A History of Money and Banking in the United States: The Colonial Era to World War II (65 page)

Robey, later to become economist at the National Association of 10Irving Fisher,
Stabilised Money
(London: George Allen and Unwin, 1935), pp. 104–13, 375–89, 411–12.

11Fisher was also a partner of James H. Rand, Jr., in a card-index manufacturing firm. Fisher, pp. 387–88; Irving Norton Fisher,
My Father Irving
Fisher
(New York: Comet Press, 1956), pp. 220ff.

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

Manufacturers. Another critic was Dr. Rufus S. Tucker, economist at General Motors. On the Federal Reserve Board the major critic was Dr. Adolph C. Miller, a close friend of Herbert Hoover, who joined in the criticisms of the Strong policy. On the other hand, Treasury Secretary Andrew W. Mellon, of the powerful Mellon interests, enthusiastically backed the inflationist policy. This split in the nation’s leading banking and business circles was to foreshadow the split over Franklin Roosevelt’s monetary departures in 1933.

THE FIRST NEW DEAL: DOLLAR NATIONALISM

The international monetary framework of the 1920s collapsed in the storm of the Great Depression; or rather, it collapsed of its own inner contradictions in a depression which it had helped to bring about. For one of the most calamitous features of the depression was the international wave of banking failures; and the banks failed from the inflation and overexpansion which were the fruits of the managed international gold-exchange standard. Once the jerry-built pyramiding of bank credit had collapsed, it brought down the banking system of nation after nation; as inflation led to a piling up of currency claims abroad, the cashing in of the claims led to a well-founded suspicion of the solvency of other banks, and so the failures spread and intensified. The failures in the weak currency countries led to the accumulation of strains in other weak currency nations, and, ultimately, on the bases of the shaky pyramid: Britain and the United States.

The major banking crisis began with the near bankruptcy in 1929 of the Boden-Kredit-Anstalt of Vienna, the major bank in Austria, which had never recovered from its dismemberment at Versailles. Desperate attempts by J.P. Morgan, the House of Rothschild, and later the New York Fed, to shore up the bank only succeeded in a temporary rescue which committed more financial resources to an unsound bank and thereby made its ultimate failure in May 1931 all the more catastrophic. Rather than permit the outright liquidation of their banking systems,
The New Deal and the

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International Monetary System

Austria, followed by Germany and other European countries, went off the gold standard during 1931.12

But the key to the international monetary situation was Great Britain, the nub and the base for the world’s gold-exchange standard. British inflation and cheap money, and the standard that had made Britain the base of the world’s money, put enormous pressure on the pound sterling, as foreign holders of sterling balances became increasingly panicky and called on the British to redeem their sterling in either gold or dollars. The heavy loans by British banks to Germany during the 1920s made the pressure after the German monetary collapse still more severe. But Britain
could
have saved the day by using the classical gold-standard medicine in such crises: by raising bank interest rates sharply, thereby attracting funds to Britain from other countries. In such monetary crises, furthermore, such temporary tight money and checks to inflation give foreigners confidence that the pound will be sustained, and they then continue to hold sterling without calling on the country for redemption. In earlier crises, for example, Britain had raised its bank rate as high as 10 percent early in the proceedings, and temporarily contracted the money supply to put a stringent check to inflation. But by 1931 deflation and hard money had become unthinkable in the British political climate. And so Britain stunned the financial world by keeping its bank rate very low, never raising it above 4.5 percent, and in fact continuing to inflate sterling still further to offset gold losses abroad.

As the run on sterling inevitably intensified, Great Britain cyni-cally repudiated its own gold-exchange standard, the very monetary standard that it had forced and cajoled Europe to adopt, by coolly going off the gold standard in September 1931.

Its own international monetary system was sacrificed on the altar of continued domestic inflation.13

12See Anderson,
Economics and the Public Welfare
, pp. 232ff.

13See Lionel Robbins,
The Great Depression
(New York: Macmillan, 1934), pp. 89–99. See also Anderson,
Economics and the Public Welfare
,
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A History of Money and Banking in the United States:
The Colonial Era to World War II

The European monetary system was thereby broken up into separate and even warring currency blocs, replete with fluctuating exchange rates, exchange control, and trade restrictions.

The major countries followed Britain off the gold standard, with the exception of Belgium, Holland, France, Italy, Switzerland, and the United States. Currency blocs formed with the British Empire forming a sterling bloc, with parities mutually fixed in relation to the pound. It is particularly ironic that one of the earliest effects of Britain’s going off gold was that the overvalued pound, now free to fluctuate, fell to its genuine economic value, at or below $3.40 to the pound. And so Britain’s grand experiment in returning to a form of gold at an overvalued par had ended in disaster, for herself as well as for the rest of the world.

In the last weeks of the Hoover administration, a desperate attempt was made by the U.S. to restore an international monetary system; this time the offer was made to Britain to return to the gold standard at the current, eminently more sensible par, in exchange for substantial reduction of the British war debt. No longer would Britain be forced by overvaluation to be in a chronic state of depression of its export industries. But Britain now had the nationalist bit in its teeth; and it insisted on outright “reflation” of prices back up to the pre-depression, 1929

levels. It had become increasingly clear that the powerful “price stabilizationists” were interested not so much in stabilization as in high prices, and now they would only be satisfied with an inflationary return to boom prices. Britain’s rejection of the American offer proved to be fatal for any hopes of international monetary stability.14

The world’s monetary fate finally rested with the United States, the major gold-standard country still remaining. Federal Reserve attempts to inflate the money supply and to lower pp. 244 ff.; and Frederic C. Benham,
British Monetary Policy
(London: P.S.

King and Son, 1932), pp. 1–45.

14Robbins,
The Great Depression
, pp. 100–21.

The New Deal and the

453

International Monetary System

interest rates during the depression further weakened confidence in the dollar, and gold outflows combined with runs and failures of the banks to put increasing pressure on the American banking system. Finally, during the interregnum between the Hoover and Roosevelt administrations, the nation’s banks began to collapse in earnest. The general bank collapse meant that the banking system, always unsound and incapable of paying more than a fraction of its liabilities on demand, could only go in either of two opposite directions. A truly laissez-faire policy would have allowed the failing banks to collapse, and thereby to engage in a swift, sharp surgical operation that would have transformed the nation’s monetary system from an unsound, inflationary one to a truly “hard” and stable currency.

The other pole was for the government to declare massive

“bank holidays,” that is, to relieve the banks of the obligation to pay their debts, and then move on to the repudiation of the gold standard and its replacement by inflated fiat paper issued by the government. It is important to realize that neither the Hoover nor the Roosevelt administrations had any intention of taking the first route. While there was a considerable split on whether or not to stay on the gold standard, no one endorsed the rigorous laissez-faire route.15

The new Roosevelt administration was now faced with the choice of retaining or going off the gold standard. While almost everyone supported the temporary “bank holidays,” there was a severe split on the longer-run question of the monetary standard.

While the bulk of the nation’s academic economists stood staunchly behind the gold standard, the indefatigable Irving Fisher redoubled his agitation for inflation, spurred onward by his personal desire to reinflate stock prices. Since the Stable 15See Rothbard,
America’s Great Depression
, pp. 284–99; H. Parker Willis, “A Crisis in American Banking,” in
The Banking Situation,
H.P.

Willis and J.M. Chapman, eds. (New York: Columbia University Press, 1934), pp. 3–120.

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

Money Association had been supposedly dedicated to price stabilization, and what Fisher and the inflationists wanted was a drastic raising of prices, the association liquidated its assets into the new and frankly inflationist Committee for the Nation to Rebuild Prices and Purchasing Power. The Committee for the Nation, founded in January 1933, stood squarely for the “reflation” of prices back to their pre-1929 levels; stabilization of the price level was to proceed only
after
that point had been achieved. The Committee for the Nation, which was to prove crucially influential on Roosevelt’s decision, was composed largely of prominent businessmen. The committee was originated by Vincent Bendix, president of Bendix Aviation, and General Robert E. Wood, head of Sears, Roebuck and Company.

They were soon joined, in the fall of 1932, by Frank A. Vanderlip, long close to Fisher and former president of the National City Bank of New York, by James H. Rand, Jr., of Remington Rand, and by Magnus W. Alexander, head of the National Industrial Conference Board.

Other members of the Committee for the Nation included: Fred H. Sexauer, president of the Dairymen’s League Cooperative Association; Frederic H. Frazier, chairman of the board of the General Baking Company; automobile magnate E.L. Cord; Lessing J. Rosenwald, chairman, Sears, Roebuck; Samuel S. Fels of Fels and Company; Philip K. Wrigley, president of William Wrigley Company; John Henry Hammond, chairman of the board of Bangor and Aroostook Railroad; Edward A. O’Neal, head of the American Farm Bureau Federation; L.J. Taber, head of the National Grange; F.R. Wurlitzer, vice president of Rudolph Wurlitzer Manufacturing Company; William J.

McAveeny, president of Hudson Motor Company; Frank E. Gannett of the Gannett Newspapers; and Indiana banker William A.

Wirt. Interestingly enough, this same group of highly conservative industrialists was later to become the Committee for Constitutional Government, the major anti–New Deal propaganda group of the late 1930s and 1940s. Yet the committee was the major proponent of the inflationist policy of the early New Deal in reflating and abandoning the gold standard.

The New Deal and the

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International Monetary System

Also associated with the Committee for the Nation was another great influence on Franklin Roosevelt’s decision: agricultural economist George F. Warren of Cornell, who, along with his colleague Frank A. Pearson, was the inspiration for the reflationist Roosevelt program of continually raising the buying price of gold.

The Committee for the Nation at first included several hundred industrial and agricultural leaders, and within a year its membership reached over two thousand. Its recommendations, beginning with going off gold and embargoing gold exports, and continuing through devaluing the dollar and raising the price of gold, were fairly closely followed by the Roosevelt administration.16 For his part, Irving Fisher, in response to a request for advice by President-elect Roosevelt, had strongly urged at the end of February a frankly inflationist policy of reflation, devaluation, and leaving the gold standard without delay.17 By April 19, when Roosevelt had cast the die for this policy, Fisher exulted, “Now I
am
sure—as far as we ever can be sure of anything—that we are going to snap out of this depression fast. I am now one of the happiest men in the world.” In the same letter to his wife, an heiress of the substantial Hazard family fortune, Fisher added,

My next big job is to raise money for ourselves. Probably we’ll have to go to Sister [his wife’s sister Caroline] again. . . . I have defaulted payments the last few weeks, because I did not think it was fair to ask Sister for money when there was a real chance that I could never pay it back. I mean that if F.D.R. had followed Glass we would have been pretty surely ruined. So would Allied Chemical [in which much of his wife’s family fortune was invested], and the U.S. Govt. . . .
Now
I can go to Sister with a clean conscience.18

16Fisher,
Stabilised Money
, pp. 108–09, 118–22, 413–14; and Jordan Schwarz, ed., 1
933: Roosevelt’s Decision, the United States Leaves the Gold
Standard,
(New York: Chelsea House, 1969), pp. 44–60, 116–20.

17Schwarz,
1933: Roosevelt’s Decision
, pp. 27–35.

18Fisher,
My Father Irving Fisher
, pp. 273–76.

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

If Irving Fisher’s interest was personal as well as ideological, economic interests also underlay the concern of the Committee for the Nation. The farm groups wanted farm prices driven up, including farm export prices, which necessarily increase in terms of other currencies whenever a currency is devalued. As for the rest of the committee and other inflationists, Herbert Feis notes:

By the spring of 1933 diverse organizations and groups were crying aloud for some kind of monetary inflation or devaluation, or both. Most effective, probably, was the Committee for the Nation. Among its members were prominent merchants, such as the head of Sears, Roebuck, some journalists, some Wall Street operators and some foreign exchange speculators. Their purpose was to get the United States off the gold standard and to bring about devaluation of the dollar from which they would profit either as speculators in foreign exchange or as businessmen. Another group, more conservative, who stood to gain by devaluation were those who had already exported gold or otherwise acquired liquid deposits in foreign banks. They conceived that they were merely protecting the value of their capital. . . . Then there were the exporters—especially of farm products—who had been at a disadvantage ever since Great Britain had gone off the gold standard and the value of sterling had fallen much below its previous parity with the dollar.19