During the 1920s, as agricultural prices kept falling, this expert on cows, trees, and chickens had also spent a decade researching the determinants of commodity price trends. In 1932, he and a colleague published their work in an exhaustive monograph titled Wholesale Prices for 213 Years: 1720- 1932, which created enough of a stir that, in 1933, it was issued as a book. Warren was able to document how trends in commodity prices correlated strongly with the balance between the global supply and demand for gold. When large gold discoveries came onto the world market and supply out-paced demand, commodity prices tended to rise. By contrast, when new supply lagged behind, this showed up in declining prices for commodities. It was easy to quibble with some of the details of the thesis—the correlation was not perfect because a variety of other factors, not least of which were wars, intervened to blur the link. Nevertheless, it was hard to argue with the general conclusion. After all, under the gold standard, there was supposed to be a direct connection between bank credit and gold reserves—thus when gold was plentiful, so was credit, which in turn caused prices to rise.
It was Warren’s policy conclusions, however, that generated the most controversy. If commodity prices fell because of a shortage of gold, he argued, then one way to raise them was to raise the price of gold—in other words, to devalue the dollar. An increase of 50 percent in the price of bullion was no different in its effects from suddenly discovering 50 percent more of the metal. Both brought about a higher value of gold within the credit system and both would therefore stimulate higher commodity prices.
It sounded simple, but to most of Roosevelt’s economic advisers, talk of devaluation was plain blasphemy, smacking of the worst forms of repudiation. How was this different from the practice of clipping and debasing coins adopted by insolvent monarchs in the Middle Ages? Given its vast gold reserves, the United States had little reason to resort to this currency manipulation, which might threaten confidence in the credit standing of the U.S. government and even endanger rather than promote recovery.
During the first few weeks of the administration, following the proclamation suspending gold exports on Roosevelt’s first day in office, the currency situation remained in limbo. Secretary Woodin tried to reassure everyone that the United States had not left the gold standard, but the president was not so unequivocal. At his first press conference, on March 8, he joked with reporters, “As long as nobody asks me whether we are off the gold standard or gold basis, that is all right, because nobody knows what the gold basis or gold standard really is.”
On the evening of April 18, he gathered his economic advisers in the Red Room at the White House to discuss preparations for the forthcoming World Economic Conference in London. With a chuckle, Roosevelt casually turned to his aides and said “Congratulate me. We are off the gold standard.” Displaying the Thomas amendment to the Agricultural Adjustment Act, which gave the president the authority to devalue the dollar against gold by up to 50 percent and to issue $3 billion in greenbacks without gold backing, he announced that he had agreed to support the measure.
“At that moment hell broke lose in the room,” remembered Raymond Moley. Herbert Feis, the economic adviser to the State Department, looked as if he were about to throw up. Warburg and Douglas were so horrified that they began to argue with the president, scolding him as if “he were a perverse and particularly backward schoolboy.” Warburg declared that the legislation was “completely hare-brained and irresponsible” and would lead to “uncontrolled inflation and complete chaos.” Imperturbable as ever, Roosevelt bantered good-naturedly with them, insisting that going off gold was the best way to lift prices and that unless they did something to reflate, Congress would take matters in its own hands.
The discussion continued until midnight. Leaving the White House, a group of aides—Warburg, Douglas, Moley, and William Bullitt, a special assistant to the secretary of state—having just been presented with what many of them viewed as the most fateful step since the war, were unable to sleep and continued the discussion in Moley’s hotel room. They talked for half the night, analyzing the impact on the credibility of the whole New Deal program, the value of the dollar, capital flows, and relations with other countries. Finally, Douglas announced, “Well, this is the end of western civilization.”
ROOSEVELT’S DECISION To take the dollar off gold rocked the financial world. Most people could not understand why a country with the largest gold reserves in the world should have to devalue. It seemed so perverse. Indignant bankers lamented the loss of the one anchor that could keep governments honest. Bernard Baruch, the noted financier, went a little overboard though when he said that the move, “can’t be defended except as mob rule. Maybe the country doesn’t know it yet, but I think we may find that we’ve been in a revolution more drastic than the French Revolution.”
But in the days after the Roosevelt decision, as the dollar fell against gold, the stock market soared by 15 percent. Financial markets gave the move an overwhelming vote of confidence. Even the Morgan bankers, historically among the most staunch defenders of the gold standard, could not resist cheering. “Your action in going off gold saved the country from complete collapse,” wrote Russell Leffingwell to the president.
Taking the dollar off gold provided the second leg to the dramatic change in sentiment, which had begun with the bank rescue plan, that coursed through the economy that spring. Harrison, spurred into action by the threat that the government might issue unsecured currency, injected some $400 million into the banking system during the following six months. The combination of the renewed confidence in banks, a newly activist Fed, and a government that seemed intent on driving prices higher broke the psychology of deflation, a change reflected in almost every indicator. During the following three months, wholesale prices jumped by 45 percent and stock prices doubled. With prices rising, the real cost of borrowing money plummeted. New orders for heavy machinery soared by 100 percent, auto sales doubled, and overall industrial production shot up 50 percent.
If the decision to take the dollar off gold split the U.S. banking community, it unified European bankers—provoking another quip from Will Rogers: that it was obviously the best thing to do if both Britain and France were against it.
After the pound had been so humiliatingly ejected from the gold standard, Montagu Norman seemed to lose his bearings. He found himself on a road without familiar guideposts, and all his old certainties had gone. As he confessed at his annual Mansion House Speech in October 1932, “The difficulties are so great, the forces are so unlimited, precedents are so lacking, that I approach the whole subject in ignorance. . . . It is too great for me—I will admit that for the moment the way, to me, is not clear.”
Though the press still continued to be oddly fascinated by him, the tone of the coverage had changed—it was now tinged with a hint of mockery. When he came to the United States in August 1932, Time magazine described him as “a handsome, fox-bearded gentleman with a black slouch hat and the mysterious manner of the Chief Conspirator in an Italian opera.” The New York Times scolded him for his “penchant for mysterious comings and goings, his acceptance of the alias ‘Professor Clarence Skinner’ to mask what purported to be a simple vacation,” and “his affectation of the role of international man of mystery.”
&nbs
p; When, he dropped the pseudonym on his visit to the United States the next year, the New York Post could not help poking fun:Deport The Blighter:
We have a bone to pick with Montagu Norman, governor of the Bank of England. He has enjoyed American hospitality for several summers, and his visits have provided copy for the press during the doldrums. Not because the American public is interested in the Bank of England but because Mr. Norman had the bright idea of traveling incognito as Professor Skinner.
Mr. Norman, governor of the Bank of England, is worth a paragraph. But Mr. Norman, governor of the Bank of England, traveling as Professor Skinner, commanded reams of copy. It suggested plots. It conjured up visions of international cabals. . . .
We regard “Montagu C. Norman Lands in New York Under His Own Name” as a threat to an established American institution. . . . How much longer must we suffer the machinations of international bankers?
Though Norman no longer dominated the stage of international finance, most of his colleagues remarked on how much easier he was to deal with. The reason was revealed on January 20, 1933. The press uncovered that he had applied to the Chelsea Registry Office for a marriage license. The next day, to the great bemusement of all London, he was married at the age of sixty-one to the thirty-three-year old Priscilla Worsthorne. Born into an old aristocratic Roman Catholic family, she had been married once to a rich and indolent Belgian émigré, Alexander Koch de Gooreynd, who had adopted the anglicized name of Worsthorne. They had two sons but were now divorced. Norman had hoped for a small private ceremony. Instead the Chelsea Registry Office was mobbed by reporters and the newly married couple had to make a getaway by the back door and through an almshouse. Later that afternoon to avoid the paparazzi, they escaped Thorpe Lodge by climbing over the back garden wall.
The week that Roosevelt took the dollar off gold, Norman was away in the Mediterranean on a belated honeymoon. On his return to London the following week, no one could tell him what was going on. Even Harrison was able to provide only a little direction, telling Norman on the phone that he had been taken completely by surprise by the dollar devaluation. He himself was having to rely on the newspapers for information on currency policy, which as far as he could tell was being decided by the “whims” of the brain trust in the White House. With the president’s hands on the lever, the Fed itself was now “completely in the dark as to what our policy is or is to be.” Meanwhile, Meyer had resigned from the Fed Board, which was now hardly functioning, and Morgans was supporting the president’s inflation policy.
It was hard for Norman to know how to respond. However much he longed for the certainties of the gold standard, he had to admit that going off gold had worked for Britain. The country had benefited enormously from the 30 percent fall in the pound. The sinking currency had insulated the local economy from the worldwide chaos of late 1931 and 1932—while prices in the rest of the world had fallen 10 percent during 1932, in Britain they actually rose by a couple of percentage points. Moreover, once the need to keep the pound pegged to gold had been removed, Norman had been able to cut interest rates to 2 percent. The combination of the end to deflation, cheap money at home, and a lower pound abroad, making British goods more competitive in world markets, touched off an economic revival. Britain was thus the first major country to lift itself out of depression.
Norman, however, drew a distinction between the situation of Britain, which had been forced off gold by its weak international position, and the situation of the United States, which with its enormous bullion reserves could play the leadership role in the world economy. He feared that the United States was now abdicating that position, that the dollar devaluation might be a first predatory step in a full-scale currency war as countries tried to weaken their exchange rates in order to steal markets from one another and that the world might be entering a period of monetary anarchy.
While Norman was worried about what the dollar move might mean for Britain, he at least shared Roosevelt’s belief that falling prices were the cause of the Depression. Clément Moret, the governor of the Banque de France, saw the world in very different terms. For France, the last major power still clinging to gold, the fall in the dollar was a disaster. By undervaluing the franc during the 1920s and thus undercutting its competitors in world markets, France had managed to sidestep the collapse of the world economy in 1929 and 1930. It was now having the tables turned on it. It had been hit hard when sterling was knocked out of the gold standard in 1931. The U.S. devaluation compounded the problem. France now risked being left stranded as the highest cost producer of all the major powers in the world.
Moret, however, refused to subscribe to the view that the solution was to inject more money into the system. For him the source of the world’s economic problems was a lack of confidence brought on precisely by too much experimentation with money. Having been scarred so badly by their experience in the early 1920s, French monetary officials believed, with all the fervor and dogmatism of reformed alcoholics, that the path to recovery was a generalized return to the gold standard. In Moret’s case, his orthodoxy in economic matters was not mere theorizing. He practiced it in his personal life. After a twenty-five-year career as an official in the Ministry of Finance, he had grown so used to living modestly that in the years since he was appointed governor of the Banque de France, he had ended up saving 85 percent of his $20,000 a year salary. It was all invested in French gold bonds.
Roosevelt’s decision to devalue came just a few weeks before a long-planned World Economic Conference was scheduled to open in London. It had originally been conceived under Hoover, who, believing that the Depression originated with international problems, thought that a global conference might be the answer. In the event, the London conference proved to be a complete fiasco, the last of that long line of disastrous summits that had begun in Paris in 1919.
It started with the usual squabbles about the agenda. The British wanted to talk about war debts. The Americans refused, presumably on the principle that one cannot be forced into concessions about something one will not discuss. As a tactic for debt collecting, it did not work. France had already stopped making payments on its war debts. Britain would make a token payment that June, in the middle of the conference, and then also stop paying. The only country that eventually paid the Americans in full was Finland.
After the U.S. break from gold, the only thing that everyone—except the Americans—wanted to talk about was currency stabilization, how to prevent the dollar from falling too low. In the weeks before the meeting, as one foreign leader after another paraded through Washington in preparation for the conference, Roosevelt was his usual obtuse self. The visiting delegations all came away with the impression that the president was open to an arrangement for stabilizing the dollar. Even his own financial advisers reached that conclusion. The problem was that Roosevelt, who disliked open confrontations, had mastered the art of seeming to agree with whom-ever he was talking to while keeping his own cards close to his chest. He was not exactly being deceitful—he had not decided himself what to do.
The president’s true attitude to the conference should have been obvious from his choices for the U.S delegation. Even by the insular standards of the Congress, they were singularly unqualified to represent their country in an international forum. Secretary of State Cordell Hull led the team, accompanied by James M. Cox, former governor of Ohio; Senator James Couzens of Michigan, a noted protectionist; Senator Key Pittman of Nevada, a longtime believer in inflation and advocate of the remonetization of silver; Ralph W. Morrison of Texas, a bigwig in Democratic Party finances; and Samuel D. McReynolds, a congressmen from Tennessee. None of them had ever been to an international conference before, most of them knew little or nothing of economic matters, and three were isolationists convinced that the whole exercise was bound to fail.
The conference opened on June 12 in the Geological Museum in South Kensington. Of the sixty-seven nations invited, all but one accepted—poor little Panama replied that it had insufficient funds to pay for its delegates. Attending the conference were one king—Feisal of Iraq—eight prime ministers, twenty foreign ministers, and eighty other cabinet members and heads of central banks. Even Foreign Commissar Maxim Maximovitch Litvinov of the Soviet Union, which had almost completely cut itself off from the world economy, decided to attend.
While the American delegates may not have matched these luminaries in prestige, they made up for it in colorfulness, Senator Pittman in particular providing great fodder for scandalmongers. At an official reception at Windsor Castle, he broke with all social convention by wearing his raincoat and a pair of bright yellow bulbous-toed shoes while being presented to King George V and Queen Mary, greeting them with the salutation, “King, I’m glad to meet you. And you too Queen.” He was usually drunk but even then amazed everyone by his ability to spit tobacco juice into a spittoon from a great distance with remarkable accuracy. One night he was discovered by floor waiters at Claridges sitting stark naked in the sink of the hotel pantry, pretending to be a statue in a fountain. Another night, he amused himself by shooting out the streetlamps on Upper Brook Street with his pistol. Pittman did take one subject seriously—the remonetization of silver, of which Nevada was a major producer—an issue about which he was so passionate that one evening when one of the American experts expressed a contrary opinion on its merits, Pittman pulled out a gun and chased the poor man through the corridors of Claridges. For his part, Congressman McReynolds paid only the most cursory of attention to the business of the conference and rarely attended any meetings. He spent his energies on getting his daughter presented at court, at one point threatening the prime minister’s private secretary that the American delegation would pack up and go home unless the desired invitation from the palace arrived.