Lords of Finance

“Well, if I had I have forgotten them.”

Keynes would later describe Norman as looking like “an artist, sitting with his cloak round him hunched up, saying, ‘I can’t remember,’ thus evading all questions.” Norman testified for only two days—the bank’s senior staff realized that he was doing more harm than good, and the remainder of the testimony was passed back to the deputy governor. But the damage to Norman’s standing had been done. In the aftermath, one banker confided to his colleagues that the governor “grows more and more temperamental, freakish, and paradoxical.”

18. MAGNETO TROUBLE

1930-31

To what extremes won’t you compel our hearts,

you accursed lust for gold?

—Virgil, The Aeneid

IN December 1930, Maynard Keynes published an article titled “The Great Slump of 1930,” in which he described the world as living in “the shadow of one of the greatest economic catastrophes of modern history.” During the previous year, industrial production had fallen 30 percent in the United States, 25 percent in Germany, and 20 percent in Britain. Over 5 million men were looking for work in the United States, another 4.5 million in Germany, and 2 million in Britain. Commodity prices across the world had collapsed—coffee, cotton, rubber, and wheat prices having fallen by more than 50 percent since the stock market crash. Three of the largest primary producing countries, Brazil, Argentina, and Australia, had left the gold

standard and let their currencies devalue. In the industrial world, wholesale prices had fallen by 15 percent and consumer prices by 7 percent.

Despite all this bad news, at this stage Keynes was uncharacteristically sanguine. “We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand,” he wrote. Comparing the economy to a stalled car, he declared it was a simple matter of some “magneto trouble” (a magneto was a device then commonly in use for creating an electric spark in the ignition system of automobiles), trouble that could be easily cured by “resolute action” by the central banks to “start the machine again.”

There were in fact reasonable grounds for optimism. The downturn that had hit the United States in 1930 in the wake of the stock market crash had indeed been deep, but the U.S. economy had faced a similarly sharp decline in prices and production in 1921 and had bounced back. There had been as yet no major financial disaster or bankruptcy.

Keynes did recognize that it was hard for any single central bank to act alone. To jump-start the economy, a central bank had to have enough gold, the underlying raw material for credit creation under the gold standard. The international monetary system was now operating, however, in a very perverse way. Because of investor fear, capital in search of security was flowing into those countries with already large gold reserves—such as the United States and France—and out of countries with only modest reserves—such as Britain and Germany.

As it had been during the 1920s, the United States was major haven for gold flows. Far more damaging than the effect of the protectionist Smoot-Hawley Act was the collapse in capital flows. After a brief revival early in 1930, U.S. foreign investment into Europe suddenly dried to a trickle. American bankers became risk averse and cautious and, claiming that it was hard to find creditworthy borrowers, pulled in their horns. With American capital bottled up at home and U.S. demand for European goods shrinking—a result of the weak U.S. economy and of higher import tariffs imposed in June 1930 by the Smoot-Hawley Act—Europe could only pay for its imports and service its debts in gold. During 1930, a total of $300 million in bullion was shipped across the Atlantic into the vaults of the Federal Reserve system.46

Even more disruptive to international stability, however, was the flow of gold into France, the one country in Europe that had somehow remained immune from the world economic storm. Émile Moreau’s strategy of keeping the franc pegged at a low rate had meant that French goods remained attractively priced. As a result the economy held up very well in 1929 and 1930, and capital, in search of safety, started flooding into France: a total of $500 million of gold during 1930. It was one of the startling ironies of that whole period that France, viewed by bankers in the years after the war as irresponsible and suspect, had now become the world’s financial safe haven. By the end of 1930, the Banque de France, in addition to the $1 billion it held in sterling and dollar deposits, had accumulated a gold reserve mountain of over $2 billion, three times that of the Bank of England. French officials, who only a few years before had been quick to blame their woes on the work of international currency “speculators,” now began touting the superior wisdom of these selfsame “investors” for the votes of confidence they had cast on French economic management.

While everywhere else in the global economy consumers and businesses were cutting back and slashing their budgets, in France, money remained easily available and people continued to spend. French commentators were calling their country L’Île Heureuse. In the summer of 1930, Paris was still full of tourists, and business at Au Printemps, the famed Parisian department store, was booming. The contrast with its neighbors could not have been greater. While in Germany 4.5 million men were on the dole and in Britain 2 million, in France only 190,000 men were collecting unemployment benefits. And while prices across the rest of the world were dropping like stones, in France they continued to rise.

Quite without knowing what it was doing, France had backed into the position of the strongest economy in Europe. After a decade of suffering an inferiority complex created by the combination of “the war . . . fear of Germany [and] the franc’s fall,” it responded to its unexpected good for-was tune with an outburst of self-congratulation. According to the prime minister, André Tardieu, France, having successfully navigated the economic storm, was admired by the whole for its “harmonious economic structure . . . the natural prudence of the French people, their ability to adapt, their modernity and their courage.” Tardieu, with his bejeweled pince-nez and his gold cigarette holder, his boulevardier taste in silk hats and fancy waistcoats, his fondness for raffish company, his involvement before the age of thirty-five in at least two financial scandals, was the embodiment of all that the British despised about French politicians. That this “glittering new embodiment of Gallic self confidence” could now lecture the world about prudence and indulge in his nation’s habit of attributing its successes to the innate and inestimable advantages of French civilization profoundly irritated France’s neighbors.

FIGURE 6

British commentators, unable to understand why commodity prices kept falling, why, despite the massive cuts in interest rates, production in their own country kept dropping and unemployment rising, blamed the operation of the gold standard as the primary cause of world depression, especially the role played by the Federal Reserve and the Banque de France. By the end of the year, the United States and France, between them, held 60 percent of the world’s gold, and neither was doing anything to recirculate it.

The French came in especially for blame for starving the world of liquidity by short-circuiting the gold standard mechanism. Paul Einzig, author of the influential Lombard Street column for the Financial News, wrote that it was “the French gold hoarding policy which brought about the slump in commodity prices, which in turn was the main cause of the economic depression; that it is the unwillingness of France to cooperate with other nations which has aggravated the depression into a violent crisis.” Similarly, the prominent Swedish economist, Gustav Cassell, the primary exponent of the view that world deflation in commodity prices reflected insufficient circulation of gold, argued, “The Banque de France has consistently and unnecessarily acquired enormous amounts of gold without troubling in the least about the consequences that such a procedure is bound to have on the rest of the world, and therefore on the world economic position.”

By the end of 1930, the Banque de France had begun to understand that this accumulation of gold was harming the rest of the world by starving it of reserves. It was especially damaging because of the idiosyncrasies of the French banking system. In most countries, banks worked to make every dollar of gold support a multiple of that amount in currency and credit. The French banking system, however, was unusually inefficient in putting its bullion to use. As a result, the newly arrived $500 million of gold was translated into less than $250 million in circulating currency.

French officials claimed that there was little they could do about this buildup, that the high demand for gold in France was a consequence of the rural character of the country or the innate thriftiness and risk aversion of its citizenry. In fact, it was clear that during 1930, the Banque under Émile Moreau had been very consciously and deliberately offsetting—the technical term was sterilizing—the natural tendency of an influx of gold to expand the currency, lest it lead to inflation. With prices around the world collapsing, this may sound strange, but it was a symptom of how badly scarred he and other French officials had been by the currency crises of 1924 and 1926.

Unknown to most people, much of the gold that had supposedly flown into France was actually sitting in London. Bullion was so heavy—a seventeen-inch cube weighs about a ton—that instead of shipping crates of it across hundreds of miles from one country to another and paying high insurance costs, central banks had taken to “earmarking” the metal, that is, keeping it in the same vault but simply re-registering its ownership. Thus the decline in Britain’s go

ld reserves and their accumulation in France and the United States was accomplished by a group of men descending into the vaults of the Bank of England, loading some bars of bullion onto a low wooden truck with small rubber tires, trundling them thirty feet across the room to the other wall, and offloading them, though not before attaching some white name tags indicating that the gold now belonged to the Banque de France or the Federal Reserve Bank.47 That the world was being subject to a progressively tightening squeeze on credit just because there happened to be too much gold on one side of the vault and not enough on the other provoked Lord d’Abernon, Britain’s ambassador to Germany after the war and now an elder statesmen-economist, to exclaim, “This depression is the stupidest and most gratuitous in history.”

As the French hoard kept piling up during the summer and fall of 1930—and with it tensions between Britain and France—the French went through the motions of proposing remedies. The return of French gold policy to the forefront of economic debate was too much for Norman. He happy to deal with the Americans, but having had his fingers burned by his experience with Moreau in 1927, he absolutely refused to have anything to do with French officialdom.

Instead, he wisely left it up to the British Treasury to try to negotiate with their counterparts in the Ministry of Finance. These conversations led nowhere. Indeed, they brought out the worst in the characters of both countries. The British insisted upon patronizing lectures on the primitive nature and deficiencies of the French banking system, without any sense that they themselves would have found such advice from abroad intrusive and insulting.

It soon became clear that France was motivated not so much by economic arguments but by strategic calculations. French officials tried to use their financial muscle to extract political concessions—money to them not being its own reward. Even the French Military High Command became involved. General Réquin, a senior adviser to Minister of Defense André Maginot, wrote to General Weygand, chief of the General Staff, urging that France “lean on England while the pound is at our mercy. . . . We can make her understand . . . that if she wants our help as a lender, other questions must first be settled.”

In September 1930, it was suddenly announced that Moreau was resigning. This had been rumored in Paris for months, but it still came as a great shock in British banking circles. Initially the talk was that he was being forced out by British pressure and that his departure might foreshadow a change in French policy.

In fact, having presided over the recovery of the franc, he had just been decorated as Grand Officier de la Légion d’Honneur and decided himself that it would be a good time to go. He was simply following the age-old practice in France whereby senior civil servants, unusually poorly paid by international standards, move to the private sector to build up a nest egg. He had accepted the position of vice president of the Banque de Paris et Pays-Bas, the most prominent of the private banques d’affaires, a distinctively French type of banking house that combined security underwriting with direct investments in industry. Indeed, he had already moved out of the official apartment assigned to him as governor, which despite its “sumptuous trimmings” was lit by kerosene lamps, had especially “antiquated heating,” and smelled of “a miser’s snuggery,” into a magnificent hôtel particulier, a large town house on the Rue de Constantine opposite Les Invalides.

He was succeeded by his deputy, Clément Moret, like Moreau a graduate in law, who had then gone on to Sciences Po, and also on to the Ministry of Finance—Moret, however, was not part of the elite Inspectorat des Finances. Instead, the self-effacing Moret had spent twenty-five years clambering up the Ministry of Finance hierarchy. Plucked from obscurity by Poincaré, who described him as “abnormally honest,” Moret had become a director general within the ministry and in 1928 had been assigned to the Banque as deputy governor.

He was of a different generation—at the age of forty-five the youngest man to be appointed governor. And in contrast to Moreau, who had been blunt to the point of rudeness, Moret was courteous and thoughtful. But though there was a change in style at the Banque, there was to be no change in the substance of policy. Indeed, Moret thought of himself, even more than had Moreau, as a civil servant and the Banque de France as essentially an arm of the state. He did propose that if the goal was to redirect gold reserves from France to Britain, the British government should borrow directly in France. Of course, lacking any assurance that the pound would remain stable, such a loan would have to be denominated in francs. For Norman, who thought that it was contrary to the “prestige” of London even to appear to “ask favors from the French,” this would have been the ultimate humiliation. And so, as a combination of British pride and heavy-handedness locked horns with French selfishness and arrogance, the French gold mountain kept growing.