‘When England went off gold it was like the end of the world….’

Jackson E. Reynolds, President, The First National Bank of New York

On 24 August, even as Ramsay MacDonald began the task of forming a National Government, it was clear that it would not have a smooth passage. For on the same day The Times’ leader stated that the central bank credits were almost exhausted.[1] Representing the first published indication of the Bank of England’s utilization of its borrowed funds, this revelation had a negative effect on foreign exchange markets and caused the Bank to lose more foreign currency than on any previous day.[2] The acquisition of new credits thus continued to be the Government’s first priority; therefore Morgan Grenfell, at the request of the Bank of England, formally reiterated to Morgan’s (N.Y.) the request of the British Government for a short term credit, adding that the Government was simultaneously approaching Paris. As a stopgap measure the Treasury placed at the disposal of the Bank of England dollar securities amounting to some £28 m ($140 m) held for its account by Morgan’s (N.Y.).[3] Morgan’s (N.Y.) agreed to form a syndicate to provide the credit but as their offer would not remain open indefinitely, the New York house stressed the importance of concluding the transaction as soon as possible, emphasizing that it was of vital importance to arrange the French half of the transaction.[4]

Negotiations in Paris had in fact begun with the arrival of H.A. Siepmann on 24 August. However, he took the approach that the question of a credit was not a top priority matter, a rather surprising position in the circumstances and one that not only confused Governor Moret but diverged totally from the viewpoint held by Morgan’s (N.Y.) and Harrison.[5] The Americans were motivated by their precise knowledge of the extent to which the Bank had supported sterling and by a belief that any delay increased the likelihood of failure for a stabilization operation. Their sense of urgency was also influenced by the mixed reaction of the foreign press to the new British Government. The New York partners believed very strongly that the Government’s program must be seen to be widely supported by the British people, yet it was immediately and publicly evident that this was not to be the case. For example, The New York Times on 25 August reported that the trade union group of the Labour Party had declared war on Ramsay MacDonald and that Arthur Henderson now had an opportunity to become the Prime Minister.[6] But political concerns did not form the whole picture. In particular, various American financial publications focussed on underlying British financial weaknesses. Thus the Whaley-Eaton Service’s Foreign Letter of 25 August stated that ‘the British difficulty is too aggravated to be cured by a mere balancing of the Budget.’[7]

Negotiations for the American credit were conducted by Grenfell on behalf of his New York partners and by Harvey and Peacock for the British Government. They did not progress as smoothly as might have been expected. The stumbling block was not the amount of the credit, which was now envisioned to be at least $150 m and, with luck, $200 m, but rather was the cost of this financing to the British. The opening commission of 1% plus %, the same as in 1925, was not controversial. What was under discussion was Morgan’s proposal that advances under the credit bear a rate of 4% which was equal to Bank rate at the time. It is true that often the Bank rate or discount rate applicable to the borrower is used as the basis on which interest is calculated but in this case the borrower felt that with money cheap all over the world, particularly in the U.S. where the discount rate was 1%, a rate of three times that was exorbitant.[8] The British were unhappy enough for MacDonald himself to complain to Stimson who had arrived in London en route to the U.S. In turn the Secretary of State called on J.P. Morgan to remonstrate with him but was told that the American banks, not appreciating the gravity of the situation, thought the proposed interest rate was very low because it was not higher than that charged in 1925.[9] In fact although Morgan’s (N.Y.) previous reluctance to arrange a credit showed an awareness of the prevailing mood of the American financial institutions, it was surprised by the hitherto unheard-of number of refusals received in reply to its offer cable. As one turned down such an invitation at the peril of being excluded from future loan syndicates, that this reaction was so common showed the depth of American feeling in August 1931 against foreign credits.[10] Therefore, the firm felt it would be impossible to offer their participants any less than the terms previously communicated to the British Government. The British, who would ultimately capitulate, were left with an increased resentment of American power which had already begun to develop because of a belief that the massive American hoarding of gold was responsible for their problems. To Sir Frederick Leith-Ross: ‘American banks, finding themselves tied on the Continent, recoup themselves at our expense.’[11] As his comment indicated, for at least some Britons the goal of Anglo-American monetary cooperation was fast becoming a chimera not worth the sacrifice of any British interest.[12]

Morgan’s had been insistent that no American credit would be obtainable until a French credit for an equal amount had at a minimum been agreed upon. On 26 August, Anglo-French negotiations began in earnest. Leith-Ross, who took his first aeroplane ride in order to reach France in good time, was joined by S.D. Waley and Siepmann for this meeting between British and French Treasury officials.[13] The British received a warm reception as the French credit enjoyed the blessing of Premier Laval, the French leader telling American diplomat Theodore Marriner that the Governor of the Bank of France had concurred in the decision that France together with the United States should do its full share to help the British.[14] Moret still believed that the British goal ought to be a long term credit but understood and supported the British request for a short term credit.

The two main subjects under negotiation were the form the French credit should take and the question of taxation. Moret believed that if the French market was to provide the same amount as the American tranche, now fixed at $200 m (£40 m), it was necessary for the borrowing to be divided into two parts, half to be provided as a bank credit and the other half to take the form of a public subscription for one year British Treasury bills. The British were not happy with the latter proposal both because they believed that the French wished to advertise British penury and French strength publicly and also because it forced them to borrow the entire amount of the public offering at once instead of, like the bank borrowing, as and when needed.[15] Yet once more the British had no choice but to acquiesce in the French proposals. On the taxation question, the French Treasury accommodated itself by a piece of financial legerdemain to the understandable British desire to pay as little tax as possible (transaction taxes customarily are for the account of the borrower).[16]

As negotiations continued the British fear that the French would use this opportunity to pressure them into changing their position on reparations was shown to have been well-founded. During the most crucial stage of negotiations Flandin took the opportunity to bring up the German financial situation and state his Government’s opposition to any further conferences or meetings on the subject. He sought to ascertain the British position and in response Leith-Ross enquired whether Flandin was deliberately linking reparations with the British credit. Flandin disingenuously answered that he was simply taking advantage of Leith-Ross’ presence for an exchange of personal opinions.[17]

By the following day, 27 August, discussions had progressed far enough for Leith-Ross to meet with representatives of the Paris banks. At the end of the day the British received Treasury clearance for the public issue notwithstanding the strong fear that it carried with it the risk that the subscription would cause a drain of French funds from London thus rendering the whole exercise pointless. The only unsettled question was the interest rate for the British borrowings.[18] Snowden and Morgan discussed the same issue in London on 28 August. Morgan carried with him a cable from Morgan’s (N.Y.) to be shown to the Chancellor. It stated that:

In reference to the proposed interest rate in America we may emphasize further that there is not a single institution in our whole banking community which actually desires the British Treasury Notes on any terms either as to commission or interest. If they go into the matter it will be because of their becoming convinced that it is important and necessary for the whole banking community here to co-operate in the support of sterling…. Every institution is probably making strenuous endeavours to get its position more liquid. At the cost of interest account the banks are allowing maturities to run off and are rejecting customer’s loans which in normal times they would be glad to have. It is for this reason that quoted interest rates in this market by no means represent the actual state of affairs.[19]

The next day the British Government conceded and, Morgan’s (N.Y.) having learned that an agreement in principle with the French had been reached at a cost to the British equal to that of the American credit, the agreement pertaining to the Morgan credit was executed. It took the form of an agreement by Morgan’s (N.Y.) and 109 other American banks to purchase British Government dollar Treasury Bills in amounts of $10 m or multiples thereof for periods of 30, 60 or 90 days, thus providing the British with an available war chest of $200 m (£40 m) with which to protect sterling.[20]

That the credit was arranged as expeditiously as possible and for an amount which made it the largest inter-war era credit provided by Morgan’s shows two things. The first is that the New York house still retained a great deal of influence over the American banking community, particularly in the Northeast. The second is that the participants, although no doubt partially drawn into the transaction by Morgan’s (N.Y.) pressure, also obviously believed in the importance of both the gold standard and the maintenance of sterling’s stability. At a time when a record number of American banks were failing and with German exposure far in excess of that of British banks American financial institutions were willing to enter into the British credit on three days’ notice. The German experience had shown that something besides high interest rates was needed to produce new money. That extra dimension appears to have been an American belief in the importance of the British battle to the U.S. This consciousness of solidarity was to be one of the casualties of the British defeat.

Morgan’s believed the signing had not come a moment too soon for the political waters remained troubled. On 26 August, the Labour Party had issued a manifesto announcing its opposition to the National Government and its proposed budget cuts and proposing to substitute for reductions in the unemployment benefit the taxation of fixed interest-bearing securities and a decrease in the interest paid in respect of war debts.[21] Together with the virtually unanimous rejection by the Labour Party of MacDonald, the result was foreign skepticism as to the ability of the National Government to carry out its stated mission. Clearly concerned, Morgan’s (N.Y.) immediately cabled Morgan Grenfell to ascertain, among other things, whether an Associated Press prediction that the Government would not have a working majority in the House of Commons was true.[22] Morgan’s, in company with the American Government, was also not pleased that the Labour Party’s explanation of the fall of the late Government placed great weight on the allegation that a bankers’ ramp led by George Harrison had been primarily responsible for its demise. While Morgan’s could and did take comfort in the fact that it was not mentioned either by name or implication, Acting Secretary of State Castle personally expressed his indignation to the British Charge d’Affairs in Washington.[23]

The Bank of England immediately made plans to draw under the American credits, convening for this purpose a meeting of the Committee of Treasury on 29 August.[24] The British Government prepared for the special session of the House of Commons scheduled to begin on 8 September whose purpose was to debate the Government’s economy plan. To aid in this task H.D. Henderson prepared a memorandum which attempted to anticipate Labour Party strategy. He speculated that a class attack would be most likely and stressed the importance of emphasizing that ‘had the pound been allowed to go during the present crisis it would not have been a matter of a depreciation of 10% or 20%, but a real ‘degringolade.’ Henderson, in passing, made a further point which was in the event as interesting as his main thesis:

It is well to remember that the controversy over the return to the gold standard in 1925 is more familiar to most of the British public than the experience of continental inflation and that the critics of the return to gold are fairly held to have been justified by the event. To many reasonable minds, accordingly, the idea of the depreciation of sterling conveys no more serious suggestion than that of a reversal of the dubious policy of six years ago.[25]

The reaction of the British public after 21 September would prove the prescience of this remark.

Also prepared for MacDonald was an analysis which showed that the National Government’s proposed economies differed only marginally from those which were acceptable to the late Labour Government. The Prime Minister, obviously distressed at the events of the previous week, spent much time responding to the numerous angry or sad letters he had received from Labour Party members explaining their decision not to support him. For example, John Baker said the bankers knew at the time of the 1920 Brussels Conference that their policy would involve massive unemployment yet they persisted anyway and R.S. Young, M.P., while stressing his sorrow at the turn of events, concluded that: ‘the international bankers will have to face up to the fact that democracy will simply not tolerate poverty in the midst of plenty.’[26] MacDonald tried to justify his actions, telling his constituency party that the crisis facing the government was of such magnitude that it could have brought the country to an industrial standstill causing wages to fall drastically, unemployment pay to disappear and costing the working classes millions of pounds. The Prime Minister also took the opportunity of pointing out to Herbert Morrison that:

When the necessary legislation is passed, the Party will be able to discuss things in a house still standing and not from the top of heaps of ruins, so whatever you may say or do, I have the credit of saving the Party.[27]

The credits having been obtained, sterling appeared firmer on 29 August as the pound traded at $4.86, up one-eighth from the previous day. However, because the exchange rate was being supported by the Bank of England which had obtained American and French bridge loans for this purpose, it did not accurately reflect the true position of sterling which would remain shaky unless and until the budgetary proposals became reality.[28] The concern over the pound was universal; Dr. G. Vissering of the Netherlands’ Central Bank called Harvey to request that Dutch gold held by the Bank of England be earmarked. Harvey huffily refused, saying that the Dutch could either take their gold back to Amsterdam or keep it in London but if they chose the latter course they would not be placed in the position of a preferred creditor. To assuage Vissering’s fears Harvey wrote him about the credits and stressed the total commitment of the National Government to the maintenance of the gold standard.[29] Austen Chamberlain, now at the Admiralty, was concerned enough at the possible effect of Labour propaganda to suggest to R.H. Brand that the latter write a series of columns for The Times to explain the August crisis and the necessity for staying on the gold standard, Chamberlain adding that the tone should be along the lines of ‘if Napoleon had won at Waterloo.’[30] Such a series of articles was tailor-made to respond to the cable sent by Lamont to Grenfell on 29 August, which stressed Lamont’ s view that it was crucial for the new Government to remember how vital the restoration of American confidence in Britain was, especially as, in Lamont’s opinion, the American financial community now shared the City’s distrust of the drift of British political affairs.[31] Grenfell was worried enough to read this cable to the Committee of Treasury and, together with Harvey, authorized Peacock to discuss it privately with Neville Chamberlain.[32]

Lamont’s message was followed on Monday, 31 August by a cable from Morgan’s (N.Y.) to Grenfell. Its purpose was to highlight the New York house’s concern at what it viewed as the poor handling of the sterling exchange, a symptom of which was the frequent breaks in the value of sterling in the New York market after the London market had closed. Morgan’s (N.Y.) suggested better liaison between the Bank of England, the Bank of France and the FRBNY so that the credits would become an offensive weapon rather than a sitting duck for rapacious financiers. Having been left by his New York partners to decide whether to divulge the contents of this message to the Bank of England, Grenfell showed it only to Peacock who agreed that he and Harvey would take up the exchange question with Sir Robert Kindersley, head of the Committee of Treasury’s Exchange Committee, but without revealing the source of the concern.[33] While Harvey pondered this problem, he also worried over what he saw as the Government’s lack of progress in turning words into deeds. Thus to Herbert Samuel he wrote that the Bank was very concerned about the delay in announcement of the Government’s programme as this hesitancy had led to doubts being expressed both domestically and abroad. Two days later, on 31 August, he wrote to Francis Rodd that improvement in the currency situation would surely come if only the Government would make a satisfactory announcement of its agenda and then back it by appropriate propaganda throughout the nation.[34]

Harvey had indeed taken to heart Morgan’s criticisms about the method of utilization of the credits with the result that the Committee of Treasury agreed on the last day of August to authorise the expansion of the Bank’s current arrangements for handling foreign exchange operations.[35] Yet Morgan’s (N.Y.) remained concerned about the sterling exchange, sending their London partners on 1 September an analysis of the New York and London markets with a particular emphasis on the weakness and lack of depth of the forward market.[36] The attention of the New York partners was not solely concentrated on this subject; Leffingwell, as was usual for him, reflected on the broader British situation. In a wide-ranging letter sent to Lamont, he placed a great weight on Keynes’ attitude as a destabilizing force in the situation, attributing the economist’s animosity to the principles Leffingwell viewed as sacred to Keynes’s perverse and Puckish personality and to resentment that the Macmillan Report, on which Keynes had laboured hard, had been eclipsed by the May Report.[37]

Morgan’s (N.Y.) continuing concern over the British situation was echoed by the FRBNY. Harrison shared the New York partners’ belief that the credits were being mishandled and on 3 September cabled Harvey to say that in his opinion the British decision to peg sterling at $4.86 to $4.86 1/8, a rate considerably above the gold point, only encouraged sales of sterling. Harrison’s solution was to allow sterling to fluctuate just slightly above the gold point.[38] Harvey replied that while he was in general agreement with these sentiments this was not the time to change tactics.[39]

Thus matters stood while the Government attempted to make its contribution to the battle. The Cabinet knew that the eyes of the world’s financial leaders were focussed upon it yet they were anything but united. MacDonald, mirroring the feelings of his colleagues, wrote Stanley Baldwin to ask: ‘How long can this Government continue?’ The Prime Minister’s answer to his rhetorical question was ‘not very long.’[40] Matters were not made easier by the advice rendered by Harvey and Peacock who were called to the Cabinet meeting of 3 September. The Deputy Governor stated that although the formation of the present Government had somewhat improved the position, causing withdrawals of foreign exchange to decrease, they were still larger than the Bank cared to see. While Harvey admitted that he really did not know why the sterling drain was continuing, he was sure that ‘the future course of events depended largely upon the attitude of the British public towards the Government’s proposals.’ Thus at the height of the currency crisis, the Bank of England, which in past years had exulted in its control over financial matters, was claiming that it could not be responsible for the fate of the pound; the Government and the British people would decide the issue. Interestingly, at this time Harvey did not seek to hold foreigners responsible; on the contrary he went out of his way to state that the Bank of England had found the FRBNY and the Bank of France to be most cooperative.

With the probable motive of reinforcing his comments, Harvey was very forthcoming with figures illustrating the position. Since the beginning of the crisis, the Bank had lost close to £130 m ($650 m), of which £35 m ($175 m) had been in gold. £50 m ($250 m) had been derived from the central bank credits, drawings had been made under the Morgan credit and the remainder came from the Bank’s own reserves of foreign exchange. The last item must have come as a surprise to the Cabinet which would not have been aware that the Bank possessed such reserves.

As if this was not gloomy enough, Harvey stated that the agreements pertaining to the central bank credits provided that, failing other means of repayment, these borrowings would be repaid in gold. The Deputy Governor said that this ‘amounted in effect to a lien on a portion of their existing gold holding and reduced their actual free holding to little more than £80 m or about the equivalent of the new Government credit.’ This alarming exposition of the credit agreements was, however, seriously misleading. They did not provide for a lien on the Bank of England’s gold or anything close to it. Rather they contained a gold payment clause which required repayment to be made in gold.[41] What this meant was clearly stated by Siepmann in an internal bank memorandum written less than three weeks later where he delineated the difference between the ‘usual gold clause’ and a negative pledge on gold with the former constituting a mere moral obligation on the debtor’s part to provide gold for repayment. It is further clear from Siepmann’s memorandum that he was not expounding a new position but rather stating the accepted interpretation.[42] The Bank of England again displayed a belief that ends justified means, to wit, that in certain circumstances, mere facts should not stand in the way of persuasiveness.

After debating the merits of disclosing to the House of Commons the exact balance of payments position (it was decided to use only general terms), Harvey was then asked what the effect abroad of a general election would be. He replied that it might not be harmful if the results indicated a country united and determined to make major financial readjustments, but, if this were not the case, foreign opinion would be greatly disturbed. Peacock agreed, stating that the talk that the present Government might remain in office for only a few weeks had been troubling. The discussion then moved to the importance of correctly steering public opinion and the meeting ended with the Prime Minister mentioning the attacks which had been made on the Bank of England’s handling of the situation and the Government’s role in bowing to bankers’ pressure. As MacDonald believed that this was caused by ignorance, he suggested that when the crisis was over, the Bank of England ‘should be prepared to meet these charges and to make some statement as to the principles which had guided them in dealing with the general financial situation.’[43] Not only the British public but future historians would have profited had the Bank done as MacDonald requested.

As it was, both the Bank of England and the Cabinet left this Cabinet session disquieted. Harvey and Peacock believed it was vital for the Government to put forth firmly an economy programme and concentrate its efforts on enactment. Instead the Cabinet’s chief concern appeared to be the merits of an election, a question which the bankers believed to be nothing if not ill-timed. For their part, the Ministers, who had been raised in an atmosphere which held the Bank of England to be financially omnipotent, saw that the Bank at its time of ultimate testing was wanting. Harvey and Peacock had spent a good deal of August saying that if the economy programme was agreed upon and new credits obtained, all would be well. The politicians had followed their lead yet the promised results had not been delivered and to make matters worse the bankers appeared to refuse any responsibility for the current state of events and even declined to offer an explanation of why their prescription of the previous month had not produced a cure. No wonder Samuel Hoare for one later noted that he had been most unimpressed by the performance of the Bank and the City.[44]

The question facing the Government was whether it could handle the stern demands placed on it. These were not only internal in origin; Lamont writing on 4 September to Grenfell placed the responsibility for dealing with American public opinion on the British Government.[45] At the same time the BIS expressed the opinion that British finances were now the shakiest in Europe.[46] Certainly much had changed in the six weeks since the London Conference had convened to attempt to solve the German problem.

During this period Montagu Norman was recuperating in Canada. From Quebec, his initial destination, he had travelled to St. Andrews and then, on 4 September, to Digby, Nova Scotia. Although his departure from Great Britain had been caused by a physical and nervous breakdown, previous accounts of the crisis, notably those of Clay and Sayers, were not justified in concluding that the Governor was uninvolved in its dénouement.[47] On the contrary, the Governor, while in the New World, participated in the final stages of the battle he had for so long waged. Norman’s first conversations were with Harrison on 22 and 23 August. During the first discussion, which had been previously arranged by cable with Norman and by telephone with Peacock, the hitherto undecided question of whether Norman would go to Bar Harbor as he desired was finally answered in the negative because of Harrison’s belief that the British situation was too critical for Norman to take any action which could lead to unnecessary publicity and false rumours. In response to Norman’s query as to the current state of events, Harrison described the budgetary programme but did not go into much detail because he was unsure of how well Norman was and did not want to trouble him unnecessarily. Norman, however, assured Harrison he was feeling much better and would telephone him on the next day.[48]

During the conversation of 23 August Harrison was more forthcoming. He told the British Governor that he had spent the day out at Glen Cove with the Morgan’s (N.Y.) partners and that the Cabinet was now in session deliberating on the economy programme. Norman agreed with Harrison that the implication contained in some of the Government’s messages that it would resign if either Morgan’s (N.Y.) or the New York Governor thought the programme inadequate placed an unfair burden on the Americans. Harrison, by way of reiterating that the proposals’ merits could only be properly weighed in London, stated that he had asked Harvey several times for his opinion as to the programme’s adequacy and while the Deputy Governor generally implied that it was satisfactory, he did not give a direct answer. Norman, according to Harrison, intimated that Harvey probably would not allow himself to be pinned down but that he, Norman, believed that the programme was inadequate, and as any inadequate programme would cause trouble in a year or so the correct approach would be to seize this opportunity to force an economic adjustment encompassing a reduction in the cost of production and in wages drastic enough to make British goods competitive again. Norman concluded by saying that if this were done, the British crisis would be cured without the need for further credits but conceded that Harrison’s point as to the risky nature of placing total weight on budgetary reform had some merit.[49]

Thus by the end of August, Norman had discarded the non-participatory attitude he had demonstrated during the earlier part of the month. However, it is interesting to speculate on Norman’s prior intentions concerning his role during the August and September crisis. During previous breakdowns it had been his habit to go to South Africa yet this time he refused to go there and instead chose North America for his destination.[50] Perhaps the Governor wanted to be able to return to Britain relatively quickly. On the other hand, he may well have intended to play a major role behind the scenes, as it were, free from public scrutiny. His relationship with Harrison and Morgan’s (N.Y.) made this feasible and there is much in Norman’s character to suggest such a strategy. In either case, it is clear that Norman retained his earlier assumptions and still believed that something drastic had to be done to end the strained conditions under which the Bank had been operating. In August his solution was drastically to force down British costs of production. During the following month a different solution would appear.

Harrison could not have been pleased to hear Norman’s negative opinion of the budgetary proposals. Yet he appears not to have mentioned his conversations with the British Governor to anyone, least of all Harvey. The Deputy Governor, left in the dark as to his chief’s whereabouts, in desperation cabled Harrison to ask: ‘Have you seen our Governor? We have urgent messages for him.’ Harrison confined his answer to a simple statement of Norman’s current domicile and his present intention to sail from Halifax on 13 September. Harrison then cabled Norman to tell him to expect to hear from Harvey.[51]

No budget day was the focus of more attention than that of 8 September 1931. MacDonald found it an ordeal and reflected that ‘Tories in the crowd from the inside are even worse than from outside.’[52] Although the Government won its first vote of confidence by a majority of 59, the Labour Party persisted in its bitter opposition to the National Government’s proposals. The attitude of Henderson and his followers was motivated in part by the firm stance against the Government taken by the TUC and in part by bitterness. This was a logical response for a party that resented being labelled unpatriotic yet found it next to impossible to make substantive comments for it had supported most of the proposals now being put forth by the National Government. In delivering his budget message, Snowden, for his part bitter at his rejection by the Labour Party, did not hesitate to make this last point abundantly clear. His speech, which ended with the emotional quotation: ‘Come the world against her, England yet shall stand’, was perhaps the best of his career but it did not sway his former colleagues. Nor did it produce anything better than a mixed reaction from financial markets which appeared undecided as to whether the budget would prove sufficient to turn the tide of gold and foreign currency towards Britain.[53]

Against this background Morgan’s (N.Y.) continued to question the way the credits were being handled. On 7 September they cabled Morgan Grenfell to convey their concern at the rapid drawdowns under the credit; within ten days, 40% of the American tranche had been requested. They posed detailed questions to ascertain the amount of reserves, the status of the French credit and the timetable for implementation of the budgetary changes. Finally they asked:

Are the British Treasury and the Bank of England satisfied that the present method of dealing with the sterling exchange is the best that can be devised? In this connection the question naturally arises as to why the Bank of England does not use the classic remedy of Bank Rate instead of apparently pegging the exchange.[54]

Obviously Harvey’s efforts to alter the handling of foreign exchange had not assuaged their fears.

The next day Morgan Grenfell responded and, after giving the schedule for the closing of the French credits and a summary of the status of the Government’s programme, said:

It would be wrong to think that the Bank of England has in any way abandoned the use of the classic remedies of the Bank Rate, gold shipments etc. when in its judgement such action is desirable. If it is suggested that they appear to have refrained from using these remedies during the past few weeks it must be remembered that the whole situation is most unusual and those responsible have always to weigh the relative advantages that might be expected to accrue from these remedies against the possible disadvantages of taking any steps which might tend to further distance public confidence at home and abroad.[55]

As Morgan Grenfell did not point out which disadvantages had weighed against using the textbook methods, the fears of the New York partners were probably not assuaged. Harvey had to deal with the same concerns emanating from the FRBNY as Harrison also remained convinced that the credits were being wasted. On 8 September the Deputy Governor took the opportunity to tell Harrison that the French had concurred in his decision to continue to peg sterling.[56]

Simultaneously American Government officials were airing their opinions of the British predicament. Hoover, who had previously expressed his approval of the Morgan loan, took the opportunity of Stimson’s return to Washington on 8 September to tell the Secretary of State that he anticipated that Britain would be unable to keep sterling at par and predicted it would fall by 20%. The President, whose involvement in European affairs had increased steadily since his decision to propose the Moratorium, then began speaking about reparations and war debts. He viewed the now universally admitted linkage between war debts and reparations as a significant problem because it forced the U.S. to treat all nations alike when he would prefer to be able to help Britain, who needed assistance without aiding France, who did not. Hoover, however, blamed this on the Balfour Note and Annex 3 to the Young Plan, not admitting that the link between two kinds of payment obligations was not created by mercenary Europeans but represented a clear factual relationship.[57] Hoover’s concern about the European situation led him to tell Stimson four days later that he was considering another gesture on reparations and war debts but first felt it was imperative to get a plan and a war chest with which to fight the domestic banking crisis whose dimensions were growing daily. However, the President attached unrealistic preconditions to any new international initiative; before any new American move both the Balfour Note and Annex 3 of the Young Plan would have to be abrogated and an agreement by France to reconsider German capacity to pay achieved.[58]

Atherton reported to Castle on 11 September that Warren Fisher had attributed the now publicly known adverse balance of payments to the financial situation in Holland and Switzerland, an internal flight of capital and the payment for foodstuffs. The American diplomat himself added withdrawals from the U.S. and France as further causes of the negative figure. Atherton devoted much attention both in this letter and in a subsequent missive to Stimson to the possibility of a British tariff being enacted.[59] His comments reflected a pervasive American worry that the National Government, in accord with the views of most Conservatives, would indeed impose a tariff. Clearly the Americans, although not at all dependent on foreign trade (it composed about 10% of total U.S. trade), were nonetheless unhappy at the prospect of the demise of Britain’s free trade policy.

Thus by the end of the first two weeks of September, much remained unsettled. However, the French credit had been oversubscribed, bringing much satisfaction to its French organizers and reassurance to the British.[60] Further the British Government, having disclosed its budget, could now concentrate on the defense of sterling. Therefore MacDonald wrote to the Cabinet on 10 September that to better handle the financial situation he was proposing the creation of a Cabinet Subcommittee on the Financial Situation (hereafter the ‘Financial Subcommittee’) composed of himself, the Chancellor of the Exchequer, the Foreign Secretary, Lord Reading and the Minister of Health, Neville Chamberlain. Reading, a favourite of Morgan’s due to their close relationship during the First World War, was the Cabinet Minister who showed the most initiative during the crisis. He suggested to Snowden that the Treasury prepare for the first meeting an analysis of the method of mobilization of foreign securities used during the War, having previously urged MacDonald to have the Bank of England prepare detailed financial data for the Financial Subcommittee’s consideration.[61] The mood at the Bank of England appeared more cheerful; Harvey, amongst other things, probably was relieved that he had made contact with Norman.[62] The latter cabled his deputy on 10 September that he was meeting Harrison somewhere and confided that his definite plan was to sail on 16 September on the Duchess of Bedford.[63] Perhaps Harvey hoped that the meeting of the two Bank Governors, for which Norman appears to have postponed his departure, would be as productive for Britain as those between Strong and Norman in previous years. In that event the position of sterling might become more secure for some time to come.

Monday, 14 September, saw the first meeting of the Financial Subcommittee. Reading and Chamberlain were informed by Snowden that Fisher had reported that, according to Harvey, £20 m ($100 m) had been used which meant that at the present rate of expenditure, the borrowed funds would be exhausted in about a month. According to Fisher, Stimson had promised to do what he could to help the British including discussing the country’s plight with American financiers. Therefore Fisher suggested that his close personal friend, American Counsellor Atherton, be approached to discuss the situation with Stimson.

This led to a discussion orchestrated by Reading as to the origin of sterling sales. The Foreign Secretary pointed out that, as many sales appeared to be British inspired, the Committee ought to consider methods of curbing such transactions. Reading continued to dominate the meeting as it moved on to the question of the soundness of the American financial situation (the consensus was that its financial stability was overrated) and to the creation of a balance sheet reflecting British resources as at that date. The gloomy results produced by this exercise were still being assessed when Harvey joined the meeting. He gave an updated account of the British exchange position saying that heavy withdrawals had occurred at the end of the previous week. As these were made to obtain francs, there was some hope that this particular drain had been triggered by a desire to take advantage of the profitable opportunity presented by participation in the French tranche of the British Government credits (an eventuality which had been feared by British officials). In reply to a question posed by Reading, Harvey appeared pessimistic about the ability of the Government or the Bank to stop British capital flight and he further made the false statement that the sale of sterling by British citizens was not really an important problem.[64] After exploring the immediate prospects for Britain, the Deputy Governor turned to the last major issue for discussion, the question of the use of gold. He said that, while in recent weeks the Bank had not resorted to the use of gold, the Bank continued to anticipate allowing the export of gold to be resumed when conditions had become more stable.[65] Harvey’s comment illustrates the fact that in one sense the battle for Britain’s gold standard had been lost during the first week of August when the Bank of England, through its manipulation of the market at the behest of their lenders/advisors in New York and Paris, halted British sales of gold. To be sure devices such as altering discount rules and open market operations had diluted the impact of classical gold standard theory long before the summer of 1931. But quantity does at times betoken a change in quality and the use of £120 m ($600 m) in foreign exchange over a six week period was unprecedented enough to suggest in itself that the era of the traditional gold standard had come to an end.

More important than the subjects covered at the first meeting of the Financial Subcommittee were the matters not discussed. Morgan’s had pointed out - correctly - that for the pound to remain on gold, a united and stable government was a key prerequisite. Three things were imperilling this: the attitude of Labour, the possibility of an election and the question of a tariff. These were the factors which would determine the pound’s fate yet the conferees did not begin to deal with them. However, the latter two issues were the subject of much debate on Monday, 14 September and Tuesday, 15 September. MacDonald, writing to the King, cited the growing feeling among politicians that the financial situation could only be straightened out by a Government which had the support of an organized party in the House of Commons.[66] A day later, on 15 September, Morgan Grenfell cabled to its New York partners that there was a difference of opinion as to whether the National Government should stay in office after the budget was balanced, a process which Grenfell estimated would take three weeks. If party opinion led by Conservatives in favor of an early dissolution should prevail, a general election might be expected around 15 October.[67] Not only Peacock but Henry Clay of the Bank of England worked ceaselessly for a tariff, the latter writing to Geoffrey Lloyd on 14 September that the only way the battle for the gold standard could be won was if Britain had a positive balance of payments and this was impossible in the absence of a tariff.[68] Clay also took the opportunity of exhorting his fellow citizens during a radio broadcast the following day not to wait for Parliament but immediately to reduce imports and insofar as was possible buy only British goods.[69]

Tuesday, 15 September, seemed destined to be dominated by the election question, MacDonald writing in his diary that he was being pressed to lead an immediate campaign.[70] Yet a morning message from Sir Austen Chamberlain, First Lord of the Admiralty, enclosing a telegram from the Admiral of the Atlantic Fleet soon pushed the election talk to the back of the politicians’ minds. In response to a proposed cut in pay for experienced ratings (part of the economy scheme) about 500 men at Invergordon had assembled for mass meetings, ignoring orders to return to their ships until their protest was over. In response to this and to the sailors’ continued insubordination, the Admiral announced the postponement of Atlantic Fleet manoeuvres.[71] It was this action which elevated what might have remained a small incident into a major occurrence. Headline news around the world (except in Britain where coverage was played down at the Government’s request) the reports made alarming reading for two reasons.[72] The first was that still fresh in people’s minds was the memory of the Russian and German revolutions which had been marked by mutinies of their respective fleets. This knowledge, together with the traditional belief in the solidity and reliability of the Royal Navy caused tremors to rock world money markets, a reaction exacerbated by fears that if protest had doomed one plank of the economy platform, this would inevitably lead to other parts being pried loose.

The latter fear was proved to be realistic when it was announced the next day that the grievances of the men would be considered and if possible redressed. The Cabinet had unhappily been backed into a corner by what appears to have been the weakness of Chamberlain and the Admiralty.[73] Attention then shifted back to the financial sphere. When MacDonald met with Harvey on Wednesday morning, 16 September, he was met with dismal news. For Harvey had been told the previous day that at the present rate of usage, the Bank’s reserves of dollars and francs would last approximately a fortnight. The two alternatives were further foreign borrowings or an increase in Bank rate coupled with the sale of gold.[74] Yet Harvey, unbeknownst to MacDonald, was probably aware that further borrowing, at least from the U.S., was not possible. Harrison had spent Monday, 14 September and Tuesday, 15 September with Norman in Quebec and they obviously discussed the British situation.[75] During these discussions Harrison would have certainly told Norman that, mainly due to the increasing depth of American banking and financial problems and the precarious position of the many American foreign loans, the chances of a new American credit were virtually nonexistent. Furthermore, given their fairly close relationship and the fact that the two Governors’ discussions were in person rather than by cable or over the still distrusted telephone, Norman probably was far better informed of where Harrison stood than Harvey would have been. As Harvey and Norman had been in communication, it makes sense to assume that prior to his departure for England on 16 September Norman informed his deputy as to the outcome of his meetings with the New Yorker.[76] Thus it is quite likely that Harvey had a much better idea of the future than the Government, which had no reason to suspect that Norman had done anything in Canada other than recuperate.

Such a scenario would help explain why Catterns, Chief Cashier of the Bank, prepared a memorandum on 16 September detailing the ramifications of proceeding without further credits.[77] If Norman had indeed confirmed to Harvey that an appeal to the U.S. would be futile and perhaps also had opined that maintenance of the gold standard no longer seemed possible, Harvey’s resultant actions and general attitude may have been what motivated the Treasury on 17 September, prior to the meeting of the Financial Subcommittee which had summoned Harvey and Peacock to a session at 4:00 p.m. on that day, to begin drafting the legislation necessary for a departure from the gold standard.[78] Although Norman had been the great exponent of a universal gold standard, an about-face by mid-September is certainly within the realm of possibility. No longer caught in the maelstrom, he was in a position to be able to view the situation dispassionately and probably realized that if sterling had not responded in the anticipated manner after both a change of government and the obtaining of £130 m ($650 m) in foreign credits, there was little likelihood of a sudden turnaround. Thus it would have been reasonable for Norman to conclude that there was not much point to expending the Bank of England’s gold reserves in what would be a doomed cause. Rather the logical move, although perhaps not a noble one, was to jettison the gold standard as soon as practicable after losing a sufficient amount of gold to verify the depth of the crisis. Furthermore to maintain the status quo would require additional borrowings. Even if these were forthcoming, to Norman their price may have been too high; always jealous of the leading position of the Old Lady he surely shared the sentiments of The Times’ City Editor who on 10 September wrote:

It is humiliating for any country, especially a creditor country, to have to raise money abroad to support its currency and the better the budget is balanced, the sooner the credits can be repaid and the humiliation forgotten.[79]

Finally leaving the gold standard at this juncture would aid Norman’s own position. Under attack all summer and, furthermore, having deserted his post in time of battle, he may reasonably have feared for his job. Indeed according to a Time magazine article of late August speculation was rife that he was to be replaced, an opinion shared by Cochran in Basle.[80] Renominations for Governor and Deputy Governor were scheduled for late autumn. It may well have been Norman’s conclusion that, if the decision to leave the gold standard was inevitable, it would be better for him personally if it were taken when he was literally and apparently informatively at sea.

Norman’s future relationship with Harvey and Peacock support this hypothesis. Harvey served as Deputy Governor until his retirement in 1936. Peacock and Norman continued their close friendship, Norman in 1932 specifically entrusting to his close friend secret missions because he believed Peacock the most trustworthy of his associates.[81] Given Norman’s exceedingly centralized management style, it being no exaggeration to say he believed that La Banque, c’est moi, it seems difficult to believe that Norman would approve of Harvey and Peacock taking a decision as major as leaving the gold standard without consulting him when they had the ability to do so and an awareness that he was conversant with the current situation. The intimacy of Norman’s post 1931 relations with Harvey and Peacock would seem to indicate the Governor’s approval of their activities during Norman’s absence. Thus after taking into account Norman’s personality and approach a very likely conclusion then is that he had been involved in a decision that, all things remaining equal, Britain should leave the gold standard.

A question which must be asked is whether, assuming that Norman was involved in the decision to leave the gold standard, his participation made a difference to the outcome of the crisis. It is true that Harvey and Peacock were well aware that their battle was not going well. However, given the fact that Britain possessed the resources to continue the fight for some time after the actual surrender and keeping mind the gravity of the decision that was made, it may well have been that Norman’s concurrence, if that is what they indeed received, was the support Harvey and Peacock needed to be able to urge the Cabinet into a move that would by its timing alone in Sayers’ words cause ‘bitter complaints and resentment’ among other central bankers whose respect Norman had worked so hard and so long to earn.[82]

That Harvey and Peacock may have personally come to the conclusion that the gold standard was at least temporarily doomed was not something they revealed on 17 September to either the Committee of the Treasury or the Financial Subcommittee. At the former meeting the main topic of discussion was the possibility of a General Election and the negative effect this would have on the position of sterling. The record of proceedings of the Financial Subcommittee shows that while Harvey was explicit about the increasingly large financial demands made on the Bank (the drain on Wednesday had been £5 m ($25 m), he did not convey a sense that the decision to depart from the gold standard might be taken within hours. Indeed neither Harvey and Peacock demurred during a discussion of the possibility of obtaining further credits from the U.S. and France and both concurred in the decision that the American and French governments should be contacted. Again the question of a general election and its possible effects on the financial situation proved a topic of great interest.[83]

The Cabinet indeed did not appreciate how critical matters were for MacDonald made no move to alter his weekend plans at Chequers.[84] Grenfell, however, was under no such illusions, and on 17 September he asked J.P. Morgan, who was in Scotland, to return to London.[85] Interestingly on 17 September Harvey refused to talk with Harrison. C.P. Mahon on his behalf cabled to Harrison that: ‘Deputy Governor wishes me to inform you that owing to his engagements in meetings he is unable to speak to you today but that at present he has nothing special to say.’[86] As the two men had spoken or cabled virtually daily since the beginning of August, the most logical explanation for this somewhat odd behavior is that Harvey, unable to disclose the fact that a decision had been made to leave the gold standard, wanted to avoid being in a position to have to lie to the New York Governor.

18 September proved the day of surrender for the British forces fighting the battle for the gold standard. Gold losses Thursday having amounted to over £10 m ($50 m), MacDonald was called at Chequers and immediately returned to London.[87] At what MacDonald called the most solemn conference ever held at 10 Downing Street, Harvey, Peacock and various Treasury officials discussed the situation.[88] The Deputy Governor made it clear that he believed that the only course of action was for Britain to leave the gold standard. He made it appear that he had discussed the situation after Friday’s close of trading with Harrison which was not in fact true.[89] Furthermore, Harvey, in response to a question from MacDonald, said he did not think it was worthwhile to raise even £100 m ($500 m) if people were only going to withdraw it. At this time the Prime Minister seemed to accept the unpalatable inevitability and the balance of the meeting was devoted to the mechanics of this watershed decision.[90]

Although the Americans had received word that MacDonald’s message, authorised at the previous day’s Cabinet meeting, would arrive at 1:00 p.m., Eastern time on Friday, the addressee, Secretary of State Stimson, did not in fact receive it until 5:45 p.m. He immediately took it to the White House. That night the President and Stimson were joined by Secretary Mellon, Commerce Secretary Robert Lamont and Henry Robinson. After canvassing various possibilities they concluded that there was nothing they could do to ameliorate the admittedly serious British predicament. Neither the Federal Reserve Banks nor the private institutions were in a position to grant further credits and any government loan would need the consent of Congress. Yet to call a special Congressional session would be nothing short of disastrous because it would open the doors to a flood of domestic relief legislation which would drown any proposal to aid Britain. Finally a gesture on war debts would be unavailing for no money was payable by Britain until December 1932. Thus the meeting ended.[91]

The exact nature of the British plight was probably something of a surprise to the American government. It is true that fairly accurate reports of Harvey’s meetings of 17 September had appeared in The New York Times on Friday morning but the Secretary of State of course relied to a great extent on the United States Embassy in London.[92] This turned out to be a mistake because not only did Atherton apparently never communicate Fisher’s message (if indeed Fisher ever delivered it) but American Ambassador Charles Dawes was consistently wrong in his predictions of the future course of events in Britain. The reason for this was that Dawes relied heavily on informants in the National Government Cabinet and on the Court of Directors for the facts upon which he based his prognostications. Unfortunately for him, his Government source, J.H. Thomas, was not on the Financial Subcommittee and for this and other reasons was unaware of much that was going on. Dawes’ financial contacts were Kindersley and McKenna and they suffered from the same lack of information as Thomas.[93] However, foreknowledge would not have altered Stimson’s reply to British Chargé d’Affairs Osborne. Delivered late on the evening of 18 September it regretfully informed the British Government that the American Government could offer only sympathy.[94]

During the White House conference Hoover had telephoned Thomas Lamont for his views of the situation. This was probably not the first Morgan’s (N.Y.) had heard of the decision as Lamont’s diary records a meeting on the exchange position at 7:00 p.m.[95] Yet it was a matter of some embarrassment to Grenfell that his partners learned so late the depth of the crisis. It appears that the Deputy Governor either under the pressure of events or, out of embarrassment, did not call Harrison, who was to get in touch with Morgan’s (N.Y.), until late Friday evening and when he did, Harvey indicated only that there was a possibility that Britain would leave the gold standard.[96] Actually Morgan’s (N.Y.) could have been informed far earlier of the parlous state of the British gold standard for Grenfell, in his capacity as director of the Bank of England where he sat on the Committee of Treasury and as the influential Conservative Party M.P. for the City, obviously possessed detailed information about the Bank of England’s hour-to-hour position. Grenfell had of course an unenviable role. His clear conflict of interest forced him to choose which loyalty was more important - that to his nation or that to his partners who were also his friends. King and country won out but at a price; Grenfell was conscience-stricken about the disadvantageous position he had placed the New York house in and would repeatedly apologise during the next year.[97]

Saturday, 19 September was taken up by the myriad of details, some larger than others, which the decision to leave the gold standard necessarily entailed. Harrison and Harvey spoke twice that day. The British decision which Harvey now confirmed as definite greatly shocked Harrison, who obviously had received no intimations of such an eventuality from Norman. Indeed, notwithstanding the fact that Friday’s losses had exceeded £17 m ($85m), Harrison tried to see if there was any way the gold standard could be preserved but his attempt met the same fate as had MacDonald’s the previous day.[98]

The British remained firm in their course of action despite the fact that the French, having received a message similar to that given Stimson, immediately offered a long-term loan of £15 m - £25 m ($75 m - $125 m) independent of action taken by any other market.[99] The French were clearly eager to do whatever they could to ensure that Britain remained on gold, Laval saying as much to British diplomat Ronald Campbell on Saturday morning.[100] This was not disinterested charity. The French, having begun September with high sterling reserves, had actually increased their holdings during the month and therefore stood to lose a great deal if the British left the gold standard. Furthermore there was concern over the repayment of French credits. Finally the French feared that the British departure from gold would destroy the gold standard system and with it their current financial hegemony.

However the British were not interested in a further French credit. This was clearly seen at the conference held at 10 Downing Street on Saturday afternoon. In attendance were MacDonald, Baldwin and Samuel, Harvey and Peacock, Fisher and Leith-Ross and Sir Robert Vansittart, Permanent Undersecretary of State at the Foreign Office. Fisher said that the Treasury view on the subject of a fresh credit was that the French offer was insufficient to stem the tide. The conferees also discussed the mechanics to be put into place and received an update of the withdrawals from Harvey.[101]

On the same day, J.P. Morgan, accompanied by his son and partner Harry, returned to London. The elder Morgan went to the American Embassy where he conferred with Dawes and J.H. Thomas. According to the Ambassador, the financier first broke the news about the decision to leave the gold standard to Thomas and then the three discussed the question of a general election, Thomas predicting that the National Government would have 400 out of 600 members of the new Parliament.[102] In the meantime Lamont, at Peacock’s request, prepared a draft public announcement for the British Government to release which Peacock sent to the Treasury. Lamont also drafted a press statement to be circulated to American newspapers which emphasized the temporary nature of the suspension and the fact that it would not affect any obligations payable in gold previously contracted by the British Government. (This was designed to prevent a massive dumping of British Government dollar denominated securities.)[103]

Yet Morgan’s (N.Y.) was not resigned to the British decision. On 20 September they cabled Morgan Grenfell to ask whether it was not possible for sterling to remain on gold if the Bank rate were immediately raised and other methods of controlling the exchanges utilized. Their London partners somewhat testily replied that the Bank of England had of course considered raising Bank rate but had decided that with money so cheap in the U.S. this would simply exacerbate any panic instead of cure the widespread doubts.[104] With that the New York house had to rest content because the game was up. Sunday was spent completing the necessary chores and informing appropriate parties of what the next day would bring. Thus MacDonald invited Henderson to 10 Downing Street on Sunday evening and the Foreign Office sent cables to all embassies. The French, who had offered all possible assistance to the British, agreed to suspend sterling trading although they did not follow the British lead and completely close the stock market.[105]

From Washington Osborne reported that during his conversation with Stimson early on Saturday morning the Secretary of State had taken the opportunity to say that the British debt funding terms were the occasion of shameful regret to all right thinking Americans but also emphasized that two main difficulties stood in the way of revision, the Balfour Note and Annex 3 of the Young Plan.[106] Stimson, who was spending Sunday with the President at his Camp Rapidan retreat spent part of the morning reflecting on the ramifications of the British decision to leave the gold standard, both for Britain and for the world.[107]

At the Bank of England, most unusually for a Sunday, all was activity. Meetings were held of leading clearing bankers and representatives of accepting houses and brokerage firms as plans were worked out to cope with such items as a rise in Bank rate to 6% effective simultaneously with the departure from gold and the closing of the Stock Market. Harvey drafted and sent the famous cable to Norman aboard the Duchess of Bedford which said: ‘Sorry we have to go off tomorrow and cannot wait to see you before doing so.’[108] Hitherto interpreted as Norman’s first indication of the dénouement of the crisis, it could equally have been the prearranged notice that the eventuality envisaged during the previous week had indeed come to pass.

A full Cabinet meeting was held at 4:30 p.m. After the many uninformed Ministers learned of the events of Friday and Saturday, the Cabinet approved the various actions that had been taken and the text of the necessary amendment to the Gold Standard Act.[109] After further discussion which resulted, most significantly, in the decision that Britain’s going off the gold standard would not affect the Cabinet’s decision to implement an economy programme, the meeting adjourned.[110] Clearly everyone was wondering, what came after the end of the world?

NOTES

1. The Times, 24 August 1931, p. 15.

2. Morgan Grenfell, BG Credit 1931, Morgan Grenfell to Morgan’s (N.Y.), 31/4934, 24 August 1931; PRO 30/69/1753, MacDonald Diaries, 24 August 1931.

3. Morgan Grenfell, BG Loan in the USA-5A, Hopkins to C.F. Whigham, 24 August 1931; B/E, S73, Harvey to Hopkins, 24 August 1931.

4. Morgan Grenfell, BG Credit 1931, Morgan Grenfell to Morgan’s (N.Y.), 31/4934, 24 August 1931; Memorandum of telephone conversation between Morgan and Grenfell (London) and Lamont & C. Whitney (New York), 25 August 1931 (noted as shown to Deputy Governor, 25 August 1931); B/E, MB53, C/T Minutes, 26 August 1931.

5. B/E, S73, Siepmann Note of conversation with Moret at the Bank of France, 25 August 1931; Harrison Papers, Binder 59, Harrison Memorandum, 25 August 1931, concerning telephone conversation with Lacour-Gayet, 25 August 1931.

6. The New York Times, 25 August 1931, p. 1.

7. Whaley-Eaton Service, ‘Foreign Letter No. 645’, 25 August 1931.

8. Morgan Grenfell, BG Credit 1931, Internal Memorandum (undated) on the Crisis (hereafter M.G. Memorandum), p. 8, Morgan’s (N.Y.) to Morgan Grenfell, 31/2386, 25 August 1931; FRBNY, Crane Trip, Crane to Harrison, 18, 27 August 1931.

9. Stimson Diaries, Reel 3, Vol. 17, Memorandum of Conversation with MacDonald, 27 August 1931; Memorandum of Conversation with Morgan, 27 August 1931.

10. Morgan Grenfell, BG Credit 1931, Morgan’s, (N.Y.) to Morgan Grenfell, 31/2410, 29 August 1931.

11. The Times, 17 September 1931, p. 17.

12. B/E, C43/298, Note of Conversation at the Ministry of Finance, France, 6:30 p.m., 26 August 1931.

13. F.W. Leith-Ross, Money Talks: Fifty Years of International Finance, (Hutchinson & Co., London, 1968), p. 138.

14. NA, RG59, 751.62/153, Marriner to Secretary of State, 25 August 1931.

15. B/E, C43/248, Note of Conversation at the Bank of France, 5:00 p.m., 26 August 1931, Note of Conversation at the Ministry of Finance, 6:30 p.m. 26 August 1931; Harrison Papers, Binder 59, Harrison Memorandum, 27 August 1931, of telephone conversation with Lacour-Gayet, 26 August 1931.

16. By having the British Consul-General in Paris endorse the bills in blank, they could be considered a domestic issue and thus not subject to the onerous tax applicable to foreign issues.

17. B/E, C43/298, Note of Conversation at the Ministry of Finance, 6:30 p.m., 26 August 1931.

18. B/E, C43/298, Note of Conversation in Paris, 27 August 1931.

19. Morgan Grenfell, BG Credit 1931, Morgan’s (N.Y.) to J.P. Morgan, 31/2401, 27 August 1931.

20. Morgan Grenfell, BG Credit 1931, Morgan’s (N.Y.) to Chancellor of Exchequer, 28 August 1931, concerning credit opened by Morgan’s (N.Y.) and other U.S. Banks on behalf of His Majesty’s Government.

21. Dalton, op. cit., pp. 274–7.

22. Morgan Grenfell, BG Credit 1931, Morgan’s (N.Y.) to Morgan Grenfell, 31/2393, 27 August 1931.

23. Lamont Papers, 96–14, 27 August 1931; PRO, F0371/15679, Osborne to Foreign Office, 26 August 1931.

24. Morgan Grenfell, BG Credit 1931, MG Memorandum, p. 11.

25. PRO 30/69/260, Henderson, Notes on the Economy Issue’, 27 August 1931.

26. PRO 30/69/1315, J. Baker to MacDonald, 26 August 1931; R.S. Young to MacDonald, 28 August 1931.

27. PRO 30/69/1314, MacDonald to W. Caxon, 25 August 1931; MacDonald to H. Morrison, 27 August 1931.

28. The New York Times, 30 August 1931, p. 5; FRBNY, Crane Trip, Crane to A. Sproul, 22, 28 August 1931.

29. B/E, G3/210, Harvey to G. Vissering, 27 August 1931.

30. Brand Papers, Box 115, Chamberlain to Brand, 28 August 1931.

31. Lamont Papers, 111–23, Lamont to Grenfell, 31/2413, 29 August 1931.

32. Morgan Grenfell, BG Credit 1931, Morgan’s (N.Y.) to Grenfell, 31/2417, 31 August 1931.

33. Morgan Grenfell, BG Credit 1931, Morgan’s (N.Y.) to Grenfell, 31/2417, 31 August 1931, penned notation.

34. B/E, G3/210, Harvey to H. Samuel, 29 August 1931; Harvey to Rodd, 31 August 1931.

35. B/E, MB 53, C/T Minutes, 31 August 1931.

36. Morgan Grenfell, BG Credit 1931, Morgan’s (N.Y.) to Morgan Grenfell, 31/2418, 1 September 1931.

37. Leffingwell Papers, Leffingwell to Lamont, 29 August 1931.

38. FRBNY, C261, Harrison to Harvey, 334/31, 3 September 1931.

39. FRBNY, C261, Harvey to Harrison, 402/31, 4 September 1931.

40. PRO 30/69/1314, MacDonald to S. Baldwin, 5 September 1931.

41. For example, the agreement with Morgan’s (N.Y.) provided that, ‘we [Morgan’s (N.Y.)] will upon demand purchase from it [the British Treasury] British Government Dollar Treasury Bills in amounts of $10,000,000 nominal or multiples thereof. The Bills … are to be payable at our office in the City of New York in gold coin of the United States of America of the present standard of weight and fineness without deduction for any British taxes and shall so state.’ Morgan Grenfell, BG Credit 1931, Morgan’s (N.Y.) to Chancellor of Exchequer, 28 August 1931, concerning credit opened by Morgan’s (N.Y.) and other U.S. Banks on behalf of His Majesty’s Government.

42. B/E, OV4/105, Siepmann Memorandum, ‘Semi-Pledged Gold’, 16 September 1931.

43. PRO, T172/1756, ‘Secretary’s Note of a Conversation Between Sir Ernest Harvey and Mr. Peacock and Members of the Cabinet,’ 3 September 1931.

44. Templewood Papers, Box VII-1, Templewood Memorandum: ‘The First National Government’, undated.

45. Morgan Grenfell, BG Credit 1931, Lamont to Grenfell, 31/2428, 4 September 1931.

46. NA, RG39, Box 104, Cochran to Castle, 3 September 1931.

47. Clay, op. cit., p. 399. It is interesting that while Sayers concludes that Norman did not ‘personally share in the responsibilities of these last hectic weeks’ (Sayers, op. cit., p. 415) he does provide evidence to the contrary by noting that Harrison told Harvey that he had seen Norman. (Ibid., p. 407, n.1.).

48. FRBNY, Harrison Papers, 3115.2, Harrison Memorandum, 24 August 1931, concerning telephone conversation with Norman, 22 August 1931.

49. Harrison Papers, Binder 59, Harrison Memorandum, 24 August 1931, concerning telephone conversation with Norman, 23 August 1931.

50. Morgan Grenfell, BG Credit 1931, Grenfell to Morgan, 18 August 1931.

51. B/E, S40/1, Harvey to Harrison, 404/31, 5 September 1931, Harrison to Harvey, 304/34, 5 September 1931.

52. PRO 30/69/1753, MacDonald Diaries, 8 September 1931.

53. The New York Times, 11 September 1931, p. 1.

54. Morgan Grenfell, BG Credit 1931, Morgan’s (N.Y.) to Morgan Grenfell, 31/2473, 7 September 1931. The bankers used the term ‘pegging the pound’ to indicate direct buying and selling of sterling in order to keep it at par. Raising the Bank rate in order to accomplish the same goal would not have been considered ‘pegging’.

55. Morgan Grenfell, BG Credit 1931, Morgan Grenfell to Morgan’s (N.Y.) 31/4987, 31/4988, 8 September 1931.

56. FRBNY, C261.1, Harvey to Harrison, 411/31, 8 September 1931.

57. Stimson Diaries, Reel 3, Vol. 18, 8 September 1931.

58. Stimson Diaries, Reel 3, Vol. 18, 12 September 1931.

59. HHPL, Castle Papers, Atherton to Castle, 11 September 1931; NA, RG59, 841.51/965, Atherton to Stimson, 11 September 1931.

60. Morgan Grenfell, BG Credit 1931, Morgan et Cie. to Morgan’s (N.Y.) 87.652, 10 September 1931. The French credit was divided into two parts with half taking the same form as the American tranche and the other half being issued as an invitation for a public subscription for franc-denominated British Treasury Bills.

61. Cambridge University Library, Cambridge, Stanley Baldwin Papers, volume 44, MacDonald to Cabinet, 10 September 1931; PRO, PREM 1/97, Lord Reading to MacDonald, 10 September 1931; PRO, Tl72/1746, Reading to Snowden, 11 September 1931.

62. FRBNY, Crane Trip, Crane to Harrison, 9 September 1931.

63. B/E, S40/1, Norman to Harvey, 10 September 1931.

64. Harvey had been sufficiently alarmed about British sales of sterling to write to various culprits such as Lord Bradbury to ask them not to continue to purchase dollars. Also Fisher had told Atherton that internal capital flight was one of the causes of Britain’s problems. As the Bank of England not the Treasury kept track of currency movements, Fisher could only have known this if the Bank so informed him.

65. PRO, Cab 27/462, Minutes of Meeting, Committee on the Financial Situation, 14 September 1931.

66. PRO 30/69/1314, MacDonald to King George V, 14 September 1931.

67. Morgan Grenfell, Gold Standard 1931 Bundle 233, Morgan Grenfell to Morgan’s (N.Y.), 31/4999, 15 September 1931.

68. B/E, SMT 5/3, Clay to Peacock, 15 September 1931; SMT 5/3, Clay to Godfrey Lloyd, 14 September 1931.

69. B/E, SMT 5/60, Clay Speech, 15 September 1931. The general effect of this appeal is unclear but at least advertising copywriters were rapidly benefitted, for within the week advertisements of major retailers pointed out with monotonous regularity that the illustrated goods were British in origin and thus their purchase would be a patriotic act beneficial for the British economy.

70. PRO 30/69/1753, MacDonald Diaries, 15 September 1931.

71. PRO 30/69/1314, A. Chamberlain to MacDonald, 15 September 1931.

72. The New York Times, 16 September 1931, p. 10.

73. The New York Times, 17 September 1931, p. 1; D. Dutton, Austen Chamberlain: Gentleman in Politics (Ross Anderson, London, 1985) pp. 303–5.

74. PRO 30/69/1753, MacDonald Diaries, 16 September 1931; B/E, S74, Catterns to Harvey, 15 September 1931.

75. B/E, S40/1, Norman to Harvey, 12 September 1931.

76. Evidence of their communication may well be seen in a letter from Grenfell to Morgan dated 17 September 1931 in which Grenfell stated that Norman had sailed for England and briefed Morgan on the Governor’s condition. Grenfell clearly received this information from Harvey who in turn learned it from either Harrison, Norman or from both men. (Morgan Grenfell, BG Credit 1931).

77. B/E, S74, Catterns to Harvey, 16 September 1931.

78. B/E, S74, F. Phillips Memorandum, 17 September 1931.

79. The Times, 10 September 1931, p. 17.

80. Time, 24 August 1931, p. 16; NA, RG39, Box 104, Cochran to Castle, 3 September 1931.

81. B/E, S31/2, Norman to Peacock, 17 December 1931.

82. Sayers, op. cit., p. 415.

83. B/E, MB 53, C/T Minutes, 17 September 1931; PRO, Cab 27/462, Minutes of Meeting, Cabinet Committee on the Financial Situation, 17 September 1931.

84. PRO 30/69/1753, MacDonald Diaries, 18 September 1931.

85. Morgan Grenfell, BG Credit 1931, Grenfell to Morgan, 17 September 1931.

86. FRBNY, C261, C.P. Mahon to Harrison, 17 September 1931.

87. Whether this was cause or effect is unclear as the Bank had taken the position that it was advisable to lose gold before announcing the departure from the gold standard.

88. PRO 30/69/1753, MacDonald Diaries, 18 September 1931.

89. See pp. 136–7 infra.

90. PRO, PREM 1/97, Notes of a Meeting on 18 September 1931.

91. PRO, T188/30, MacDonald to Stimson, 5:00 p.m. and 8:30 p.m., 18 September 1931; Stimson Diaries, Reel 3, Vol. 18, 18 September 1931.

92. The New York Times, 18 September 1931, p. 1.

93. Examples of Dawes’ use of the information provided by his sources is provided in his cables to Stimson of 15, 17 and 18 September 1931, respectively NA, RG59, 841.51/964, 841.00/1169 and 841.00/ 1170.

94. NA, RG59, 841.51/971A, Stimson to Dawes, 19 September 1931; PRO, T188/30; Osborne to MacDonald, 576, 19 September 1931; PRO, F0371/15681, Osborne to Reading, 25 September 1931.

95. Lamont Papers, 173–1 Lamont Diaries, 18 September 1931.

96. Morgan Grenfell, BG Credit 1931, MG Memorandum, p. 16.

97. See, e.g., Morgan Grenfell, BG Credit 1931, Grenfell to Lamont, 16 March 1932.

98. Harrison Papers, Binder 59, Harrison Memorandum dated 19 September 1931, concerning telephone conversations with Harvey at 6:30 a.m. and 8:35 a.m., 19 September 1931.

99. PRO, T188/30, MacDonald to Flandin, 5:00 p.m. and 8:30 p.m., 18 September 1931; B/E, OV 45/4, Bank of France Proposals to Bank of England, 19 September 1931; PRO, F0371/15681, Campbell to Reading, 26 September 1931.

100. PRO, T188/30, Campbell to Snowden, 19 September 1931.

101. PRO, PREM 1/97, Note of a Conference held on 19 September 1931.

102. NA, R659, 841.51/975, Dawes to Stimson, 19 September 1931.

103. B/E, Gold Standard - Gold, Grenfell to Peacock, 19 September 1931; Lamont Papers, 196–14, ‘Statement’, 19 September 1931; Morgan Grenfell, Gold Standard-Bundle 233, Morgan’s (N.Y.) to Morgan Grenfell, 31/2454, 19 September 1931 (noted as sent to Peacock).

104. Morgan Grenfell, Gold Standard-Bundle 233, Morgan’s (N.Y.) to Morgan Grenfell, 31/2461, 20 September 1931, Morgan Grenfell to Morgan’s (N.Y.), 31/5012, 20 September 1931.

105. PRO 30/69/1753, MacDonald Diaries, 20 September 1930; T188/30, Foreign Office to Dominion and Foreign Governments, 20 September 1931; Foreign Office to Campbell, 4:35 p.m. and 7:00 p.m., 20 September 1931.

106. PRO, T188/30, Osborne to Foreign Office, 578, 20 September 1931.

107. Stimson Diaries, Reel 3, Vol. 18, 20 September 1931.

108. B/E, S40/1, Harvey to Norman, 20 September 1931.

109. See Appendix below.

110. PRO, Cab 23/68, 20 September 1931.

Chapter Five

NOBODY TOLD US WE COULD DO THAT