A History of Money and Banking in the United States: The Colonial Era to World War II (54 page)

Finally, economist Adolph C. Miller, professor at Berkeley, had married into the wealthy, Morgan-connected Sprague family of Chicago. At that period, Secretary of Treasury McAdoo and his longtime associate, John Skelton Williams, comptroller of the currency, were automatically
The Gold-Exchange Standard in the Interwar Years
373

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 Federal Reserve Board members, but only ex officio. Thus, setting aside the two ex officio members, the Federal Reserve Board began its existence with one Kuhn, Loeb member, one Morgan man, one Rockefeller person, a prominent Alabama banker with both Morgan and Rockefeller connections, and an economist with family ties to Morgan interests.

When we realize that the Rockefeller and Kuhn, Loeb interests were allied during this era, we can see that the Federal Reserve Board scarcely could be considered under firm Morgan control. Rothbard, “The Federal Reserve,” p. 108.

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

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 collaboration 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.

30Clay,
Lord Norman
, p. 487; and Andrew Boyle,
Montagu Norman
(London: Cassell, 1967), p. 198.

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375

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

31Chernow,
House of Morgan
, pp. 246, 244.

32Too much has been made of the fact that this discovery of the inflationary power of open market purchases by the Fed was the accidental result of a desire to increase Fed earnings. The result was not
wholly
unexpected. Thus, Strong, in April 1922, wrote to Undersecretary of the Treasury S. Parker Gilbert that one of his major reasons for these open market purchases was “to establish a level of interest rates . . . which would facilitate foreign borrowing in this country . . . and facilitate business improvement.” Strong to Gilbert, April 18, 1922. Gilbert went on to become a leading partner of the House of Morgan. See Murray N. Rothbard,
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A History of Money and Banking in the United States:
The Colonial Era to World War II

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
America’s Great Depression,
4th ed. (New York: Richardson and Snyder,

[1963] 1983), p. 321, n. 2. See also ibid., pp. 123–24, 135; Chandler,
Benjamin Strong,
pp. 210–11; and Harold L. Reed,
Federal Reserve Policy,
1921–1930
(New York: McGraw-Hill, 1930), pp. 14–41.

33In terms of currency plus total adjusted deposits. If savings and loan shares are added, the money supply rose by 9 percent during 1924.

Rothbard,
America’s Great Depression
, pp. 88, 102–05.

The Gold-Exchange Standard in the Interwar Years
377

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 34Strong to Pierre Jay, April 23 and April 28, 1924. Strong to Andrew Mellon, May 27, 1924. Moggridge,
British Monetary Policy
, pp. 51–53; Rothbard,
America’s Great Depression
, pp. 133–34; Chandler,
Benjamin
Strong
, pp. 283–84, 293ff.

35Rothbard,
America’s Great Depression
, p. 133; Chandler,
Benjamin Strong
, pp. 284, 308 ff., 312 ff.; and Moggridge,
British Monetary Policy
, pp. 60–62.

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

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 mas-terful 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 36Robbins,
Great Depression,
p. 80; Rothbard,
America’s Great Depression
, p. 133; and Benjamin H. Beckhard, “Federal Reserve Policy and the Money Market, 1923–1931,” in
The New York Money Market,
Beckhart, et al. (New York: Columbia University Press, 1931), 4, p. 45.

37Grenfell to J.P. Morgan, Jr., March 23, 1925; Chernow,
House of
Morgan
, pp. 274–75.

The Gold-Exchange Standard in the Interwar Years
379

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