The Power of Gold: The History of an Obsession
Page 33
And finally, the climactic passages at the end:
We care not upon what lines the battle is fought. If they say bimetallism is good, but that we cannot have it until other nations help us, we reply that, instead of having a gold standard because England has, we will restore bimetallism and let England have bimetallism because the United States has it. If they dare come out in the open field and defend the gold standard as a good thing, we will fight them to the uttermost. Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests, and the toilers everywhere, we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold.
Bryan lost the election, and by a substantial margin. McKinley scored a majority of 95 in the Electoral College and a plurality of 602,000 in the popular vote-a huge advance over Cleveland's plurality of 381,000 in his "landslide" of 1892.34
The impact of the election results on the financial markets was extraordinary. Bryan's noisy campaign had provoked a high degree of nervousness and uncertainty during the summer, with a steep break in stock prices, a wave of selling dollars for pounds sterling, call money at one point up to 125 percent, and a queue of individuals outside the Sub-Treasury redemption windows waiting to exchange legal tenders for gold coin." Within a week after the election, stock prices soared, money rates were down to 4 percent, and gold coin began to flow back into the Sub-Treasury windows for conversion back into paper currency.
Explanations for McKinley's great victory vary. Although bimetallism had been the traditional form of monetary standard for centuries, many voters in the 1890s were so unfamiliar with its operation that they perceived it as a newfangled idea that was not to be trusted. Despite the many hair-raising vicissitudes of recent history, gold had effectively been the single standard in the United States for over twenty years. Few people had any clear memory of any other set of arrangements. These instinctive views of gold's triumph were also helped along by the larger resources of the Republican Party for organizing and conducting the educational process.
Nature, however, was also at work once again. In October, news arrived of a failure of the Indian wheat crop serious enough to convert India from an exporter to an importer of wheat. Wheat prices jumped from 53¢ a bushel in August to 747/8¢ in October, and then to 943/8¢ in election week. Although Bryan claimed that the "money power" was manipulating the market, the raw facts demonstrated that wheat prices could rise even under a full gold standard. Whereas the Democrats had won a small plurality in Ohio, Michigan, and Minnesota in the election of 1892, the Republicans now ran a plurality of 148,000 in these three states.36 As we like to say in our own time, "It's the economy, stupid!"
Milton Friedman takes a different view, citing "a fascinating example of the far-reaching and mostly unanticipated effects of a seemingly minor monetary development." He ascribes Bryan's defeat to the MacArthur-Forrest invention of the cyanide gold-refining process in Scotland and its subsequent introduction in the South African mines in 1890. There was no doubt that this development promised a tremendous increase in world monetary gold supplies and, in all likelihood, the inflationary turn that the farmers and other followers of Bryan had been so desperately yearning for.;'
Bryan later wrote an account of the campaign of 1896, which he called The First Battle, but that campaign would turn out to be the last battle for bimetallism. Bryan did help to launch the first battle for an impressive list of radical causes in his own day that would become law over the next quarter century: government regulation of railroads, telegraph, and telephone; control of monopolies; an eight-hour day for labor; the income tax, tariff reform, woman suffrage; and temperance, among others.3x
When Bryan died in 1925, only 65 years old, the charismatic rhetoric he had uttered in a Chicago tent in the summer of 1896 was as pertinent and appropriate as it had been 29 years earlier. Great decisions were afoot that would press down the crown of thorns on the brow of labor and crucify mankind on a cross of gold. What powerful language might Bryan have mustered had he lived to witness the outcome?
lthough World War I changed most of the world beyond recognition, one paramount feature of the prewar era rose triumphantly from the ashes: gold. The neatly piled bricks of gold in the vaults of the central banks dominated economic policy in the 1920s and often domestic and international political strife as well, suffusing the entire scene with a yellow glow.
Despite all the gaiety associated with the Roaring Twenties, the fixation on gold during the 1920s and early 1930s makes the period resemble a horror movie. You watch helplessly as the international power struggles and the blind attachment to gold in the wake of World War I drive the whole system toward the inevitable but catastrophic ending in the Great Depression. This is an unusual horror movie, however, because it has no bad guys. The good guys do enough damage on their own. When they are not shooting one another in the foot, they take the opportunity to shoot themselves in the foot. Along the way, the decisions that seem to make best sense at the moment turn out in the end to be nonsense.
These judgments are easy to make with the hindsight of more than seven decades. Unlike the leaders responsible for putting the world back together after World War II, the statesmen and economists of the 1920s were in uncharted territory, without any guide or precedent to help them find their way through the dark wilderness before them. Not a single episode in the history of gold or money recounted so far in this book could have been of much)help. Nothing like the war of 1914-1918 had ever occurred before, in terms of scope, casualties, cost, or pain. It was natural to seek a return to the structure that most people believed had held the world together during the long peace and rising living standards of the Victorian and Edwardian eras, Disraeli's warning notwithstanding. In addition, experience had shown that mistrust in the value of money can have a powerful and destructive impact on social structures, the established order of property ownership, and economic progress. Newfangled experiments in the insecure environment of the postwar world had no attraction for the authorities, and for only a tiny number of the experts, especially in the world of finance. The road to recovery had to be paved with gold.
In Britain, the shape of the future was laid out as early as January 1918 in the report of a special committee established for the specific purpose of proposing appropriate policies for the postwar transition. Known as the Cunliffe Committee after Lord Cunliffe, its Chairman and the Governor of the Bank of England, the report based its suggestions upon "the machinery which long experience has shown to be the only effective remedy for an adverse balance of trade and an undue growth of credit." The report's unequivocal recommendation was that "It is imperative that after the war the conditions necessary for the maintenance of an effective gold standard should be restored without delay." The Committee pointed out, furthermore, that they were "glad to find there was no difference of opinion among the witnesses who appeared before us as to the vital importance of these matters." The respected periodical, The Economist, immediately applauded with an editorial titled "Back to Sanity" and characterized the report as "an eminently sound document."
One of the few outspoken critics was the brash John Maynard Keynes, then 36 years old, but Lord Cunliffe dealt with him by observing that "Mr. Keynes ... in commercial circles ... [is] not considered to have any knowledge or experience in practical Exchange or business problems."' The passage of time would prove this accusation to be wildly wide of the mark.
The Cunliffe Committee described an appealing goal but omitted directions on how to get from here to there. No one paused to recall Disraeli's wise observation that the nineteenth-century gold standard was the symptom, not the cause, of prosperity. Most of the basic and essential conditions that had fostered the gold standard had been torn to shreds by four years of carnage. Political alliances, government finance, international debts, Britain's leading position in global
banking and finance, and the state of industrial efficiency had been altered almost beyond recognition. Recovery from the dreadful toll taken by the war would have been difficult enough even if mindsets had been less rigid and economic analysis less mired in the theories of the past. Yet it was assumed that full recovery could be achieved only when the gold standard was back where it belonged.
When the slaughter of World War I finally came to an end in November 1918, over eight million men had perished in combat, with somewhat more than half from the Allied side, including 1.8 million Russians and 1.4 million Frenchmen. Over a third of the German male population aged 19 to 22 years were gone; one in ten of British soldiers had fallen. The United States, by comparison, lost 114,000 men, less than half the losses of Romania. A total of fifteen million men on both sides were wounded, many so badly hurt that they would be dependent for support on society and on their families for the rest of their lives, beyond hope of returning to a productive existence. In northeastern France, the primary battleground of the war, more than half the roads were torn up, hundreds of bridges were destroyed, nine thousand factories employing more than ten or more people were crippled or demol- 2 ished, and half of France's vital textile industry was out of action.
The financial consequences were just as appalling. National debts had swelled by many multiples of their 1914 values. Difficult as those burdens were to manage, each country owed most of that money to its own citizens. But the Allies also ended up in debt to the United States to the tune of nearly $2 billion, while France, Italy, and Russia each owed the United Kingdom some $500 million.3 These sound like piddling sums in today's economy, but one must remember that the dollar value of total current output in the United States is about one hundred times as large as it was in the early 1920s and that the economies of each of the European countries were substantially smaller than the American economy and seriously impoverished by the war. Total holdings of gold by Britain, France, and Germany at the end of the war amounted to no more than about $2 billion.4 These debts amounted to substantial sums.
Despite early hopes, the years ahead would promise only occasional relief to Europeans from anything except the warfare itself, and in some parts of Europe even that horror persisted. Mass hunger, unemployment, and uncertainty about the value of money did not have to wait until the onset of the Great Depression. That worldwide catastrophe was just an extension of the intractable difficulties that had already been haunting one part of Europe or another off and on for ten years.
Rancor, bitterness, selfishness, and envy stained almost every aspect of international relationships, corroding the congenial cooperative spirit of the earlier years. The French, having sustained most of the physical damage of the war, insisted on payment of the outlandishly harsh German reparations; until Germany came through, the French refused to repay their debts to the British, whose land was unharmed. The British, however, had also shed copious amounts of the blood of their youth and, in the process, had liquidated a substantial volume of their overseas wealth in order to pay for the war. Without payments from the French, the British were unwilling to pay down their debts to the Americans, who had come out of the war with only minor casualties and an economy that was both wealthier and as strong and vigorous as ever.
In addition, relations between the British and the French often led to serious problems that might otherwise have been avoided. Despite the high level of casualties, the British emerged from the war convinced that the English Channel still kept them separate from "Europe" and from the massive disorders on the Continent-France's war damage, Germany's revolution and impoverishment, the breakup of the Hapsburg Empire, the Russian Revolution, and upheaval from Poland on down through the Balkans. At the Versailles Peace Conference, this attitude kept Prime Minister Lloyd George from making much effort to block the French Premier, Georges Clemenceau, from imposing a peace treaty on the Germans so brutal and impossible to fulfill that it would lead to the rise of Hitler and a war even more terrible in its toll than the war of 1914-1918. As we shall soon see, this attitude also interfered with British-French cooperation on the matter of gold at crucial steps along the way.
Meanwhile, the Americans took the position that "They hired the money, didn't they?" Standing on the indisputable evidence that the doughboys had come to the rescue of the Allies in the nick of time, the United States made concessions only when crisis conditions pushed matters in that direction or when others made proportionate sacrifices. Many Americans disapproved of the peace treaty and Wilson's helplessness to influence the outcome in the more noble directions he had promised. Consequently, there was persistent pressure to cling to traditional prejudices against "foreign entanglements." That the United States sat in comfort on by far the largest pile of gold reserves of any country only fortified the reluctance of Americans to become involved in the economic turmoil in Europe.
A small number of officials recognized how essential American cooperation was to the recovery of Europe, but they were only putting their fingers in a dike that the flood would overwhelm in spite of their efforts. Before the structure collapsed, even they managed to shoot everybody else in the foot as they were taking aim at their own.
In 1920, when the pound was trading in the foreign exchange markets at around $4.00-it would touch $3.40 at its lowest-Parliament mandated a full return to the gold standard in Britain by the end of 1925. Britain had managed this step in four years after the end of the wars against Napoleon; this time the process would consume seven years. As in the earlier episode, the primary obstacle to going back on gold was the inflated price level, but this time the hurdle was far higher. Four years after the defeat of Napoleon, prices were already back to the levels of 1799, but prices at the end of World War I were roughly three times their prewar level and in 1925 were still close to double their 1914 levels. Meanwhile, prices in the wartime United States had only about doubled, then fell back in 1921 to where they were just about 40 percent above prewar, and remained trendless up to 1929.5
Two additional hurdles made the task even more difficult. First, the national debt had risen by J 5.5 billion during the war to well over 'C7 billion, but the government's budget deficit was still bulging, and the usual political haggling over who would bear the burden of rectitude seemed beyond resolution.' Perhaps even more serious, Britain's vaunted productive apparatus was aging, with costs that were out of line with much of the competition from Europe and America, a process already under way before 1914. Just as American business managers during the 1960s and 1970s were slow to recognize the growing competitive threat from the improving productivity of manufacturers in Japan and Europe, British management in the early 1920s was hesitant about changing its ways. In 1924, British exports were running 25 percent below prewar levels. In addition to the resulting disappointments in export performance, Britain's difficulties were compounded further by strong demand for imports-back up to prewar levels-loss of overseas income, and the failure of shipping and insurance income to revive.
If Britain were to revert to the gold standard at Isaac Newton's longstanding metric, which had worked out to $4.86 per pound sterling for Americans in the prewar era, that $4.86 was not going to buy anywhere near as much in the Britain of the 1920s as $4.86 had bought in the past. Thus, it was clear that the stubborn character of the adverse trends in the balance of trade might well create unmanageable pressures on the gold stock. If, however, some lesser value were chosen for the pound as a means of helping the trade position, Britain's coveted credibility would be compromised and doubt would persist as to any kind of stability to British money for the indefinite future. Foreigners long accustomed to using the City of London as a banking center would flee elsewhere-New York or Paris, for example-and the pound would never look sterling again.
Although the debate swung back and forth all the way up to the 1925 deadline, informed opinion remained in firm support of $4.86. The obstacles appeared small compared to the magnitude of the victory that appeared to lie ahead. "Sacrifice"
became a buzzword. As one contemporary expert, Sir Charles Addis, expressed it, "Admitting a sacrifice even though we may differ as to the amount, I think it would not be too high a price to pay for the substantial benefit to the trade of [the nation's] working classes, and also, although I put it last, for the recovery by the City of London of its former position as the world's financial center."'
Presiding over most of the major economic policy decisions and much of the debate over the pound was a mysterious and powerful man named Montagu Norman. Norman was elected Governor of the Bank of England for a record 24 years, serving twelve consecutive two-year terms from 1920 to 1944. According to his biographer Andrew Boyle, Norman's "reputation for godlike aloofness and for tantalizing omniscience" enabled him to exert with gusto every bit of the power that "the tremendous mystique surrounding the high office he held" placed in his hands.'
Gaunt, elegant, with a small beard and a grayish visage, Norman had descended from a family that had long been a part of the upper-class establishment of the City. He was alternately severe, austere, demanding, charming, and seductive, as well as given to periodic nervous breakdowns that kept him out of the office for extended periods of time. Brilliant in finance but unshakable in his conservative ideologies, he was, in Boyle's words, "the high priest of the City's dogma that the power of Britain had been founded on gold.... an article of faith as unassailable as the universal belief of mankind before the time of Copernicus and Galileo that it was the sun which moved, not the earth. ... [Gold] was also a mystical symbol of all that was finest in the struggle of mankind to better its lot on earth."9 When it came to views on sound money, Norman walked in the path that Ricardo had laid out just one hundred years earlier after the Napoleonic Wars.