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” 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.
Norman, however, drew a distinction between the situation of Britain, which had been forced off gold by its weak international position, and the situation of the United States, which with its enormous bullion reserves could play the leadership role in the world economy. He feared that the United States was now abdicating that position, that the dollar devaluation might be a first predatory step in a full-scale currency war as countries tried to weaken their exchange rates in order to steal markets from one another and that the world might be entering a period of monetary anarchy.
While Norman was worried about what the dollar move might mean for Britain, he at least shared Roosevelt’s belief that falling prices were the cause of the Depression. Clément Moret, the governor of the Banque de France, saw the world in very different terms. For France, the last major power still clinging to gold, the fall in the dollar was a disaster. By undervaluing the franc during the 1920s and thus undercutting its competitors in world markets, France had managed to sidestep the collapse of the world economy in 1929 and 1930. It was now having the tables turned on it. It had been hit hard when sterling was knocked out of the gold standard in 1931. The U.S. devaluation compounded the problem. France now risked being left stranded as the highest cost producer of all the major powers in the world.
Moret, however, refused to subscribe to the view that the solution was to inject more money into the system. For him the source of the world’s economic problems was a lack of confidence brought on precisely by too much experimentation with money. Having been scarred so badly by their experience in the early 1920s, French monetary officials believed, with all the fervor and dogmatism of reformed alcoholics, that the path to recovery was a generalized return to the gold standard. In Moret’s case, his orthodoxy in economic matters was not mere theorizing. He practiced it in his personal life. After a twenty-five-year career as an official in the Ministry of Finance, he had grown so used to living modestly that in the years since he was appointed governor of the Banque de France, he had ended up saving 85 percent of his $20,000 a year salary. It was all invested in French gold bonds.
Roosevelt’s decision to devalue came just a few weeks before a long-planned World Economic Conference was scheduled to open in London. It had originally been conceived under Hoover, who, believing that the Depression originated with international problems, thought that a global conference might be the answer. In the event, the London conference proved to be a complete fiasco, the last of that long line of disastrous summits that had begun in Paris in 1919.
It started with the usual squabbles about the agenda. The British wanted to talk about war debts. The Americans refused, presumably on the principle that one cannot be forced into concessions about something one will not discuss. As a tactic for debt collecting, it did not work. France had already stopped making payments on its war debts. Britain would make a token payment that June, in the middle of the conference, and then also stop paying. The only country that eventually paid the Americans in full was Finland.
After the U.S. break from gold, the only thing that everyone—except the Americans—wanted to talk about was currency stabilization, how to prevent the dollar from falling too low. In the weeks before the meeting, as one foreign leader after another paraded through Washington in preparation for the conference, Roosevelt was his usual obtuse self. The visiting delegations all came away with the impression that the president was open to an arrangement for stabilizing the dollar. Even his own financial advisers reached that conclusion. The problem was that Roosevelt, who disliked open confrontations, had mastered the art of seeming to agree with whom-ever he was talking to while keeping his own cards close to his chest. He was not exactly being deceitful—he had not decided himself what to do.
The president’s true attitude to the conference should have been obvious from his choices for the U.S delegation. Even by the insular standards of the Congress, they were singularly unqualified to represent their country in an international forum. Secretary of State Cordell Hull led the team, accompanied by James M. Cox, former governor of Ohio; Senator James Couzens of Michigan, a noted protectionist; Senator Key Pittman of Nevada, a longtime believer in inflation and advocate of the remonetization of silver; Ralph W. Morrison of Texas, a bigwig in Democratic Party finances; and Samuel D. McReynolds, a congressmen from Tennessee. None of them had ever been to an international conference before, most of them knew little or nothing of economic matters, and three were isolationists convinced that the whole exercise was bound to fail.
The conference opened on June 12 in the Geological Museum in South Kensington. Of the sixty-seven nations invited, all but one accepted—poor little Panama replied that it had insufficient funds to pay for its delegates. Attending the conference were one king—Feisal of Iraq—eight prime ministers, twenty foreign ministers, and eighty other cabinet members and heads of central banks. Even Foreign Commissar Maxim Maximovitch Litvinov of the Soviet Union, which had almost completely cut itself off from the world economy, decided to attend.
While the American delegates may not have matched these luminaries in prestige, they made up for it in colorfulness, Senator Pittman in particular providing great fodder for scandalmongers. At an official reception at Windsor Castle, he broke with all social convention by wearing his raincoat and a pair of bright yellow bulbous-toed shoes while being presented to King George V and Queen Mary, greeting them with the salutation, “King, I’m glad to meet you. And you too Queen.” He was usually drunk but even then amazed everyone by his ability to spit tobacco juice into a spittoon from a great distance with remarkable accuracy. One night he was discovered by floor waiters at Claridges sitting stark naked in the sink of the hotel pantry, pretending to be a statue in a fountain. Another night, he amused himself by shooting out the streetlamps on Upper Brook Street with his pistol. Pittman did take one subject seriously—the remonetization of silver, of which Nevada was a major producer—an issue about which he was so passionate that one evening when one of the American experts expressed a contrary opinion on its merits, Pittman pulled out a gun and chased the poor man through the corridors of Claridges. For his part, Congressman McReynolds paid only the most cursory of attention to the business of the conference and rarely attended any meetings. He spent his energies on getting his daughter presented at court, at one point threatening the prime minister’s private secretary that the American delegation would pack up and go home unless the desired invitation from the palace arrived.
The first big spat of the conference was over the chairmanship. Before they sailed for Europe, the Americans had been led to believe that they had been promised the chair. In London they discovered that the French finance minister, Georges Bonnet, coveted the post. After all, this was a conference about international money and France was the sole great power still on the gold standard. “With Washington committed to devaluation we cannot have an American as monetary chairman,” declared Bonnet. “With France committed to repudiation,” replied James Cox, referring to the French default on war debts, “we cannot have a Frenchman.” It was all downhill from there.
In the first few days of the conference as more than a thousand people crammed into the small and poorly ventilated museum, each nation was permitted a fifteen-minute opening statement—which, allowing for translations, occupied four whole days. Supporting the American delegation was a team of financial experts, which included Warburg, Harrison, and Oliver Sprague, professor of economics at Harvard, Roosevelt’s old economics teacher, a longtime adviser to the Bank of England and now an adviser to the U.S. Treasury. They had all arrived in London believing—perhaps because they wanted to believe it—that the president had given them a mandate to negotiate an arrangement to stabilize currencies. But recognizing that a debate about key currencies in a forum of a thousand delegates would quickly deteriorate into incoherence, they decided to take the discussion offstage. Led by the three major central bankers of the conference—Harrison of the New York Fed, Norman of the Bank of England, and Moret of the Banque de France—a select band gathered out of the limelight at the Bank of England to hammer out an arrangement for stabilizing currencies. For a few days it looked as if the “Most Exclusive Club in the World” was back in business.
They had almost reached agreement—it would have involved allowing the pound to remain some 30 percent below its original gold standard level, the dollar to be propped up at some 20 percent below its par value, and the franc to remain at parity, thus leaving Britain with a modest cost advantage and setting the floor to currencies, which the French were demanding—when word leaked out. Though they had only agreed to a temporary attempt at currency stability for a period limited to the duration of the conference, New York financial markets, fearing a return to the gold standard and the end of Roosevelt’s experiment with inflation, took a tumble. Commodity prices fell 5 percent and the Dow swooned by 10 percent. Roosevelt, who by now had begun taking his cue from the commodity exchanges and stock markets, dispatched a cable to the American delegates curtly reminding them that they were there to focus on plans for economic recovery and were not to be sidetracked by the European obsession with currency stabilization.
Moreover, the White House went out of its way to disavow any knowledge of Harrison’s activities, pointedly reminding reporters that he was not a representative of the government but of the New York Fed, an independent entity. With the rug pulled out from underneath him and feeling betrayed, Harrison returned to New York—he told friends that “he felt as if he had been kicked in the face by a mule.” It was a lesson that the old days of the “Most Exclusive Club in the World,” when central bankers meeting in private could set credit and currency conditions without reference to politicians, were now gone.
The American experts in London still had a hard time getting the message. By the end of June, a new yet more innocuous agreement was negotiated with the British and the French, this time by Warburg and Moley. It committed no one to anything. It merely expressed the intention of the parties to return the pound and the dollar to the gold standard at an unspecified exchange rate and at an unspecified date when the time was right. Again as word of the new agreement came over the wires, New York financial markets expressed their discomfort.
Roosevelt was on his summer yachting holiday with Morgenthau aboard the schooner Amberjack II off the coast of New England. As he torpedoed this new agreement, he made sure on this occasion not to mince his words. “I would regard it as a catastrophe amounting to a world tragedy,” he cabled from the naval destroyer Indianapolis, which had been escorting his boat “if the greatest conference of nations, called to bring about a real and permanent financial stability . . . allowed itself a purely artificial and temporary expedient. . . .” Condemning the “old fetishes of so-called international bankers . . . ,” he declared that the current plans for stabilization were based on a “specious fallacy.” Though Roosevelt would later concede that his choice of words for a cable to be publicly released to the whole conference was a little too strong, he had at least finally got his point across with brutal clarity. He would not allow international considerations to stand in the way of getting the U.S. economy moving again, and devaluation of the dollar was the key to revival.
Maynard Keynes was among the few economists to applaud Roosevelt’s decision. In an article in the Daily Mail headlined “President Roosevelt Is Magnificently Right,” he hailed the message as an invitation “to explore new paths” and “to achieve something better than the miserable confusion and unutterable waste of opportunity in which an obstinate adherence to ancient rules of thumb has engulfed us.”
Thereafter the conference limped to a sad close. A disillusioned Warburg resigned, saying, “We are entering upon waters for which I have no charts and in which I therefore feel myself an utterly incompetent pilot.”
Roosevelt was still not finished. By October 1933, though the dollar had fallen by more than 30 percent, commodity prices began to sink again and the economy started to stall once more. Roosevelt decided that it was time for a new initiative. Warren’s original proposal to devalue the dollar had been controversial enough. Now the professor recommended that the government give the dollar another nudge downward by itself buying gold in the open market.
On October 22, Roosevelt told the country in another of his fireside chats, “Our dollar is altogether too greatly influenced by the accidents of international trade, by the internal policies of other nations and by political disturbances in other continents. Therefore the United States must take firmly in its own hands the control of the gold value of the dollar.” Whereas the first fireside chat had brought clarity to a complex issue, this one was a masterpiece of obfuscation. The following day the government started to buy gold.
Every one of the president’s economic advisers was opposed to the policy. Secretary Woodin had fallen fatally ill with cancer and Undersecretary Acheson was acting for him. Though the punctilious Acheson believed that the new policy was in fact against the law, he decided to sit on his objections temporarily in the hope of heading off even worse policies. Even so he was contemplating resigning when Roosevelt, falsely suspecting that he might be the source of newspaper leaks critical of the gold purchases, fired him. In a surprise appointment, Henry Morgenthau, the man who had first brought George Warren to Washington, became acting secretary of the treasury. In the following weeks, Professor Sprague also resigned from the Treasury, no doubt disappointed at his former student’s failure to grasp the fundamentals of monetary economics.
Every morning at nine o’clock, Morgenthau; Jesse Jones, the head of the RFC; and George Warren would meet with the president over his breakfast of soft-boiled eggs, to determine the price of gold for that day. They began at $31.36 an ounce. The next morning this increased to $31.54, then $31.76 and $31.82. No one had a clue how they went about setting the price, although everyone presumed that some subtle analyses of the world bullion and foreign exchange markets went into their calculations. In fact, the choice of price was completely random. All they were trying to do was push the price a little higher than the day before. The exercise brought out the juvenile in Roosevelt. One day he picked an increase of 21 cents, and when asked why, replied that it was a lucky number, three times seven.
Everyone wanted to know more about the mysterious “crack-brained” economist of whose theories Roosevelt had become so enamored. Much to the dismay of the publicity-shy Warren, his face appeared on the cover of Time magazine. Reporters fina
lly managed to track down the elusive professor who had taken leave from Cornell; he was living at the Cosmos Club in Washington and worked from an office in the Commerce Building with an unlisted phone number. There were no files in the office—he carried all his research in his briefcase and slipped in and out of the White House through one of the side entrances. Anyone knocking at the door would be greeted with a cry, “Not in!”
As the bridge between the government and the markets, it was Harrison at the New York Fed who actually had to buy the gold. Here was a man trained to believe that nothing was more sacrosanct than the value of the currency, a protégé of one of the key architects of the postwar gold standard, being asked to weaken the dollar as an act of policy. It was, as one journalist put it, “like asking a sworn teetotaler to swallow a bottle of gin.”
Harrison was by nature a diplomat. With Wall Street mocking the president for allowing currency policy to fall into the hands of an expert on chickenfeed, it required all his tact and diplomatic skills to act as the intermediary between the bankers and a White House that was breaking every monetary convention in the rule book. When Harrison first informed Norman of the new policy, the British central banker “hit the ceiling.” “This is the most terrible thing that has happened. The whole world will be put into bankruptcy,” he exclaimed. Roosevelt and Morgenthau both roared with laughter at the thought of “old pink whiskers”—Roosevelt’s nickname for Norman—and the other “foreign bankers, with everyone of their hairs standing on end with horror.”
During November and December 1933, Harrison and the president would talk on the telephone several times a week, sometimes several times a day. Though Harrison thought that Warren’s ideas were complete bunkum, he gradually found himself succumbing to Roosevelt’s seductive charm, even becoming an honorary associate member of the president’s circle. And so while all the other hard-currency men who had come in with the new administration—Warburg, Sprague, Acheson, Moley—resigned or were fired, Harrison hung in there, convinced that if he went, Roosevelt might come up with some even more harebrained scheme; or even worse, that Congress would get into the act. And he feared the inflationists in Congress more than Roosevelt’s predilection for wacky ideas.
Lords of Finance Page 49