A History of Money and Banking in the United States: The Colonial Era to World War II (64 page)

Moreover, they pass on to America the task of making some of the foreign loans if they seem too heavy, always retaining the political advantage of these operations.

England is thus completely or partially entrenched in Austria, Hungary, Belgium, Norway, and Italy. She is in the process of entrenching herself in Greece and Portugal. She seeks to get a foothold in Yugoslavia and fights us cunningly in Rumania. . . . The currencies will be divided into two classes. Those of the first class, the dollar and the pound sterling, based on gold and those of the second class based on the pound and the dollar—with a part of their gold reserves being held by the Bank of England and the Federal Reserve Bank of New York. The latter moneys will have lost their independence.3

3Émile Moreau diary entry of February 6, 1928. Lester V. Chandler,
Benjamin Strong, Central Banker
(Washington, D.C.: Brookings Institution, 1958) pp. 379–80. On the gold-exchange standard and European countries being induced to overvalue their currencies, see H. Parker Willis, “The Breakdown of the Gold Exchange Standard and its Financial Imperialism,”
The Annalist
(October 16, 1931): 626 ff.; and William Adams Brown, Jr.,
The International Gold Standard Reinterpreted, 1914–1934
(New York: National Bureau of Economic Research, 1940), 2, pp. 732–49.

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

Inducing the United States to support and bolster the pound and the gold-exchange system was vital to Britain’s success, and this cooperation was ensured by the close ties that developed between Montagu Norman and Benjamin Strong, governor of the Federal Reserve Bank of New York, who had seized effective and nearly absolute control of Federal Reserve operations from his appointment at the inception of the Fed in 1914 until his death in 1928. This control over the Fed was achieved over the opposition of the Federal Reserve Board in Washington, which generally opposed or grumbled at Strong’s Anglophile policies. Strong and Norman made annual trips to visit each other, all of which were kept secret not only from the public but from the Federal Reserve Board itself.

Strong and the Federal Reserve Bank of New York propped up England and the gold-exchange standard in numerous ways. One was direct lines of credit, which the New York bank extended, in 1925 and after, to Britain, Belgium, Poland, and Italy, to subsidize their going to a gold-exchange standard at overvalued pars. More directly significant was a massive monetary inflation and credit expansion which Strong generated in the United States in 1924 and again in 1927, for the purpose of propping up the pound. The idea was that gold flows from Britain to the United States would be checked and reversed by American credit expansion, which would prop up or raise prices of American goods, thereby stimulating imports from Great Britain, and also lower interest rates in the U.S. as compared to Britain. The fall in interest rates would further stimulate flows of gold from the U.S. to Britain and thereby check the results of British inflation and overvaluation of the pound. Both times, the inflationary injection worked, and prevented Britain from reaping the results of its own inflationary policies, but at the high price of inflation in the United States, a dangerous stock market and real estate boom, and an eventual depression.

At the secret central bank conference of July 1927 in New York, called at the behest of Norman, Strong agreed to this inflationary credit expansion over the objections of Germany and
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France, and Strong gaily told the French representative that he was going to give “a little
coup de whiskey
to the stock market.” It was a
coup
for which America and the world would pay dearly.4

The Chicago business and financial community, not having Strong’s ties with England, protested vigorously against the 1927 expansion, and the Federal Reserve Bank of Chicago held out as long as it could against the expansion of cheap money and the lowering of interest rates. The
Chicago Tribune
went so far as to call for Strong’s resignation, and perceptively charged that discount rates were being lowered in the interests of Great Britain. Strong, however, sold the policy to the middle West with the rationale that its purpose was to help the American farmer by means of cheap credit. In contrast, the English financial community hailed the work of Norman in securing Strong’s support, and
The Banker
of London lauded Strong as “one of the best friends England ever had.”
The Banker
praised the “energy and skillfullness he [Strong] has given to the service of England” and exulted that “his name should be associated with that of Mr. [Walter Hines] Page as a friend of England in her greatest need.”5

4On the
coup de whiskey
, see Charles Rist, “Notice Biographique,”
Revue d’Economie Politique
(November–December, 1955): 1005; translation mine. On the Strong-Norman collaboration, see also Lawrence E. Clark,
Central Banking Under the Federal Reserve System
(New York: Macmillan, 1935), pp. 307–21; and Benjamin M. Anderson,
Economics and the Public
Welfare: Financial and Economic History of the United States, 1914–1946

(New York: D. Van Nostrand, 1949).

5
The Banker
, June 1, 1926, and November 1928. In Clark,
Central
Banking Under the Federal Reserve,
pp. 315–16. See also Anderson, pp.

182–83; Benjamin H. Beckhart, “Federal Reserve Policy and the Money Market, 1923–1931,” in
The New York Money Market
(New York; Columbia University Press, 1931), 4, pp. 67ff. In the autumn of 1926, a leading American banker admitted that bad consequences would follow Strong’s cheap-money policy, but added, “that cannot be helped. It is the price we must pay for helping Europe.” H. Parker Willis, “The Failure of the Federal Reserve,”
North American Review
(1929): 553.

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

A blatant example of Strong’s intervention to help Norman and his policy occurred in the spring of 1926, when one of Norman’s influential colleagues proposed a full gold-coin standard in India. At Norman’s request, Strong and a team of American economists rushed to England to ward off the plan, testifying that a gold drain to India would check inflation in other countries, and instead they successfully backed the Norman policy of a gold-exchange standard and domestic “economizing” of gold to permit domestic expansion of credit.6

The intimate Norman-Strong collaboration for joint inflation and the gold-exchange standard was not at all an accident of personality; it was firmly grounded on the close ties that both of them had with the House of Morgan and the Morgan interests. Strong himself was a product of the Morgan nexus; he had been the head of the Morgan-oriented Bankers Trust Company before becoming governor of the New York Fed, and his closest ties were with Morgan partners Henry P. Davison and Dwight Morrow, who induced him to assume his post at the Federal Reserve. J.P. Morgan and Company, in turn, was an agent of the British government and of the Bank of England, and its close financial ties with England, its loans to England and tie-ins with the American export trade, had been highly influential in inducing the United States to enter World War I on England’s side.7 As for Montagu Norman, his grandfather had been a partner in the London banking firm of Brown, Shipley, and Company, and of the affiliated New York firm of Brown Brothers and Company, a powerful investment banking firm long associated with the House of Morgan. Norman himself had been a partner of Brown, Shipley and had 6See Rothbard,
America’s Great Depression,
p. 138; and Chandler,
Benjamin Strong,
pp. 356ff.

7Charles Callan Tansill,
America Goes to War
(Boston: Little, Brown, 1938), pp. 70–134. On the aid given by Benjamin Strong to the House of Morgan and the loans to England and France, see ibid., pp. 87–88, 96–101, 106–08, 118–32.

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worked for several years in the offices of Brown Brothers in the United States.

Moreover, J.P. Morgan and Company played a direct collaborative role with the New York Fed, lending $100 million of its own to Great Britain in 1925 to facilitate its return to gold, and also collaborating in futile loans to prop up the shaky European banking system during the financial crisis of 1931. It is no wonder that in his study of the Federal Reserve System during the pre–New Deal era, Dr. Clark concluded that “the New York Reserve Bank in collaboration with a private international banking house [J.P. Morgan and Company] determined the policy to be followed by the Federal Reserve System.”8

The major theoretical rationale employed by Strong and Norman was the idea of governmental collaboration to “stabilize” the price level. The laissez-faire policy of the classical, prewar gold standard meant that prices would be allowed to find their own level in accordance with supply and demand, and without interference by central bank manipulation. In practice, this meant a secularly falling price level, as the supply of goods rose over time in accordance with the long-run rise in productivity.

And
in practice
, price stabilization really meant price
raising
: either keeping prices up when they were falling, or “reflating” prices by raising them through inflationary action by the central banks. Price stabilization therefore meant the replacement of the classical, laissez-faire gold standard by “managed money,” by inflationary credit expansion stimulated by the central banks.

In England, it was, as we have seen, no accident that the lead in advocating price stabilization was taken by Sir Ralph Hawtrey and various associates of Montagu Norman, including Sir Josiah Stamp, chairman of Midland Railways and a director of the Bank of England, and two other prominent directors—Sir Basil Blackett and Sir Charles Addis.

8Clark,
Central Banking Under the Federal Reserve System
, p. 343.

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

It long has been a myth of American historiography that bankers and big businessmen are invariably believers in

“hard money” as against cheap credit or inflation. This was certainly not the experience of the New Deal or the pre–New Deal era.9 While the most articulate leaders of the price stabilizationists were academic economists led by Professor Irving Fisher of Yale, Fisher was able to enlist in his Stable Money League (founded 1921) and its successor, the Stable Money Association, a host of men of wealth, bankers and businessmen, as well as labor and farm leaders. Among those serving as officers of the league and association were: Henry Agard Wallace, editor of
Wallace’s Farmer
and secretary of agriculture in the New Deal; the wealthy John G. Winant, later governor of New Hampshire; George Eastman of the Eastman-Kodak family; Frederick H. Goff, head of the Cleveland Trust Company; John E. Rovensky, executive vice president of the Bank of America; Frederic Delano, uncle of Franklin D. Roosevelt; Samuel Gompers, John P. Frey, and William Green of the American Federation of Labor; Paul M. Warburg, partner of Kuhn, Loeb and Company; Otto H. Kahn, prominent investment banker; James H. Rand, Jr., head of Remington Rand Company; and Owen D. Young of General Electric. Furthermore, the heads of the following organizations agreed to serve as ex officio honorary vice presidents: the American Association for Labor Legislation; the American Bar Association; the American Farm Bureau Federation; the Brotherhood of Railroad Trainmen; the National Association of Credit Men; the National Association of Owners of Railroad and Public Utility Securities; the National Retail Dry Goods Association; the 9For examples of businessmen and bankers in favor of cheap money and inflation in American history, and particularly on the inflationary role of Paul M. Warburg of Kuhn, Loeb and Company during the 1920s, see Murray N. Rothbard, “Money, the State, and Modern Mercantilism,” in
Central Planning and Neo-Mercantilism
, Helmut Schoeck and James W.

Wiggins, eds. (Princeton, N.J.: D. Van Nostrand, 1964), pp. 146–54.

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United States Building and Loan League; the American Cotton Growers Exchange; the Chicago Association of Commerce; the Merchants’ Association of New York; and the heads of the bankers associations of 43 states and the District of Columbia.10

Irving Fisher was unsurprisingly exultant over the supposed achievement of Governor Strong in stabilizing the wholesale price level during the late 1920s, and he led American economists in trumpeting the “new era” of permanent prosperity which the new policy of managed money was assuring to America and the world. Fisher was particularly critical of the minority of skeptical economists who warned of overexpansion in the stock and real estate markets due to cheap money, and even after the stock market crash, Fisher continued to insist that prosperity, particularly in the stock market, was just around the corner. Fisher’s partiality toward stock market inflation was perhaps not unrelated to his own personal role as a millionaire investor in the stock market, a role in which he was financially dependent on a cheap-money policy.11

In the general enthusiasm for Strong and the new era of monetary and stock market inflation, the minority of skeptics was led by the Chase National Bank, affiliated with the Rockefeller interests, particularly A. Barton Hepburn, economic historian and chairman of the board of the bank, and Chase National’s chief economist, Dr. Benjamin M. Anderson, Jr. Another highly influential and indefatigable critic was Dr. H. Parker Willis, editor of the
Journal of Commerce
, formerly aide to Senator Carter Glass (D-Va.) and professor of banking at Columbia University, along with Willis’s numerous students, who included Dr. Ralph W.