Winston Churchill, who would come to know Norman all too well for his liking over the next few years, would later portray him in the Sunday Pictorial: “Mr. Norman’s dislike of publicity in any form has enshrouded him with an air of mystery, which has led to ordinary and casual incidents of his daily life being scrutinized and magnified by the money markets of the world. . . . The more he seeks privacy, the more significant his acts become. He travels under an assumed name, and is instantly identified. He remains in seclusion in his country home, and the United States is searched to make sure that he is not there. Indeed the very process of self-effacement has proved—to his added disgust—the most subtle and effective form of advertisement. . . . It may well be that a little more plain speech . . . would have served his real purpose better than so much silence and precaution.”
Not everyone was taken by his charm or his personality. Hating arguments or direct confrontations, he got his way by going around opponents and consequently developed a reputation for subterfuge. Some people retained a suspicion that Norman’s attempts to cloak himself in mystery were simply a more subtle and sophisticated form of showmanship. Lord Vansitartt, head of the British diplomatic service between the wars, dismissed him as a “poseur.”
And while Norman’s public persona may have changed dramatically, he still carried within him many of the same private demons that had beset him before the war. He was by nature a pessimist, prone to bouts of despair, unfortunate traits in a central banker confronted with the task of nursing a crippled economy back to health. During that first grim year in office, as he struggled with a weak pound and the depths of a recession, he wrote of his “sensation of being as it were tossed about on a sea in which I can hardly swim.”
Francis Williams, then city editor of the left-wing Daily Herald, considered that though Norman was able to exert a strange fascination over the City, he was “secretive, egotistic, suspicious of intellectual ability, and almost incapable of normal human relationships.” Lord Cunliffe may have got the best measure of him when he confided that he thought Norman, “a brilliant neurotic personality [who] is certain to cause trouble. . . .” He added, “He’s not an ordinary personality. . . . He needs the power just to keep going and he won’t give it up until it’s too late.”
DURING THE EARLY 1920s, Norman would often talk of creating a league of central bankers to take responsibility for stabilizing European finances and promoting world economic recovery. No government seemed capable of doing it and he thought—a little grandiosely—that his guild could somehow fill the vacuum left by politicians. He liked to envisage himself and the other members of his small brotherhood as elite tribunes, standing above the fray of politics, national resentments, and amateur nostrums. Though Norman “delighted in appearing unconventional,” his views about society were very much “those of an old Etonian.” Still an Edwardian, he clung to the belief in aristocratic government.
In March 1922, he wrote to Strong in that elliptical way of his, “Only lately have the countries of the world started to clear up after the war, two years having been wasted in building castles in the air and pulling them down again. Such is the way of democracies it seems, though a ‘few aristocrats’ in all countries realized from the start what must be the inevitable result of hastily conceived remedies for such serious ills.” He obviously thought that the “few aristocrats” were bankers like himself.
At this stage, though, he was the one building castles in the air. His notion that the world’s central bankers would not be subject to the same nationalistic pressures to which politicians were also responding was curiously naive. His vision of a league of the lords of world finance was at this stage largely a pipe dream. He could not even get Strong to support him fully. After the Genoa Economic Conference of 1922, he floated the idea of a grand conclave of central bankers. But Strong resisted the idea, fearing that the United States, as the world’s major creditor, would be ambushed by a concert of its European debtors, all clamoring for America with its vast gold reserves to refloat them. As he wrote to Norman, “Anything in the nature of a league or alliance, with world conditions as they are, is necessarily filled with peril.” It would, he feared, be like “handing a blank check to some of the impoverished nations of the world, or to their banks of issue, and especially to those whose finances are in complete disorder and quite beyond control.”
By 1923, Norman’s club consisted essentially of himself and Strong, commiserating with each other over their respective health problems and the economic anarchy that seemed to surround them. Their friendship, however, had blossomed.
After Norman’s three trips to the United States in 1921 and 1922, they did not see each other again for almost eighteen months. Falling ill once more, Strong had to take a leave of absence for most of 1923. Thereafter, they agreed to meet at least twice a year, alternating generally between Europe in the summer and New York in the winter. They wrote to each other every few weeks—a combination of financial gossip and views about economic policy. Despite their closeness, they usually addressed each other, in the quaintly formal style of the day, as “Dear Strong” or “Dear Norman,” although letting their hair down on occasion with “Dear Strongy,” “Dear Old Man,” or “Dear old [sic] Monty.” They furnished each other with advice, often revealing confidential details to which even their own colleagues were not privy. Occasionally they scolded each other. When Norman operated too much on his own and failed to consult his own directors, Strong admonished him, “You are a dear queer old duck and one of my duties seems to be to lecture you now and then.”
It was not all about work. They often ribbed each other affectionately. On one occasion, Norman, who had just returned from a visit to Strong in New York and discovered that he had packed one of Strong’s jackets by mistake, wrote:Dear Ben,
Since I wrote on the steamer, a further crime has been discovered. The second evening I was home, as usual I changed clothes in the evening and on going downstairs discovered myself in the disguise of a gentleman, if not a dude! This was due to velvet jacket of good style, fit and finish: In other words, Ben, I can only look respectable with the help of your wardrobe!
At times, they sounded like a couple of harmless old bachelors who took great pleasure in joshing each other—whether over an oil portrait of Strong upon which Norman had stumbled in the pages of Town and Country , or Norman’s irritability when Thorpe Lodge was under repair, or his engagement with the philosophy of Spinoza.
Norman, by nature the more emotional, could be gushing and sentimental and fussed over his friend’s health. “Let me beg you to care for yourself more than you seem to be doing. You belong to others quite as much as to yourself,” he wrote after a 1921 visit to New York. He lectured Strong about smoking too many Camels and insisted on details about “what is happening to your pulse & sleep & pins & breathing . . . not a word have I heard for 4 weeks.” The more aloof Strong, with a large family of his own, had less need to confide. But each was the other’s closest friend. In 1927 after a visit from Norman while he was down with pneumonia, Strong too would write, “To have a sympathetic person to talk over matters is helpful anyway, but when it is a best friend, it is more than that.”
By 1923, they were seriously fearing for the future. The first few years of peace, begun so hopefully, had turned out to be a time of great frustration and disappointment for both. The United States had washed its hands of European affairs and retreated into isolation. Currencies in Europe remained unstable. Neither of them could do much about the failures of economic policy in Germany or France, both paralyzed by reparations: Germany refusing to do anything to stabilize its economy until a fairer settlement was established, France in its turn insisting that it could make no concessions until a deal was reached on its war debts to Britain and America.
Norman saw “the Civilization of Europe” at stake. But all he could do was watch gloomily from the sidelines as matters continued to deteriorate. He became increasingly pro-German and anti-French. French
obstinacy during the reparations dispute only served to reinforce his private prejudices, particularly against the French political class, which in his view was uniformly venal, underhanded, corrupt, and dishonorable. “The black spot of Europe and the world continues to be on the Rhine,” he wrote to Strong after the occupation of the Ruhr. “There you have all the conditions of war except that one side is unarmed. How long can Germany continue thus?”
For Strong the frustrations were more personal. Though he remained financially comfortable, over the years he had to adjust his lifestyle drastically. The contrast between his relatively modest way of living and those of his old colleagues in the private sector could not have been more apparent. Following his separation and divorce, he lived in a series of small apartments, initially in a suite at the Plaza Hotel, and from mid-1922, in a small two-bedroom apartment in midtown Manhattan. Harry Davison had the benefit of a mansion on Park Avenue, a sixty-acre estate on the North Shore of Long Island, and a plantation estate in Georgia, until he died suddenly of a brain tumor in May 1922. Meanwhile Thomas Lamont, the embodiment to Strong of the road not taken, lived in a large town house at Seventieth Street and Park Avenue, continued to use his property in Englewood during the spring, and summered on his estate in North Haven, Maine.
Strong continued to be plagued by illness. In February 1923, the tuberculosis spread to his larynx, forcing him to take yet another extended leave of absence in Colorado—his fourth in seven years—from which he returned to work in October, and then only part time. Since he had first contracted the disease in 1916, he had spent almost half the time away from his desk. Even when he was nominally at work, he was often incapacitated, “afflicted by the generous use of morphine,” to control the terrible pain. He had aged enormously. Compelled to give up tennis and other vigorous exercise, he had put on weight and was losing his hair. He looked haggard and overworked, almost unrecognizable from the tall, slim, confident, good-looking young man of ten years earlier.
In those days, even after his first wife’s death, he had always been very social and clubby. Now he rarely went out at night and was never seen at the theater or the opera. His job was his anodyne, his evenings devoted to quiet working dinners with other bankers and officials.
In early 1924, with both his sons talking of getting married, he wrote to Norman: “The temptation is constantly before me to wind up my work and quit, do some traveling, a little writing, and take things easy.” Neither of them foresaw that after four years of frustration they were on the verge of achieving their goals.
Maynard Keynes’s Wedding, 1925
9. A BARBAROUS RELIC
THE GOLD Standard
Time will run back and fetch the age of gold.
—JOHN MILTON, On the Morning of Christ’s Nativity
AFTER THE WAR, there was a universal consensus among bankers that the world must return to the gold standard as quickly as possible. The almost theological belief in gold as the foundation for money was so embedded in their thinking, so much a part of their mental equipment for framing the world, that few could see any other way to organize the international monetary system. Leading that quest were Montagu Norman and Benjamin Strong.
The biggest obstacle to such a return was the mountain of paper currency issued by the central banks of the belligerent powers during the war. Take Britain, for example. In 1913, the total amount of money circulating in the country—gold and silver coins; notes issued by the Bank of England and by the large commercial banks; and the largest category, bank deposits—amounted to the equivalent of $5 billion. This supply of money, in all its various forms, was backed in aggregate by the country’s $800 million of gold, surprisingly only $150 million of which was held in the vaults of the Bank of England, the remainder consisting of gold coins in circulation or bullion held by the commercial banks, such as Barclays or Midland. By 1920, the Bank of England had lent so much money to the government to help pay for the war effort that the total money supply had ballooned to the equivalent of $12 billion, which in turn had driven prices up by two and a half times. Britain’s gold reserves meanwhile remained roughly the same. Thus, whereas in 1913, there had been 15 cents worth of gold within the country for every $1 dollar in money, in 1920 each $1 of money was backed by less than 7 cents. The Bank of England made every effort to economize on gold, for example, by replacing gold coins with paper currency, and by concentrating the bullion originally held by commercial banks into its own holdings. Nevertheless, at war’s end it was clear that the country’s reserves would not provide enough of a monetary cushion for Britain to contemplate returning to gold at the old 1914 exchange rate.
Every nation involved in the war, even the United States, faced the same dilemma. For all had resorted to inflationary finance to a greater or lesser degree. There were essentially only two ways to restore the past balance between the value of gold reserves and the total money supply. One was to put the whole process of inflation into reverse and deflate the monetary bubble by actually contracting the amount of currency in circulation. This was the path of redemption. But it was painful. For it inescapably involved a period of dramatically tight credit and high interest rates, a move that was almost bound to lead to recession and unemployment, at least until prices were forced down.
The alternative was to accept that past mistakes were now irreversible, and reestablish monetary balance with a sweep of the pen by reducing the value of the domestic currency in terms of gold—in other words, formally devalue the currency. This sounds painless. But to a generation reared on the certainties of the gold standard, devaluation was viewed as a disguised form of expropriation, a way of cheating investors and creditors out of the true value of their savings—which to some degree it was. Moreover, it was not completely costless. Central banks that resorted to devaluation as a way of cleaning up a past monetary mess were viewed as the financial equivalent of reformed alcoholics—it was hard to clear the stain on their reputations for financial discipline, and as a consequence, they generally had to pay up to borrow.
A simple analogy of the choice between deflation and devaluation might be that of the man who has put on weight and is having a hard time fitting into his clothes. He can either choose to lose the weight—that is, deflate—or alternatively accept that his larger waistline is now irreversible and have his clothes altered—that is, devalue. Whether to deflate or devalue became the central economic decision for every country after the war. The burden of deflation fell on workers, businesses, and borrowers, that of devaluation on savers. The fate of the world economy would hinge over the next two decades on which path each country took. The United States and Britain took the route of deflation, Germany and France that of devaluation.
Of all the belligerents, the United States, having come late to the war and having spent the least of any of the major powers, was in the best financial shape. Though it, too, had allowed its currency to expand by 250 percent during the war, and prices to double, it also had seen its gold reserves more than double as the enormous European purchases of war materials and the massive flight of European capital seeking safety across the Atlantic, carried over $2 billion worth of gold into the United States. By 1920, the country held close to $4 billion in gold. Even allowing for war inflation, therefore, it still had a comfortable reserve of bullion to back its expanded currency base, and was able to return to the gold standard almost immediately after hostilities ceased.
Even in the United States, the return to gold and monetary stability was not completely painless. In 1919 and 1920, after the years of wartime austerity, consumers let rip and went on a buying binge; inflation began to accelerate and for a brief moment, seemed about to spin out of control. Strong reacted forcefully, leading a move by the Fed to tighten credit policy dramatically by raising interest rates to 7 percent and keeping them there for a full year. This constriction was accompanied by a similar move by the federal government to bring its budget into balance. The economy plunged into recession. Over two and a half mill
ion men lost their jobs. Bankruptcies soared. But by the end of 1921, with prices down by almost a third, the economy once again began to recover. During the next seven years, the U.S. economy, led by new technologies such as automobiles and communications, would experience an unprecedented period of strong growth and low inflation.
At the opposite end of the spectrum from the United States was Germany, which had taken the path of least resistance during the war and expanded its money supply by 400 percent. By the end of 1920, German prices stood at ten times their 1913 level. Germany had issued so much currency that it had no hope of being able to reverse the process, and when the war ended, seemed clearly headed for a massive devaluation. In retrospect, that would have been a blessing. But instead of trying to rebuild its finances, the German government adopted a policy of systematic inflation, in part to meet reparations, and thus launched itself on that voyage of fantasy into the outer realms of the monetary universe.
FIGURE 1
Britain and France lay somewhere in between. During the war, France had expanded its currency by 350 percent, pushing up prices equivalently. After the war, the Banque de France avoided German-style hyperinflation and currency collapse by putting a lid on the issue of new currency. However, France continued to flirt with disaster by running budget deficits of $500 million and was saved once again only by the remarkable thriftiness of its people. While there was a group within the Banque who harbored the fantasy of reversing the more than threefold price increase and returning the franc to gold at its prewar parity, most rational observers agreed that when France returned to the gold standard, it would have to be at a radically lower exchange rate—and even that still seemed many years away.
Lords of Finance Page 16