaluation of the dollar. The gold nations continued on gold for two more years, but the greatly devalued dollar now began to attract a flood of gold from the gold countries, and France was finally forced off gold in the fall of 1936, with the other major gold countries—Switzerland, Belgium, and Holland—following shortly thereafter. While the dollar was technically fixed in terms of gold, there was no further gold coin or bullion redemption within the U.S. Gold was used only as a method of clearing balances of payments, with only fitful redemption to foreign countries.

36Schlesinger,
Coming of the New Deal
, p. 224; Ferrell,
American
Diplomacy in the Great Depression
, pp. 273ff.

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

The only significant act of international collaboration after 1934 came in the fall of 1936, at about the time France was forced to leave the gold standard. Partly to assist the French, the United States, Great Britain, and France entered into a Tripartite Agreement with France, beginning on September 25, 1936. The French agreed to throw in the exchange-rate sponge, and devalued the franc by between one-fourth and one-third.

At this new par, the three governments agreed—
not
to stabilize their currencies—but to iron out day-to-day fluctuations in them, to engage in mutual stabilization of each other’s currencies only within each 24-hour period. This was scarcely stabilization, but it did constitute a moderating of fluctuations, as well as politico-monetary collaboration, which began with the three Western countries and soon expanded to include the other former gold nations: Belgium, Holland, and Switzerland. This collaboration continued until the outbreak of World War II.37

At least one incident marred the harmony of the Tripartite Agreement. In the fall of 1938, while the United States and Britain were hammering out a trade agreement, the British began pushing the pound below $4.80. At the threat of this cheapening of the pound, U.S. Treasury officials warned Secretary of the Treasury Henry Morgenthau, Jr., that if “sterling drops substantially below $4.80, our foreign and domestic business will be adversely affected.” In consequence, Morgenthau successfully insisted that the trade agreement with Britain must include a clause that the agreement would terminate if Britain should allow the pound to fall below $4.80.38

37On the Tripartite Agreement, see Raymond F. Mikesell,
United States
Economic Policy and International Relations
(New York: McGraw-Hill, 1952), pp. 55–59; W.H. Steiner and E. Shapiro,
Money and Banking
(New York: Henry Holt, 1941), pp. 85–87, 91–93; and Anderson,
Economics and
the Public Welfare
, pp. 414–20.

38Lloyd C. Gardner,
Economic Aspects of New Deal Diplomacy
(Madison: University of Wisconsin Press, 1964), p. 107.

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International Monetary System

Here we may only touch on a fascinating historical problem which has been discussed by revisionist historians of the 1930s: To what extent was the American drive for war against Germany the result of anger and conflict over the fact that, in the 1930s’ world of economic and monetary nationalism, the Germans, under the guidance of Dr. Hjalmar Schacht, went their way successfully on their own, totally outside of Anglo-American control or of the confinements of what remained of the cherished American Open Door?39 A brief treatment of this question will serve as a prelude to examining the aim of the war-borne “second New Deal” of reconstructing a new international monetary order, an order that in many ways resembled the lost world of the 1920s.

German economic nationalism in the 1930s was, first of all, conditioned by the horrifying experience that Germany had had with runaway inflation and currency depreciation during the early 1920s, culminating in the monetary collapse of 1923.

Though caught with an overvalued par as each European country went off the gold standard, no German government could have politically succeeded in engaging once again in the dreaded act of devaluation. No longer on gold, and unable to devalue the mark, Germany was obliged to engage in strict exchange control. In this economic climate, Dr. Schacht was particularly successful in making bilateral trade agreements with individual countries, agreements which amounted to 39For revisionist emphasis on this economic basis for the American drive toward war with Germany, see ibid., pp. 98–108; Lloyd C. Gardner,

“The New Deal, New Frontiers, and the Cold War: A Re-examination of American Expansion, 1933–1945,” in
Corporations and the Cold War,
David Horowitz, ed. (New York: Monthly Review Press, 1969), pp. 105–41; William Appleman Williams,
The Tragedy of American Diplomacy
(Cleveland, Ohio: World Publishing, 1959), pp. 127–47; Robert Freeman Smith, “American Foreign Relations, 1920–1942,” in
Towards a New Past,
Barton J. Bernstein, ed. (New York: Pantheon Books, 1968), pp. 245–62; and Charles Callan Tansill,
Back Door to War
(Chicago: Henry Regnery, 1952), pp. 441–42.

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