A History of Money and Banking in the United States: The Colonial Era to World War II

by Murray N. Rothbard

  With German control of the buyers of Europe and her practice of governmental control of all trade, it would be well within her power as well as the pattern she has thus far displayed, to shut off our trade with Europe, with South America and with the Far East.44

  Not only were Hull and the United States ardent in pressing an anti-German policy against its bilateral trade system, but sometimes Secretary Hull had to whip even Britain into line. Thus, in early 1936, Cordell Hull warned the British ambassador that the “clearing arrangements reached by Britain with Argentina, Germany, Italy and other countries were handicapping the efforts of this Government to carry forward its broad program with the favored-nation policy underlying it.” The tendency of these British arrangements was to “drive straight toward bilateral trading,” and they were therefore milestones on the road to war.45

  One of the United States government’s biggest economic worries was the growing competition of Germany and its bilateral trade in Latin America. As early as 1935, Cordell Hull had concluded that Germany was “straining every tendon to undermine United States trading relations with Latin America.”46 A great deal of political pressure was used to combat German competition. Thus, in the mid-1930s, the American Chamber of Commerce in Brazil repeatedly pressed the State Department to scuttle the Germany-Brazil barter deal, which the chamber termed the “greatest single obstacle to free trade in South America.” Brazil was finally induced to cancel its agreement with Germany in exchange for a $60 million loan from the U.S. America’s exporters, grouped in the National Foreign Trade Council, issued resolutions against German trade methods, and pressured the government for stronger action. And in late 1938 President Roosevelt asked Professor James Harvey Rogers, an economist and disciple of Irving Fisher, to make a currency study of all of South America in order to minimize “German and Italian influence on this side of the Atlantic.”

  It is no wonder that German diplomats in Brazil, Chile, and Uruguay reported home that the United States was “exerting very strong pressure against Germany commercially,” which included economic, commercial, and political opposition designed to drive Germany out of the Brazilian and other South American markets.47

  In the spring of 1935, the German ambassador to Washington, desperately anxious to bring an end to American political and economic warfare, asked the United States what Germany could do to end American hostilities. The American answer, which amounted to a demand for unconditional economic surrender, was that Germany abandon its economic policy in favor of America. The American reply “really meant,” noted Pierrepont Moffat, “a fundamental acceptance by Germany of our trade philosophy, and a thoroughgoing partnership with us along the road of equality of treatment and the reduction of trade barriers.” The United States further indicated that it was interested that Germany accept, not so much the principle of the most-favored national clause in all international trade, but specifically for American exports.48

  When war broke out in September 1939, Bernard Baruch’s reaction was to tell President Roosevelt that “if we keep our prices down there is no reason why we shouldn’t get the customers of the belligerent nations that they have had to drop because of the war. And in that event,” Baruch exulted, “Germany’s barter system will be destroyed.”49 But particularly significant is the retrospective comment made by Secretary Hull:

  [W]ar did not break out between the United States and any country with which we had been able to negotiate a trade agreement. It is also a fact that, with very few exceptions, the countries with which we signed trade agreements joined together in resisting the Axis. The political lineup follows the economic lineup.50

  Considering that Secretary Hull was a leading maker of American foreign policy throughout the 1930s and through World War II, it is certainly a possibility that his remarks should be taken, not as a quaint testimony to Hull’s idée fixe on reciprocal trade, but as a positive causal statement of the thrust of American foreign policy. Read in that light, Hull’s remark becomes a significant admission rather than a flight of speculative fancy. Reinforcing this interpretation would be a similar reading of the testimony before the House of Representatives in 1945 of top Treasury aide Harry Dexter White, defending the Bretton Woods agreements. White declared:

  I think it [a Bretton Woods system] would very definitely have made a considerable contribution to checking the war and possibly might have prevented it. A great many of the devices which Germany and Japan utilized would have been illegal in the international sphere, had these countries been participating members.51

  Is White saying that the Allies deliberately made war upon the Axis because of these bilateral, exchange control and other competitive devices, which a Bretton Woods—or for that matter a 1920s—system would have precluded?

  We may take as our final testimony to the possible economic causes of World War II the assertion by the influential Times of London, well after the start of the war:

  One of the fundamental causes of this war has been the unrelaxing efforts of Germany since 1918 to secure wide enough foreign markets to straighten her finances at the very time when all her competitors were forced by their own debts to adopt exactly the same course. Continuous friction was inevitable.52

  THE SECOND NEW DEAL: THE DOLLAR TRIUMPHANT

  Whether and to what extent German economic nationalism was a cause for the American drive toward war, one point is certain: that, even before official American entry into the war, one of America’s principal war aims was to reconstruct an international monetary order. A corollary aim was to replace economic nationalism and bilateralism by the Hullian kind of multilateral trading and “Open Door” for American goods. But the most insistent drive, and the particularly successful one, was to reconstruct an international monetary system. The system in view was to resemble the gold-exchange system of the 1920s quite closely. Once again, all the major world’s currencies were to abandon fluctuating and nationally determined exchange rates on behalf of fixed parities with other currencies and of all of them with gold. Once again, there was to be no full-fledged or internal gold standard for any of these nations, while in theory all currencies were to be fixed in terms of one key currency, which would form a gold-exchange standard on which other nations could pyramid their own supply of domestic money. But there were two crucial differences from the 1920s. One was that while the key currency was to be the only currency redeemable in gold, there was to be no further embarrassing possibility of internal redemption in gold; gold was only to be a method of international payment between central banks, and never again an actual money held by the public. In this way, the key currency—and the rest of the world in response—could expand and inflate much further than in the 1920s, freed as they were from the check of domestic redemption. But the second difference was more politically far-reaching: for instead of two joint-partner key currencies, the pound and the dollar, with the dollar as workhorse junior subaltern, the only key currency now was to be the dollar, which was to be fixed at $35 to the gold ounce. The pound had had it; and just as the United States was to use World War II to replace British imperialism with its own far-flung empire, so in the monetary sphere, the United States was now to move in and take over, with the pound no less subordinate than all the other major currencies. It was truly a triumphant “dollar imperialism” to parallel the imperial American thrust in the political sphere. As Secretary of the Treasury Henry Morgenthau, Jr., was later to express it, the critical and eminently successful objective was “to move the financial center of the world” from London to the United States Treasury.53 And all this eminently was in keeping with the prophetic vision of Cordell Hull, the man who, in the words of Gabriel Kolko, had “the basic responsibility for American political and economic planning for the peace.” For Hull had urged upon Congress as far back as 1932 that America “gird itself, yield to the law of manifest destiny, and go forward as the supreme world factor economically and morally.”54

  World War II was the occasion for a new coalition to form
behind the New Deal, a coalition which reintegrated many conservative “internationalist” financial interests who had been thrown into opposition by the domestic statism or economic nationalism of the earlier New Deal. This reintegration of the entire conservative financial community was particularly true in the field of international economic and monetary policy. Here, Dr. Leo Pasvolsky, a conservative economist who had broken with the New Deal upon the scuttling of the London Economic Conference, returned to a crucial role as Secretary Hull’s special adviser on postwar planning. Dean Acheson, also disaffected by the radical monetary measures of 1933–34, was now back as assistant secretary of state for economic affairs. And when the ailing Cordell Hull retired in late 1944, he was replaced by Edward Stettinius, the son of a Morgan partner and himself former president of Morgan-oriented U.S. Steel. Stettinius chose as his assistant secretary for economic affairs the man who quickly became the key official for postwar international economic planning, William L. Clayton, a former leader of the anti–New Deal Liberty League, and chairman and major partner of Anderson, Clayton and Company, the world’s largest cotton export firm. Clayton’s major focus in postwar planning was to promote and encourage American exports— with cotton, not unnaturally, never out of the forefront of his concerns.55

  Even before American entry into the war, U.S. economic war aims were well-defined and rather brutally simple: they hinged on a determined assault upon the 1930s system of economic and monetary nationalism, so as to promote American exports, investments, and financial dealings overseas—in short, the “Open Door” for American commerce. In the sphere of commercial policy, this took the form of pressure for reduction of tariffs on American products, and the elimination of quantitative import restrictions on those products. In the allied sphere of monetary policy, it meant the breakup of powerful nationalistic currency blocs, and the restoration of an international monetary order based on the dollar in which currencies would be convertible into each other at predictable and fixed parities and there would be a minimum of national exchange controls over the purchase and use of foreign currencies.

  And even as the United States prepared to enter the war to save its ally, Great Britain, it was preparing to bludgeon the British at a time of great peril to abandon their sterling bloc, which they had organized effectively after the Ottawa Agreements of 1932. World War II would presumably deal effectively with the German bilateral trade and currency menace; but what about the problem of Great Britain?

  John Maynard Lord Keynes long had led those British economists who had urged a policy of all-out economic and monetary nationalism on behalf of inflation and full employment. He had gone so far as to hail Roosevelt’s torpedoing of the London Economic Conference because the path was then cleared for economic nationalism. Keynes’s visit to Washington on behalf of the British government in the summer of 1941 now spread gloom about the British determination to continue their bilateral economic policies after the war. High State Department official J. Pierrepont Moffat despaired that “the future is clouding up rapidly and that despite the war the Hitlerian commercial policy will probably be adopted by Great Britain.”56

  The United States responded by putting the pressure on Great Britain at the Atlantic Conference in August 1941. Undersecretary of State Sumner Welles insisted that the British agree to remove discrimination against American exports, and abolish their policies of autarchy, exchange controls, and Imperial Preference blocs.57 Prime Minister Churchill tartly refused, but the United States was scarcely prepared to abandon its crucial aim of breaking down the sterling bloc. As President Roosevelt privately told his son Elliott at the Atlantic Conference:

  It’s something that’s not generally known, but British bankers and German bankers have had world trade pretty well sewn up in their pockets for a long time.... Well, now, that’s not so good for American trade, is it?... If in the past German and British economic interests have operated to exclude us from world trade, kept our merchant shipping closed down, closed us out of this or that market, and now Germany and Britain are at war, what should we do?58

  The signing of Lend-Lease agreements was the ideal time for wringing concessions from the British, but Britain consented to sign the agreement’s Article VII—which merely involved a vague commitment to the elimination of discriminatory treatment in international trade—only after intense pressure by the United States. The agreement was signed at the end of February 1942, and in return the State Department pledged to the British that the U.S. would pursue a policy of economic expansion and full employment after the war. Even under these conditions, however, Britain soon maintained that the Lend-Lease Agreement committed it to virtually nothing. To Cordell Hull, however, the agreement on Article VII was decisive and constituted “a long step toward the fulfillment, after the war, of the economic principles for which I had been fighting for half a century.” The United States also insisted that other nations receiving Lend-Lease sign a virtually identical commitment to multilateralism after the war. In his first major public address in nearly a year, Hull, in July 1942, could now look forward confidently that

  leadership toward a new system of international relationships in trade and other economic affairs will devolve very largely upon the United States because of our great economic strength. We should assume this leadership, and the responsibility that goes with it, primarily for reasons of pure national self-interest.59

  In the postwar planning for economic affairs, the State Department was in charge of commercial and trade policies, while the Treasury conducted the planning in the areas of money and finance. In charge of postwar international financial planning for the Treasury was the economist Harry Dexter White. In early 1942, White presented his first plan, which was to be one of the two major foundations of the postwar monetary system. White’s proposal was of course within the framework of American postwar economic objectives. The countries of the world were to join a Stabilization Fund, totaling $5 billion, which would lend funds at short term to deficit countries to iron out temporary balance-of-payments difficulties. But in return for this provision of greater liquidity and short-term aid to deficit countries, exchange rates of currencies were to be fixed, in relation to the dollar and hence to gold, with the gold price to be set at $35 an ounce, and exchange controls were to be abandoned by the various nations.

  While the White Plan envisioned a substantial amount of inflation to provide greater currency liquidity, the British responded with a Keynes Plan that was far more inflationary. By this time, Lord Keynes had abandoned economic and monetary nationalism for Britain under severe American pressure, and his aim was to salvage as much domestic inflation and cheap money for Britain as he could possibly induce America to accept. The Keynes Plan envisioned an International Clearing Union (ICU), which, in return for agreeing to stable exchange rates between currencies and the abandonment of exchange control, provided a huge loan fund to its members of $26 billion. The Keynes Plan, moreover, provided for a new international monetary unit, the “bancor,” which could be issued by the ICU in such large amounts as to provide almost unchecked room for inflation, even in a country with a large deficit in its balance of payments. The nations would consult with each other about correcting balance-of-payments disequilibria, through altering their exchange rates. The Keynes Plan, furthermore, provided automatic access to the fund of liquidity, with none of the embarrassing requirements, as included in the White Plan, for deficit countries to cease creating deficits by inflating their currency. Whereas the White Plan authorized the Stabilization Fund to require deficit countries to cease inflating in return for fund loans, the Keynes Plan envisioned that inflation would proceed unchecked, with all the burden of necessary adjustments to be placed on the hard-money, creditor countries, who would be expected to inflate faster themselves, in order not to gain currency from the deficit nations.

  The White Plan was stringently attacked by the conservative nationalists and inflationists in Britain, particularly G.R. Boothby, Lord Beaverbrook, t
he Times of London, and the Economist. The Keynes Plan was attacked by conservatives in the United States, as was even the White Plan for interfering with market forces, and for automatic extension of credit to deficit countries. Critical of the White Plan were the Guaranty Survey of the Guaranty Trust Company and the American Bankers Association; furthermore, the New York Times and New York Herald Tribune called for return to the classical gold standard, and attacked the large measure of governmental financial planning envisioned by both the Keynes and White proposals.60