A History of Money and Banking in the United States: The Colonial Era to World War II (50 page)

EPILOGUE: RETURN OF THE MORGANS

It is well not to cry for the Morgans. Though permanently dethroned by the New Deal, they were able to make a comeback by the late 1930s. The great thrust for economic nationalism had subsided, and the Morgans were able to begin to work again for stabilization of exchange rates. In the fall of 1936, the United 99Ibid., p. 108. Marriner Eccles, too, ended up left behind by the New Deal revolution he had helped to lead. Specifically, Eccles could not understand why Truman’s Fair Deal insisted on continuing deficits and monetary inflation even after the depression and World War II were over.

Removed by Truman as chairman of the Federal Reserve Board in 1948, Eccles, as a continuing member of the board, was the principal figure in forcing an end, in 1951, to the disastrously inflationary Fed policy of supporting the price of Treasury securities, and hence providing a channel for perpetual monetization of the federal deficit. After leaving the Fed, Eccles went back into the conservative Republican camp. Such is the leftward drift of American politics that he could do so without repudiating any of his New Deal macro positions.

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The Colonial Era to World War II

States entered into a tripartite agreement with Great Britain and France, the three countries agreeing—not exactly on fixed exchange rates—but on maneuvering to support each other’s exchanges at least within any given 24-hour period. Soon, the agreement, which was to last until World War II, was expanded to include Belgium, Holland, and Switzerland.

As the nations moved toward World War II, the Morgans, who had long been closely connected with Britain and France, rose in importance in American foreign policy, while the Rockefellers, who had little connection with Britain and France and had patent agreements with I.G. Farben in Germany, fell in relative strength. Secretary of State Cordell Hull, a close longtime friend of FDR’s roving ambassador and Morgan man Norman H.

Davis, took the lead in exerting pressure against Germany for its bilateral rather than multilateral trade agreements and for its exchange controls, all put in place to defend a chronically overvalued mark.100, 101

100Rothbard, “New Deal and International Monetary System,” pp. 105–11.

Germany could not devalue the mark, because the German public erroneously blamed foreign exchange devaluation, instead of monetary expansion, for the disastrous runaway inflation of 1923, and devaluation would have been political suicide for any government, even Hitler’s. For a valuable explanation of the workings of the German barter agreements of the 1930s, see Ludwig von Mises,
Human Action
(New Haven, Conn.: Yale University Press, 1949), pp. 796–99. Unfortunately, this section was removed in later editions. [
Mises’s original text was reinstated in the scholar’s edition
(Auburn, Ala.: Ludwig von Mises Institute, 1998), pp. 796–799.
—Ed.]

101One incident almost marred the success of the Tripartite Agreement.

In the fall of 1938, the British began pushing the pound below $4.80.

Treasury officials promptly warned Morgenthau that if “sterling drops substantially below $4.80, our foreign and domestic business will be adversely affected.” Morgenthau then successfully insisted that a new trade agreement then being worked out with Britain include a provision that the agreement would end should the British allow the pound to fall below $4.80. Lloyd C. Gardner,
Economic Aspects of New Deal Diplomacy
(Madison: University of Wisconsin Press, 1964), p. 107.

From Hoover to Roosevelt:

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The Federal Reserve and the Financial Elites
As the United States prepared to enter World War II, it made its economic war aims brutally simple: the ending of the economic and monetary nationalism of the 1930s, and their replacement by a new international economic order based upon the dollar instead of the pound. In the trade area, this meant vigorous U.S. promotion of exports and the reduction of tariffs and quotas against American products (the so-called “open door” for American commerce and investments), and in the monetary sphere, it meant the breakup of national currency blocs, and the restoration of multilateral exchanges with fixed parities based upon the dollar. Even as the United States prepared to enter the war to save Britain, its continuing conflict with the British proclivity for exchange controls and an Imperial Preference bloc remained unresolved.102

The resolution of the problem came after lengthy negotiations throughout World War II, culminating in the Bretton Woods Agreement in July 1944. Basically, the agreement was a compromise in which the United States won the main point: a new multilateral world of fixed exchange rates of currencies based on the dollar, while the Americans accepted the British 102At the Atlantic Conference with Churchill in August 1941, FDR

revealingly told his son, Elliott:

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, that’s not so good for world 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? (Robert Freeman Smith, “American Foreign Relations, 1920–1942,” in
Toward
a New Past
, Barton J. Bernstein, ed. [New York: Pantheon, 1968], p. 252)

See also Gabriel Kolko,
The Politics of War: The World and United States
Foreign Policy, 1943–45
(New York: Random House, 1968), pp. 248–49; and Rothbard, “New Deal and International Monetary System,” pp. 111–15.

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

Keynesian insistence on jointly promoting permanent inflationary policies to ensure “full employment.” The United States had achieved the objective expressed by Secretary Morgenthau: “to move the financial center of the world from London to the United States Treasury.”103 It is no wonder that, in January 1945, Lamar Fleming, Jr., president of Anderson, Clayton and Company, world’s largest cotton export brokers, could write to his longtime colleague and boss William L. Clayton that the

“British empire and British international influence is a myth already.” The United States would soon become the protector of Britain against the emerging Russian landmass, prophesied Fleming, and this would mean “the absorption into the American empire of the parts of the British empire which we will be willing to accept.”104

The dominant role in the critical wartime negotiations leading up to Bretton Woods was played not by the State Department, but secretly by the Council of Foreign Relations (CFR), a highly influential organization of businessmen and experts set up by the Morgans after World War I to promote an internationalist foreign political and economic policy. Private study groups set up by the CFR intermeshed and virtually dictated to parallel study groups established by the sometimes reluctant Department of State. President of the CFR from 1936 until 1944 and director of this effort was none other than Norman Davis, longtime Morgan affiliate and disciple of Morgan partner Henry P.

Davison. The Morgans, indeed, were back.105 During the war, many Morgan-oriented men who had strongly opposed the 103Richard N. Gardner,
Sterling-Dollar Diplomacy
(Oxford: Clarendon Press, 1956), p. 76.

104Kolko,
Politics of War,
p. 294. See also Rothbard, “New Deal and International Monetary System,” pp. 112, 120.

105See the illuminating research of Domhoff,
Power Elite
, pp. 115ff.; and Laurence H. Shoup and William Minter,
Imperial Brain Trust: The
Council on Foreign Relations and United States Foreign Policy
(New York: Monthly Review Press, 1977).

From Hoover to Roosevelt:

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The Federal Reserve and the Financial Elites
economic nationalism of the early New Deal happily came back to help run the World War II and postwar version of the new era: Lewis W. Douglas; Dean Acheson, who had left the New Deal because of its radical monetary measures, was back as assistant secretary of state for monetary affairs; Acheson’s mentor, Henry L. Stimson, was secretary of war; and Stimson’s other disciple, John J. McCloy, in effect ran the war effort as his deputy secretary. And when the ailing Cordell Hull retired in late 1944, he was replaced as secretary of state by Edward Stettinius, son of a Morgan partner and himself former president of Morgan-dominated United States Steel.106

After World War II, the Morgans were content to slide into a new role as junior partner to the Rockefellers. The new prominence of oil made the Rockefellers the dominant force in the political and financial Eastern Establishment. The Rockefellers assumed control of the Council of Foreign Relations, the entire shift being neatly symbolized by the new postwar role of John J.

McCloy, who was to serve as chairman of the Council of Foreign Relations, of the Rockefeller Foundation, and of the Rockefeller flagship bank, the Chase National Bank.107 The old verities and financial group conflicts of the pre–World War II era had disappeared, and had been transformed into a new world.

106Stettinius chose as his assistant secretary for economic affairs William L. Clayton, chairman and major partner of the cotton export firm, Anderson, Clayton and Company. Clayton had formerly been a leader of the fiercely anti-New Deal Liberty League. Clayton’s major focus in the postwar era was the promotion of American exports, especially cotton; as undersecretary of state he was chiefly responsible for drafting and pushing through the Marshall Plan, which promptly awarded Anderson, Clayton and Company a major cotton export contract. His work in foreign policy accomplished, Clayton could return to private life. Rothbard,

“New Deal and International Monetary System,” p. 113.

107It is no wonder that, in the late 1950s, John Kenneth Galbraith and Richard Rovere dubbed McCloy “Chairman of the Establishment.” Kai Bird,
The Chairman: John J. McCloy, the Making of the American Establishment
(New York: Simon and Schuster, 1992).

Part 4

THE GOLD-EXCHANGE STANDARD

IN THE INTERWAR YEARS

THE GOLD-EXCHANGE STANDARD

IN THE INTERWAR YEARS

Great Britain emerged victorious from its travail in World War I, but its economy, and particularly its currency, lay in shambles. All the warring countries had financed their massive four-year war effort by monetizing their deficits, most of them doubling, tripling, or quadrupling their money supply, with equivalent impacts upon their prices.1 The massive influx of government paper money forced these warring governments to go rapidly off the gold standard. The currencies depreciated in terms of gold, but the depreciation was masked by a network of exchange controls that marked the collectivized economies 1Germany, which multiplied its money supply eightfold during the war, would soon spiral into runaway inflation, propelled by accelerated monetization of government deficits and of private credit; France and Austria also went into hyperinflation after the war to a lesser extent than Germany. See Melchior Palyi,
The Twilight of Gold 1914–1936
(Chicago: Henry Regnery, 1972), p. 33. See also D.E. Moggridge,
British Monetary
Policy, 1924–1931: The Norman Conquest of $4.86
(Cambridge: Cambridge University Press, 1972).

[
Previously published in an edited version as “The Gold-Exchange Standard
in the Interwar Years,” in
Money and the Nation State: The Financial Revolution, Government and the World Monetary System,
Kevin Dowd
and Richard H. Timberlake, Jr., eds. (New Brunswick, N.J.: Transactions
Publishers, 1998), pp. 105–63.—
Ed.]

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The Colonial Era to World War II

during World War I. Only the United States, which entered the war two and a half years after the other countries and hence inflated its currency less, managed to remain de jure on its prewar gold standard. De facto, however, the U.S. barred export of gold during the war, and so was effectively off gold during that period. In March 1919, when foreign exchange markets became free once more, the bad news became evident: while the dollar, again de facto as well as de jure on gold, remained at its prewar par (approximately one-twentieth of a gold ounce), European fiat paper currencies were sadly depreciated. The once-mighty pound sterling, traditionally at approximately $4.86, now sold at approximately $3.50 and at one point, in February 1920, was down to $3.20.2 Here was a 30- to 35-percent depreciation from its prewar par.

Thus, wartime and postwar Europe was thrown into a cauldron of inflation, depreciation, exchange-rate volatility, and the menace of warring currency blocs. For the first time since the Napoleonic Wars, the world lacked an international money, a medium of exchange that could be used throughout the world, and lacked the international harmony, the monetary stability and calculability, that a world money could generate. Europe, and the world, were plunged into the chaos of an international moneyless, or barter, system. All the countries therefore looked back with understandable nostalgia at the relative Eden that had existed before the Great War.

THE CLASSICAL GOLD STANDARD

The nineteenth-century monetary system has been referred to as the “classical” gold standard. It has become fashionable among economists to denigrate that system as only existent in the last decades of the nineteenth century, and as simply a form 2Precisely, British currency had traditionally been defined so that one ounce of gold was equal to 77s. 102d. Comparing the prewar ratios of the dollar and the pound to gold, the pound sterling was therefore set at $4.86656. The gold ounce was also set equal to $20.67.

The Gold-Exchange Standard in the Interwar Years
353