Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World (66 page)

Pitted against this array of economic expertise was one man—the president himself. Roosevelt did not even pretend to grasp fully the subtleties of international finance; but unlike Churchill, he refused to allow himself to be in the least bit intimidated by the subject’s technicalities—when told by one of his advisers that something was impossible, his response was “Poppycock!
⁷²⁷
” Instead, he approached the subject with a sort of casual insouciance that his economic advisers found unnerving but which nevertheless allowed him to cut through the complications and go to the heart of the matter.

His simplistic view was
⁷²⁸
that since the Depression had been associated with falling prices, recovery could only come about when prices began going the other way. His advisers patiently tried to explain to him that he had the causality backward—that rising prices would be the result of recovery, not its cause. They were themselves only half right. For in an economy where everything is connected, there is often no clear distinction between cause and effect. True, in the initial stages of the Depression the collapse in economic activity had driven prices downward. But once in motion, falling prices created their own dynamic. By raising the real cost of borrowing, they had discouraged investment and thus caused economic activity to weaken further. Effect became cause and cause became effect. Roosevelt would have been unable to articulate all the linkages very clearly. But he had an intuitive understanding that the key was to reverse the process of deflation and kept insisting that the solution to the Depression was to get prices moving upward.

There still remained a chicken-and-egg problem. How to get prices up without first having to wait for economic recovery? Several years before when Roosevelt needed help with the trees on his estate in Hyde Park, his Hudson Valley neighbor and friend Henry Morgenthau introduced him to an obscure fifty-nine-year-old economist, George Warren, professor of farm management at Cornell, under whom Morgenthau had studied as an undergraduate.

The short and stocky professor, with his owlish spectacles, Quaker-like earnest demeanor and a bunch of pencils protruding from his top pocket, had none of the earthiness that one might associate with an expert in farming. He had in fact grown up herding sheep on a Nebraska ranch and still lived firmly rooted to the soil on a five-hundred-acre working farm outside Ithaca, New York, where he raised cash crops and a large herd of Holstein cows. He had published a variety of books and pamphlets on agriculture, including a monograph titled
Alfalfa
and another,
An Apple Orchard Survey of Wayne and Orleans County, New York,
which exhaustively documented the various techniques for growing apples in upstate New York, down to which manures worked the best; a standard textbook,
Dairy Farming;
and two
seminal works,
The Elements of Agriculture
and
Farm Management
. He had also devised a system for inducing chickens to lay more eggs. As a teacher, he was known to be dismissive of theories and made a point of taking his students out to working farms. His quaint pastoral homilies on these visits had become part of the Cornell folklore—“You paint a barn roof
⁷²⁹
to preserve it. You paint a house to sell it. And you paint the sides of barn to look at”—although none of his students were quite sure what they meant.

During the 1920s, as agricultural prices kept falling, this expert on cows, trees, and chickens had also spent a decade researching the determinants of commodity price trends. In 1932, he and a colleague published their work in an exhaustive monograph titled
Wholesale Prices for 213 Years: 1720–1932,
which created enough of a stir that, in 1933, it was issued as a book. Warren was able to document how trends in commodity prices correlated strongly with the balance between the global supply and demand for gold. When large gold discoveries came onto the world market and supply outpaced demand, commodity prices tended to rise. By contrast, when new supply lagged behind, this showed up in declining prices for commodities. It was easy to quibble with some of the details of the thesis—the correlation was not perfect because a variety of other factors, not least of which were wars, intervened to blur the link. Nevertheless, it was hard to argue with the general conclusion. After all, under the gold standard, there was supposed to be a direct connection between bank credit and gold reserves—thus when gold was plentiful, so was credit, which in turn caused prices to rise.

It was Warren’s policy conclusions, however, that generated the most controversy. If commodity prices fell because of a shortage of gold, he argued, then one way to raise them was to raise the price of gold—in other words, to devalue the dollar. An increase of 50 percent in the price of bullion was no different in its effects from suddenly discovering 50 percent more of the metal. Both brought about a higher value of gold within the credit system and both would therefore stimulate higher commodity prices.

It sounded simple, but to most of Roosevelt’s economic advisers, talk of devaluation was plain blasphemy, smacking of the worst forms of repudiation. How was this different from the practice of clipping and debasing coins adopted by insolvent monarchs in the Middle Ages? Given its vast gold reserves, the United States had little reason to resort to this currency manipulation, which might threaten confidence in the credit standing of the U.S. government and even endanger rather than promote recovery.

During the first few weeks of the administration, following the proclamation suspending gold exports on Roosevelt’s first day in office, the currency situation remained in limbo. Secretary Woodin tried to reassure everyone that the United States had not left the gold standard, but the president was not so unequivocal. At his first press conference, on March 8, he joked with reporters, “As long as nobody asks me
⁷³⁰
whether we are off the gold standard or gold basis, that is all right, because nobody knows what the gold basis or gold standard really is.”

On the evening of April 18, he gathered his economic advisers in the Red Room at the White House to discuss preparations for the forthcoming World Economic Conference in London. With a chuckle, Roosevelt casually turned to his aides and said “Congratulate me. We are off the gold standard.” Displaying the Thomas amendment to the Agricultural Adjustment Act, which gave the president the authority to devalue the dollar against gold by up to 50 percent and to issue $3 billion in greenbacks without gold backing, he announced that he had agreed to support the measure.

“At that moment hell broke lose in the room,” remembered Raymond Moley. Herbert Feis, the economic adviser to the State Department, looked as if he were about to throw up. Warburg and Douglas were so horrified that they began to argue with the president, scolding him as if “he were a perverse and particularly backward schoolboy.” Warburg declared that the legislation was “completely hare-brained and irresponsible” and would lead to “uncontrolled inflation and complete chaos.” Imperturbable as ever, Roosevelt bantered good-naturedly with them, insisting that going off
gold was the best way to lift prices and that unless they did something to reflate, Congress would take matters in its own hands.

The discussion continued until midnight. Leaving the White House, a group of aides—Warburg, Douglas, Moley, and William Bullitt, a special assistant to the secretary of state—having just been presented with what many of them viewed as the most fateful step since the war, were unable to sleep and continued the discussion in Moley’s hotel room. They talked for half the night, analyzing the impact on the credibility of the whole New Deal program, the value of the dollar, capital flows, and relations with other countries. Finally, Douglas announced, “Well, this is the end of western civilization
⁷³¹
.”

ROOSEVELT
’
S DECISION TO
take the dollar off gold rocked the financial world. Most people could not understand why a country with the largest gold reserves in the world should have to devalue. It seemed so perverse. Indignant bankers lamented the loss of the one anchor that could keep governments honest. Bernard Baruch, the noted financier, went a little overboard though when he said that the move, “can’t be defended except as mob rule
⁷³²
. Maybe the country doesn’t know it yet, but I think we may find that we’ve been in a revolution more drastic than the French Revolution.”

But in the days after the Roosevelt decision, as the dollar fell against gold, the stock market soared by 15 percent. Financial markets gave the move an overwhelming vote of confidence. Even the Morgan bankers, historically among the most staunch defenders of the gold standard, could not resist cheering. “Your action in going off gold
⁷³³
saved the country from complete collapse,” wrote Russell Leffingwell to the president.

Taking the dollar off gold provided the second leg to the dramatic change in sentiment
⁷³⁴
, which had begun with the bank rescue plan, that coursed through the economy that spring. Harrison, spurred into action by the threat that the government might issue unsecured currency, injected some $400 million into the banking system during the following six months. The combination of the renewed confidence in banks, a newly
activist Fed, and a government that seemed intent on driving prices higher broke the psychology of deflation, a change reflected in almost every indicator. During the following three months, wholesale prices jumped by 45 percent and stock prices doubled. With prices rising, the real cost of borrowing money plummeted. New orders for heavy machinery soared by 100 percent, auto sales doubled, and overall industrial production shot up 50 percent.

If the decision to take the dollar off gold split the U.S. banking community, it unified European bankers—provoking another quip from Will Rogers: that it was obviously the best thing to do if both Britain and France were against it.

After the pound had been so humiliatingly ejected from the gold standard, Montagu Norman seemed to lose his bearings. He found himself on a road without familiar guideposts, and all his old certainties had gone. As he confessed at his annual Mansion House Speech in October 1932, “The difficulties are so great
⁷³⁵
, the forces are so unlimited, precedents are so lacking, that I approach the whole subject in ignorance. . . . It is too great for me—I will admit that for the moment the way, to me, is not clear.”

Though the press still continued to be oddly fascinated by him, the tone of the coverage had changed—it was now tinged with a hint of mockery. When he came to the United States in August 1932,
Time
magazine described him as “a handsome, fox-bearded gentleman
⁷³⁶
with a black slouch hat and the mysterious manner of the Chief Conspirator in an Italian opera.” The
New York Times
scolded him for his “penchant for mysterious comings and goings, his acceptance of the alias ‘Professor Clarence Skinner’ to mask what purported to be a simple vacation,” and “his affectation of the role
⁷³⁷
of international man of mystery.”

When, he dropped the pseudonym on his visit to the United States the next year, the
New York Post
could not help poking fun:

Deport The Blighter
⁷³⁸
:

We have a bone to pick with Montagu Norman, governor of the Bank of England. He has enjoyed American
hospitality for several summers, and his visits have provided copy for the press during the doldrums. Not because the American public is interested in the Bank of England but because Mr. Norman had the bright idea of traveling incognito as Professor Skinner.

Mr. Norman, governor of the Bank of England, is worth a paragraph. But Mr. Norman, governor of the Bank of England, traveling as Professor Skinner, commanded reams of copy. It suggested plots. It conjured up visions of international cabals. . . .

We regard “Montagu C. Norman Lands in New York Under His Own Name” as a threat to an established American institution. . . . How much longer must we suffer the machinations of international bankers?

Though Norman no longer dominated the stage of international finance, most of his colleagues remarked on how much easier he was to deal with. The reason was revealed on January 20, 1933. The press uncovered that he had applied to the Chelsea Registry Office for a marriage license. The next day, to the great bemusement of all London, he was married at the age of sixty-one to the thirty-three-year old Priscilla Worsthorne. Born into an old aristocratic Roman Catholic family, she had been married once to a rich and indolent Belgian émigré, Alexander Koch de Gooreynd, who had adopted the anglicized name of Worsthorne. They had two sons but were now divorced. Norman had hoped for a small private ceremony. Instead the Chelsea Registry Office was mobbed by reporters and the newly married couple had to make a getaway by the back door and through an almshouse. Later that afternoon to avoid the paparazzi, they escaped Thorpe Lodge by climbing over the back garden wall.

The week that Roosevelt took the dollar off gold, Norman was away in the Mediterranean on a belated honeymoon. On his return to London the following week, no one could tell him what was going on. Even
Harrison was able to provide only a little direction, telling Norman on the phone that he had been taken completely by surprise by the dollar devaluation. He himself was having to rely on the newspapers for information on currency policy, which as far as he could tell was being decided by the “whims
⁷³⁹
” of the brain trust in the White House. With the president’s hands on the lever, the Fed itself was now “completely in the dark as to what our policy is or is to be.” Meanwhile, Meyer had resigned from the Fed Board, which was now hardly functioning, and Morgans was supporting the president’s inflation policy.

It was hard for Norman to know how to respond. However much he longed for the certainties of the gold standard, he had to admit that going off gold had worked for Britain. The country had benefited enormously from the 30 percent fall in the pound. The sinking currency had insulated the local economy from the worldwide chaos of late 1931 and 1932—while prices in the rest of the world had fallen 10 percent during 1932, in Britain they actually rose by a couple of percentage points. Moreover, once the need to keep the pound pegged to gold had been removed, Norman had been able to cut interest rates to 2 percent. The combination of the end to deflation, cheap money at home, and a lower pound abroad, making British goods more competitive in world markets, touched off an economic revival. Britain was thus the first major country to lift itself out of depression.