A History of Money and Banking in the United States: The Colonial Era to World War II (63 page)

the cloak of the prestige of gold, was destined to last a great deal longer than the British venture, finally collapsing at the end of the 1960s.113

113For an overview of the monetary struggles and policies of the New Deal, see Murray N. Rothbard, “The New Deal and the International Monetary System,” in
The Great Depression and New Deal Monetary Policy
(San Francisco: Cato Institute, [1976] 1980), pp. 79–129. Some of the details in this account of the economic and financial interests involved have been superseded by Ferguson, “From Normalcy to New Deal,” pp.

41–93; Thomas Ferguson, “Industrial Conflict and the Coming of the New Deal: The Triumph of Multinational Liberalism in America,” in
The
Rise and Fall of the New Deal Order, 1930–1980,
Steve Fraser and Gary Gerstle, eds. (Princeton, N.J.: Princeton University Press, 1989), pp. 3–31.

On the road to Bretton Woods, see G. William Domhoff,
The Power Elite
and the State
(New York: Aldine de Gruyter, 1990), pp. 114–81. On the Harriman influence in the New Deal, see Philip H. Burch, Jr.,
Elites in
American History
, vol. 3,
The New Deal to the Carter Administration
(New York: Holmes and Meier, 1980), pp. 20–31.

PART 5

THE NEW DEAL AND THE

INTERNATIONAL MONETARY SYSTEM

THE NEW DEAL AND THE

INTERNATIONAL MONETARY SYSTEM

The international monetary policies of the New Deal may be divided into two decisive and determining actions, one at the beginning of the New Deal and the other at its end. The first was the decision, in early 1933, to opt for domestic inflation and monetary nationalism, a course that helped steer the entire world onto a similar path during the remainder of the decade. The second was the thrust, during World War II, to reconstitute an international monetary order, this time built on the dollar as the world’s “key” and crucial currency. If we wished to use lurid terminology, we might call these a decision for dollar nationalism and dollar imperialism respectively.

THE BACKGROUND OF THE 1920S

It is impossible to understand the first New Deal decision for dollar nationalism without setting that choice in the monetary world of the 1920s, from which the New Deal emerged. Similarly, it is impossible to understand the monetary system of the 1920s without reference to the pre–World War I monetary order and its breakup during the war; for the world of the 1920s was an attempt to reconstitute an international monetary order,

[
Originally published in
Watershed of Empire: Essays on New Deal Foreign Policy,
Leonard P. Liggio and James J. Martin, eds. (Colorado Springs,
Colo.: Ralph Myles, 1976).
—Ed.]

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

seemingly one quite similar to the
status quo ante
, but actually based on very different principles and institutions.

The prewar monetary order was genuinely “international”; that is, world money rested not on paper tickets issued by one or more governments but on a genuine economic commodity—

gold—whose supply rested on market supply-and-demand principles. In short, the international gold standard was the monetary equivalent and corollary of international free trade in commodities. It was a method of separating money from the State just as enterprise and foreign trade had been so separated.

In short, the gold standard was the monetary counterpart of laissez-faire in other economic areas.

The gold standard in the prewar era was never “pure,” no more than was laissez-faire in general. Every major country, except the United States, had central banks which tried their best to inflate and manipulate the currency. But the system was such that this intervention could only operate within narrow limits. If one country inflated its currency, the inflation in that country would cause the banks to lose gold to other nations, and consequently the banks, private and central, would before long be brought to heel. And while England was the world financial center during this period, its predominance was market rather than political, so it too had to abide by the monetary discipline of the gold standard. As H. Parker Willis described it: Prior to the World War the distribution of the metallic money of gold standard countries had been directed and regulated by the central banks of the world in accordance with the generally known and recognized principles of international distribution of the precious metals. Free movement of these metals and freedom on the part of the individual to acquire and hold them were general. Regulation of foreign exchange . . . existed only sporadically . . . and was so conducted as not to interfere in any important degree with the disposal of holding of specie by individuals or by banks.1

1H. Parker Willis,
The Theory and Practice of Central Banking
(New York: Harper and Bros., 1936), p. 379.

The New Deal and the

439

International Monetary System

The advent of the World War disrupted and rended this economic idyll, and it was never to return. In the first place, all of the major countries financed the massive war effort through an equally massive inflation, which meant that every country except the United States, even including Great Britain, was forced to go off the gold standard, since they could no longer hope to redeem their currency obligations in gold. The international order not only was sundered by the war, but also split into numerous separate, competing, and warring currencies, whose inflation was no longer subject to the gold restraint. In addition, the various governments engaged in rigorous exchange control, fixing exchange rates and prohibiting outflows of gold; monetary warfare paralleled the broader economic and military conflict.

At the end of the war, the major powers sought to reconstitute some form of international monetary order out of the chaos and warring economic blocs of the war period. The crucial actor in this drama was Great Britain, which was faced with a series of dilemmas and difficulties. On the one hand, Britain not only aimed at re-establishing its former eminence, but it meant to use its victorious position and its domination of the League of Nations to work its will upon the other nations, many of them new and small, of post-Versailles Europe. This meant its monetary as well as its general political and economic dominance.

Furthermore, it no longer felt itself bound by old-fashioned laissez-faire restraints from exerting frankly political control, nor did it any longer feel bound to observe the classical gold-standard restraints against inflation.

While Britain’s appetite was large, its major dilemma was its weakness of resources. The wracking inflation and the withdrawal from the gold standard had left the United States, not Great Britain, as the only “hard,” gold-standard country. If Great Britain were to dominate the postwar monetary picture, it would somehow have to take the United States into camp as its willing junior partner. From the classic prewar pound-dollar par of $4.86 to the pound, the pound had fallen on the international
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A History of Money and Banking in the United States:
The Colonial Era to World War II

money markets to $3.50, a substantial 30-percent drop, a drop that reflected the greater degree of inflation in Great Britain than in the U.S. The British then decided to constitute a new form of international monetary system, the “gold-exchange standard,” which it finally completed in 1925. In the classical, prewar gold standard, each country kept its reserves in gold, and redeemed its paper and bank currencies in gold coin upon demand. The new gold-exchange standard was a clever device to permit Britain and the other European countries to remain inflated and to continue inflating, while enlisting the United States as the ultimate support for all currencies. Specifically, Great Britain would keep its reserves, not in gold but in dollars, while the smaller countries of Europe would keep
their
reserves, not in gold but in pounds sterling. In this way, Great Britain could pyramid inflated currency and credit on top of dollars, while Britain’s client states could pyramid
their
currencies, in turn, on top of pounds. Clearly, this also meant that
only
the United States would remain on a gold-coin standard, the other countries

“redeeming” only in foreign exchange. The instability of this system, with pseudo gold-standard countries pyramiding on top of an increasingly shaky dollar-gold base, was to become evident in the Great Depression.

But the British task was not simply to induce the United States to be the willing guarantor of all the shaky and inflated currencies of war-torn Europe. For Great Britain might well have been able to return to the original form of gold standard at a new, realistic, depreciated parity of $3.50 to the pound. But it was not willing to do so. For the British dream was to restore, even more glowingly than before, British financial preeminence, and if it depreciated the pound by 30 percent, it would thereby acknowledge that the dollar, not the pound, was the world financial center. This it was fiercely unwilling to do; for restoration of dominance, for the saving of financial face, it would return at the good old $4.86 or bust in the attempt. And bust it almost did. For to insist on returning to gold at $4.86, even on the new, vitiated, gold-exchange basis, was to mean that the pound would be absurdly expensive in relation to the dollar
The New Deal and the

441

International Monetary System

and other currencies, and would therefore mean that at current inflated price levels, Britain’s exports—its economic lifeline—

would be severely crippled, and a general depression would ensue. And indeed, Britain suffered a severe depression in her export industries—particularly coal and textiles—throughout the 1920s. If she insisted on returning at the overvalued $4.86, there was only one hope for keeping her exports competitive in price: a massive domestic deflation to lower price and wage levels. While a severe deflation is difficult at best, Britain now found it impossible, for the new system of national unemployment insurance and the new-found strength of trade unions made wage-cutting politically unthinkable.

But if Britain would not or could not make her exports competitive by returning to gold at a depreciated par or by deflating at home, there was a third alternative which it could pursue, and which indeed marked the key to the British international economic policy of the 1920s: it could induce or force
other
countries to inflate, or themselves to return to gold at overvalued pars; in short, if it could not clean up its own economic mess, it could contrive to impose messes upon everyone else. If it did not do so, it would see inflating Britain lose gold to the United States, France, and other “hard-money” countries, as indeed happened during the 1920s; only by contriving for other countries, especially the U.S., to inflate also, could it check the loss of gold and therefore halt the collapse of the whole jerry-built international monetary structure.

In the short run, the British scheme was brilliantly conceived, and it worked for a time; but the major problem went unheeded: if the United States, the base of the pyramid and the sole link of all these countries to gold and hard money, were to inflate unduly, the
dollar too
would become shaky, it would lose gold at home and abroad, and the dollar would itself eventually collapse, dragging the entire structure down with it. And this is essentially what happened in the Great Depression.

In Europe, England was able to use its domination of the powerful Financial Committee of the League of Nations to
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A History of Money and Banking in the United States:
The Colonial Era to World War II

cajole or bludgeon country after country to (1) establish central banks that would collaborate closely with the Bank of England; (2) return to gold
not
in the classical gold-coin standard but in the new gold-exchange standard which would permit continued inflation by all the countries; and (3) return to this new standard at overvalued pars so that European exports would be hobbled vis-à-vis the exports of Great Britain. The Financial Committee of the League of Nations was largely dominated and run by Britain’s major financial figure, Montagu Norman, head of the Bank of England, working through such close Norman associates on the committee as Sir Otto Niemeyer and Sir Henry Strakosch, leaders in the concept of close central bank collaboration to “stabilize” (in practice, to raise) price levels throughout the world. The distinguished British economist Sir Ralph Hawtrey, director of Financial Studies at the British Treasury, was one of the first to advocate this system, as well as to call for the general European adoption of a gold-exchange standard. In the spring of 1922, Norman induced the league to call the Genoa Conference, which urged similar measures.2

But the British scarcely confined their pressure upon European countries to resolutions and conferences. Using the carrot of loans from England and the United States and the stick of political pressure, Britain induced country after country to order its monetary affairs to suit the British—that is, to return only to a gold-exchange standard at overvalued pars that would hamper their own exports and stimulate imports from Great Britain. Furthermore, the British also used their inflated, cheap credit to lend widely to Europe in order to stimulate their own flagging export market. A trenchant critique of British policy was recorded in the diary of Émile Moreau, governor of the Bank of France, a country that clung to the gold standard and to a hard-money policy, and was thereby instrumental in bringing down the pound and British financial domination in 1931. Moreau wrote: 2See Murray N. Rothbard,
America’s Great Depression,
3rd ed. (Kansas City, Mo.: Sheed and Ward, 1975), pp. 159ff.

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443

International Monetary System

England having been the first European country to reestablish a stable and secure money [
sic
] has used that advantage to establish a basis for putting Europe under a veritable financial domination. The Financial Committee [of the League of Nations] at Geneva has been the instrument of that policy. The method consists of forcing every country in monetary difficulty to subject itself to the Committee at Geneva, which the British control. The remedies prescribed always involve the installation in the central bank of a foreign supervisor who is British or designated by the Bank of England, and the deposit of a part of the reserve of the central bank at the Bank of England, which serves both to support the pound and to fortify British influence. To guarantee against possible failure they are careful to secure the cooperation of the Federal Reserve Bank of New York.