‘Could anything be more heartening than for England and America to lock hands for honest money?’

Russell Leffingwell, 10 September 1923, advocating an American loan to help Britain return to the gold standard

Although Sir Edward Grey’s celebrated remark ‘the lamps are going out all over Europe’ is generally quoted in a political context, it is equally applicable to international financial relations. The pre-war monetary system based upon the gold standard was another casualty of the Great War. While it was neither as simple nor as automatic as nostalgic retrospective accounts would maintain, the financial order which had existed prior to 1914 had functioned smoothly and, inter alia, had allowed Great Britain without undue strain on her resources to maintain the position of top ranked player in the league table of nations. It is thus not surprising that even before the war had ended, in fact while Britain was still officially on the gold standard[1], the Committee on Foreign Exchanges After the War (known as the Cunliffe Committee) declared:

In our opinion it is imperative that after the war the conditions necessary to the maintenance of an effective gold standard should be restored without delay. Unless the machinery which long experience has shown to be the only effective remedy for an adverse balance of trade and an undue growth of credit is once more brought into play, there will be grave danger of a progressive credit expansion which will result in a foreign drain of gold menacing the convertibility of our note issue and so jeopardizing the international trade position of the country.[2]

In its deliberations the Committee assumed that when the pound was returned to gold its value would be set at the pre-war dollar parity of $4.86 5/8. Even when the pound, which had been pegged during the war at $4.76 7/16, was released from its golden moorings in 1919 and quickly plummeted to $3.40 by February 1920, this assumption was not seriously questioned by those studying currency matters. This is not surprising if one remembers the concerted attempt throughout the world, as American President Warren G. Harding rather infelicitously termed it, to ‘return to normalcy’. A re-creation of the status quo ante meant for Britain, among other things, the safeguarding of her traditional financial primacy. In order to accomplish this the first prerequisite, according to the City, the Bank of England and the Treasury, was a strong and reliable pound. Furthermore, particularly during the first years after the war, the fact that Britain had been victorious and indeed had greatly enlarged the territory under her control through the acquisition of League of Nations’ mandates coupled with both the need to vindicate Britain’s role in the awesome conflict and also the ephemeral promise of reparations resulted in a general lack of cognizance of the enormous price the British had paid for ‘victory’. Yet even the most sanguine observer could not help but be daunted by a total war expenditure of £8,215 m over and above the expected £1,000 m estimated as the total budget cost for the years 1914–1918 had the war not taken place. As only 10.7% of this amount had been paid by taxation the result was an enormous increase in the national debt.[3] A large percentage of this debt was held abroad and, while Britain remained a net creditor in 1918, her financial strength had been greatly eroded. For example, by 1918–1919, British privately held debt in the United States alone amounted to $1,027.3m.[4] Simultaneously the war had caused a great improvement in the economic position of Britain’s erstwhile ally. From a net debtor on private account until 1916, the U.S. had emerged from the war a net creditor with a surplus balance of $3.5 billion and government debts owing to her in excess of $10 billion.[5] This change in America’s financial situation was to have a significant effect on her diplomacy and would boost the competitive ability of New York bankers vis-à-vis the City of London. It would also alter the nature of the relationship between the U.S. and Britain.

The financial threat from the U.S., to the extent that it was perceived by British financial and political leaders between 1918 and 1925, undoubtedly served as incentive to return the pound to gold as soon as possible. (That the emphasis which was placed on the importance of the pound to the British economy represented to a large extent a reversal of cause and effect was not yet apparent). One of the most influential advocates of this course was Montagu Norman (1871–1950), Governor of the Bank of England from 1920 to 1944. Norman, by virtue of his enormous presence, air of mystery and unprecedentedly long tenure as Governor of the Bank of England, has remained a figure of fascination. Variously described as having the appearance of a courtier in Queen Elizabeth’s court or looking like a band leader, his reign in Threadneedle Street represented a coalescing of the man and the moment.[6] Norman became Governor at the last time that the Bank would possess full responsibility and free discretion in currency matters. Unlike previous Governors, including his grandfather, who had so served from 1885 to 1887, he did not hold an important position at a City firm and thus was prepared and even eager to devote all his energies to the Bank and to the stabilization of the pound. Moreover he was imbued with a Weltanshaüng which would provide both a stable world financial system and a central role for Norman and the Bank of England.

This scheme for financial reconstruction, formulated in memoranda prepared by the Bank in connection with the international economic conference held in Genoa in April 1922, was based on four principles which Norman hoped would be followed by every central bank. The first was ‘co-operation’ which represented the intention by central banks to consult on matters of joint relevance. ‘Exclusiveness’ referred to technical banking relations in countries outside the central bank’s own and envisioned a commitment of the central bank to maintain transactional relationships only with other central banks and not with foreign commercial banks. ‘Balances’, the third principle, embodied the willingness of the Bank of England and hopefully other central banks to handle interest bearing accounts for fellow central banks and also served as a rubric for the legitimization of the gold exchange standard. This offshoot of the traditional gold standard allowed central banks who were still considered to be on it to hold their reserves either in gold or in the currency of a country on the gold standard. While this was not a new development, it only became accepted practice in the 1920’s when financial leaders were forced to cope with what was generally perceived as a drastic shortage of monetary gold.[7] Adherence to the gold exchange standard was seen as a way to economise the use of gold and, it was believed, would strengthen the position of the central banks which issued reserve currency. That this created a two tier network of countries was immediately apparent to the French and Belgians whose opposition to the gold exchange standard at Genoa led to a drastic watering down of the Conference’s resolutions. What was less obvious was that a central bank which issued reserve currency garnered prestige and a strong boost for its currency only at a potentially very high price. Its currency would increasingly be held by foreign central banks and these institutions might choose to use the power which they had thus achieved in ways detrimental to the issuing central bank and the economy it guarded. The fourth principle was that of ‘autonomy’: central banks should be independent in both form and substance.[8] Norman held banking to be above politics and believed in the importance of independent experts for the achievement of financial stability.[9] His own bifurcation mandated that the Bank of England should concern itself with matters technical and financial while the Government in general and the Chancellor of the Exchequer in particular handled the political and fiscal side.[10] Because he felt the creation of central banks modelled upon his own institution to be one of his most important tasks, Norman was ready to send Bank of England advisers to any country which requested them and urged governors of other central banks to spend time at the Bank of England with the aim of allowing his guests ‘to share our everyday life, just as it is and to feel that, in some way, it expresses a generally human reality.’[11] Norman’s efforts resulted in the creation of strong personal and institutional ties between the Bank of England and central banks in the dominions, in countries like Austria and Germany and in many Eastern European countries. However it was Norman’s relationship with Benjamin Strong, first Governor of the New York Federal Reserve Bank (‘FRBNY’) which provided Norman not only with a personal relationship which he cherished but with an alliance of great importance for the future of the pound.

To say that the United States Federal Reserve System was in its infancy in the 1920’s is no exaggeration; it was only created in 1913 and began operations the following year. Unlike previous attempts at an American central bank (the ill-fated Banks of the United States), it was not patterned after the Bank of England. Instead there had been created a financial institution which, mirroring the government it served, was notable for its separation of powers. The nation was divided into twelve federal reserve districts each with a federal reserve bank whose activities would be in part independent but would also be coordinated by an autonomous Federal Reserve Board in Washington. It was felt that this plan would dilute the influence of the Wall Street ‘money trust’ on the one hand and the Federal Government on the other. What its creators did not foresee was that their finely balanced equilibrium created a power vacuum which presented both the opportunity and the need for someone to provide leadership. From 1914 until 1928, when ill health caused his resignation and subsequent death, Benjamin Strong filled the gap, so much so that many British accounts of the inter-war period, both contemporaneous and historical, refer to the FRBNY as the American central bank. Strong was both a committed internationalist and a man who realised that the United States had interests separate from those of Europe. However, in his devotion to the gold standard and in his belief that Britain should return to it as soon as possible he was at one with Governor Norman whom he had met frequently since Strong’s first war-time trip to London.[12]

Other influential Americans also wanted to aid the British return to gold. Most important among them were the partners of J.P. Morgan & Co. The ‘house that Morgan built’ was really three interrelated houses: J.P. Morgan & Co. (New York), Morgan Grenfell & Co. (London) and Morgan, Harjes et Cie., later Morgan et Cie. (Paris).[13] This financial empire was founded in London in 1838 by American expatriate George Peabody who grew successful by selling American securities to British investors. Junius Morgan became a partner in 1854 but it was his son J. Pierpont Morgan who was responsible for the House of Morgan’s climb to the top of the Wall Street pyramid. Until his father’s death in 1890, Pierpont concentrated his efforts in the United States and in so doing controlled by the turn of the century the United States Steel Corporation, the largest corporation in the nation, as well as a majority of the country’s railroads.[14] By 1901 the American satirist Peter Finley Dunne could write that when Morgan was in the mood he could buy up Europe and reorganize it on a paying basis by using his small change.[15] The firm’s British power base had in fact been strengthened the previous year when Morgan recruited as a partner Edward C. Grenfell, future Conservative M.P. for the City of London and member of the Court of Directors of the Bank of England. Partly because of these London connections and also because uniquely among major American investment houses in the beginning of the twentieth century it had no German connections, Morgan’s (N.Y.) was chosen to serve as the financial agent for Great Britain during the First World War. Its stalwart efforts on behalf of the Allies (the firm also represented the French Government) and the close relationship between Morgan’s and the Bank of England ensured them a firm place in the British financial world after the war.[16]

During the inter-war period the New York house was led by a triumvirate of influential individuals. The senior partner was J. Pierpont Morgan, Jr., who had taken over at his father’s death in 1913.[17] J.P. was a confirmed anglophile who had lived in Britain for many years and still spent between three and six months a year in this country where he maintained three homes. As he lacked the overweening ambition of his father, Morgan did not seek to maintain the House of Morgan’s total dominance of Wall Street which had existed prior to the War. But he had inherited his father’s view that those possessing great wealth had the responsibility to use it rationally and constructively; this was demonstrated by the House of Morgan’s international lending activities during the two decades after Morgan’s succession. In recognition of his firm’s contribution to the British war effort and also in gratitude for his gifts to the British Museum, he was awarded an honorary Doctorate of Civil Law by Oxford University in November 1930.[18]

Thomas W. Lamont and Russell C. Leffingwell made up the balance of the leadership of Morgan’s (N.Y.). Lamont, who had gone to Harvard on a scholarship, joined Bankers Trust Company after a stint as a newspaperman. Invited to be a Morgan partner in 1911, he was the man responsible for creating the face Morgan’s presented to clients and to the general public. Conscious of the fact that the atmosphere of unbridled power created by Morgan, Senior had caused great problems for the firm, he made use of his background in journalism to cultivate good relations with reporters and editors. His efforts extended to clients and potential clients as well; for example, in 1927 he offered to arrange a special dinner for Ramsay MacDonald who was making a private tour of the United States, a gesture which led to the development of a personal relationship between the two men.[19]

Russell Leffingwell, wartime Undersecretary of the Treasury and Wall Street lawyer, joined Morgan’s (N.Y.) in 1923. The acknowledged ‘brain’ of the firm, his role was to take apart and reassemble potential transactions to increase their viability and eliminate risks to the extent possible. His partners also grew to rely on his trenchant reading of political events and leaders. Together with Morgan and Lamont he shared a common outlook, one important part of which was a belief in the importance of the restoration of the gold standard for the world in general and Britain in particular.[20]

It was not only foreign bankers and the Bank of England who favoured the return to gold between 1919 and 1925, when the task was finally accomplished. The Treasury was behind this move as were many British industrialists who believed that price uncertainty was playing a large role in the decline of British exports.[21] The City of London was united in its support as were various politicians and economists. As one historian has said, ‘the conflict was about means, not ends.’[22] Interestingly, what was true in 1918 remained unchanged in the early ‘twenties: there was virtually no discussion about an alteration in the parity of the pound. Thus one of the most important milestones before Britain could return to the gold standard was a raising of the exchanges.

The other stumbling block which needed to be removed was the overwhelmingly large principal amount of British war debt owing to the United States which by Armistice Day existed in the form of a demand obligation to the United States in the amount of £978,000,000. In January 1923, Chancellor of the Exchequer Stanley Baldwin together with Montagu Norman journeyed to Washington to negotiate a settlement. Although Baldwin made a very good impression on the Americans, the resulting agreement which called for repayment over 62 years at a split interest rate of 3% for the first ten years and 3% for the remaining life of the loan was only accepted grudgingly by the Bonar Law Cabinet and British opinion at large.[23] Yet it would have been naive to expect a settlement much better than that which the British obtained. It is true that nations who settled later received better terms but Britain’s case was unique. The ambivalent nature of the Anglo-American relationship was composed of mutual admiration and suspicion, the desire to cooperate being mixed with the urge to compete. This created a tension that was apparent not only in the debt negotiations but at the various naval conferences held during the 1920’s. Furthermore, Britain did not exhibit a humble attitude towards the U.S., either in general or specifically at the negotiating table. A continued belief that Britain remained the preeminent world power might have been the honest British view and it might also have been appropriate if Britain were to retain her financial leadership. However, it was ill-calculated to appeal favourably to the prevailing American sentiment best exemplified by President Calvin Coolidge’s remark made in explanation of his opposition to a further reduction in war debts’ payments: ‘they hired the money, didn’t they?’

Once the debt settlement was history and particularly after the Conservatives returned to office in November 1924, the pound’s steady appreciation convinced both the Bank of England and the Treasury that the time was approaching for Britain to return to the gold standard. That the Act prohibiting the free export of gold was due to expire at the end of 1925 provided a further impetus towards making a decision soon, notwithstanding the fact that hearings in front of the Chamberlain-Bradbury Committee on the amalgamation of the note issues had elicited a mixed bag of opinions as to the right time for this major step.[24] With the stabilization of Germany accomplished by the Dawes Plan, Treasury officials were convinced that ‘the greatest danger is that London will be isolated in a gold standard world.’[25] During 1924 as well, Governor Strong, believing that American domestic conditions warranted such a move, brought down the Federal Reserve discount rate (the American equivalent to Bank rate) below the London Bank rate, thus strengthening the pound.[26] At the end of the year Norman, accompanied by his deputy Sir Alan Anderson, journeyed to New York in order to ascertain if Strong and Morgan’s (N.Y.) believed that a return to gold was feasible during 1925. According to J.P. Morgan:

The first question was whether in our opinion England should return to a free gold market at the end of this year when the export restriction law expires. To this, without hesitation, we replied in the affirmative. The next question was the method and amount of insurance against difficulty, which the British Government and the Bank of England should set up to protect themselves against undue flood of gold exports by speculators…. It would be really important to have the Federal Reserve Bank in it for as much as they could arrange with satisfaction to the Bank of England but as I told Norman, we could work up a bank credit here for $300,000,000 or for the whole $500,000,000.[27]

Strong also believed supporting credits were a prerequisite. They were to be just as Morgan said, insurance, the purpose of which was not only to stop speculation but also to show potentially nervous investors that Great Britain had the financial resources to make the stablization of the pound stick. With this raison d’être the credits had to be of a high order of magnitude, thus Norman, Morgan and Strong contemplated a figure of $500 m. The two central bankers agreed with Morgan that part of the money should take the form of a credit granted by the FRBNY to the Bank of England with the remainder to be in the form of a borrowing by the British government from a syndicate of banks led by Morgan’s (N.Y.).

Simultaneously with these negotiations, senior officials at the Treasury and the Bank convinced Chancellor of the Exchequer Winston Churchill that the gold standard was superior to a managed paper currency. The gist of their argument was that it was an overriding British interest that the pre-war system should be restored. In response to the Chancellor’s concern over the domestic implications of any Bank rate changes which might be necessary to protect the pound, Churchill was told that the gold standard could be defended by the other methods such as the shipment of gold.[28] It is worth noting that Churchill clearly foresaw that Bank rate and the conflict between its international effect and domestic ramifications would constitute the greatest difficulty which would face Norman and the Bank of England once the gold standard was re-established. Nonetheless, Churchill acquiesced in the advice offered him and on 28 April 1925 the decision to return to gold was announced.[29] A $200 m credit from the FRBNY had been obtained and a Morgan’s (N.Y.) managed credit, albeit for only $100 m, put into place. The reduction in the latter’s principal amount had occurred in part because it was felt that a total package of $300 m was sufficient but mainly because the British Government baulked at paying a commitment fee on the whole amount of the credit, irrespective of whether it was used.[30] In the event, the lesser amount proved ample, neither credit was drawn down and the return to gold was judged a success. It remained for Stanley Baldwin to say:

…when I remember that the men responsible in America for working with us in the restoration of the Gold Standard - which in itself is making a long step forward to the restoration of normal trade throughout the world - are Mr. Mellon, the Secretary of the Treasury, the Governor of Federal Reserve Bank and Messrs. Morgan I should like to say as my convinced opinion that in these men we are dealing with men [sic] than whom there are none higher for financial ability and moral rectitude. I would trust each and all of them no more and no less than I would trust the Governor of the Bank of England and those who have taken this matter in hand in our own country.[31]

His comparison of the American government, the FRBNY and Morgan’s with the Bank of England and the British Government was an augury of the future - it was precisely in these American entities that the British would have to trust in the years ahead.

From May 1925 through 1926, the financial waters were relatively tranquil but the first half of 1927 proved otherwise as the Bank began to lose sizeable amounts of gold. Partly in response to this pressure Norman went to New York. There he not only discussed financial and other matters with Strong and with J.P. Morgan and his partners, Dwight Morrow (future United States Ambassador to Mexico and father-in-law of Charles Lindbergh) and Russell Leffingwell, while cruising on Morgan’s yacht the Corsair, but participated in a conference of central bankers held in Long Island in July, 1927. There the projected French and Belgian stabilizations were discussed and, more important to Norman, Strong agreed to lower the FRBNY discount rate in order to encourage funds to move out of New York and into London.[32] For doing this Strong received both the gratitude of Norman and the opprobrium of then Secretary of Commerce Herbert Hoover. Calling Strong a ‘mental annex’ of Europe, Hoover, not alone, blamed Strong’s action for triggering the stock market boom which ended in Black Tuesday 26 months later.[33] This criticism illustrates yet again the major problem the use of Bank rate could cause for a nation’s economy. Although it was the traditional and still preferred method of protecting a country’s exchange position during the 1920’s, the domestic results of using this weapon were for the first time examined and, particularly in Britain, excoriated. Although it had long been realised that a high Bank rate necessarily has a deflationary effect, it was only after the First World War, when unemployment and the decline in British industry became major national concerns, that the tension between the country’s external and internal needs became apparent. The domestic pressures against raising Bank rate resulted in it being changed only 18 times or an average of three times a year during the period May 1925 - September 1931 in contrast to the six year period 1908–1914 when it was altered 39 times or an average of six times a year. Although in 1929 Norman still felt sure enough of his authority to raise Bank rate without first consulting the Chancellor of the Exchequer, there is no question but that the Governor felt debarred from the unrestricted use of this device which his principles would have seemed to mandate. No matter how firmly he believed that Britain’s international position had the first priority, the state of British industry during the nineteen-twenties could not be ignored, particularly when those who claimed that high interest rates were destroying their hopes of prosperity had articulate spokesmen such as John Maynard Keynes and Reginald McKenna. Therefore, during the difficult years 1928–1931 Norman increasingly utilized other weapons, primarily open market operations, to protect the pound. He thus shielded British industry from the full effect of the return to gold but also changed the nature of Bank rate from an everyday tool to a relatively drastic measure, a development which would have ramifications during the 1931 crisis.

Britain’s problems in 1928 were largely a result of actions taken by two of her erstwhile allies. In New York the stock market boom drew money like a magnet from all over the world particularly after the FRBNY, partly in response to pressure from Washington, began to raise discount rates. American policy was also affected by Benjamin Strong’s retirement in 1928 and his replacement by George Harrison. A personable man, Harrison was a lawyer by training but had no banking experience other than at Strong’s side, first as Counsel and then, from 1920–1928, as Deputy Governor. His liabilities and strengths were summed up by Leffingwell who said in a letter to Edward Grenfell:

George Harrison has been under the disadvantage of being young and new and a promoted subordinate and he has inherited all the antagonisms that poor Ben left behind him. But I have confidence in the soundness of his views and his ability to work out the situation ultimately.[34]

Unfortunately at a time of growing crisis the Federal Reserve System needed leadership and Harrison, although of sufficient standing to fight to a deadlock with the Governors of the Federal Reserve Board with whom he came into conflict (first Roy Young and then Eugene Meyer), did not have the strength to win. The resulting drift in United States monetary policy, best exemplified by the conflict over discount rates during 1929, had negative effects not only in the United States but throughout the world.[35]

The Bank of England’s other problems were French in nature. France had officially restabilized the franc in June 1928 at the undervalued exchange rate of one-fifth of its pre-war level. This strengthened the franc’s position and increasingly, foreign money was attracted to France. The Bank of France’s firm resistance to a rise in the franc’s value and its disinclination to follow Norman’s suggestion and move to a gold exchange standard further resulted in the accumulation by France of gold reserves which by 1931 were second only to those of the United States. The success of the French stabilization had immediately placed a strain on Britain as large sums of French money which had flown from France in the years prior to 1928 were repatriated after June of that year. However, after this ‘stabilization shock’ had been assimilated there continued an irregular seasonal drain on the City caused by variations in the French money supply which affected London because, due to the undeveloped nature of the Paris money market, French banks and other institutions invested their short term funds in London. Of course such transactions were the lifeblood of the City, and indeed one of the impetuses for the return to gold had been to ensure that the pound would be considered a safe currency for investors. What was not foreseen was that the solid cushion of earnings from British overseas investment would decrease in size, that London would be robbed of the monopoly of international money markets by the emergence of New York as an alternative center and that the financial bill, of which London was master, would become less important to international transactions due to the growth of wire transfers of money. The net result was that the British financial structure was far more vulnerable than before the war to the possible effects of sizable deposits and withdrawals beyond the control of the Bank of England. To the extent that this was perceived in Britain, there appeared to be little to be done except to cling tighter to the gold standard; financiers agreed with J.P. Morgan who had said that ‘[I] believe this step [the return to gold] the most important that has been taken since the war as showing how far Great Britain has gone on the road to recovery…’[36] Further no one offered a viable alternative to the gold standard; not even Keynes was yet ready for the brave new world of totally managed money.[37] The parlous state of British industry only encouraged this view for, to the extent that Britain had a positive balance of payments, it was due to the City whose financial health, according to contemporary wisdom, depended on the continuance of the gold standard, which therefore had to be protected.

British problems with the French were not limited to currency matters for personalities played their part. As Norman was a convinced francophobe, it was not surprising that his relations with the various governors of the Bank of France were the exception to his rule of close ties with other heads of central banks. Power politics contributed to this continual enmity, for men like Emile Moreau saw in the Bank of England’s eager assistance to nations seeking to create a central bank an attempt to subvert France’s traditional ties with Eastern Europe and a new form of British imperialism.[38] The continuing point of contention was reparations. Beginning with the negotiations at Versailles, Britain and France had been at odds over how much the Germans should be made to pay. The French had not forgiven the British for their lack of support over the Ruhr confrontation while the British, for their part, believed that the French insistence on Le Boche payera would only lead to the continued destabilization of Europe.

In 1929 the reparations controversy assumed the form of negotiations on and disputes concerning the Paris and Hague Conferences held to draw up what would become the Young Plan. Under the leadership of American industrialist Owen D. Young, a committee of experts gathered yet again to revise downward German obligations to the Allies. The American delegation (acting in their individual capacities, not as official representatives of the United States) included both J.P. Morgan and Thomas Lamont, choices dictated no doubt in part by the fact that the House of Morgan was now at the pinnacle of its international power and prestige. The war had played havoc with the various European currencies, and accordingly there was a pronounced need for a supranational banking institution to help accomplish the required stabilizations. The Bank of England, under Norman’s leadership, provided advisors but was under pressure to conserve its own assets and limit the outflow of private British funds abroad. The House of Morgan, with three branches and ready access to plentiful American funds, willingly stepped into the breach. Not only were foreign transactions profitable but they satisfied the Morgan partners’ sense of duty.

During the period 1919–1933 foreign issues sold by Morgan’s approximated $1,350 billion. They helped draw up the Dawes and Young Plans and managed not only their American tranches but also organised the British credit and aided, among others, the governments of Austria, Belgium, France and Italy.[39] These loans provided the fuel to power the triangular flow of funds which transformed the nature of international financial relations during the nineteen-twenties; money was raised in the U.S. which enabled Germany to pay reparations to the Allies who made payments to the U.S. in respect of their war debts. This willingness to assume quasi-governmental responsibility illustrated by their international transactions and the participation by Morgan and Lamont in the Young negotiations was appreciated by the government in Washington which was maintaining the increasingly transparent fiction that reparations bore no relationship to war debts and further were of no interest to the U.S. That Morgan’s (N.Y.) assumption of responsibility would cause problems when the interests of the American Government and Morgan’s (N.Y.) diverged was not yet apparent.

Norman felt increasingly anxious about the position of the pound in 1929; by March it was only one-quarter of a cent above the gold point.[40] As he ascribed the ‘increasing feeling of nervousness in London’ to the situation in America,[41] Norman took the opportunity of a March visit to the Young conferees to complain to both Young and the Morgan partners:

1. While in Paris I protested … to Owen D. Young against conditions in U.S. which have lasted long and which in spite of your [Harrison’s] personal endeavours continue. For these conditions especially those of your credit position and money rates he as a Director cannot escape some responsibility. I pointed out that ignoring Berlin and Paris the whole exchange strain of Europe falls on London and that penal rates in London cannot fail to affect half-a-dozen European banks.

2. Similarly I protested to J.P. Morgan and T.W. Lamont generally as regards Europe and particularly as regards those countries which they assisted to stabilize on gold. I asked them whether under present conditions in U.S. it was proper for J.P. Morgan & Co. to watch without attempting to help the position of these stabilised European clients jeopardized by the present action or inaction of the System.[42]

Yet Harrison and the Board of Directors of the FRBNY had no choice but to continue pushing for ever higher discount rates as they made a futile attempt to contain the New York stock market boom, no matter what the effect on London. Norman’s comments to Morgan and Lamont showed how the Governor, taking them at their own valuation, expected Morgan’s (N.Y.) to act in a governmental fashion. He did not appreciate the constraints which faced the New York partners, for while their leadership may have been recognized in Wall Street, it was shunned and resented in other parts of the country, especially the south and west, where the word ‘Morgan’ conjured up the 1913 Pujo Committee hearings which had attempted to expose a Money Trust supposedly led by J.P. Morgan, Senior. These hearings had found not an explicit illegal combination in restraint of trade but instead revealed a network of control by Morgan partners which encompassed seventy-two directorships in forty-seven large financial corporations worth more than $10 billion.[43] A result of these hearings was the establishment of the Federal Reserve System and thus for Morgan’s (N.Y.) to attempt explicitly to pressure the FRBNY was something that even if they wished to do would have been disastrous.

Norman had a further opportunity to continue his conversations with Lamont in July 1929 when, during a temporary breakdown in the Young negotiations, the latter came to Britain. He had lunch at the Bank of England and met with Chancellor of the Exchequer, Philip Snowden, who told him Britain would bear the brunt of any problems caused by an untimely termination of the reparations’ revision talks.[44] Norman went further; when Lamont, the Governor and Prime Minister MacDonald conferred in Scotland the following month, Norman said that the consequences of a breakdown in negotiations would be ‘the financial collapse of Germany followed by most severe trouble in England and a possible abandonment of the gold standard.’[45] During August as well Norman and Harrison were discussing by cable the purchase by Federal Reserve Banks of sterling bills to help bolster the pound and Harrison even suggested a credit to support the pound, an option which Norman quickly dismissed.[46] Fortunately the immediate cause of the strain on London, the high New York discount rate, was soon removed. That the cause, the Wall Street crash, was worse than the disease would later be evident; initially the feelings of most British bankers were voiced by Keynes who said:

We in Great Britain cannot help heaving a big sigh of relief at what seems like the removal of an incubus which has been lying heavily on the business life of the whole world outside America.[47]

The relief generated by easing conditions in New York did not solve London’s problems; in fact as 1930 succeeded 1929, the situation seemed to worsen. The chief culprit in the minds of the British remained the French. Sir Otto Niemeyer, advisor to Norman, attributed a French unwillingness to conduct their gold transactions in London to a desire to weaken sterling, both to emasculate Britain’s negotiating position at the Hague and to further the development of the nascent French money market.[48] Certainly the French wanted to improve the Paris market. According to Charles Rist, Professor of Finance and Director of the Bank of France, the short term market had to be reorganized so that it no longer compared unfavourably with that of London, New York or even Berlin.[49] The British found themselves with ambivalent feelings about their French competitor. As long as gold flowed from London to Paris the British longed for a French market which could absorb some of the demand. Indeed during 1929–31 they intermittently campaigned to encourage the growth of a putative Paris competitor.[50] When the gold drain ceased, the British desire for a preeminent London market with its prestige and power unchallenged overcame the fear of being forced off gold. Thus great importance was placed on this topic during the discussions between the British and French Treasuries detailed below.

The Bank continued to focus on French activity during the summer and autumn of 1930. An unsigned internal memorandum written at the end of July criticized French policy as selfish and mistaken but concluded:

There is little doubt that they intend to pursue it relentlessly and so long as they do so we may expect the continuance and at times an increase of the gold drain to Paris.[51]

In December the Bank of England compiled statistics which showed that between May and November the Bank of France had taken £20.8 m gold from the Bank of England and £16.8 m gold from the London market.[52] Attempting to ameliorate this situation, British Treasury officials suggested that Norman approach his counterpart in Paris but, according to Sir Frederick Leith-Ross, ‘The Governor always takes the line that it is contrary to the prestige of London to make any representations to the French about these gold movements.’[53] Perhaps spurred on by the fact that after November 1930 the Bank of England’s net gold position began to deteriorate, Norman did go to Paris in December 1930. His discussions with Governor Clement Moret of the Bank of France achieved little because, according to a French diplomat, Norman appeared reluctant to enter any substantive discussions.[54]

In response to this failure, the British Treasury and the French Ministry of Finance agreed to hold discussions as soon as a new French government was constituted. When Norman was told of this he said that while discussions on monetary matters were all well and good, tariffs, war debts, cartels, etc. would all have to be brought into a comprehensive discussion.[55]

The Governor was correct in his view that given world conditions at the end of 1930, a purely monetary solution to Britain’s problems did not exist. Though his statement showed an enormous leap from his earlier position which mandated an independent and autonomous place for monetary matters, Norman did not yet take the next logical step: if the state of the nation’s currency could be considered only together with matters which were under government control, it followed that once the Government understood this, it would seek power over monetary affairs. Such a realization would be one of the results of the 1931 crisis.

NOTES

1. Britain was officially on the gold standard throughout the war but on 1 April 1919, coinciding with the end of official support measures for the pound, the export of gold was prohibited by regulations promulgated under the Defence of the Realm Act. The necessary regulations were combined in the Gold and Silver (Export Control) Act 1920 which was due to expire in December 1925.

2. Public Record Office, Kew, T208/17, Cunliffe Committee, ‘First Interim Report’, 15 August 1918, para. 47.

3. PRO, T208/41, R.G. Hawtrey, ‘The Cost of the War’, 12 August 1921.

4. K. Burk, Britain, America and the Sinews of War 1914–1918 (George Allen and Unwin, London, 1985), Appendix III.

5. M. Leffler, ‘Expansionist Impulses and Domestic Constraints’ in W. H. Becker and S. F. Wells, Jr., eds., Economics and World Power (Columbia University Press, New York, 1984), p. 227.

6. Time, 19 August 1929, p. 52.

7. Although the gold exchange standard as such was not followed before the war, foreign exchange holdings by central banks were accepted practice prior to 1914. See, e.g., Bloomfield, op. cit., pp. 55–6; K. W. Dam, The Rules of the Game (University of Chicago Press, Chicago, 1982), pp. 31–4.

8. R.S. Sayers, op. cit., pp. 157–9, Appendices 9 and 10.

9. See, e.g., Bank of England Archives, London, (‘B/E’) G3/198, Norman to D.M. Mason, 5 November 1931, where Norman expounded on the Bank’s complete impartiality towards all British governments and the related need for the Bank to remain above politics.

10. B/E, G15/7, Note of a conversation between Norman and P. Snowden, 4 September 1929.

11. B/E, G3/197, Norman to W. Wroblewski, 17 March 1930.

12. L. Chandler, Benjamin Strong, Central Banker, (Brookings Institution, Washington, D.C., 1958), p. 94.

13. J.P. Morgan & Co. held a partnership interest in both the London and Paris houses and thus the New York partners were partners in the foreign houses.

14. A. Sinclair, Corsair, The Life of J. Pierpont Morgan (Little Brown & Co., Boston, 1981), pp. 124–39.

15. Peter Finley Dunne, Mr. Dooley, quoted in Sinclair, op. cit., p. 140.

16. The term ‘Morgan’s’ as used herein refers to the three houses as a whole while ‘Morgan’s (N.Y.)’ refers specifically to the New York house.

17. At his father’s death, J.P. Morgan Jr. dropped the ‘Jr.’ and thus will be referred to herein without it.

18. The New York Times, 24 November 1930, p. 14.

19. Baker Library, Harvard University, Cambridge, Mass., T.W. Lamont Papers, 52–4, Lamont, to E.F. Wise, 28 February 1927.

20. Leffingwell expounded this view often. In a penetrating eight page letter written on 10 September 1923 to Morgan he proceeded to enumerate the risks to Britain whichever decision was made and explained why he felt it was of overriding importance both to Britain and to the world for Britain to return to the gold standard, in the process demolishing the arguments of J.M. Keynes. (Morgan Grenfell & Co., Limited, London, Morgan Grefell Papers, (‘Morgan Grenfell’), R.C. Leffingwell, Bundle 252).

21. PRO, T173/46 : Memorandum: ‘Return to the Gold Standard’, undated.

22. Howson, op. cit., p. 35.

23. Lamont Papers, 111–15, Lamont to E.C. Grenfell, 26 January 1923.

24. This Committee was set up to deal with the problems caused by the war-time issue of Treasury notes but at its wide ranging hearings considered the question of a return to gold at great length.

25. PRO, T208/54, Hawtrey, ‘Sterling and the Gold Standard’, 24 April 1924.

26. Chandler, op. cit., p. 305.

27. Morgan Grenfell, British Gold Credit - 1925, Morgan to Grenfell, 11 February 1925.

28. B/E, 95.04, Hawtrey, ‘The Gold Standard’, 2 February 1925.

29. The decision took the form of an announcement by Churchill that the Act of 1920 prohibiting the export of gold would be allowed to lapse.

30. Morgan Grenfell, British Gold Standard Gold Credit - 1925, Morgan to Grenfell, 7 March 1925.

31. Morgan Grenfell, British Gold Standard Gold Credit - 1925, Grenfell and Lamont to Morgan, 25/4615, 5 May 1925.

32. At this time each Federal Reserve Bank had the right to set its own discount rate although in practice they usually followed the FRBNY.

33. H. L. Hoover, The Memoirs of Herbert Hoover - The Great Depression (Macmillan, New York, 1952), p. 9.

34. Yale University, New Haven, Conn., R.C. Leffingwell Papers, I/3/69, Leffingwell to Grenfell, 29 May 1929.

35. See, e.g., B/E, G3/194, Norman to E. Moreau, 23 March 1929.

36. Morgan Grenfell, British Gold Standard Credit - 1925, Morgan to Baldwin, 30 April 1925.

37. In this connection, it is interesting to note that as late as November, 1931, Keynes was advocating instead of a system of totally managed money the linkage of the pound to a commodity-based index. (PRO, T188/48, Keynes, ‘Notes on the Currency Question’, 16 November 1931.)

38. Chandler, op. cit., p. 380.

39. Morgan Grenfell, JPM Miscellaneous, File 18/A, Statement of G. Whitney to the U.S. Senate Subcommittee on Banking and Currency, 25 May 1933.

40. B/E, G3/194, Norman to R.V.N. Hopkins, 4 March 1929.

41. B/E, G3/194, Norman to Moreau, 23 March 1929.

42. Morgan Grenfell, British Gold Standard Credit - 1925, Norman to Harrison, 12 March 1929.

43. Sinclair, op. cit., p. 223.

44. Lamont Papers, 173–1, Lamont Diaries, 29 July 1929.

45. Lamont Papers, 173–1, Lamont Diaries, 10 August 1929.

46. Columbia University, New York, N.Y., G. L. Harrison Papers, Binder 18, Harrison Memorandum to Files, 16 August 1928.

47. J.M. Keynes, The Collected Writings of John Maynard Keynes, Vol. XX - Activities 1929–1931, (Cambridge University Press for the Royal Economic Society, Cambridge, 1981), p. 1.

48. B/E, OV45/3, O.E. Niemeyer, ‘French Exchange and the Gold Efflux’, 24 February 1930.

49. B/E, OV45/3, C. Rist, ‘The Paris Market Should Play an International Role’, L’Europe Nouvelle, 11 January 1930.

50. Concerning the sometime British desire to see an expansion of the Paris market, see, e.g., a list of practical suggestions to curtail gold movements to France drawn up at a meeting of Sir F.W. Leith-Ross, S.D. Waley, O.M.W. Sprague and H.A. Siepmann, on 30 January 1931 (B/E, OV45/4).

51. B/E, OV45/3, Memorandum: ‘The French Demand for Gold’, 29 July 1930.

52. B/E, OV45/3, Memorandum: ‘France Estimate of Gold Movements - 1930’, undated.

53. PRO, T208/148, Leith-Ross, ‘Note of an interview with Monsieur Pouyanne on 16 December 1930’, 17 December 1930.

54. Ibid.

55. PRO, T208/148, Hopkins postscript to above cited Note, 17 December 1930.

Chapter One

BACKGROUND TO A CRISIS