‘Cooperation between the United States and Great Britain on monetary problems [is] called for.’

Ramsay MacDonald to Thomas Lamont

9 May 1931

The New Year did not relieve the strain on London caused by continued exports of gold to France because the normal January improvement in the exchanges did not occur. This lent a note of urgency to the Anglo-French Treasury discussions which began in Paris on 2 January 1931. Sir Frederick Leith-Ross, senior British Treasury representative at these meetings, felt that the French had changed their attitude and were in earnest about seeking to improve relations although the only tangible result of these first meetings was the decision to resume talks in London on 14 January.[1]

These unprecedented meetings attracted a great deal of attention. American Ambassador to France Walter Edge cabled Secretary of State Henry Stimson that the purpose of the talks was to plan a conference on the question of gold movements and Edge further reported that the French were offering the British a credit to support sterling.[2] The French press also carried the latter story but maintained that British pride would not permit them to accept a credit from France.[3]

Norman was not impressed by the joint Treasury meetings, informing the Committee of Treasury of the Court of Directors of the Bank of England (the group of Directors who performed a quasi-governing function) that the first round had produced no tangible results and expressed doubt as to whether there would even be a second encounter.[4] He added that by mutual agreement the Bank of England and the Bank of France had not participated in these discussions, a statement which would indicate that Norman was either uninformed about French views or being disingenuous since according to Leith-Ross, the French wished the Bank of France to be involved.[5] At this same 7 January Committee of Treasury meeting Norman discussed the continued drain of gold and possible steps to be taken to protect the exchanges. Three options appeared to be open: raise Bank rate to induce funds to remain or return to London, convert foreign currency into earmarked gold which would obviate the necessity to ship gold from London and thus make the bank return look better, or to play a waiting game and hope the situation would improve. The last course of action was chosen.[6] A week later Norman explained his problems to Harrison in the following fashion:

[A Bank rate increase] depends on gold movements. Firstly if exports continue making substantial reduction in our holding market may become nervous and notwithstanding shortage of bills may lift rates to a point which would force us to raise Bank rate. Secondly even although market rates failed to rise sufficiently to force us we may have to go up if continued drains were to reduce our gold holding to some total which I cannot now forecast….

The above may seem indefinite but our actions must be governed by gold movements. We could not in any case remain passive indefinitely in face of continued losses of gold, especially taking into account our present fiscal and industrial position.[7]

Norman’s dilemma was clear. Caught between the Scylla of Britain’s domestic position and the Charybdis of international economic currents, his room for manoeuvre was very limited. One option Norman did have was to pressure the Government to try to take action to calm the market and he did not hesitate to read his cable to Harrison to Snowden and tell him that a flight from sterling could be caused by a loss of gold, budget problems or socialist legislation and in any such eventuality a rise in Bank rate (then at 3%) would be necessary.[8] It should be noted that this enumeration indicates that the three elements underlying the summer crisis - gold movements caused by domestic and international problems, a British budgetary crisis and the dislike evidenced by the financial community within and without Britain of the dole and other ‘socialist’ accomplishments - were already present in January. They would remain important elements of the British financial and political scene, although their strength would ebb and flow, until August when the simultaneous reemergence in full force of all three factors would culminate in the crisis.

The joint Treasury discussions resumed as scheduled and the French submitted a memorandum designed to answer British charges that London’s problems were due to a combination of weaknesses in the French money markets and deficiencies in the enabling legislation of the Bank of France which prevented it from engaging in open market operations or taking a major foreign currency position.[9] The French response, written by M. Escallier, ascribed the increase in the Bank of France’s gold reserve to the French balance of payments surplus which began in 1926 and continued through 1930. Admitting that French investors deposited and withdrew large balances frequently from London, he pointed out the obvious fact that this was a chief function of the London market and then somewhat disingenuously complimented the London market on its fine handling of these transactions. Escallier did state that the French were planning to open up the French market to foreign issues (another British idea) and then suggested that if the British wished to end the gold drain they should ‘allow free play to the whole of the factors which tend the whole time to bring the amount of the foreign liabilities of a country into due proportion with its foreign resources’ which was to say the British should raise Bank rate and improve their export position. After criticizing the Bank of England’s resort to open-market operations, Escallier, with what his opposite numbers must have considered a typically gallic twist of the knife, expressed the hope that his British colleagues would examine their own system ‘in the same spirit’ as the French had shown.[10]

The British dismissed the Escallier memorandum, the Treasury concluding it was wrong on every major point.[11] They missed the central fact - that their demand that the French Ministry of Finance and Bank of France mend their evil ways was exceedingly arrogant. Indeed one has only to imagine Montagu Norman’s reaction if he had received a list of alterations to be made to the Bank of England’s Charter. That under the circumstances the French not only prepared the Escallier memorandum thereby showing a willingness at least to examine their policy but also came to London to meet with Treasury officials supports Leith-Ross’s assessment that the French were seeking to improve relations. This conclusion is buttressed by the results of the London meetings. The French agreed to minimize the amount of idle balances at the Bank of France, said they shared the British view that a resumption of foreign lending by London, New York and Paris was imperative, and promised to consider allowing the League of Nations Gold Delegation (which had been formed to examine the causes of the fluctuations in the purchasing power of gold and their economic effects) to publish its report - a step the British were very much in favour of but one the French had formerly opposed. Thus Leith-Ross’s conclusion of 15 January that the value of the meetings should not be underestimated is not surprising.[12] Another sign of a continued pattern of French helpfulness was the Bank of France’s acquiescence in Governor Norman’s request that the Bank of England be allowed to swap dollars it held in New York for francs held by the Bank of France, which francs the Bank of France would apply to purchases of sterling thereby obviating the need for gold shipments from London to Paris.[13]

It is interesting to speculate on the reasons for this change of attitude on the part of the French. Partly no doubt it was a response to the fact that the slump, which had been late in arriving in France, had begun to affect the French economy by late 1930.[14] This had the effect of altering the French view that their excellent monetary policy had rendered them immune to economic dislocation. Secondly, conditions in Germany were clearly deteriorating; a British Treasury official writing in the second half of January said: ‘I feel that events in Germany are moving slowly but inevitably to disaster.’[15] The French no doubt wanted to have the British on their side if there was to be yet another revision of reparations and this was far more likely if monetary cooperation between Britain and France was improved.

The position of sterling, however, continued very weak and the Daily Herald attributed this to ‘a very serious quarrel between powerful American and British banking interests.’ It further stated that the American grievance resulted from resentment over the loss of foreign business to London.[16] The Herald’s report was clearly erroneous; although it was true that the principal amount of foreign securities offered for sale in the U.S. in 1930 and early 1931 was far lower than in previous years, this had been caused not by successful competition from Great Britain but resulted from a decline in American interest in foreign securities growing out of the Wall Street crash and increased by a loss of confidence in European borrowers.[17] Far from gloating over the paucity of American loans to Europe, the British Treasury was clearly concerned about the American reluctance to lend abroad.[18] However, this article does illustrate a readiness among some members of the Labour party to ascribe British economic problems to American financiers - an uncanny foreshadowing of the famous Herald story of 25 August 1931 which ascribed the fall of the Labour government to a bankers’ ramp led by George Harrison.

Yet American policy was not only the concern of the British left during early 1931; it was discussed as well when the Chairmen of the ‘Big Five’ clearing banks made their speeches at their banks’ respective annual general meetings. According to Reginald McKenna, Chairman of Midland Bank Ltd., a fair percentage of British problems could be laid at the door of the late Wall Street speculative fever while F.C. Goodenough, head of Barclay’s Bank Ltd., urged America to improve her own economy and that of the world by cancelling war debts.[19]

The Chancellor of the Exchequer took up the theme of the war debts and the American attitude towards them during his major speech on the budgetary situation delivered on 11 February. Presented against a back drop of the continuing drain of gold which had reached such an alarming level that Keynes wrote that for the first time in his memory there were open discussions about a devaluation of sterling and the abandonment of the gold standard,[20] Snowden said:

We have the burden of the war debt. I do not wish to give offence to anybody when I make this statement, that when the history of the way in which that debt was incurred — its recklessness, its extravagance, commitments being made which were altogether unnecessary in the circumstances at the time — when that comes to be known I am afraid posterity will curse those who were responsible.[21]

Perhaps Snowden’s main target was David Lloyd George, leader of the Liberal Party and Prime Minister during the First World War, but he obviously had no hesitation about attacking the U.S. in the process. The pendulum marking the British attitude towards the U.S. appeared to have begun to swing to a hostile position. At the same debate the Chancellor, faced with his own estimate of a budget deficit for the 1931–2 fiscal year of £30 m and a projected gap of £50 m for the following year, ended his speech by saying that:

If there were a well grounded fear that this country’s budgeting was not sound, it might have very disastrous consequences, which would have their repercussions abroad. It is quite true that other countries are watching, and that therefore, we must maintain our financial reputation and that we can do.[22]

Snowden was correct. Britain had to decrease its budget deficit and rationalize its finances. London’s unique strength, her financial markets, were more and more proving her Achilles heel and concern about their condition would increasingly burden the British government both domestically and internationally.

As Snowden saw the budget as crucial, his acquiescence in the Liberal amendment to a Conservative motion which provided for a committee to be appointed in order to propose government economies was not surprising. With the creation of what would become the May Committee, another of the fires which would ignite the August crisis was now laid.

The issue of war debts was also the subject of discussions between France and Britain; Montagu Norman reported to the Committee of Treasury that:

The French government are anxious for all European nations concerned to agree beforehand to pursue a common policy concerning Debt payments. If Germany defaults on Reparations, France and Italy will claim a moratorium on War Debt payments.

According to the Committee’s minutes, it was decided that ‘the matter should remain open for further consideration in the light of the conditions obtaining if and when the need for a decision should arise.’[23] Thus the issue of war debts could force Britain to decide with whom to side: France or the U.S. The answer had obvious implications for the course of European history.

Norman also took this occasion to tell the Committee of Treasury that he had agreed to submit what would sometimes be known as the Norman Plan to the Bank for International Settlements for its consideration. This scheme, also called the Kindersley Plan after its architect Sir Robert Kindersley, Chairman of Lazard Brothers and a director of the Bank of England, called for the formation of an international corporation which would make loans to foreign countries and corporations. The capital of the corporation would be subscribed by France, the U.S. and Britain but it was to the ‘surplus’ gold supplies of France and the U.S. that Kindersley primarily looked for money which would be recycled into the hands of the debtor nations.[24] In January Norman had said he thought the plan not very practical and, although he had not changed his mind (he told Treasury officials in late February it would not work), he had obviously decided there was no harm in proposing the plan.[25]

It may be that Norman’s increasingly pessimistic view of global financial conditions motivated this change of heart. He ascribed British problems ‘to defects in our financial policy during the last few years and a consequent lack of confidence in British Government securities and sterling.’ He even went so far as to say that the French were correct when they emphasized the importance of a loss of confidence in Britain to an understanding of the British plight, thus providing one of the very few instances when the Governor said the French were right about anything.[26] The Treasury was not as self critical, continuing to blame the French for causing an ‘abnormal’ gold drain from London to Paris.[27]

The Bank for International Settlements (“BIS”) took up the Kindersley Plan at its monthly board meeting of 9 February 1931. An outgrowth of the Young Plan and designed with the main purpose of facilitating German reparations payments, this first supranational banking institution had begun operations in May 1930. The central banks of all major gold standard countries were founding members save for U.S. which refused to join because of the Bank’s explicit connection with reparations. Instead Morgan’s (N.Y.), The First National Bank of New York and the First National Bank of Chicago subscribed to the American shares which were subsequently sold to the public. The FRBNY began a careful tightrope walk between involvement and non-involvement, a task not made easier by the selection of Gates McGarrah, a former director of the FRBNY as the first President of the BIS, a choice determined by the need to preserve neutrality between the French and the Germans.

Norman quickly became disparaging about the ‘World Bank’ as the BIS was occasionally called. By September 1930 he had stated that:

It is common talk that the BIS is a menace to the international exchange market and judging by the way this [dollar] swap was proposed and is now commenced, this common talk is true.[28]

The next month he wrote to the Governor of South Africa’s central bank that:

The BIS in its administration is dominated by American habits and by French ideas and these ideas include a good deal of advertisement and the seeking of conditions, profits and the like, which you and I have not been accustomed to associate with Central Banking.[29]

One reason for Norman’s dislike of the BIS was his recognition that the BIS, by creating a mechanism for government to government transfers of money outside the realm of central banks, was eroding the theretofore total control of central banks over foreign transfer payments. The Governor was concerned enough to note this change to the Committee of Treasury:

[The Governor] mentioned that the advent of the BIS had altered the time honoured relations between the Bank and the Treasury…. This fact necessitates frequent interviews and consultations between officials of the Treasury and the Bank with the result that the Governors are not and cannot be the sole connecting link. He viewed this situation with some disquiet….[30]

In fact the BIS not only encroached upon what Norman considered the Bank of England’s prerogatives but took over some of Morgan’s functions, specifically their provision of dollars for the British payment of its war debts to the U.S.[31] It thus represented one of the first steps in the shift of power from central banks and their merchant bank allies to governments which would be enshrined in post-Second World War creations such as the International Bank for Reconstruction and Development (also known as the World Bank) and the International Monetary Fund.

Notwithstanding his feelings Norman made a practice of attending the monthly BIS board meetings held at its Basle headquarters. If nothing else these gatherings of central bankers provided them with an opportunity to discuss their mounting problems in an informal and relatively private manner particularly at the Sunday night dinners which preceded the regular Monday board meetings. It was at such a dinner that Norman first learned that the Kindersley Plan was not receiving an enthusiastic reception from the French and the Americans, partly due to a suspicion that the Plan was designed to steal their well-earned gold reserves in order to redistribute them to countries who through their own profligacy had squandered the opportunity to amass comparable stocks. It is not difficult to see why they had bristled; the original summary of the Plan, later revised to soothe those nations’ ruffled sensibilities, began by stating:

Many Authorities are agreed that the maldistribution of gold has in large measure contributed to the existing world crisis… and that world recovery will be impeded by the fact that the U.S. and France, instead of lending back to the world their surplus for a usable balance of payment, have been taking this surplus in the form of gold.[32]

This exposition reflected the British contention that not only did the U.S. and France possess an inequitable proportion of the world’s monetary gold but that they had made matters worse by ‘sterilizing’ it; that is to say, refusing to allow imports of gold to have the inflationary effect on the American and French money supplies which the theory nominally adhered to by all nations on the gold standard would have mandated. There is no question but that the Americans and French were guilty as charged but what the British failed to recognize was that they were not in a position to throw stones; by increasing its tacit reliance on open-market operations in lieu of increases in Bank rate, the Bank of England was also deviating from the practices mandated by traditional gold standard theory. However, as the American and French actions were far more visible, it is not surprising that these countries bore the brunt of the Interim Report of the League of Nations Gold Delegation. This document, prepared in 1930–31, criticized the hoarding of gold by avaricious countries and without naming names pointed a finger at the U.S. and France.[33] Perhaps because of the discussions connected with the Kindersley Plan, it began to be rumoured that the BIS might expand on the work of the Gold Delegation, specifically by effecting a reduction in the proportion of gold reserves held by member nations’ central banks, and indeed this possibility continued to be mooted at Basle over the next few months.[34]

During late February as the Kindersley Plan was being debated in financial capitals by central banks and merchant bankers (Lamont was sent a copy on 14 February), the British and the French Treasuries resumed their talks.[35] The background was still ominous, Kindersley writing that French investors, fearing that Britain might go off the gold standard at any moment, were loath to purchase British bills.[36] These discussions did not progress very far because the British baulked at the French deflationary remedy for their problems - an increase in Bank rate.[37] The French were equally reluctant to adopt any of the detailed suggestions the British had prepared for them; to be precise, ten ‘bright ideas’.[38] Once more a suggestion of a British loan in Paris, this time in the form of the discounting by French banks of British bills, was discussed. According to Ambassador Edge, the French officials were unhappy with the British noncommittal attitude to this possible solution to British problems, a response attributed by an official of the Bank of France to:

a hesitancy in accepting any arrangement that might eventually, even in some small degree lead to the transfer to Paris of world financing operations, in which London has hitherto played the leading role.[39]

While Leith-Ross retained his view that the French sought to cooperate with their British counterparts, his positive feelings about the French were not shared by the Prime Minister Ramsay MacDonald.[40] Speaking on the subject of naval negotiations, he said: ‘France plays her usual game of dishonest construction on words and approaches. The sole problem for Europe apparently is to be how to keep France in her place.’[41] With a leader who had formed such a negative view of the French and, given that the Bank of England was consistently anti-French, it is not surprising that the attempt at an Anglo-French financial rapprochement did not succeed. Having thus turned away from Europe, the issue for Great Britain was whether a working relationship with the U.S. was possible.

MacDonald’s counterpart in Washington was at that time (21–22 February) contemplating the issue of war debts in general and the British war debt in particular. Herbert Hoover was America’s 30th President and almost certainly her unluckiest. A native of middle America, born in very poor circumstances, he rapidly rose to fame as one of the world’s most successful mining engineers. Both as a senior partner in Bewick, Moreing & Company, a British firm, and head of his own firm of mining consultants, he lived in London from 1907 to 1914 and it was his work organising facilities for Americans stranded in Europe at the onset of the First World War which led to his role as head of the Commission for Relief in Belgium. (It should be noted that the combination of his pre-war experience in Britain and his battles with Asquith, Lloyd George and Churchill over Belgian relief left him with at least a slight anti-British bias.) As Hoover’s fame as ‘The Great Humanitarian’ soon exceeded his reputation as the ‘The Great Engineer’, he was the logical choice for U.S. Food Administrator once the U.S. entered the War, in which capacity he introduced ‘victory sausage’ and put the slogan ‘Food Will Win the War’ into the American vocabulary.[42] In 1920, an amateurish attempt to run for President having fizzled out in California, Hoover campaigned for the Harding/Coolidge ticket and asked for the position of Secretary of Commerce on the condition that he be given responsibility for all commercial activities including international economic matters formerly under the supervision of the Departments of State and Treasury.[43] His terms were granted and Hoover ran the Commerce Department for the next eight years, his tenure being the only time in that department’s history when it attracted any attention. At Commerce, Hoover attempted to implement his personal philosophy which consisted of an attempt to wed traditional American ideology to the realities of twentieth century life. He believed that science and rationalism would provide answers for most of the world’s problems and that, of all professionals, the engineer was the most important to modern life. As Hoover considered that individual initiative was the key to a nation’s strength, he was against government intervention when there was any alternative, particularly criticizing the dole.[44]

In 1928 Hoover ran for President and soundly defeated Alfred E. Smith. While he did not coin the slogan, ‘a chicken in every pot’, that was the unsaid message; with Hoover the prosperity of the 1920’s would continue. It was not to be. Barely six months after taking his office came the Wall Street crash and the beginning of what would commonly be called in the U.S. the ‘Hoover Depression.’ Although he continued his very involved, ‘hands-on’ Presidency (his style was very similar to that of Neville Chamberlain and the contrast between Hoover and his predecessor Calvin Coolidge analogous to that of Chamberlain and Stanley Baldwin), Hoover slowly turned bitter and isolated himself in the White House. To Stimson meetings with the President were like being in a bath of ink.[45] Initially Hoover had believed that the depression was temporary, isolated and home-grown but by December 1930 he had changed his mind, saying that ‘in the longer view the major forces of the depression now lie outside of the United States.’[46]

Almost despite himself the President began focusing on European problems and in particular the war debts/reparations conundrum. Earlier he had not been sympathetic to European complaints. In 1922 Lamont wrote Grenfell that ‘Hoover, whose heart is supposed to be melting with tenderness for Europe, is the worst of the lot.’[47] In February 1931, Hoover did not yet believe that the U.S. would make any substantial contribution by postponing debt payments; he told Stimson that a mere $250 m (the total payments due to the U.S. in 1931) was too small to have any effect on the world situation. Furthermore nothing he did could aid Britain for, thanks to the Balfour Note, any benefit derived from a reduction in the amount of monies owing to the U.S. by Britain would immediately be passed on to her debtors.[48] It would take considerable pressure - the failure of one country’s major bank and the threat to a second nation’s financial order - before Hoover would revise his thinking.[49]

As time passed and foreign demands for gold continued slowly but steadily to erode British reserves, R.H. Brand gloomily concluded: ‘there is a great and growing lack of confidence, both here and abroad (which I think well justified) in our power to adjust ourselves to external conditions.’[50] Norman occupied himself by continuing to criticise the BIS, writing Harrison that ‘the BIS is already slipping to the bottom of a ditch….’[51] His antagonism was probably not lessened by the fact that the BIS was at that time serving as a depositary for central banks which had converted sterling holdings into dollars.[52] At last, during the end of the first week of March, the pound had strengthened against the franc. However, sterling had weakened against the dollar and Norman reported that Snowden had said that he was always being told that no matter what he did, Britain would slide off the gold standard, to which the Governor had reassured the Chancellor that the Bank was prepared to take any steps that might be necessary, however drastic, to prevent that taking place. He had also informed the Chancellor that ‘no financial position, however good, could be maintained indefinitely against worsening fiscal and industrial conditions.’[53] Again Norman had indicated the inextricability of financial conditions from other matters; the erosion of his original ivory tower conception of monetary matters was continuing apace.

In keeping with his usual custom and in order to discuss Britain’s exchange position, Norman, together with Harvard Professor O.M.W. Sprague, who served as his advisor, made plans to visit the U.S. Leffingwell had offered him a home as had Parker Gilbert (former Agent-General for Reparations and now a Morgan partner) but on Harrison’s advice Norman turned both men down and instead accepted the hospitality of the FRBNY’s Governor.[54] Norman and Sprague embarked on 21 March and the Bank released a statement urging that no special significance be attached to his trip.[55]

The Governor was not yet aware that the last week in March marked the end of the first sterling crisis of 1931 - by the beginning of April the exchanges would turn definitely in Britain’s favour where they would stay until mid-July. Ironically this earlier crisis, instead of serving as a warning, may have produced a false sense of security. For by standing fast Britain had weathered the storm. She had not made major concessions to anyone, nor had the Bank of England broken precedent and issued a public loan to shore up sterling. The truth of Sir Richard Hopkins’ comment of a year earlier, that should an exchange crisis come there would always be plenty of time in which to handle it, appeared to have been borne out.[56]

While Norman was en route, the Kindersley Plan returned to the forefront of international discussion; it was reported that J.P. Morgan had told Gates McGarrah that his bank was not interested in cooperating in its implementation.[57] This coincided with earlier intimations in Basle that the opposition of the Bank of France had doomed the Plan.[58] Yet on his arrival in New York on 28 March, Norman was immediately asked about it but, as usual, he refused to speak to the press, although he affably wished them ‘better luck next time’.[59] Norman spent the first week of his trip in New York where he must have been cheered by the prevailing sentiment which was focused on the hope of an economic upturn. For example, the monthly First National Bank of New York Report said that there were continued improvements in the business situation[60] and Sullivan & Cromwell, a major Wall Street law firm, was under the impression that the German bond business would improve in the near future.[61] (The latter information confirmed British reports that the situation in Germany was getting better.[62]) Germany was in the forefront of the political news during this period; Foreign Offices and Treasury Departments were focusing on the Austro-German plan for a customs union. The U.S. State Department had difficulty deciding whether such a scheme would violate any existing treaties unlike the French who were sure it was illegal. Stimson’s preliminary conclusion was that he should not allow himself to be quoted on the topic as the matter was bound to cause problems between France and Germany.[63]

Stimson began his direct involvement with the world of international finance when he visited the FRBNY in New York on 1 April. Until the previous month liaison with the FRBNY and the Federal Reserve Board in Washington had been handled by Harrison together with Undersecretary of State Joseph Cotton, but the latter’s untimely death had left a vacuum which Stimson himself, at Harrison’s suggestion, agreed to fill.[64] Thus when Norman arrived, an invitation to Stimson was extended and the latter travelled to the FRBNY’s 33 Liberty Street headquarters to meet the British central banker. At their first meeting Norman apparently said very little but Harrison previously had reported that Norman believed that the key to the financial situation was the position of labour and that the depression would not be cured unless the price of labour was brought down to a par with other commodities.[65] Several days later, with sterling definitely improving, Norman journeyed to Washington where he met with President Hoover to whom he reiterated his views as to the necessity for the deflation of labour costs.[66] Stimson also had the pleasure of lunching with the Governor at Secretary of the Treasury Mellon’s home and finally they had an extended discussion at the Secretary of State’s office.[67] Norman, as was now usual for him, was very pessimistic about the general European situation. After excluding Belgium and France from consideration on the grounds that they were not badly affected by the slump, he singled out Poland, Czechoslovakia, Rumania and Yugoslavia as countries which Poincare, by offering loans, had been trying to form into an anti-German block, thus mirroring the accusation Moreau had earlier levelled against Norman. The Governor put Germany and Britain in a category by themselves, being in very similar economic straits, and then proceeded to praise Germany and excoriate Russia as ‘the very greatest of dangers.’ Finally Norman spoke in very gloomy terms about the English predicament and the role of the Labour Party. While he had only the highest praise for Philip Snowden, calling him ‘the best loved Chancellor of the Exchequer that England had had within his memory’, the Governor said that the rank and file Labour party was socialistic and the leaders were tied to them and could not escape.[68]

Norman’s comments are very revealing: he was obviously far more candid with the Americans than he was in Britain. One must conclude that his honesty did not aid the British cause during the next few months - having expressed a lack of confidence in the Government his Bank worked with, it was only logical that his audience came to share his misgivings. It is also interesting to consider the nature of his American reception. It would seem that Norman had reached the apogee of his success; he was received by the President, the Secretaries of State and Treasury as well as by Harrison and various Morgan partners. Everyone was eager to hear what the Governor of the Bank of England thought about the world’s problems. Perhaps if more constructive answers had been forthcoming, neither Norman’s position nor that of the institution he represented would have declined in the years to come in the way that they did.

The American papers followed Norman’s progress closely, not only speculating on possible results if the Kindersley Plan were adopted but publishing reports that a key purpose of his visit was to suggest an international parley on war debts.[69] French observers also watched carefully; according to an American diplomat, it was the secrecy and suddenness of Norman’s trip which excited the interest Parisians obviously took.[70] Swiss reports were contrary to French comments which also emphasized a possible Anglo-American agreement on war debts; Basle gossip had it that Norman was seeking a reduction in the FRBNY discount rates, which was the only report seemingly borne out by future events.[71] At dockside on 14 April Norman again evaded questions save for one enquiry in response to which he said he did not believe that the fate of King Alfonse of Spain would have any effect on international finance.[72]

The Governor returned to London on 21 April and attended the Committee of Treasury meeting the next day. First Professor Sprague, summarizing the impressions he had garnered in his native land, opined that the hoped-for spring revival would not occur. The Governor then said that the attitude of the U.S. towards Britain specifically and the world generally had altered, that Americans believed that Britain either could not or would not adjust to present realities and that Germany was ‘the outstanding country in Europe which possesses the foresight and courage necessary to deal with the problems of the present moment.’[73] What Norman appears to have done here is to quote himself back to the Committee of Treasury, attributing his sentiments to the Americans. This is clear when one examines what Stimson recorded Norman as saying specifically about the Germans:

she was the one country whose policy had been directed with manly courage … they had got it to a point where the members of the employed class were ashamed not to be employed. They were ashamed to rest upon the dole….[74]

By emphasizing an American lack of respect for Britain, Norman may have hoped to force changes in her domestic monetary policy for this would not be the last time he misquoted others to suit his purposes. He was, however, right that Americans had at least perceived a shift in the balance of Anglo-American relations; for example, Stimson said in late April that Britain, instead of interfering in American diplomatic initiatives, now simply followed America’s lead.[75] This alteration in the balance of power between the U.S. and Britain would obviously have ramifications on the events of the next few months.

Norman had much to occupy himself with upon his return. The sterling exchange continued to rise, an event which frankly puzzled the Governor.[76] A warning memorandum prepared by his central banking section was circulated in the Bank and shown to the Treasury. It predicted that in the summer the franc would strengthen and thus gold exports from London to Paris beginning in July until the middle of November must be expected.[77] Finally he surely paid attention to the budget which Snowden presented to Parliament on 27 April. Making use of the expedients for which he had so often condemned Churchill, Snowden balanced the budget chiefly by altering the timing of income tax payments.[78] While the ploy worked, no one doubted that the solution was purely temporary in nature.

By May even the American optimists had given up on a possible recovery; leading economist Irving Fisher told Stimson that the cause of the depression’s continuing force was the failure of the FRBNY to purchase bonds on the open market and Fisher attributed Harrison’s inaction to his being under the thumb of Russell Leffingwell.[79] Leffingwell’s partners, J.P. Morgan and Thomas Lamont, were meanwhile journeying in opposite directions. Morgan, having left England where he had lunched with Norman at the end of April, was returning to New York while Lamont, after visiting Italy and France, arrived in Britain and immediately went to the Bank of England.[80] There he dined with Grenfell and Norman and the latter painted a dismal picture - finance was trying to keep on a steady course caught between the industrial crisis and political storms. According to the Governor:

The Labour Government did not know where it was going - it had no fiscal policy that was settled…. England was not master in her own ship but the U.S.[was] blind and taking no steps to save the world and the gold standard.[81]

Putting this statement together with those he made earlier, one can conclude that Norman, having despaired of the pound’s future, may have believed that his chief hope was an American - sponsored rescue. Given his American ties (he had spent several happy years there and had many friends in the U.S.) and the support he had received from Strong and Morgan’s, such an attitude on his part would not have been surprising. It would also explain why after Britain had gone off the gold standard in September 1931, Norman was considered the most likely originator of the destructive rumours about the U.S. financial position which caused her to suffer a massive gold drain. If he felt rejected by the country whose help he had sought, he may have found a suitable revenge.[82]

The exchanges remained favourable to Britain and with call money rates in New York down to 1%, their lowest rate since 1908, Norman felt justified in cabling Harrison on 13 May that Bank rate would be reduced to 2% effective the next day.[83] But this development was not sufficient to overcome Norman’s depressed mood. Firstly he was informed that the report of the Macmillan Committee would shortly be released and furthermore that it would contain recommendations which would be embarassing to the Bank.[84] Formally known as the Committee on Finance and Industry, the Macmillan Committee had been established in 1929 to investigate the position of the City and its relationship with British industry.

More ominous at the time, the situation in Austria was rapidly deteriorating. The Bank of England had maintained close ties with Austria, aiding in her post-war reconstruction and helping to create the Austrian National Bank while Britain had been one of the guarantors of the various League of Nations loans issued on Austria’s behalf between 1922 and 1930. Indeed, Norman’s services were appreciated by the Austrian government to the extent that it decided to reward him; after some debate between the propriety of a medal versus a piece of art, he received the Grosse Goldene Ehrenzeichen am Bande from Ambassador Baron von Franckenstein in March 1931.[85] In March as well, the negotiations over the Austro-German customs union became public knowledge and, as Norman’s positive feelings about this scheme were not shared by the French, tension rose in Central Europe.[86] However, the general feeling of apprehension over Austria’s future was replaced in early May by two specific worries. The lesser was the release of information from the Austrian Government budget office of figures which indicated that notwithstanding various financial sleights of hand, the Austrian budget had produced a small deficit for the year 1930 and a very large predicted deficit for 1931.[87] In the era when what is now known as deficit financing was considered national bankruptcy, this was indeed serious. The more present danger was represented by a bank which has gone down in financial history as the match which ignited the 1931 cataclysm - Credit Anstalt. This bank was not only the largest bank in Austria but controlled 40% of Austrian industry.[88] After a somewhat halting start it had seemed that this entity formed by merger three years earlier was on solid footing but due to a witch’s brew of circumstances - the parlous state of the Austrian economy, a general perception that the French were withdrawing their funds out of anger over the customs union plan and peculations at the Credit Anstalt - by May the Credit Anstalt was on the verge of closing its doors.[89] The problem was splashed across front pages of newspapers in London, New York and Paris on 11 May and by the end of that week the Austrian government was urgently seeking new financing. The government turned to Morgan’s hoping it would coordinate the loan but was told that present conditions in London and New York prevented their taking the kind of role the Austrian Government had envisioned.[90] By 18 May the major central banks had become involved as they pondered a BIS suggested credit of 100 m Schillings.[91] Within the week both Norman and Harrison felt that Austrian problems were so grave that it was imperative to involve their respective governments. Therefore Norman went to Downing Street to report about the crisis while Harrison called Stimson.[92] During this period, and for the last time, Norman and the Bank of England took the lead in organising a rescue attempt, convening a Credit Anstalt creditors’ committee (including reluctant Morgan Grenfell partner Charles Whigham) at the Bank of England and supervising their deliberations.[93] In showing a willingness to forget Great Britain’s troubles in an attempt to alleviate those of Austria, Norman was motivated in part by his close ties with Austria but more importantly by his belief that ‘a monetary breakdown in Austria might quickly produce a similar result in several countries.’[94] Time would confirm his judgement.

NOTES

1. B/E, OV45/4, Leith-Ross, ‘Note on Financial Discussions with the French Treasury’, 5 January 1931.

2. National Archives of the United States, Washington, D.C., RG 59, 851.51/1663, W. Edge to H. Stimson, 7 January 1931.

3. NA, RG59, 851.51/1663, Edge to Stimson, 6 January 1931.

4. B/E, MB52, Committee of Treasury (“C/T”) Minutes, 7 January 1931.

5. B/E, OV45/4, Leith-Ross, ‘Note on Financial Discussions with the French Treasury’, 5 January 1931.

6. B/E, MB52, C/T Minutes, 7 January 1931.

7. Federal Reserve Bank of New York Archives, New York, N.Y., C261, Norman to Harrison, 9/31, 13 January 1931.

8. B/E, MB52, C/T Minutes, 14 January 1931.

9. B/E, OV45/4, Hawtrey, ‘French Gold’, 26 January 1931.

10. B/E, OV45/4, Escallier Memorandum, 13 January 1931.

11. Hawtrey, op. cit., 26 January 1931.

12. PRO, T188/22, Leith-Ross, ‘Memorandum Concerning Conversation with French Treasury Officials’, 15 January 1931.

13. B/E, G3/198, Norman to C. Moret, 26 January 1931.

14. Bundesarchiv, Koblenz, Federal Republic of Germany, R 111/32, ‘Operations of the Bank of France 1930’, Bankers Trust Company Department of Foreign Relations - French Section, February 1931.

15. PRO, T188/24, Leith-Ross Memorandum, 20 January 1931.

16. The New York Times, 27 January 1931, p. 12.

17. W. Lippman and W.O. Scroggs, The United States In Foreign Affairs - 1931 (Harper & Brothers, New York, 1932) pp. 32–3.

18. See, e.g., Leith-Ross’s comments in his ‘Memorandum Concerning Conversations with French Treasury Officials’, 15 January 1931, (PRO, T188/22).

19. NA, RG59, 841.516/80, R. Atherton to Stimson, 31 January 1931.

20. Keynes, op. cit., p. 485.

21. NA, RG59, 841.00/1145, Atherton to Stimson, 13 January 1931.

22. Ibid.

23. B/E, MB52, C/T Minutes, 4 February 1931.

24. NA, RG39, Box 104, M.H. Cochran to J. Cotton, 11 February 1931.

25. B/E, MB52, C/T Minutes, 7 January 1931; PRO, T208/149, Leith-Ross, ‘Memorandum Concerning Conversation with Sir Richard Hopkins and Governor Norman’, 17 February 1931.

26. Leith-Ross Memorandum, op. cit., 13 February 1931.

27. PRO, T208/149, Treasury Memorandum, 13 February 1931.

28. B/E, G3/197, Norman Memorandum, 19 September 1930.

29. B/E, G3/197, Norman to W.H. Clegg, 10 December 1930.

30. B/E, MB52, C/T Minutes, 17 September 1930.

31. Morgan Grenfell, British Government Loan in the U.S. - 5/3, Hopkins to Morgan Grenfell, 15 December 1930.

32. Cochran, op. cit., 11 February 1931.

33. NA, RG59, 851.51/1672, Edge to Stimson, 26 January 1931.

34. NA, RG3 9, Box 104, Cochran to Cotton, 6 February 1931.

35. Lamont Papers, 181–19; Lamont was sent a copy on 14 February 1931 by his Paris partner N.D. Jay who had received it from Gates McGarrah.

36. B/E, OV45/4, R. Kindersley Memorandum, 20 February 1931.

37. PRO, T188/22, Leith-Ross, ‘Notes of a Meeting with French Treasury’, 21 February 1931.

38. B/E, OV45/4, ‘Notes of a Meeting of Leith-Ross, Waley, Sprague and Siepmann’, 3 0 January 1931.

39. NA, RG59, 851.51/1684, Edge to Stimson, 26 February 1931.

40. Leith-Ross Memorandum, op. cit., 21 February 1931.

41. PRO, 30/69/1753, J. Ramsay MacDonald Diaries, 22 February 1931.

42. R.N. Smith, An Uncommon Man, The Triumph of Herbert Hoover (Simon and Schuster, New York, 1984), pp. 86, 89.

43. J.H. Wilson, Herbert Hoover: Forgotten Progressive (Little Brown and Co., Boston 1975), pp. 79–80.

44. Ibid., pp. 149–51.

45. Yale University, Sterling Library, New Haven, Conn., H.L. Stimson Diaries, Vol. 3, Reel 16, 18 June 1931.

46. Lippman and Scroggs, op. cit., p. 3.

47. Lamont Papers, 111–14, Lamont to Grenfell, 19 October 1922.

48. The Balfour Note of August 1922 announced that the British Government would collect only as much in debts owing to her from her former allies as was necessary to pay the U.S. in respect of British war debts. It failed to accomplish its purpose which was to influence the American government into cancelling or greatly reducing these obligations.

49. Stimson Diaries, Vol. 3, Reel 16, 21 February 1931.

50. Bodleian Library, Oxford, R.H. Brand Papers, 28.24, Brand to Hawtrey, 24 February 1931.

51. B/E, G3/198, Norman to Harrison, 3 March 1931.

52. N/A, RG39, Box 104, Cochran to Cotton, 26 February 1931.

53. B/E, MB 52, C/T Minutes, 4 March 1931.

54. FRBNY, C261, Norman to Harrison, 65/31, 4 March 1931; Harrison to Norman, 78/31, 9 March 1931.

55. B/E, C43/296, E.H.D. Skinner, to A.C. Grey, 21 March 1931.

56. PRO, T175/16, Hopkins Memorandum, May 1930.

57. NA, RG39, Box 104, Cochran to W.R. Castle, Jnr., 27 March 1931.

58. NA, RG39, Box 104, Cochran to Castle, 11 March 1931.

59. The New York Times, 28 March 1931, p. 6.

60. Bundesarchiv, R 111/23, Report of The First National Bank of New York, March 1931.

61. Bundesarchiv, R 111/23, E. Archdeacon to O.P. McComas, 14 March 1931.

62. PRO, T188/24, E. Rowe-Dutton to Leith-Ross, 6 March 1931.

63. Stimson Diaries, Reel 3, Vol. 15, 25 March 1931.

64. Stimson Diaries, Reel 3, Vol. 15, 26 March 1931.

65. Stimson Diaries, Reel 3, Vol. 15, 1 April 1931.

66. The New York Times, 6 April 1931, p. 34; Stimson Diaries, Reel 3, Vol. 15, 7 April 1931.

67. Stimson Diaries, Reel 3, Vol. 15, 7 April 1931.

68. Stimson Diaries, Reel 3, Vol. 15, 8 April 1931.

69. The New York Times, 12 April 1931, p. 25.

70. NA, RG59, 841.51/910, B. Thaw, Jnr. to Stimson, 14 April 1931.

71. NA, RG39, Box 104, Cochran to Castle, 21 April 1931.

72. The New York Times, 15 April 1931, p. 13.

73. B/E, MB53, C/T Minutes, 22 April 1931.

74. Stimson Diaries, Reel 3, Vol. 15, 8 April 1931.

75. Stimson Diaries, Reel 3, Vol. 16, 21 April 1931.

76. FRBNY, C261, Norman to Harrison, 31/113, 29 April 1931.

77. B/E, OV45/4, Memorandum: ‘The Normal Rhythm of the French Balance of Payments’, 27 April 1931.

78. The New York Times, 28 April 1931, p. 1.

79. Stimson Diaries, Reel 3, Vol. 16, 23 April 1931.

80. B/E, ADM20/20, Norman Diaries, 30 April 1931.

81. Lamont Papers, 173–3, Lamont Diaries, 8 May 1931.

82. Herbert Hoover Presidential Library, West Branch, Iowa, W.R. Castle Jnr. Papers, Castle to O. Mills, 29 October 1931.

83. The New York Times, 12 May 1931, p. 1; FRBNY, C261, Norman to Harrison, 130/31, 13 May 1931.

84. B/E, MB53, C/T Minutes, 13 May 1931.

85. B/E, G3/197, Norman to Baron von Franckenstein, 3 December 1930; B/E, G3/198, Norman to Otto Juch, 11 March 1931.

86. Stimson Diaries, Reel 3, Vol. 15, 8 April 1931.

87. Morgan Grenfell, Austrian Negotiation 1931 Documents, Memorandum: ‘Present Outlook for Austrian Budget’, 6 May 1931.

88. The Credit Anstalt, whose full name was the Oesterreichische Credit-Anstalt für Handel und Gewerbe, had been formed when the Oesterreiche Credit Anstalt, a Rothschild controlled bank, was forced in 1928 by the Austrian Government to take over the Boden Kredit Anstalt which had failed.

89. Morgan Grenfell, Credit Anstalt 1, Morgan’s (N.Y.) to Morgan Grenfell, 11 March 1931. Kindleberger, op. cit., pp. 149–50, makes a persuasive case for believing that the charge against the French was unjust.

90. Morgan Grenfell, Credit Anstalt 1, C.F. Whigham to Baron Wimmer, 19 May 1931.

91. Harrison Papers, Binder 2, BIS to FRBNY, 31/308, 18 May 1931; PRO 30/69/288, Note to Prime Minister, 25 May 1931.

92. Stimson Diaries, Reel 3, Vol. 16, 27 May 1931.

93. Morgan Grenfell, Credit Anstalt 1, Morgan Grenfell to Morgan’s (N.Y.) 31/4768, 26 May 1931; B/E, ADM20/20, Norman Diaries, 26 May 1931; B/E, MB53, C/T Minutes, 27 May 1931.

94. Harrison Papers, Box 20, Norman to Harrison, 143/31, 25 May 1931.

Chapter Two

STORM BEFORE THE CALM, CALM BEFORE THE STORM