Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World (53 page)

He came to Washington in 1917 as a dollar-a-year man working for Woodrow Wilson, and had stayed on, becoming director of the War Finance Corporation and then head of the Federal Farm Loan Board. A larger-than-life figure, he commuted between a grand house on Crescent Place off Sixteenth Street, full of Cézannes and Monets and Ming vases; a seven-hundred-acre estate in Mount Kisco in New York; a
six-hundredacre cattle farm in Jackson Hole, Wyoming; and a plantation in Virginia. His wife, Agnes, a difficult egocentric woman who put him through a rocky and unhappy marriage, ran the most fashionable salon in Washington, where poets, painters, and musicians might mingle with politicians and bankers.
^fn2

Meyer’s was not an uncontroversial nomination—Huey Long, the populist governor of Louisiana, declared he was nothing but “an ordinary tin-pot bucket shop operator
⁵⁸⁷
up in Wall Street . . . not even a legitimate banker.” His confirmation hearings proved to be difficult. Senator Brookhart of Iowa came out against him, calling him a “Judas Iscariot . . . one who has worked the Shylock game for the interests of big business”—for all his wealth, he had had to struggle with anti-Semitism throughout his career.

If there was anyone who seemed capable of reversing the paralysis of the Fed, it was Meyer. Yet, even he was soon overwhelmed. He found a Board racked by petty intrigues and feuds. Adolph Miller was at war with Charles James. Some of the old guard, such as Hamlin, resented Meyer and thought that he was too closely identified with the president.

The system of decision making and authority within the Fed, complex as it had been, had become even more byzantine. During Strong’s time, decisions about how much to inject into the banking system through open market purchases of government securities had been taken by the five-member Open Market Investment Committee (OMIC), comprising the governors of the Federal Reserve Banks of Boston, New York, Philadelphia, Chicago, and Cleveland. Strong, therefore, had to persuade only two others to get a majority vote his way.

In January 1930, policy decisions
⁵⁸⁸
for open market operations were shifted to a new twelve-man Open Market Policy Conference (OPMC), consisting of all the governors of the reserve banks. Each of these, of
course, had to refer to his own nine-member board of directors. The old five-member committee (OMIC), renamed the Executive Committee of the OPMC, retained responsibility for execution. Now three separate groups were jockeying for power—one body, the OPMC, could initiate policy but could not execute; another, the Board, had to approve policy decisions but could not initiate them; and a third, the Executive Committee of the OPMC, implemented decisions within certain discretionary limits. At each stage policy could be vetoed or stymied. As a consequence, even though the two most prominent members of the Fed, Harrison and Meyer, both believed that it should be more aggressive, they were defeated by the system.

THE GREAT CRASH
was greeted in Europe with a combination of schadenfreude and relief. According to the
New York Times
, Black Thursday’s “panicky selling left London’s City
⁵⁸⁹
in a comfortable position saying, ‘I told you so.’” Contacted by the
New York Evening Post
that same day, Maynard Keynes commented that “we in Great Britain
⁵⁹⁰
can’t help heaving a big sigh of relief at what seems like the removal of an incubus which has been lying heavily on the business life of the whole world outside America.” The Wall Street collapse was, according to one French authority, like the bursting of an “abscess
⁵⁹¹
.” The hope was that all the European capital that had been sucked into Wall Street would return home, alleviating the pressure on European gold reserves, and allowing such countries as Britain and Germany to ease credit and restart their economies.

Much to his delight, Émile Moreau had not had to miss the fall hunting season in Saint Léomer that year. By the last week of October 1929, he and Hjalmar Schacht were at the Black Forest spa of Baden-Baden attending an international bankers’ conference to finalize the Young Plan and draw up the by-laws of the newly created Bank for International Settlements. Schacht learned of the events on Wall Street when he happened to notice the American delegation looking especially glum on the morning of October 29 and could hardly contain his glee when he discovered the
reason. To a visiting Swiss banker
⁵⁹²
, he announced that he hoped that the coming chaos would finally put an end to reparations.

But of all the central bankers in Europe, Montagu Norman was the most relieved. The crash had arrived just in time to rescue sterling. Convinced that it had been the rise
⁵⁹³
in British interest rates on September 26 that finally burst the bubble, he started claiming credit for the collapse. So relaxed was he about the events on Wall Street, that on the morning of October 29, Black Tuesday, while the financial world was falling apart, he kept his usual appointment for a sitting with artist Augustus John, who had been commissioned by the Bank of England to paint his portrait.

During the last week of October
⁵⁹⁴
and the first weeks of November, George Harrison kept him in touch with developments on Wall Street by cable and transatlantic telephone, his voice drifting in and out under the usual atmospherics. On October 31, Harrison called to announce cheerfully that the market had pretty much completed its fall; the bubble had been pricked without a single bank failure.

For the first few months, things went according to plan. European stock markets dropped in sympathy with Wall Street, but not having gone up so much, they fell much less precipitously. While the U.S. market slid almost 40 percent, Britain’s went down 16 percent, Germany’s 14 percent, and France’s only 11 percent. Though the size of the British stock market was comparable as a percentage of GDP to that in the United States, the average British person preferred to bet on sports and left the stock market to the City bigwigs, while in France and Germany the size of the stock markets was tiny. Thus the crash did not exert the same hold on the psychology of European consumers and investors, and the effect on their economies was correspondingly less traumatic. Moreover, as credit conditions eased in the United States, foreign lending revived. Money suddenly became more freely available. Central banks across Europe, no longer having to defend their gold reserves against the pull of New York, were able to follow the Federal Reserve in cutting interest rates. By June 1930, with U.S. rates at their postwar low of 2.5 percent, the Bank of England was
down to 3.5 percent, the Reichsbank to 4.5 percent, and the Banque de France to 2.5 percent.

Just as the threat of having to fight off an attack on sterling receded, Norman found himself harassed from another, and completely unexpected, quarter. In November 1929, a few weeks after the crash, the new British Labor government responded to criticisms about the endemically poor performance of the British economy by appointing a select committee under an eminent judge, Lord Macmillan, to investigate the workings of the British banking system. Half of its fourteen members were bankers; the remainder, an assortment of economists, journalists, industrialists, among them three of the staunchest critics of the gold standard: Maynard Keynes, Reginald McKenna, and Ernest Bevin of the Transport and General Workers Union, the country’s most formidable trade union leader.

In setting up this committee, the allegedly radical government had made it clear that the issue of whether Britain should remain on the gold standard should be kept off the table. Even Keynes, the unremitting critic of the mechanism and the strains it had imposed on the British economy, was ready to concede that it was a fait accompli and that departing from gold at this stage would be just too disruptive.

Nevertheless, the Bank of England—and especially Norman—approached the committee with great suspicion. Within the City, it had always been said that the motto of the Bank of England was “Never explain, never apologize.” That he and the Bank were now to be subject to the spotlight of public scrutiny filled him with dread. The committee began its hearings on November 28; Norman was to appear as one of the first witnesses, on December 5. As the date approached, his nervous ailments reappeared, and two days before he was due to testify, he predictably collapsed. His doctors recommended a short leave of absence and Norman duly departed for the next two months on an extended cruise around the Mediterranean, ending up in Egypt.

In place of Norman, the deputy governor, Sir Ernest Harvey, appeared. Even without its chief, the Bank found its habits of secrecy just too
ingrained to abandon lightly. Consider this exchange between Keynes and Harvey:

KEYNES
: “Arising from
⁵⁹⁵
Professor Gregory’s questions, is it a practice of the Bank of England never to explain what its policy is?”

HARVEY
: “Well, I think it has been our practice to leave our actions to explain our policy.”

KEYNES
: “Or the reasons for its policy?”

HARVEY
: “It is a dangerous thing to start to give reasons.”

KEYNES
: “Or to defend itself against criticism?”

HARVEY
: “As regards criticism, I am afraid, though the Committee may not all agree, we do not admit there is need for defense; to defend ourselves is somewhat akin to a lady starting to defend her virtue.”

Norman finally returned in England in February 1930 and agreed to provide evidence to the select committee. He was not a good witness. Witty and articulate in private, he became sullen and defensive in public settings, replying to the questions, which in deference to his position were never aggressive, in curt sentences and sometimes even in monosyllables. Unaccustomed to having to articulate his thought processes or justify himself, he said things that he did not mean or could not possibly believe, insisting, at one point, that there was no connection between the Bank’s credit policies and the level of unemployment. He appeared to be callous and indifferent to the plight of the unemployed, reinforcing the stereotype of bankers among the Socialists of the new government and the voting public who were getting their first glimpse of this man. Confronted with Keynes’s coldly precise questions, Norman seemed to be dull and slow, retreating behind platitudes.

Finally asked by the chairman what the reasons were for a particular policy decision, he initially said nothing but simply tapped the side of his nose three times. When pressed, he replied, “Reasons, Mr. Chairman
⁵⁹⁶
? I don’t have reasons. I have instincts.”

The chairman patiently tried to probe further, “We understand that, of course, Mr. Governor, nevertheless you must have had some reasons.”

“Well, if I had I have forgotten them.”

Keynes would later describe Norman as looking like “an artist, sitting with his cloak
⁵⁹⁷
round him hunched up, saying, ‘I can’t remember,’ thus evading all questions.” Norman testified for only two days—the bank’s senior staff realized that he was doing more harm than good, and the remainder of the testimony was passed back to the deputy governor. But the damage to Norman’s standing had been done. In the aftermath, one banker confided to his colleagues that the governor “grows more and more temperamental
⁵⁹⁸
, freakish, and paradoxical.”

^fn1
He was the founder of no less than three business colleges: Babson College in Massachusetts, Webber College in Florida, and the now defunct Utopia College in Eureka, Kansas. In 1940, he ran for president of the United States as the Prohibition Party’s candidate, receiving 57,800 votes In 1948, he formed the Gravity Research Foundation, an organization dedicated to combating the effects of gravity, including the quest for antigravity matter.

^fn2
Meyer remained a Washington figure of some repute. After he retired from the Fed in 1933, he bought the near bankrupt
Washington Post,
which he successfully turned around. He was the father of the late Katharine Graham.

To what extremes
⁵⁹⁹
won’t you compel our hearts, you accursed lust for gold?

—V
IRGIL
,
The Aeneid

IN DECEMBER
1930, Maynard Keynes published an article titled “The Great Slump of 1930,” in which he described the world as living in “the shadow of one of the greatest
⁶⁰⁰
economic catastrophes of modern history.” During the previous year, industrial production had fallen 30 percent in the United States, 25 percent in Germany, and 20 percent in Britain. Over 5 million men were looking for work in the United States, another 4.5 million in Germany, and 2 million in Britain. Commodity prices across the world had collapsed—coffee, cotton, rubber, and wheat prices having fallen by more than 50 percent since the stock market crash. Three of the largest primary producing countries, Brazil, Argentina, and Australia, had left the gold standard and let their currencies devalue. In the industrial world, wholesale prices had fallen by 15 percent and consumer prices by 7 percent.

Despite all this bad news, at this stage Keynes was uncharacteristically sanguine. “We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand,” he wrote. Comparing the economy to a stalled car, he
declared it was a simple matter of some “magneto trouble” (a magneto was a device then commonly in use for creating an electric spark in the ignition system of automobiles), trouble that could be easily cured by “resolute action” by the central banks to “start the machine again.”

There were in fact reasonable grounds for optimism. The downturn that had hit the United States in 1930 in the wake of the stock market crash had indeed been deep, but the U.S. economy had faced a similarly sharp decline in prices and production in 1921 and had bounced back. There had been as yet no major financial disaster or bankruptcy.