A History of Money and Banking in the United States: The Colonial Era to World War II (55 page)

38Hughes was both attorney and chief foreign policy adviser to Rockefellers’ Standard Oil of New Jersey. On Hughes’s close ties to the Rockefeller complex and their being overlooked even by Hughes’s biographers, see the important but neglected article by Thomas Ferguson,

“From Normalcy to New Deal: Industrial Structure, Party Competition, and American Public Policy in the Great Depression,”
International
Organization
38 (Winter 1984): 67.

39“Morrow and Thomas Cochran, although moving spirits in the whole drive, remained in the background. The foreground was filled by the large, the devoted, the imperturbable figure of Frank Stearns.” Harold Nicolson,
Dwight Morrow
(New York: Harcourt, Brace, 1935), p. 232. Cochran, a leading Morgan partner, and board member of Bankers
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A History of Money and Banking in the United States:
The Colonial Era to World War II

Furthermore, when Secretary of State Charles Evans Hughes returned to private law practice in the spring of 1925, Coolidge offered his post to then-veteran Wall Street attorney and former Secretary of State and of War Elihu Root, who might be called the veteran leader of the “Morgan bar.” Root was at one critical time in Morgan affairs, J.P. Morgan, Sr.’s, personal attorney.

After Root refused the secretary of state position, Coolidge was forced to settle for a lesser Morgan light, Minnesota attorney Frank B. Kellogg.40 Undersecretary of state to Kellogg was Joseph C. Grew, who had family connections with the Morgans (J.P. Morgan, Jr., had married a Grew), while, in 1927, two highly placed Morgan men were asked to take over relations with troubled Mexico and Nicaragua.41

The year 1924 saw the Morgans at the pinnacle of their political power in the United States. President Calvin Coolidge, friend and protégé of Morgan partner Dwight Morrow, was deeply admired by Jack Morgan, who saw the president as a rare blend of deep thinker and moralist. Morgan wrote a friend: “I have never seen any President who gives me just the feeling of confidence in the Country and its Trust Company, Chase Securities Corporation, and Texas Gulf Sulphur Company, was, by the way, a Midwesterner and not an Amherst graduate and therefore had no reasons of friendship to work strongly for Coolidge. Stearns, incidentally, had not met Coolidge before being introduced to him by Morrow. Philip H. Burch, Jr.,
Elites in American History,
vol. 2
, The Civil War to the New Deal
(New York Holmes and Meier, 1981), pp. 274–75, 302–03.

40In addition to being a director of the Merchants National Bank of St.

Paul, Kellogg had been general counsel for the Morgan-dominated U.S.

Steel Corporation for the Minnesota region, and most importantly, the top lawyer for the railroad magnate James J. Hill, long closely allied with Morgan interests.

41Morgan partner Dwight Morrow became ambassador to Mexico that year, and Nicaraguan affairs came under the direction of Henry L.

Stimson, Wall Street lawyer and longtime leading disciple of Elihu Root, and a partner in Root’s law firm. Burch,
Elites
, pp. 277, 305.

The Gold-Exchange Standard in the Interwar Years
381

institutions, and the working out of our problems, that Mr.

Coolidge does.”

On the other hand, the Democratic presidential candidate that year was none other than John W. Davis, senior partner of the Wall Street law firm of Davis Polk and Wardwell, and the chief attorney for J.P. Morgan and Company. Davis, a protégé of the legendary Harry Davison, was also a personal friend and backgammon and cribbage partner of Jack Morgan’s. Whoever won the 1924 election, the Morgans couldn’t lose.42

THE ESTABLISHMENT OF THE

NEW GOLD STANDARD OF THE 1920S

BULLION, NOT COIN

One of the reasons the British were optimistic that they could succeed in their basic maneuver in the 1920s is that they were not really going back to the gold standard at all. They were attempting to clothe themselves in the prestige of gold while trying to avoid its anti-inflationary discipline. They went back, not to the classical gold standard, but to a bowdlerized and essentially sham version of that venerable standard.

In the first place, under the old gold standard, the nominal currency, whether issued by government or bank, was redeemable in gold coin at the defined weight. The fact that people were able to redeem in and use gold for their daily transactions kept a strict check on the overissue of paper. But in the new gold standard, British pounds would not be redeemable in gold coin at all: only in “bullion” in the form of bars worth many thousands of pounds. Such a gold standard meant that gold could not be redeemed domestically at all; bars could hardly circulate for daily transactions, so that they could only be used by wealthy international traders.

42Chernow,
House of Morgan
, pp. 254–55.

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

The decision of the British Cabinet on March 20, 1925, to go back to gold was explicitly predicated on three conditions. First was the attainment of a $300 million credit line from the United States. Second was that the bank rate would not increase upon announcement of the decision, so that there would be no contractionary or anti-inflationary pressure exercised by the Bank of England. And third and perhaps most important was that the new standard would be gold bullion and not gold coin.

The chancellor of the Exchequer would persuade the large

“clearing banks” to “use every effort . . . to discourage the use of gold for internal circulation in this country.” The bankers were warned that if they could not provide satisfactory assurances that they would not redeem in gold coin, “it would be necessary to introduce legislation on this point.” The Treasury, in short, wanted to avoid “psychologically unfortunate and controversial legislation” barring gold redemption within the country, but at the same time wanted to guard against the risk of “internal drain” (that is, redemption in the property to which they were entitled) from foreign agents, the irresponsible public, or “sound currency fanatics.”43 The bankers, headed by Reginald McKenna, were of course delighted not to have to redeem in gold, but wanted legislation to formalize this desired condition.

Finally, the government and the bankers agreed happily on the following: the bankers would not hold gold, or acquire gold coins or bullion for themselves, or for any customers residing in the United Kingdom. The Treasury, for its part, redrafted its banking report to allow for legislation to prevent any internal redemption if necessary, and “enforce” such a ban on the all-too-willing bankers.

Under the Gold Standard Act of 1925, then, pounds were convertible into gold, not in coin, but in bars of no less than 400

gold ounces, that is $1,947. The new gold standard was not even a full gold bullion standard, since there was to be no redemption 43The latter phrase is in a letter from Sir Otto Niemeyer to Winston Churchill, February 25, 1925. Moggridge,
British Monetary Policy
, p. 83.

The Gold-Exchange Standard in the Interwar Years
383

at all in gold to British residents; gold bullion was only due to pound-holders outside Great Britain. Britain was now only on an “international gold bullion standard.”44

The purpose of redemption in gold bullion only, and only to foreigners, was to take control of the money supply away from the public, and place it in the hands of the governments and central bankers, permitting them to pyramid monetary inflation upon gold centralized into their hands. Thus, Norman, when asked by the governor of the Bank of Norway for his advice about returning to gold, urged Norway to return only in gold bars, and only for international payments. Norman’s reasoning is revealing:

[I]n Norway the convenience of paper currency is appreciated, and confidence in the value of money does not depend upon the existence of gold coin. . . . Demand is rendered more inelastic wherever the principle of gold circulation, for currency or for hoarding, is accepted, and any inelasticity may be dangerous. . . . I do not believe that gold in circulation can safely be regarded as a reserve that can be made available in case of need, and I think that even in times of abundance hoarding is bad, because it weakens the command of the Central Bank over the monetary circulation and hence over the purchasing power of the monetary unit.

For these reasons, I suggest that your best course would be to establish convertibility of notes into gold bars only and in amounts which will ensure that the use of monetary gold can be limited, in case of need, to the settlement of international balances.45, 46

44Ibid., pp. 79–83.

45Clay,
Lord Norman
, pp. 153–54; and Palyi,
Twilight of Gold
, pp. 121–23.

46Contrast to Norman these insights of pro-gold-coin-standard economist Walter Spahr:

A gold-coin standard provides the people with direct control over the government’s use and abuse of the public purse. . . . When governments or banks issue money or other promises to pay in a manner that raises doubts as to their
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A History of Money and Banking in the United States:
The Colonial Era to World War II

Norway, and indeed all the countries returning to gold, heeded Norman’s advice. The way was paved for this development by the fact that, during World War I, the European countries had systematically taken gold coins out of circulation and replaced them with paper notes and deposits. During the 1920s, virtually the only country still on the classical gold-coin standard was the United States.

Despite this tradition, it was still necessary for Monty Norman and the Bank of England to exert considerable pressure to force many European nations to return to gold bullion rather than gold coin. Thus, Dr. William Adams Brown, Jr., writes: In some countries the reluctance to adopt the gold bullion standard was so great that some outside pressure was needed to overcome it . . . [that is] strong representations on the part of the Bank of England that such action would be a contribution to the general success of the stabilization effort as a whole. Without the informal pressure . . . several efforts to return in one step to the full gold standard would undoubtedly have been made.47

THE GOLD-EXCHANGE STANDARD, NOT GOLD

The major twist, the major deformation of a genuine gold standard perpetrated by the British in the 1920s, was not the gold bullion standard, unfortunate though that was. The major value as compared with gold, those people entertaining such doubts will demand gold in lieu of . . . paper money, or bank deposits. . . . The gold-coin standard thus places in the hands of every individual who uses money some power to express his approval or disapproval of the government’s management of the people’s monetary and fiscal affairs.

(Walter E. Spahr,
Monetary Notes
[December 1, 1947], p. 5, cited in Palyi,
Twilight of Gold
, p. 122) 47Williams Adams Brown, Jr.,
The International Gold Standard
Reinterpreted, 1914–1934
(New York: National Bureau of Economic Research, 1940), 1, p. 355.

The Gold-Exchange Standard in the Interwar Years
385

inflationary camouflage was to return, not to a gold standard at all, but to a “gold-exchange” standard. In a gold-exchange standard, only one country, in this case Great Britain, is on a gold standard in the sense that its currency is actually redeemable in gold, albeit only gold bullion for foreigners. All other European countries, even though nominally on a gold standard, were actually on a pound-sterling standard. In short, a typical European country, say, “Ruritania,” would hold as reserves for its currency, not gold but British pounds sterling, in practice, bills or deposits payable in sterling at London. Anyone who demanded redemption for Ruritanian “rurs,” then, would receive British pounds rather than gold.

The gold-exchange standard, then, cunningly broke the classical gold standard’s stringent limits on monetary and credit expansion, not only for the other European countries, but also for the base or key currency country, Great Britain itself. Under the genuine gold standard, inflating the number of pounds in circulation would cause pounds to flow into the hands of other countries, which would demand gold in redemption. Thereby gold would move out of British bank and currency reserves, and pressure would be put on Britain to end its inflation and to contract credit. But, under the gold-exchange standard, the process was very different. If Britain inflated the number of pounds in circulation, the result, again, was a deficit in the balance of trade and sterling balances piling up in the accounts of other nations. But now that these nations have been induced to use pounds as their reserves rather than gold, these nations, instead of redeeming the pounds in gold, would inflate, and pyramid a multiple of their currency on top of their increased stock of pounds. Thus, instead of checking inflation, a gold-exchange standard encourages all countries to inflate on top of their increased supply of pounds.

Britain, too, is now able to “export” her inflation to other nations without paying a price. Thus, in the name of sound money and a check against inflation, a pseudo gold standard was instituted, designed to induce a double-inverted pyramid of inflation, all on top of British pounds, the whole process supported by a gold stock that does not dwindle.

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

Since all other countries were sucked into the inflationary gold-exchange trap, it seemed that the only nation Britain had to worry about was the United States, the only country to continue on a genuine gold standard. That was the reason it became so vitally important for Britain to get the United States, through the Morgan connection, to go along with this system and to inflate, so that Britain would not lose gold to the United States.

For the other nations of Europe, it became an object of British pressure and maneuvering to induce these countries themselves to return to a gold standard, with several vital provisions: (a) that
their
currencies too be overvalued, so that British exports would not suffer, and British imports would not be overstimulated—in other words, so that
they
join Britain in overvaluing their currencies; (b) that each of these countries adopt their own central bank, with the help of Britain, which would inflate their currencies in collaboration with the Bank of England; and (c) that they return, not to a genuine gold standard, but to a gold-exchange standard, keeping their balances in London and refraining from exercising their legal right to redeem those sterling balances in gold.