Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World (32 page)

When Baldwin first offered him the chancellorship, Churchill himself was caught so much by surprise that, for a moment, he thought he was being offered the position of chancellor of the Duchy of Lancaster, a sinecure office that served (and still serves) as a general utility post for junior ministers. So keen was he to return to power that he even toyed with the idea of accepting this position, which he had held a decade earlier in the aftermath of the Gallipoli disaster and had resigned in despair. When his appointment as chancellor was finally announced, there was outrage in the Conservative ranks, one minister complaining that he could not understand “how anybody can put their
³²⁰
faith in a man who changes sides, just when he thinks it is to his own personal advantage to do so,” and lamenting that
the “turbulent pushing busybody Winston will split the party.” But Baldwin was willing to weather the reaction of his many diehards, because, it was said, he wanted Churchill inside the government where he could keep an eye on him rather than outside, where he could only cause mischief.

Though everyone acknowledged his talents—formidable energy, exuberance, and restless imagination—many, particularly the more reactionary Tories, viewed Churchill as a pushy, self-promoting, ambitious political adventurer. The louche circle of friends with which he surrounded himself during those years only intensified doubts about his judgment. His three great cronies were Max Aitken, Lord Beaverbrook, the charming and manipulative press lord and a master of political intrigue; F. E. Smith, Lord Birkenhead
³²¹
, a dazzlingly clever lawyer, witty and articulate, who might have become the leader of the Conservative Party had he not been an alcoholic with a proclivity for seducing teenage girls; and Brendan Bracken, MP, an Australian-Irish rogue who fed the rumor that he was Churchill’s illegitimate son.

Despite Norman’s natural conservatism and his friendship with Baldwin, he did not particularly welcome the new Conservative government, fearing that it would allow its economic policies to fall into the hands of “traders and manufacturers, who, while they profess a remote affection for gold and a real affection for stability, always want a tot of brandy (in the shape of inflation).” And he naturally distrusted flamboyant characters like Churchill. The previous chancellor in the minority Labor government had been Philip Snowden, an intensely moralistic teetotaler, crippled by tuberculosis of the spine, who could only get around supported by two walking sticks. With his thin lips, icy eyes and bloodless skeletal face, his black suit and black Turkish cigarettes, he looked like an undertaker in a horror movie. But despite Snowden’s fervent belief that capitalism was doomed and his suspicion of bankers, he had espoused the cause of orthodox finance and the gold standard with all the fervor of the old puritan radical stock from which he sprang and had developed an exceptionally close relationship with Norman.

Churchill and Norman could not have been more different. Churchill
avidly sought publicity and had a terrible reputation for grandstanding. Norman chose to wrap himself in enigma, and shunned the limelight. Churchill courted the press lords. Norman considered them part of the vanguard of a new barbarism that preyed on the emotions of the expanded electorate. Churchill was naturally gregarious, loved company, and hated to be alone. Norman rarely socialized, buried himself in his work, and claimed that the Bank of England was “his only mistress
³²²
.” Churchill liked to argue and debate. Norman was reserved and uncommunicative, oddly inarticulate in public, and when confronted by opposition, he retreated into a shell of sullenness.

Their personal habits were also poles apart. Churchill was addicted to high living. He had a Rolls-Royce
³²³
and a chauffeur and by his own admission had never been on a bus or on the Underground.
^fn1
He kept an enormous retinue of twenty-four servants, and pampered himself with the finer things of life—silk underwear, champagne at every meal, Havana cigars, strings of polo ponies, and bouts at the gaming tables of Monte Carlo and Biarritz—and was predictably in perpetual debt. Norman, despite his inherited wealth
³²⁴
and his grand house in Holland Park, lived an existence of almost monkish simplicity, sleeping on a plain iron bed in a bare room with paintings propped up against the wall and taking the Underground to work every day.

About the only things the two men shared was a common disdain for the parochial “Little Englanders,” who would see Britain retreat from its role in the world, and a particular sympathy for the United States, an unusual trait among upper-class Englishmen who had reached maturity in the high noon of Edwardian England.

IN THE LAST
few months of 1924, the pound began to rise, buoyed by speculators betting that the new Conservative government would return
to gold. But the fundamental discrepancy between British prices and American prices remained, and Norman was still unsure whether to press for an early return to gold. Nothing was more symbolic of the change in Britain’s financial position than that before he could even think about doing so, he first had to go to New York to consult with Strong.

He arrived in New York aboard the S.S.
Carania
on December 28, having managed to slip out of Britain “undetected, like a shadow
³²⁵
in the dead of night,” as one magazine put it. But he was quickly unmasked by reporters, provoking the usual speculation. One story had it that he was there to renegotiate the war debt; another hinted that he was on a secret but unspecified mission for the British government. One rumor even had him preparing U.S. bankers for the imminent return of sterling to gold. When pushed by the press for a statement, the bank’s official spokesman expressed complete astonishment at his chief’s appearance in New York, but glossed over it with the observation that because Norman was in the habit of taking a vacation at this time of year, his absence had gone “unremarked
³²⁶
.”

The embassy in Washington was more inventive. Two months earlier, the New York Fed had moved into new headquarters on Liberty Street, which boasted not only a giant vault for the bank’s very considerable gold reserves, carved out of the solid bedrock of Manhattan and protected by doors ten feet thick and weighing 230 tons each, but also new mechanized coin-handling machines that sorted the twenty tons of nickels, dimes, quarters, and half dollars that clinked in every day. Because the Bank of England was itself about to embark on a construction project to expand its venerable London headquarters, Norman had obviously come to the United States to pick up points.

Norman had not been in the United States for two years. Buoyed by new industries such as automobiles, radios, household appliances, electrical machinery, and plastics, the U.S. economy was just embarking on the spectacular boom of the 1920s. The physical transformation of the city was remarkable. Most noticeable was the number of cars
³²⁷
on the road, which had doubled since he was last there—there were now as many on the
streets of New York City alone as there were in the whole German republic. Despite the introduction of traffic signals in Manhattan earlier that year, there were still constant jams and everyone complained about the congestion. It was not only the automobile. There had been a dizzying revolution in the types of goods available—household appliances such as washing machines and vacuum cleaners, new materials such as rayon and cellophane, radios and talking movies—that were changing the whole texture of life. The contrast between the gaudy prosperity of the United States, where a typical worker was earning close to $6 a day, with the dingy poverty of postwar Europe, where workers earned less than $2 a day, was another reminder of the terrible price exacted by the war.

Strong was waiting enthusiastically at the pier. He was the U.S. official with the deepest understanding of international financial issues, the widest network of friends and contacts in European banking circles, and the strongest commitment to European reconstruction. Nevertheless, a combination of his ill health and the administration’s official hands-off toward European financial affairs had left him relegated to the sidelines. In 1922, he had tried to involve himself in crafting a solution to German hyperinflation but had been expressly warned off by the secretary of state. For much of 1923 he had been ill. Then, earlier in 1924, he had again been excluded from the Dawes Plan negotiations by administration officials, except for a few informal discussions on a brief spring visit to London and Paris. He had fallen ill again on his return and had to spend part of the fall once more recuperating in Colorado.

But he remained convinced that given the importance of the pound to world trade, a global return to the gold standard would only be possible if Britain took the lead: “The great problem is sterling
³²⁸
, the others will come along easily if sterling could be dealt with,” he kept telling his colleagues.

Strong, who had just moved into a more spacious residence in the Maguery, an elegant apartment hotel located at Forty-eighth and Park Avenue, insisted that Norman stay with him. Over the next two weeks, during the day and in the evenings, Norman was subjected to an intense
campaign by the Americans, especially by Strong and the Morgan bankers, to get the pound back on gold as soon as possible.

Strong did not have to persuade Norman of the consequences should Britain not return to gold. They agreed that this could only lead to “a long period of unsettled conditions
³²⁹
too serious to contemplate. It would mean violent fluctuations in the exchanges, with probably progressive deterioration in the values of foreign currencies vis-a vis-the dollar; 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; and incentives to governments at times to undertake various types of paper money expedients and inflation; it might indeed result in the United States draining the world of gold.” It could but end, they believed, “with a terrible period of “hardship, and suffering, and . . . social and political disorder,” culminating in some kind of “monetary crisis.”

Strong stressed that the British had only a few weeks, at best months, to act. The pound was for the moment supported by the positive political developments at home; American capital was currently very optimistic about Europe in the wake of the Dawes Plan, and the Fed had been able to help Britain out by easing U.S. credit conditions in mid-1924. He warned that this narrow window would soon close, as Britain commenced war-debt payments, an outflow that was certain to weaken sterling. The Fed’s easing of credit during 1924 had suited America’s own domestic needs—the U.S. economy having suffered a mild and short-lived recession in the summer. But the time was fast approaching when the Fed would be forced to tighten credit for domestic reasons, making it difficult and more expensive for Britain to attract capital to support its currency. There were already murmurs within the corridors of the Fed that Strong was too greatly influenced by his friends in London.

He was acutely aware that British prices were still 10 percent too high, and that further deflation to cut them would bring further hardship. But he had become increasingly convinced that the British needed to be pushed into making the big decision—
force majeure,
he called it. The shock therapy
of forcing Britain to compete in world markets, while painful, would bring about the necessary realignment in prices more efficiently than a long drawn-out policy of protracted tight credit.

The Americans recognized that if Britain did go back to gold, it was imperative that the link not snap at the first signs of trouble. Otherwise, the credibility of the whole system might be called into question, throwing all the world’s currencies into turmoil. The government of the United States was in no position to lend money to any country—it had had enough of government-to-government lending during the war and was now saddled with renegotiating the terms of those loans. To ensure that Britain had adequate reserves to draw upon, Strong promised $200 million from the New York Fed. From the partners of J. P. Morgan came a further tentative commitment of $300 million.

Strong did impose one important condition: not, as might be supposed, a restriction on the economic policy of the Bank of England—how much credit it could provide or the level of interest rates it could set. The sole condition was that this loan would be available only while Norman remained governor.

As Norman set off homeward, perhaps because of the half-billion-dollar commitment that he metaphorically carried in his coat pocket, perhaps because of the powerful vote of confidence that he personally had received from the Americans, he was in an unusually sentimental mood. From on board the S.S.
France
he scribbled Strong a note:

My dear Ben
³³⁰
,

You won’t be expecting me to write you a letter. This beast of a ship rolls so much that I can hardly sit on a chair—much less write at a table. But whatever this year may bring forth for us, I am glad to have begun it with you: it is always true to say that we don’t meet often enough. . . . We
ought
indeed to get together once a quarter if we are to keep together all the year; that much we shall hardly manage; I guess once in 6 months is more
probable. At least we have made good beginning for 1925. . . . And you know, Ben, I am grateful for all your welcome and hospitality: and for all you do for me and are to me. God bless you.

NORMAN GOT BACK
to London in the middle of January to find resistance building against any early return to gold. Even some of his closest allies at the Bank were beginning to resent the American pressure tactics, fearing that Britain might be borrowing too much money for an uncertain payoff.

The most articulate critic of resumption continued to be Maynard Keynes, who railed at those in charge at Threadneedle Street for acting like “the Louis XVI of the monetary revolution
³³¹
,” and for “attacking the problems of the post-war world with unmodified pre-war views and ideas.” But his own proposals for a managed currency, outlined in the
Tract,
had been largely ignored or disparaged. Recognizing that no one was taking his idea of managed money seriously, he beat a tactical retreat and began urging instead that any return to the gold standard be at least delayed until the discrepancy between British and American costs had narrowed.