Lords of Finance

As Norman set off homeward, perhaps because of the half-billion-dollar commitment that he metaphorically carried in his coat pocket, perhaps because of the powerful vote of confidence that he personally had received from the Americans, he was in an unusually sentimental mood. From on board the S.S. France he scribbled Strong a note:My dear Ben,

You won’t be expecting me to write you a letter. This beast of a ship rolls so much that I can hardly sit on a chair—much less write at a table. But whatever this year may bring forth for us, I am glad to have begun it with you: it is always true to say that we don’t meet often enough. . . . We ought indeed to get together once a quarter if we are to keep together all the year; that much we shall hardly manage; I guess once in 6 months is more probable. At least we have made good beginning for 1925. . . . And you know, Ben, I am grateful for all your welcome and hospitality: and for all you do for me and are to me. God bless you.

NORMAN GOT BACK to London in the middle of January to find resistance building against any early return to gold. Even some of his closest allies at the Bank were beginning to resent the American pressure tactics, fearing that Britain might be borrowing too much money for an uncertain payoff.

The most articulate critic of resumption continued to be Maynard Keynes, who railed at those in charge at Threadneedle Street for acting like “the Louis XVI of the monetary revolution,” and for “attacking the problems of the post-war world with unmodified pre-war views and ideas.” But his own proposals for a managed currency, outlined in the Tract, had been largely ignored or disparaged. Recognizing that no one was taking his idea of managed money seriously, he beat a tactical retreat and began urging instead that any return to the gold standard be at least delayed until the discrepancy between British and American costs had narrowed.

His main point was that under current arrangements, given that U.S. gold reserves were so dominant, to tie the pound to gold in effect meant tying it to the dollar and the British economy to that of the United States—and by implication, to Wall Street. He did not attempt to conceal his distaste for what he, and all Bloomsbury with him, considered the crass materialism of the United States or for the prospect of having Britain’s economic future determined by the needs of an America, imprisoned in its own insularity. “We should run the risk of having to curtail . . . credit to our industries,” he wrote in one article, “merely because an investment boom in Wall Street had gone too far, or because of a sudden change in fashion amongst Americans towards foreign bond issues, or because banks in the Middle West had got tied up with their farmers or because of the horrid fact that every American had ten motor-cars and a wireless set in every room of every house had become known to manufacturers of these articles.”

In article after article he returned to the same theme—that Britain, suffering from a slow rate of growth, exhausted finances, and “faults in her economic structure,” was simply too weak to tether itself to a United States that seemed to “live in a vast and unceasing crescendo.” The United States, with all its strength and dynamism, could “suffer industrial and financial tempests in the years to come, and they will scarcely matter to her; but England if she shares them, may almost drown.” Few people, however, paid much attention to such gloomy prognostications.

Much more significant than Keynes’s polemics was the opposition of Lord Beaverbrook. This elflike man with a larger-than-life personality was at the time the most dominant and successful newspaper proprietor in England. A Scots-Canadian by birth and a minister’s son, though one might not have guessed it, he was a self-made millionaire many times over by the age of thirty-one, when he moved to England, in 1910. Seeing in the power of the press his path to the top, he acquired the Daily Express, a small loss-making newspaper with a circulation of some 200,000. By giving the public what it wanted—a bold and simply written paper full of gossip, sports, women’s features, and articles about spiritualism and other social trends—he won it the largest circulation in the country with close to 1.5 million subscribers. Beaverbrook was an outsider to Britain, and like his paper, which appealed to all classes, he transcended the British class system. But as a Canadian, he retained a certain suspicion of the United States, and believed that a British return to gold would represent surrender to the Americans, who, according to him, were “pressing the return to the gold standard in order to mobilize the useless gold hordes [sic] of the United States.” His view of the gold standard was incisive in its simplicity: “It is an absurd and silly notion that international credit must be limited to the quantity of gold dug up out of the ground. Was there ever such mu

mbo-jumbo among sensible and reasonable men?”

Beaverbrook and Churchill were both adventurers who, though the best of friends, rarely agreed.27 On January 28, 1925, Beaverbrook came to see Churchill and his advisers, only to have his arguments casually dismissed by the Treasury officials. The following day he launched a front-page campaign against the gold standard in the Daily Express.

In reaction, Churchill decided one evening to compose a memorandum titled “The Return to Gold.” He had found that one of the best ways for him to get his arms around a subject was to debate his own way through the issues. The chancellorship had been a mixed blessing. By his own admission, Churchill never had much interest in finance or economics and knew little about the subjects. He cheerfully liked to recount how his father, Lord Randolph Churchill, chancellor for six months in 1886, when confronted with a report full of figures with decimal points, declared he “never could make out what those damned dots mean.” Winston himself, once chancellor, complained about the mandarins at the Treasury, “If they were soldiers or generals, I would understand what they were talking about. As it is they all talk Persian.”

His memorandum, patronizingly nicknamed “Mr. Churchill’s Exercise” within the Treasury, was a brilliant testament to his talent for self-education that should have put to rest the accusation that he was out of his depth when it came to finance. Circulated among senior Treasury officials and to Norman, it argued that the use of gold as the prime reserve was a “survival of a rudimentary and transitional stage in the evolution of finance and credit.” Though the United States seemed “singularly anxious to help” the British return to the gold standard, the source of this “generosity is not perhaps remarkable when we consider her own position. She has by her hard treatment of her Allies, accumulated . . . probably nearly three quarters of the public gold in the world. She is now suffering from that glut of Gold,” a large part of which was “lying idle in American vaults, playing no part whatever in the economic life of the United States.” Naturally, the Americans, so laden with the metal, had an incentive to ensure that it continued to play “as powerful and dominant a part” in world finance as possible. Churchill, however, questioned whether this was also to Britain’s advantage and worried that while the return to gold was in the interest of City financiers, it might not be equally in the interest of the rest of Britain: “the merchant, the manufacturer, the workman, and the consumer.” It was a document that could almost have been written by Maynard Keynes.

Norman tended to treat Churchill as one of those clever but erratic forces of nature who has to be carefully managed. Teddy Grenfell, the head of Morgan Grenfell, the House of Morgan’s London arm, and a director of the Bank of England, summed it up the best: “We, and especially Norman, feel that the new Chancellor’s cleverness, his almost uncanny brilliance, is a danger. At present he is a willing pupil but the moment he thinks he can stand on his own legs and believes that he understands economic questions he may, by some indiscretion, land us in trouble.”

Norman’s response to the memorandum was characteristic—a point-by-point analysis of the pros and cons of a policy was just not his style. Instead, he wrote to Churchill, “The Gold Standard is the best ‘Governor’ that can be devised for a world that is still human rather than divine.” He warned the chancellor that if he were to choose to return to gold he might be “abused by the ignorant, the gamblers and the antiquated Industrialists,” but if he were to choose against it, he “will be abused by the instructed and by posterity.”

But Churchill had endured too hard a career in politics to be so easily intimidated by slogans. Over the next few days he zeroed in on the key social and political issue: that for all its benefits, gold, if restored, would end up exacting a heavy cost for those thrown out of work in British industries priced out of world markets. “The Governor of the Bank of England shows himself perfectly happy with the spectacle of Britain possessing the finest credit in the world simultaneously with a million and a quarter unemployed,” he growled to his advisers.

Norman had never believed much in the benefits of economic policy analysis—he would later famously instruct the Bank of England’s chief economist, “You are not here to tell us what to do, but to explain to us why we have done it”—and was now beginning to find the protracted debate irritating. Feeling “so weary and done up” that he “had to go to bed for 8 days,” Norman chose this critical moment to take two weeks off in the south of France. Sometimes his behavior could be frustrating to even his closest friends. As Teddy Grenfell wrote, “Norman elaborates his own schemes by himself and does not take anyone into his counsel unless he is obliged to do so in order to combat opposition. . . . Monty works in his own peculiar way. He is masterful and very secretive.”

Meanwhile, Churchill, who, if anything, could usually be counted on to act too hastily, was uncharacteristically having trouble reaching a decision. Both sides in the debate had marshaled a bewildering accumulation of data and arguments. “None of the witch doctors can see eye to eye and Winston cannot make up his mind from day-to day,” wrote Otto Niemeyer, his principal adviser. The advice he was getting from within the Treasury and the Bank of England was, however, all one way. He must have been aware that opposing the return to gold would put him in direct confrontation with Norman, whose close friendship with Stanley Baldwin was no secret—Norman often stopped by 10 Downing Street at the end of the day for a quiet chat and was a frequent weekend visitor to Chequers, the prime minister’s new official country residence. For the moment, Baldwin had kept out of the gold debate, but Churchill feared that Norman might go around him directly to the prime minister, whom he neither wanted nor was in a position to take on. Nevertheless, the criticisms raised by Beaverbrook and Keynes had a certain unsettling resonance.

Finally, on March 17, Churchill decided to convene a sort of brain trust. His wife, Clementine, was away in the south of France, and so, because he did his best thinking late at night over port, brandy, and cigars, he organized an intimate dinner at his official residence, 11 Downing Street. Norman, just back from the Riviera, was not invited. He was known to dislike these debates and would have just sat there silent and chilling. To represent orthodoxy, Churchill invited his two principal advisers at the Treasury, Otto Niemeyer and John Bradbury, both men well established in the Norman camp. The case against gold was to be represented by Reginald McKenna, himself a former Liberal chancellor of the exchequer, now chairman of the Midland Bank, and Maynard Keynes.

Dinner began at 8:30 p.m. The small group seated around the table in the intimate oak-paneled dining room on the first floor of 11 Downing Street were all old acquaintances with a long association with one another. When Keynes had been a young Treasury official during the war, McKenna had been chancellor of the exchequer in the first coalition government, with Bradbury as his permanent secretary. Niemeyer, at the age of forty-two, was the controller of the Treasury, its second most powerful official, and the chancellor’s chief adviser on matters of domestic and international finance. Behind his disheveled exterior lay a formidable intelligence. Of German Jewish extraction, he had earned a double first at Balliol College, Oxford, and had taken the civil service entrance exams in 1906, the same year as Maynard Keynes, whom he had beaten into second place. As a result, he had joined the Treasury while Keynes had had to settle for the India Office.

As the evening wore on and the alcohol flowed—Churchill was known for his ability to consume prodigious amounts without any apparent impairment of his faculties—the discussion went round and round. The same old arguments echoed off the vaulted ceilings and across the room. Keynes was not on his best form or at his most persuasive. He and McKenna kept returning to the argument that with prices in Britain still 10 percent too high, a return to gold would inevitably involve a great deal of pain, unemployment, and industrial unrest. Sir John Bradbury kept pressing the point that the virtue of the gold standard was that it was “knave-proof. It could not be rigged for political . . . reasons.” Retur

ning to the gold standard would prevent Britain from “living in a fool’s paradise of false prosperity.”

No one changed his mind that night. There was considerable agreement about the facts. All accepted that British prices were too high and that to bring them down would involve some pain, although they disagreed about its extent. All acknowledged that tying Britain to the gold standard would mean tethering it to the United States, with all the risks that entailed. But whereas the “gold bugs” believed that the costs were worth bearing in order to reinstate the automatic mechanism of the gold standard, Keynes and McKenna thought otherwise. There were too many imponderables for anyone to be sure of the answer. Both parties were making a leap of faith. In that sense, the debate that evening, though dressed up as a technical discussion among experts, reflected, at bottom, a philosophical divide between those who believed that governments could be trusted with discretionary power to manage the economy and those who insisted that government was fallible and therefore had to be circumscribed with strict rules.

Finally, as the dinner stretched into the early hours of the morning, Churchill turned to McKenna: “You have been a politician. Given the situation as it is, what decision would you make?”

To Keynes’s disgust, McKenna replied, “There is no escape. You will have to go back; but it will be hell.”

The gold bugs had won.

After a few more days of agonizing, Churchill decided for the gold standard. Orthodox economic opinion and the country’s banking establishment were so strongly in favor that for once in his life, he lacked the necessary confidence in his own judgment to risk another policy. On his way to stay with the prime minister at Chequers one weekend, Norman dropped in at Chartwell, Churchill’s country house in Kent, and tried to reassure him, “I will make you the golden Chancellor.”

BUDGET DAY WAS until recently something of an occasion in the British parliamentary calendar. The event was traditionally surrounded with its own rituals—the buildup of suspense about the contents, the press speculation, the picture on the actual day of the chancellor emerging from No. 11 Downing Street, conspicuously brandishing the battered red dispatch box, the grand and excessively long speeches in Parliament about the minutiae of taxation and spending.28 It was, in short, a perfect opportunity for Churchill to display his talent for playing to the gallery.

On April 28, he rose before the Commons at 4:00 p.m. to great applause. Everyone knew what he was about to say, but there were nevertheless tremendous cheers when, in the first few minutes of his speech, he announced the return to gold. Ever the showman, at one point during his two-hour speech, he paused, declaring, “It is imperative that I should fortify the revenue, and I shall now, with the permission of the Commons, proceed to do so,” and proceeded to pour himself a glass of “an amber-coloured liquid,” that from the press gallery appeared to be stronger than water.

For all his ambivalence about the decision to return to gold, Churchill put on a great show. He seems to have been most swayed in his decision by the fear that not to return now would be seen as a very public admission of Britain’s diminished position in world affairs. Almost every other country was either now on gold—the United States, Germany, Sweden, Canada, Austria, and Hungary—or about to be—Holland, Australia, and South Africa—and “like ships in harbor whose gangways are joined together and who rise and fall together with the tide,” they were all linked by a common standard of value. As he would articulate a few days later in committee, “If the English pound is not to be the standard which everyone knows and trusts, the business not only of the British Empire but also of Europe as well might have to be transacted in dollars instead of pounds sterling. I think that would be a great misfortune.”

While Churchill was speaking, Norman sat in the distinguished strangers’ gallery of the House of Commons, savoring what all London saw as his personal triumph. As Churchill himself would later put it, it was Norman’s “greatest achievement . . . the final step without which all those efforts and sufferings [that is, the years since 1920] would have gone for naught.”

The decision was received with resounding applause both in the City and in the press, the Times commenting that it was “a signal triumph for those who have controlled and shaped our monetary policy, notably the Governor of the Bank.” The Economist described it as “the crowning achievement of Mr. Montagu Norman.” Only Beaverbrook’s chain of papers dissented.