Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World (42 page)

Strong had always hoped that once the other major countries were back on gold, the lopsided maldistribution, which had left so much of the world’s gold stock in the United States, would correct itself. But that had not happened. Sterling had returned to gold at an unrealistically high
exchange rate, leaving British goods expensive and difficult to sell in the world market. France, on the other hand, had done exactly the opposite. By pegging the franc at 25 to the dollar, the Banque de France had kept French goods very cheap. France was therefore in a position to steal a competitive edge over its European trading partners, particularly Britain. While this discrepancy between British and French prices persisted, the tensions could only fester. There was a natural tendency for money to move from overpriced Britain to underpriced France. To correct the situation, either prices had to fall further in Britain—which the authorities were trying to bring about without much success—or rise in France—which the Banque de France would not permit. The only alternative was to change the gold parity of sterling. But everyone feared that such a devaluation would so shock the banking world as to undermine any hope of order in international finances and even destroy the gold standard.

The Germans had avoided the British mistake. At the exchange rate of 4.2 marks to the dollar set by Schacht back in late 1923, German goods were cheap. Germany had a different problem. It had been denuded of gold during the nightmare years of the early 1920s and was now spending so much on reconstruction and reparations that, despite its large foreign borrowing, it was unable to build up new reserves. Thus, of all the countries in Europe, only France had enjoyed any success in attracting gold, although even this had been done, not so much by drawing gold from America as by weakening the position of Britain.

There was one way for the Fed to help Europe out of these dilemmas, or at least buy it some time. It could lower its interest rates further. In addition to giving Britain some breathing room, there were good domestic reasons to justify such a cut. Prices around the world were falling—not precipitously, but very gradually and very steadily. Since 1925, U.S. wholesale prices had fallen 10 percent, and consumer prices 2 percent. The United States had also entered a mild recession in late 1926, brought on in part by the changeover at Ford from the Model T to the Model A. The two main domestic indicators that Strong had come to rely on to guide his credit
decisions—the trend in prices and the level of business activity—argued that the Fed should ease. But interest rates at 4 percent were already unusually low.

Ever since the early 1920s when he had embarked on his policy of keeping interest rates low to help Europe, a faction within the Fed, led by Miller, had argued that Strong was too influenced by international considerations and especially by Norman. During Britain’s return to gold in 1925, he had been accused by some members of the Board of having exceeded his authority in providing the line of credit to the Bank of England. But at the time, there had been so much support within U.S. financial circles for Britain’s return to gold, and when the British did not even have to draw on the line of credit, the dissenting voices had died away. In 1926, while Strong was in France
⁴⁴⁶
, he was again criticized by Board members for freelancing and acting too much on his own initiative. He responded that unless they were willing to come to Europe as frequently as he did, and familiarize themselves with the people and the situation, they would just have to trust him. While he did not shy away from conflict—quite the contrary, according to one colleague he seemed to “thoroughly enjoy getting into a fight
⁴⁴⁷
and coming out on top”—the constant sniping
⁴⁴⁸
over international policy became so wearing that he even threatened to resign.

The same faction that had opposed him on Europe had pressed him to tighten in 1925 and 1926 to bring down equity prices. While they had then sounded a false alarm on a bubble in stocks, with the market still strong—the Dow was hovering close to 170—he knew that were he now to loosen monetary policy to bail out the pound, he risked severely splitting the Fed.

In the summer of 1927, still weak from his recent illness, Strong decided that rather than go to Europe as he usually did, he would invite Norman, Schacht, and Moreau to the United States.
^fn1
Before the war, when the gold standard had worked automatically, the system had simply required all
central banks, operating independently, to follow the rules of the game. Collaboration had not needed to go beyond occasionally lending one another gold.

Ever since the war, as the gold standard had been rebuilt and evolved into a sort of dollar standard with the Federal Reserve acting as the central bank of the industrial world, Strong had found it useful to consult frequently with his colleagues—he generally used his summers in Europe as an occasion to meet all of his European counterparts. This had begun with his getting together with Norman very informally and with minimum publicity once or twice a year—meetings of two friends who agreed on most essentials. After the stabilization of the mark in 1924, Schacht had joined the club, and the three of them convened in Berlin in 1925 and at The Hague in 1926. He now proposed a meeting of all four central banks, including the French.

Moreau, who spoke no English and feared being excluded from the most important discussions, decided to send his deputy governor, Charles Rist, in his place. Norman and Schacht traveled across the Atlantic together on the
Mauretania,
arriving on June 30. They took the usual precautions—their names did not appear on the passenger list and even their baggage was unmarked. But news of the meeting had leaked well in advance and the usual posse of reporters was waiting for them at dockside. Norman, nervous that Rist had arrived two days earlier and might have stolen a march on him, insisted on going straight from the ship to the downtown offices of the New York Fed.

Over the years, each of the central banks
⁴⁴⁹
had acquired its distinctive architectural signature, somehow expressive of the institution’s character. While the Bank of England, for example, looked like a medieval citadel, the Banque de France like an aristocrat’s palace, the Reichsbank like a government ministry, for some reason—perhaps in a salute to those first international bankers, the merchant princes of Renaissance Italy—the New York Federal Reserve had chosen to dress itself up as a Florentine palazzo. With its ground-floor arches, heavy sandstone and limestone walls pierced with rows of small rectangular windows, and loggia gracing
the twelfth floor, it was an almost exact imitation, on a grander and more epic scale, of the Pitti or the Riccardi palaces in Florence.

It was on the twelfth floor of this faux Italian palace that the four great banking powers of the world first convened. That weekend, however, desperate to get away from the prying eyes of the press, they moved in great secrecy to an undisclosed location out of the city. Strong had chosen for their clandestine meeting the summer home of Ogden L. Mills, undersecretary of the treasury. In an administration whose secretary of the treasury, Andrew Mellon, was the third richest man in the United States, it was in keeping that his deputy should be the heir to a robber baron fortune. Ogden Mills was, however, by the standards of third-generation wealth, a serious man with a law degree from Harvard who had made a career with a respectable white-shoe New York law firm.

But he had not completely given up on the privileges of inherited wealth.
^fn2
His estate lay on the North Shore of Long Island, now buried under suburban sprawl and, to present eyes, an unlikely setting for a secret conclave of central bankers. But in the 1920s, this was the “Gold Coast,” a Gatsby-esque world, now long gone, of mansions with gilded ceilings, of grand formal gardens and marble pavilions, of racing stables, foxhunts, and polo fields, boasting castles larger than those of Scotland and châteaus grander than along the Loire. Among those who summered there were J. P. Morgan, Otto Hermann Kahn of Kuhn Loeb, and Daniel Guggenheim, the copper king.

Its mere twenty rooms made the Mills house, a discreet and elegant neo-Georgian brick mansion with vine-covered walls, located on the Jericho Turnpike in the town of Woodbury, New York, a modest residence by the standards of some of its neighbors. A few hundred yards farther up the turnpike stood Woodlands, a thirty-two-room estate that Andrew Mellon had just bought for his daughter Ailsa as a wedding gift. Half a mile down
the road stood Oheka, the second largest house in the United States, a mock chateau of 127 rooms owned by Kahn.

The four men remained in seclusion for five days, No official record of the discussions was kept. Although they socialized and had meals together, they rarely gathered as a group, relying instead upon bilateral meetings. Strong and Norman in particular spent hours “closeted together
⁴⁵⁰
.” The discussions were almost entirely devoted to the problem of strengthening Europe’s gold reserves and to finding ways to encourage the flow of gold from the United States to Europe.

Norman dominated the proceedings
⁴⁵¹
, seated at one end of the conference room in a fan-backed oriental chair. In spite of the warm weather, he insisted on wearing his velvet-collared cape, which only added to the picturesque figure he evoked. He made it clear that his gold reserves were critically low. Any further erosion would force him to put up rates. The link between the pound and gold was seriously in peril. Moreover, he argued, the on-going worldwide decline in wholesale prices was a symptom of a mounting global shortage of gold as countries returning to the standard built up their reserves.
^fn3
And so it was imperative that countries with large reserves ease credit to spread the bullion around.

Rist, on the other hand, argued that the question of European gold was largely a British problem. Having made the mistake of fixing sterling at too high an exchange rate, Britain had no alternative but to continue its policy of deflation, however painful that might be.

Schacht proved to be more of an observer than a key participant. His main goal was to curb the flow of hot money into Germany, which the others saw as largely a side issue. He did warn that this was but one symptom of a wider problem—that Germany was getting too heavily into debt and that a breakdown over reparations would soon occur, with damaging consequences for the whole world. While Strong and Norman had some
sympathy for Schacht’s desire to renegotiate reparations once more, they warned him to be patient, that nothing could be done till after the American, French, and British elections in 1928. Nevertheless, Strong was sufficiently concerned by Schacht’s gloomy forecast that after the meeting, he asked Seymour Parker Gilbert, the agent-general for reparations, to begin work on a new deal on reparations.

Strong, though increasingly sympathetic to the French point of view—much to Norman’s discomfort—had arrived at the conference with his mind already made up. The only way to reduce selling pressure on the pound in the short run would be to cut U.S. interest rates. It helped that the domestic indicators he relied upon—price trends and economic activity—also justified a cut. And though he recognized that the stock market was a big stumbling block—he ruefully predicted to Charles Rist as the meeting got under way that a cut would give the market
“un petit coup de whisky
⁴⁵²
”
—it was a risk he was willing to take.

Strong had very deliberately not invited any members of the Federal Reserve Board to the Mills house. After the meeting was over, on July 7, the four did go down to Washington for a day, during which they paid “courtesy calls
⁴⁵³
” on members of the Board and had a “social” lunch at the Willard Hotel. They were all very careful to remain quite tight-lipped with officials in the capital. Before departing the United States, the Europeans had a final meeting in New York, to which Chairman Crissinger was invited, but none of the other members were even informed. Strong, bitter at the constant obstructionism he had met with over the years, was firmly set on keeping them out of the loop—a churlish decision that served no purpose but to irritate the Board and accumulate more enemies against him.

A few days after the European central bankers left, the New York Fed and eight of the other reserve banks voted to cut interest rates by 0.5 percent to 3.5 percent. It was a move that split the system. Four reserve banks—Chicago, San Francisco, Minneapolis, and Philadelphia—insisting that such a move would only fuel stock market speculation, refused to follow. Until then the Board had adopted the view that while it could veto
reserve banks’ decisions, it could not force them to change policy. Now, in a closely argued decision that also split the Board down the middle, it ruled that it did indeed possess the statutory authority to compel Chicago and the other intransigents to follow the majority. In the recriminations that followed, Crissinger resigned.

The two most vocal of Strong’s critics happened to be out of town when the Fed decided to cut rates. Miller had left in the middle of July for two months’ vacation in California, although he tried to exert every influence against the decision from afar. Hoover was in the South, managing relief operations to deal with the great Mississippi flood of that year. Returning in August, he submitted a stern memorandum to the Board, arguing that “inflation of credit
⁴⁵⁴
is not the answer to European difficulties,” and that “this speculation . . . can only land us on the shores of depression.” He urged both the president and Secretary Mellon to act to forestall the Fed move. Coolidge, who had elevated inaction into a philosophical principle, had become increasingly irritated by his secretary of commerce’s constant insistence not only that something must be done about everything but that he, Hoover, knew exactly what was needed. Coolidge would later complain, “That man has offered me unsolicited advice
⁴⁵⁵
for six years, all of it bad!” Fobbing Hoover off
⁴⁵⁶
with the excuse that the Fed was an independent agency, the president refused to intervene.