The Macmillan Report now revealed that the City’s short-term liabilities to foreigners came close to $2 billion. This was viewed as a shocking number even though it eventually turned out to be a gross underestimate—the true figure was closer to $3 billion.
Furthermore, after the imposition of German exchange controls, a good percentage of the loans made with these deposits were now frozen—British banks had an estimated $500 million tied up in Germany and several hundred million more in Central Europe and Latin America. Suddenly, confronted with the previously unthinkable prospect that London houses, weighed down by bad loans, might fail to meet their obligations, investors around the world started withdrawing funds from the City.
In the last two weeks of July, the Bank of England lost $250 million—almost half its gold reserves. It reacted by raising interest rates modestly from 2.5 percent to 4.25 percent in the hopes of inducing capital not to desert sterling. Norman resisted further hikes, fearing that they would only create more unemployment and by intensifying the domestic depression, might even reinforce the speculative attack on the pound. Since he did not know what else to do, he acted as if the crisis were a temporary bout of nerves and arranged to borrow $250 million from the New York Fed and from the Banque de France to tide the Bank of England through.
Norman had now been dealing with one emergency after another for ten weeks and the “steady drip of the unseen pressure” was beginning to tell on his fragile constitution. He was easily distraught, changed his mind frequently, and at times seemed paralyzed by indecision—bouts of “nervous dyspepsia,” as one of his fellow directors described it. As the prospect of a break from gold loomed, he would portray the consequences in apocalyptic terms—an evaporation of confidence in money such as had occurred during the German hyperinflation, a collapse in currency values, spiraling prices, food shortages, strikes, rationing, and riots. So exaggerated and gloomy was the portrait he painted that Russell Leffingwell, a partner in the House of Morgan, where he was usually treated with enormous deference, finally complained, “Can’t he be persuaded to quit his panicky talk?”
Finally, on Wednesday, July 29, Norman left work early, noting meticulously in his diary, “Feeling queer.” That evening he collapsed and was confined to his house under doctors’ orders to take a complete rest. His colleagues at the Bank, fearing that his erratic moods and impaired judgment would only complicate their efforts to deal with the impending crisis, urged him to go abroad to recuperate. Jack Morgan, possibly prompted by one of the Bank directors, even generously offered his yacht, the Corsair IV, with its crew of fifty. Instead, on August 15, Norman set sail for Canada aboard the Duchess of York.
On July 31, as Parliament rose for its summer recess and politicians and bankers left London for the country, yet another official committee—the May Committee—submitted its report. As the Depression in Britain had deepened, the budget had slipped into deficit and was running around $600 million, 2.5 percent of GDP—a modest gap in the circumstances. The May Committee formed to consider economy measures, exaggerated the size and significance of the deficit out of a combination, in the words of historian A. J. P. Taylor, of “prejudice, ignorance, and panic,” which, in the middle of a run on sterling, created only even more alarm. The May Committee proposed that the government seek to reverse the budgetary slide by cutting its expenditures by $500 million—including a 20 percent reduction in unemployment benefits—and raise an extra $100 million from higher taxes. In the light of what we now know about the way the economy works, it was completely absurd for the committee to propose that the solution to Britain’s economic problems, with 2.5 million men out of work, production down by 20 percent, and prices falling at a rate of 7 percent a year, was to cut unemployment benefits and raise taxes. But at the time, the prevailing orthodoxy held that budget deficits were always bad, even in a depression. Maynard Keynes called the May report “the most foolish document I have ever had the misfortune to read.”
The committee’s recommendations split the cabinet. The majority, led by the prime minister, Ramsay MacDonald, and the chancellor, Philip Snowden, though all fervent and committed Socialists, were wedded to the belief that the budget must be balanced, no matter that Britain was in depression.
Meanwhile, the $250 million loan from the New York Fed and the Banque de France had already been used up—the Bank of England had now paid out a total of $500 million in gold and still the drain continued. Bank officials, taken aback by the immensity of the outflow but convinced that raising interest rates was not the answer, could only propose more borrowing—this time not by the Ba
nk itself, whose credit lines were running out, but by the government. At the beginning of August, the government requested that the Bank put out informal feelers to ascertain the conditions that American bankers might attach to such a loan. The New York Fed, itself precluded by statute from lending directly to foreign governments, passed the inquiry on to J. P. Morgan & Co.
Bankers confronted with a country in need of money almost instinctively reach for budget cuts, preferably achieved by slashing public expenditure, as the right solution for almost any problem. During the following couple of weeks, as the conditions were being hammered out, the government, the Bank of England, and the House of Morgan threw up an intricate smoke screen around their discussions. Morgans certainly did not want its fingerprints on any evidence that it had imposed “political conditions” on a sovereign British government. Nor did the Labor prime minister want it known, not even within his own cabinet, that he had sought the permission of foreign bankers before acting. The chancellor put together a package of measures cutting $350 million in expenditures, including a 10 percent reduction in the dole, and raising taxes by $300 million and submitted it, through back channels at the Bank of England, for Morgan’s consideration.
By the weekend of August 22, as gold losses mounted, a sense of crisis pervaded London. The king suddenly and mysteriously cut short his three-week holiday at Balmoral to return to Buckingham Palace. The cabinet remained in session over the weekend, the first time since the war. For all the prime minister’s efforts at keeping the negotiations under wrap, the whole country, it seemed, awaited the telegram from New York signaling Morgan’s approval. “It certainly is a tragically comical situation,” wrote Beatrice Webb, wife of Sidney Webb, one of the recalcitrant minority in the cabinet against the budget cuts, “that the financiers who have landed the British people in this gigantic muddle should decide who should bear the burden, The dictatorship of the capitalist with a vengeance!”
On Saturday, August 22, the Morgan partners assembled at the house of F. D. Bartow in Glen Cove, Long Island, and after a long weekend of debate, gave the budget their blessing on Sunday afternoon. A telegram signaling their approval, its language suitably camouflaged to hide any hint that the budget had been submitted to the American bankers for vetting, was dispatched to Sir Ernest Harvey, deputy governor of the Bank of England, anxiously waiting at his City office. It arrived at 8:45 p.m. London time. He rushed it over personally to 10 Downing Street, outside which a large crowd had gathered as it always did at a time of national emergency—the street was littered with cigarette boxes, burned matches, paper bags, and newspapers. It was a balmy summer evening and the cabinet members were in the garden, nervously pacing around. When Harvey arrived, the prime minister snatched the telegram from his hands and rushed toward the Cabinet Room. Minutes later, the sound of angry voices emerged. To Harvey it seemed that “pandemonium had broken loose.”
Despite the promise of Morgan money, the cabinet remained split over the cuts in unemployment benefits, and that evening the prime minister went to Buckingham Palace to tender his government’s resignation. Two days later, the Daily Herald, official organ of the Labor Party, believing erroneously that the telegram had come from the Fed and not from Morgan, carried a photograph of George Harrison on its front page under the headline “Banker’s Ramp,” a ramp being a fraudulent move by financiers to manipulate the market. Within Britain, it remained an article of faith among left-wingers that the Labor government had been deliberately undermined by American fat-cat bankers opposed to socialism.
Within three days, a new National government, a coalition of fragments of Labor and the Liberals with a united Conservative Party, assumed office led by MacDonald and introduced much the same budget package that had split the previous ministry. In addition to cutting the dole by 10 percent, at the king’s insistence his Civil List, the provision by the state for his expenses, a total of $2.25 million a year, was also reduced by 10 percent. Other members of the royal family copied his example, the Prince of Wales even returning $50,000 of his income of $300,000 from the Duchy of Cornwall. No one knows whether the next time George V and his friend Jack Morgan went out shooting, the topic of the loan and the king’s economies ever came up in conversation.
On August 28, the British government received a $200 million loan from a consortium of American banks led by Morgans and a further $200 million from a group of French banks. It was gone within three weeks. The budget cuts did no good, largely because they were beside the point. A reporter for the British left-wing magazine New Statesman and Nation tried to describe the issue in the simplest of terms, as follows:What the City did in fact was to borrow from the French at 3% in order to lend to the Germans at 6% or 8%. Then came the crash in Vienna; the Bank [of England] lent money. Next the crash in Berlin, and again the Bank [of England] lent money. The French thereupon had a vision: they saw the various banks. Austrian, German, and English tied together like Alpine climbers above the abyss. Two of them had tumbled over; might they not drag the third with them? Acting on this vision they started a run on the Bank of England; in plain words they called in their deposits. . . . The “dole” has nothing to do with it.
In other words, Britain’s problem was not its budget deficit, but rather that it had clung to the role of banker to the world without any longer having the money or the resources to do so and at a time when most of the world was a damn poor risk.
It was by now increasingly obvious to most observers that Britain would have to cut loose from gold. Back from America on July 18, Maynard Keynes, in a private letter, warned the prime minister, “It is now clearly certain that we shall go off the existing parity at no distant date . . . when doubts as to the prosperity of a currency, such as now exist about sterling, have come into existence, the game’s up.” In a series of magazine articles he argued that the deflationary budget cuts would only make the situation worse, describing them in a meeting with parliamentarians as “the most wrong and foolish things which Parliament has deliberately perpetrated in my lifetime.” Even though he made an effort to be restrained in his public criticism of the Bank of England, recognizing that it would only add to the currency’s problems, on August 10, Harry Siepmann invited him to the Bank to persuade him to tone down his writings. In fact, by now even such Bank men as Siepmann were losing faith. According to one visiting New York Fed official, Bank officers “admit quite frankly that the way out is for England and most of the other European countries to go off the gold standard temporarily, leave France and the United States high and dry, and then return to gold at a lower level.”
The UK Treasury became the last bastion of the diehards. When a journalist even raised the question at a press conference there of whether Britain could or should remain on a gold standard that had become unworkable, required Britain to borrow gigantic amounts of money to sustain it, and was imposing intolerable sacrifices on the great mass of people, Sir Warren Fisher, head of the civil service and permanent secretary to the treasury, “rose to his feet, his eyes flashing, his face flushed with passion,” and berated the journalists as if he had caught them “exchanging obscenities.” “Gentlemen, I hope no one will repeat such sentiments outside this room,” he scolded. “I am sure all those of you who know the British people will agree with me that to make such a suggestion is an affront to the national honor and would be felt as a attack on their personal honor by every man and woman in the country. It is quite unthinkable.” Meanwhile, the flight from sterling continued unabated.
Among the new government’s economy measures were pay cuts for all public employees, including the military. Within the navy, a flat shilling a day was taken from the pay of all ranks from admirals to ordinary seamen. Not surprisingly, this provoked enormous resentment among the lower decks at the unfairness of the differential burden so imposed. On September 14, a group of sailors of the Atlantic Fleet at Invergordon refused to muster and put to sea. It was a minor incident of no great significance but was reported in the foreign press as a mutiny, conjuring up the image that Britain was on the verge of revolution and that that last bastion of empire, the Royal Navy, was falling apart.
By now the Bank was losing $25 million of gold a day. Ministers kept leaking the figures on reserves to their cronies on the backbenches, who promptly passed them along to City speculators. On Thursday, September 17, the losses rose to over $80 million and similarly the following day. Since the crisis had begun, the Bank had watched $1 billion fly out of the window.
On Saturday, September 19, the British government made a last desperate plea to the Hoover administration for help. An emotional Stimson, a great Anglophile, called the British ambassador to the White House, to explain that every possible avenue for helping Britain had been explored, including further reductions in war debt, but that the United States was helpless. That weekend, the prime minister, after meeting with the officials of the Bank of England, took the decision to suspend gold payments.
A telegram was dispatched to Norman, then in mid-Atlantic aboard the HMS Duchess of Bedford, on his way home from Canada but still two days from shore. He had not taken his codebook and the radio message had to be sent on an open line. There is a wonderful but apocryphal story that to disguise the message, the deputy governor wrote, “Old Lady goes off on Monday.” Puzzled by this cryptic note, Norman assumed that it referred to his mother’s plans to go on holiday and thought nothing further of it.
The real story is almost as good. The cable in fact read, “Sorry we have to go off tomorrow and cannot wait to see you before doing so.” Norman assumed that it meant Harvey was going to be away on the day of his return to Britain. He only discovered the truth when he landed at Liverpool on Wednesday, September 23. After meeting with the prime minister, he departed for a long weekend in the country to get over the shock. As his friend Baldwin put it indelicately, “Going off the gold standard was for him as though a daughter should lose her virginity.?
? But, for all his anger, it is hard to see what he would or could have done differently had he been around.
The initial public reaction that week was one of alarm and astonishment. Few people understood what it meant. Most newspapers lamented it as the end of an epoch. Only the Daily Express, organ of that clear-sighted financial adventurer Lord Beaverbrook, called it a victory for common sense. “Nothing more heartening has happened in years . . . we are rid of the gold standard, rid of it for good and all, and the end of the gold standard is the beginning of real recovery in trade,” he beamed.
The Sunday Chronicle of September 20 carried a profile of Montagu Norman by Winston Churchill, as part of a commissioned series on contemporary figures. Since leaving office in June 1929, Churchill had quarreled with his Conservative colleagues over Indian self-rule and, now isolated and out of favor, felt free to express his disillusionment with the gold standard orthodoxy openly. The problem was not so much the standard itself, he argued, but the way it had been allowed to operate. It was the hoarding of gold by the United States and France and the resulting shortage in the rest of the world that had brought on the Depression. He had begun to sound almost like Keynes—in a speech to Parliament the week before he had described how gold “is dug up out of a hole in Africa and put down in another hole that is even more inaccessible in Europe and America.”
That weekend Churchill had the star of The Gold Rush, Charlie Chaplin, as a guest at Chartwell, his country house in Kent—they had met in Hollywood when Churchill was visiting the United States in October 1929 at the time of the crash. Over dinner Chaplin opened the conversation by saying, “You made a great mistake when you went back to the gold standard at the wrong parity of exchange in 1925.” Churchill was somewhat taken aback. As the film star proceeded to hold forth at length about the subject with a great deal of knowledge, Churchill, who hated to be reminded of past mistakes, sank into a morose silence, a mood broken only when the comedian picked up two rolls of bread, put two forks in them and did the famous dance from the movie.
The next day, Monday, September 21, the first day off gold, by an odd quirk of fate, Churchill lunched with Maynard Keynes, now an ally and friend. Churchill spent much of the time protesting that he had never been in favor of returning to gold in 1925 and been overridden by Norman and the rest of the City. For Keynes it was a day of celebration and not regret. He could hardly contain his glee, “chuckling like a boy who has just exploded a firework under someone he doesn’t like.” “There are few Englishmen who do not rejoice at the breaking of the gold fetters,” he wrote in an article later that week. “We feel that we have at last a free hand to do what is sensible. . . . I believe that the great events of the last week will open a new chapter in the world’s monetary history.”
But among bankers, especially European bankers, the British departure from gold was seen as an utterly dishonorable step, a “tragic act of abdication” that “inflicted heavy losses on all those who had trusted” the word of the Bank of England. Within a few days the pound had fallen by almost 25 percent in the foreign exchange markets from $4.86 to $3.75. By December it was a little below $3.50, a drop of 30 percent. Altogether twenty-five countries followed Britain off gold during the next few months, not only the nations of the empire and its satellites Canada, India, Malaya, Pales-tine, and Egypt, but also the Scandinavians—Sweden, Denmark, Norway, and Finland—and finally those European countries with close commercial ties to Britain: Ireland, Austria, and Portugal.
Though the papers kept telling him that it was the end of an era, for the average Englishman, after a few days of stunned confusion, it was as if nothing had happened. There were no bank runs, no food shortages, no rush to the stores, no hoarding of goods. Indeed, while wholesale prices in the rest of the world would continue to fall, dropping 10 percent over the next year, in Britain deflation came to an end—prices over the next year even rose a modest 2 percent.