Benjamin Strong was a protégé of the most powerful of the partners of the House of Morgan after Morgan himself, Henry “Harry” Pomeroy Davison. Strong was also a neighbor and close friend of Davison and of two other top Morgan partners in the then-wealthy New York suburb of Englewood, New Jersey, Dwight Morrow and Thomas W. Lamont. In 1904, Davison offered Strong the post of secretary of the new Morgan-created Bankers Trust Company, designed to compete in the burgeoning trust business. So close were Davison and Strong that, when Strong’s wife committed suicide after childbirth, Davison took the three surviving Strong children into his home. Strong later married the daughter of the president of Bankers Trust, and rose quickly to the posts of vice president and finally president. So highly trusted was Strong in the Morgan circle that he was brought in to be J. Pierpont Morgan’s personal auditor during the panic of 1907. When Strong was offered the crucial post of governor of the New York Fed in the new Federal Reserve System, Strong, at first reluctant, was convinced by Davison that he could run the Fed as “a real central bank... run from New York.”25
The House of Morgan had always enjoyed strong connections with England. The original Morgan banker, J. Pierpont Morgan’s father Junius, had been a banker in England; and the Morgan’s London branch, Morgan, Grenfell and Company, was headed by the powerful Edward C. “Teddy” Grenfell (later Lord St. Just). Grenfell’s father and grandfather had both been directors of the Bank of England as well as members of Parliament, and Grenfell himself had become a director of the Bank of England in 1904. Assisting Grenfell as leading partner at Morgan, Grenfell was Teddy’s cousin, Vivian Hugh Smith, later Lord Bicester, a personal friend of J.P. Morgan, Jr.’s. Not only was Smith’s father a governor of the Bank of England, but he came from the so-called “City Smiths,” the most prolific banking family in English history, originating in seventeenth-century banking. Due to the good offices of Grenfell and Smith, J.P. Morgan and Company, before the war, had been named a fiscal agent of the English Treasury and of the Bank of England. In addition, the House of Morgan had long been closely associated with British and French wars, its London branch having helped England finance the Boer, and its French bank the Franco-Prussian War of 1870–1871.26
As soon as war in Europe began, Harry Davison rushed to England and got the House of Morgan a magnificent deal: Morgan was made the monopoly purchaser of all goods and supplies for the British and French in the United States for the duration of the war. In this coup, Davison was aided and abetted by the British ambassador to Washington, Sir Cecil Arthur Spring-Rice, a personal friend of J.P. Morgan, Jr. These war-based purchases eventually amounted to an astronomical $3 billion, out of which the House of Morgan was able to earn a direct commission of $30 million. In addition, the House of Morgan was able to steer profitable British and French war contracts to those firms which it dominated, such as General Electric, DuPont, Bethlehem Steel, and United States Steel, or to those firms with which it was closely allied, such as DuPont Company and the Guggenheims’ huge copper companies, Kennecott and American Smelting and Refining.
To pay for these massive purchases, Britain and France were obliged to float huge bond issues in the United States, and they made the Morgans virtually the sole underwriter for these bonds. Thus, the Morgans benefited heavily once more: from the bond issues, as well as from the fees and contracts from war purchases by the Allies.
In this way, the House of Morgan, which had been suffering financially before the outbreak of war, profited greatly from and was deeply committed to, the British and French cause. It is no wonder that the Morgans did their powerful best to maneuver the United States into World War I on the side of the English and French.
After the United States entered the war in the spring of 1917, Benjamin Strong, as head of the Fed, obligingly doubled the money supply to finance the war effort, and the U.S. government took over the task of financing the Allies.27 Strong was able to take power in the Fed with the help of and close cooperation from Secretary of the Treasury William Gibbs McAdoo after U.S. entry into the war. McAdoo, for the first time, made the Fed the sole fiscal agent for the Treasury, abandoning the Independent Treasury System that had required it to deposit and disburse funds only from its own subtreasury vaults. The New York Fed sold nearly half of all Treasury securities offered during the war; it handled most of the Treasury’s foreign exchange business, and acted as a central depository of funds from other Federal Reserve banks. Because of this Treasury support, Strong and the New York Fed emerged from the U.S. experience in World War I as the dominant force in American finance. McAdoo himself came to Washington as secretary of the Treasury after having been befriended and bailed out of his business losses by J.P. Morgan, Jr., personally, and by Morgan’s closest associates.28
Scarcely had Benjamin Strong been appointed when he began to move strongly toward “international central bank cooperation,” a euphemism for coordinated, or cartelized, inflation, since the classical gold standard had no need for such cooperation. In February 1916, Strong sailed to England and worked out an agreement of close collaboration between the New York Fed and the Bank of England, with both central banks maintaining an account with each other, and the Bank of England regularly purchasing sterling bills on account for the New York bank. In his usual high-handed manner, Strong bluntly told the Federal Reserve Board in Washington that he would go ahead with such an agreement with or without board approval; the cowed Federal Reserve Board then finally decided to endorse the scheme. A similar agreement was made with the Bank of France.29
Strong made his agreement with the governor of the Bank of England, Lord Cunliffe, but his most fateful meeting was with the man who was then the bank’s deputy governor, Montagu Norman. This meeting proved to be the beginning of the momentous Strong-Norman close friendship and collaboration that was a dominant feature of the international financial world in 1920. Norman became governor of the Bank of England in 1920 and the two men continued their momentous collaboration until Strong’s death in 1928.
Montagu Collet Norman was born to banking on both sides of his family. His father was a banker and related to the great banking family of Barings, while his uncle was a partner of Baring Brothers. Norman’s mother was the daughter of Mark W. Collet, a partner in the London banking firm of Brown, Shipley and Company, the London branch of the great Wall Street banking firm of Brown Brothers. Collet’s father had been governor of the Bank of England in the 1880s. As a young man, Montagu Norman began working at his father’s bank, and then at Brown, Shipley; in the late 1890s, Norman worked for three years at the New York office of Brown Brothers, making many Wall Street banking connections, and then he returned to London to become a partner of Brown, Shipley.
Intensely secretive, Montagu Norman habitually gave the appearance, in the words of an admiring biographer, “of being engaged in a perpetual conspiracy.” A lifelong bachelor, he declared that “the Bank of England is my sole mistress, I think only of her, and I’ve dedicated my life to her.”30 Two of Norman’s oldest and closest friends were the two main directors of Morgan, Grenfell: Teddy Grenfell and particularly Vivian Hugh Smith. Smith had buoyed Norman’s confidence when the latter had been reluctant to become a director of the Bank of England in 1907; more particularly, one of Norman’s best friends was the vivacious and high-spirited wife of Vivian, Lady Sybil. Norman would disappear for long, platonic weekends with Lady Sybil, who inducted him into the mysteries of theosophy and the occult, and Norman became a godfather to the numerous Smith children.
Strong, who had been divorced by his second wife, and Norman, formed a close friendship that lasted until Strong’s death. They would engage in long vacations together, registering under assumed names, sometimes at Bar Harbor or Saratoga but more often in southern France. The pair would, in addition, visit each other at length, and also write a steady stream of correspondence, personal as well as financial.
While the close personal relations between Strong and Norman were of course highly important for the col
laboration that formed the international monetary world of the 1920s, it should not be overlooked that both were intimately bound to the House of Morgan. “Monty Norman,” writes a historian of the Morgans, “was a natural denizen of the secretive Morgan world.” He continues:
The House of Morgan formed an indispensable part of Norman’s strategy for reordering European economies.... Imperial to the core, he [Norman] wanted to preserve London as a financial center and the bank [of England] as arbiter of the world monetary system. Aided by the House of Morgan, he would manage to exercise a power in the 1920s that far outstripped the meager capital at his disposal.
As for Benjamin Strong, he
was solidly in the Morgan mold.... Hobbled by a regulation that he couldn’t lend directly to foreign governments, Strong needed a private bank as his funding vehicle. He turned to the House of Morgan, which benefited incalculably from his patronage. In fact, the Morgan-Strong friendship would mock any notion of the new Federal Reserve System as a curb on private banking power.31
Let us now turn specifically to the aid that Benjamin Strong delivered to Great Britain to permit its return to gold at $4.86 in 1925. A key as we have seen, to permit Britain to inflate rather than declare, was to induce the United States to inflate dollars so as to keep it from losing gold to the U.S. Before the return to gold, the United States was supposed to inflate so as to persuade the exchange markets that $4.86 would be viable and thereby lift the pound from its postwar depreciated state to the $4.86 figure.
Benjamin Strong and the Fed began their postwar inflationary policy from November 1921 until June 1922, when the Fed tripled its holdings of U.S. government securities and happily discovered the expansion of reserves and inflation of the money supply. Fed authorities hailed the inflation as helping to get the nation out of the 1920–21 recession, and Montagu Norman lauded the easy credit in the U.S. and urged upon Strong a further inflationary fall in interest rates.32
During 1922 and 1923, Norman continued to pepper Strong with pleas to inflate the dollar further, but Strong resisted these blandishments for a time. Instead of rising further toward $4.86, the pound began to fall in the foreign exchange markets in response to Britain’s inflationary policies, the pound slipping to $4.44 and reaching $4.34 by mid-1924. Since Strong was ill through much of 1923, the Federal Reserve Board was able to take command during his absence, and to sell off most of the Fed’s holdings of government securities. Strong returned to his desk in November, however, and by January his rescue of Norman and of British inflationary policy was under way. During 1924 the Fed purchased nearly $500 million in government securities, driving up the U.S. money supply by 8.3 percent during that year.33
Benjamin Strong outlined the reasoning for his inflationary policy in the spring of 1924 to other high U.S. officials. To New York Fed official Pierre Jay, he explained that it was in the U.S. interest to facilitate Britain’s earliest possible return to the gold standard, and that in order to do so, the U.S. had to inflate, so that its prices were a bit higher than England’s, and its interest rates a bit lower. At the proper moment, credit inflation, “secret at first,” would only be made public, “when the pound is fairly close to par.” To Secretary of the Treasury Andrew Mellon, Strong explained that in order to enable Britain to return to gold, the U.S. would have to bring about a “gradual readjustment” of price levels so as to raise U.S. prices relative to Britain. The higher U.S. prices, added Strong, “can be facilitated by cooperation between the Bank of England and the Federal Reserve System in the maintaining of lower interest rates in this country and higher interest rates in England.” Strong declared that “the burden of this readjustment must fall more largely upon us than upon them.” Why? Because
it will be difficult politically and socially for the British government and the Bank of England to force a price liquidation in England beyond what they have already experienced in face of the fact that their trade is poor and they have a million unemployed people receiving government aid.34
Or, to put it in blunter terms, the American people would have to pay the penalties of inflation in order to enable the British to pursue a self-contradictory policy of returning to gold at an overvalued pound, while continuing an inflationary policy, so that they would not have to confront the consequences of their own actions, including the system of massive unemployment insurance.
Moreover, to ease the British return to gold, the New York Fed extended a line of credit for gold of $200 million to the Bank of England in early January 1925, bolstered by a similar $100 million line of credit by J.P. Morgan and Company to the British government, a credit instigated by Strong and guaranteed by the Federal Reserve. It must be added that these large $300 million credits were warmly approved by Secretary Mellon and unanimously approved by the Federal Reserve Board.35
American monetary inflation, backed by the heavy line of credit to Britain, temporarily accomplished its goal. American interest rates were down by 1.5 percent by the autumn of 1924, and these interest rates were now below those in Britain. The inflow of gold from Britain was temporarily checked. As Lionel Robbins explained in mid-1924:
Matters took a decisive turn. American prices began to rise.... In the foreign exchange markets a return to gold at the old parity was anticipated. The sterling-dollar exchange appreciated from $4.34 to $4.78. In the spring of 1925, therefore, it was thought that the adjustment between sterling and gold prices was sufficiently close to warrant a resumption of gold payments at the old parity.36
Just as Montagu Norman was the master manipulator in England, he himself was being manipulated by the Morgans, in what has been called “their holy cause” of returning England to gold. Teddy Grenfell was the Morgan manipulator in London, writing Morgan that “as I have explained to you before, our dear friend Monty works in his own peculiar way. He is masterful and very secretive.” In late 1924, when Norman got worried about the coming return to gold, he sailed to New York to have his confidence bolstered by Strong and J.P. Morgan, Jr. “Jack” Morgan gave Norman a pep talk, saying that if Britain faltered on returning to gold, “centuries of goodwill and moral authority would have been squandered.”37
It should not be thought that Benjamin Strong was the only natural ally of the Morgans in the administrations of the 1920s. Andrew Mellon, the powerful tycoon and head of the Mellon interests, whose empire spread from the Mellon National Bank of Pittsburgh to encompass Gulf Oil, Koppers Company, and ALCOA, was generally allied to the Morgan interests. Mellon was secretary of the Treasury for the entire decade. Although there were various groups around President Warren Harding, as an Ohio Republican, he was closest to the Rockefellers, and his secretary of state, Charles Evans Hughes, was a leading Standard Oil attorney and a trustee of the Rockefeller Foundation.38 Harding’s sudden death in August 1923, however, elevated Vice President Calvin Coolidge to the presidency.
Coolidge has been misleadingly described as a colorless small-town Massachusetts attorney. Actually, the new president was a member of a prominent Boston financial family, who were board members of leading Boston banks, and one, T. Jefferson Coolidge, became prominent in the Morgan-affiliated United Fruit Company of Boston. Throughout his political career, furthermore, Coolidge had two important mentors, neglected by historians. One was Massachusetts Republican chairman W. Murray Crane, who served as a director of three powerful Morgan-dominated institutions: the New Haven and Hartford Railroad, AT&T, and the Guaranty Trust Company of New York. He was also a member of the executive committee of the board of AT&T. The other was Amherst classmate and Morgan partner Dwight Morrow. Morrow began to agitate for Coolidge for president in 1919, and at the Chicago Republican convention of 1920, Dwight Morrow and fellow Morgan partner Thomas Cochran lobbied strenuously, though discreetly behind the scenes, for Coolidge, allowing fellow Amherst graduate and Boston merchant Frank W. Stearns to take the foreground.39
Furthermore, when Secretary of State Charles Evans Hughes returned to private law practice in the spring of 192
5, Coolidge offered his post to then-veteran Wall Street attorney and former Secretary of State and of War Elihu Root, who might be called the veteran leader of the “Morgan bar.” Root was at one critical time in Morgan affairs, J.P. Morgan, Sr.’s, personal attorney. After Root refused the secretary of state position, Coolidge was forced to settle for a lesser Morgan light, Minnesota attorney Frank B. Kellogg.40 Undersecretary of state to Kellogg was Joseph C. Grew, who had family connections with the Morgans (J.P. Morgan, Jr., had married a Grew), while, in 1927, two highly placed Morgan men were asked to take over relations with troubled Mexico and Nicaragua.41
The year 1924 saw the Morgans at the pinnacle of their political power in the United States. President Calvin Coolidge, friend and protégé of Morgan partner Dwight Morrow, was deeply admired by Jack Morgan, who saw the president as a rare blend of deep thinker and moralist. Morgan wrote a friend: “I have never seen any President who gives me just the feeling of confidence in the Country and its institutions, and the working out of our problems, that Mr. Coolidge does.”
On the other hand, the Democratic presidential candidate that year was none other than John W. Davis, senior partner of the Wall Street law firm of Davis Polk and Wardwell, and the chief attorney for J.P. Morgan and Company. Davis, a protégé of the legendary Harry Davison, was also a personal friend and backgammon and cribbage partner of Jack Morgan’s. Whoever won the 1924 election, the Morgans couldn’t lose.42
THE ESTABLISHMENT OF THE NEW GOLD STANDARD OF THE 1920S
BULLION, NOT COIN
One of the reasons the British were optimistic that they could succeed in their basic maneuver in the 1920s is that they were not really going back to the gold standard at all. They were attempting to clothe themselves in the prestige of gold while trying to avoid its anti-inflationary discipline. They went back, not to the classical gold standard, but to a bowdlerized and essentially sham version of that venerable standard.
A History of Money and Banking in the United States: The Colonial Era to World War II Page 32