Lords of Finance_ The Bankers Who Broke the World Part 15

Mellon tried to convince the French that in return for giving up about $200 million dollars a year in reparations, they would avoid having to pay $115 million in war debts-at a net cost to them of "only" $85 million a year. The Americans, on the other hand, would be conceding a total of $260 million a year. Laval was implacable. For two weeks the negotiations dragged on.

The seventy-six-year-old Mellon had to work both Washington and Paris hours. Statesmen had just discovered the advantages of the telephone. Every evening and sometimes two or three times a day Mellon would place a call to the White House from the U.S. amba.s.sador's residence. The French phone system was being revamped and there were only two phones working: one in the concierge's room in the bas.e.m.e.nt and the other in the bedroom of the amba.s.sador's wife. The soft-spoken Mellon could often barely be heard.

Tempers began to fray. Growing more irritated by the day, Hoover vented against the French and accused Mellon of being soft on France. Meanwhile, Germany's gold reserves continued to hemorrhage. Central bankers provided a loan of $100 million on June 24. Within ten days, it was gone. Berlin was being "bled to death" while the French and the Americans were busy arguing, complained Norman on what had become one of his regular calls to Harrison in New York. The British prime minister put it more pungently in his diary: "France has been playing its usual small minded and selfish game over the Hoover proposal. . . . To do a good thing for its own sake is not in line with France's official nature. So Germany cracks while France bargains."

The negotiations were finally concluded on July 7, the Americans conceding that Germany would only suspend payments on a portion of its reparations, the French, however, agreeing to lend the remaining reparations they did receive straight back to Germany. Both sides could claim victory. "Now, Monsieur Mellon, you can take up your interrupted vacation," said the French prime minister sarcastically. The secretary of the treasury promptly set off for the Riviera.

It was too late. On June 17, the Norddeutsche Wolkkammerei-"Der Nordwolle," a large German wool combine-declared bankruptcy, revealing losses amounting to $50 million, which it had managed to conceal by transferring its inventory at bloated prices to its Dutch subsidiary. The Nordwolle had not lost all this money in the production of blankets and comforters-it seems that its management had speculated on a rise in wool prices by building up its inventories and buying in the forward market, a bet that had gone badly wrong.

On July 5, a Basel newspaper stated that an unnamed German bank was in trouble. As Berlin swirled with rumors, on July 6, the day before the negotiations on the moratorium were concluded, the Danatbank, Schacht's old employer, the third largest in Germany, issued a denial that it was having difficulties. A bank cannot survive without confidence; when it is forced to deny rumors that it is in trouble, it is by definition in serious trouble. Two days later, the head of the Danatbank, Jacob Goldschmidt, Schacht's old colleague and nemesis, informed the Reichsbank that his bank could not meet its liabilities.

Schacht's successor at the Reichsbank was Hans Luther, who as minister of finance in 1923 at the height of the hyperinflation had originally and reluctantly appointed Schacht currency commissioner. Luther, though not a member of the Reichstag and "a politician without party," had been chancellor for eighteen months in 1925 but had been humiliatingly forced out when his government had instructed German consulates and diplomatic offices to fly, in addition to the republican flag (black, red, and gold), the flag of the merchant marine, which looked suspiciously like the banned imperial flag (black, white, and red). He was not a good choice for the Reichsbank. Though a competent administrator, he had made his reputation as a stolid munic.i.p.al official and simply lacked what it took to run a central bank, especially the understanding of the psychological dimension to the crisis and the importance of restoring confidence.

On July 8, Luther called Norman. The Reichsbank was in a desperate situation. It had lost a huge slice of its gold reserves. If it tried to bail out the Danatbank, it would fall below the minimum reserve threshold it was required to maintain by law which, in the current environment, was bound to provoke a run on its currency. It therefore faced a terrible dilemma: support its currency and let the Danatbank fail or try to support its domestic banking system and watch what reserves it had left fly out of the country. It was one of those situations in which there are no good options-only the choice between a bad outcome and a disastrous one.

Luther's only solution was to borrow abroad. He needed $1 billion, he told Norman. On July 9, Luther, his "round face deep lined with anxiety," boarded a private plane in Berlin-the first such resort by a desperate central banker. In Amsterdam he met with the governor of the Dutch central bank for two hours, then took off for Britain. He was received at Croydon Aerodrome by Norman and the British foreign secretary, Arthur Henderson. The party drove up to London, where Luther briefly met with the chancellor of the exchequer Philip Snowden. Norman was due in Basel for the monthly board meeting of the BIS and Luther decided to accompany him on the boat train as far as Calais.

It was on that journey, as Luther described the deteriorating situation in Germany, that it finally dawned on Norman that the game was up. The German economic position was now irretrievable. As a central banker, all he could do was provide a temporary loan to buy a little more time. Germany was now in deep water and sinking. The numbers would not add up. It had a GDP now of $13 billion that was shrinking by the month, reparation debts of $9 billion, and foreign private obligations of $6 billion, $3.5 billion of it short-term that could be pulled at any moment. Over the last year, $500 million in capital had fled the country. Barely $250 million in gold reserves remained. Harrison and Norman had been pushing Luther to restrict credit yet more rigorously in order to curb the outflow of capital. But with the banking system on the verge of collapse, he had run out of room. His only hope, Norman told him, lay in a long-term loan from France, the one European nation with sufficient gold reserves to bail out Germany. But he warned that French money would only come with draconian political conditions. Luther and Norman separated at Calais, Norman to go on to Basel, Luther to Paris.

Luther was received at the Gare du Nord by Governor Moret of the Banque de France. On Friday, July 10, he lunched at the Banque with the regents, the two most powerful of whom, Francois de Wendel and Baron Edmond de Rothschild, both resolutely anti-German, turned down the idea of a credit from the Banque and told Luther that his only hope was a loan from the government. That afternoon and into the evening, the Reichsbank president shuttled back and forth from ministry to ministry, missing one train after another for Berlin. The French government informed him that it might be prepared to lend as much as $300 million, provided that Germany abandon the customs union with Austria, suspend the construction of two new pocket battleships, raise interest rates sharply to halt the flight of capital abroad, and "orient itself definitely towards a policy of democracy and pacifism" by banning public demonstrations by Nationalist organizations.

Merely president of the Reichsbank, Luther did not have the authority to agree to these terms. On Sat.u.r.day, July 11, he boarded an airplane at Le Bourget for Berlin. "Not since those days of July 1914 when the World War was brewing have potent rumors been so thick," wrote Time Time magazine of that weekend. The German cabinet convened at 8:00 p.m. and debated into the early hours of the morning. Every major German newspaper fulminated against French "political blackmail" and warned that this would only increase the "bitterness of the German people" toward France. Rumors circulated that President Hindenburg would resign if the government knuckled under. An even more startling rumor came over the wires. The cabinet was considering nationalizing all private industry, banks, shipping, and trade. magazine of that weekend. The German cabinet convened at 8:00 p.m. and debated into the early hours of the morning. Every major German newspaper fulminated against French "political blackmail" and warned that this would only increase the "bitterness of the German people" toward France. Rumors circulated that President Hindenburg would resign if the government knuckled under. An even more startling rumor came over the wires. The cabinet was considering nationalizing all private industry, banks, shipping, and trade.

That Sunday, the German cabinet announced that it was rejecting the French offer. The French cabinet, which had dispersed for the long Bastille Day weekend-Laval to his country cottage, Foreign Minister Briand fishing on his farm at Cocherel, Finance Minister Flandin at the beach in Brittany-was summoned back to Paris. They heard an impa.s.sioned plea for reconsideration from the German amba.s.sador, Dr. Leopold von Hoesch. Did they really want to provoke a revolution in Germany? Though Laval agreed that "they had come to a decisive point in world history," he was unwilling to offer anything new.49 Paul Einzig captured the view of many in Europe at that point when he later wrote, "On the ruins of the wealth, prosperity, and stability of other nations, France has succeeded in establishing her much desired politico-financial hegemony over Europe." Paul Einzig captured the view of many in Europe at that point when he later wrote, "On the ruins of the wealth, prosperity, and stability of other nations, France has succeeded in establishing her much desired politico-financial hegemony over Europe."

The American amba.s.sador in Berlin, Frederick Sackett, cabled to Washington that unless Germany received $300 million immediately, it would declare national bankruptcy and default on the $3 billion it owed American banks and investors. George Harrison convened an emergency meeting at the New York Fed with Under Secretary Mills and the two most knowledgeable men on Germany, Owen Young and Parker Gilbert. They concluded it would be throwing good money after bad, when the United States had already contributed $300 million by its moratorium on war debts.

Another long Cabinet meeting in Berlin ensued that evening. To the surprise of most attending, Schacht was invited and seated next to the chancellor. By a strange quirk of fate, the English and American editions of his book The End of Reparations The End of Reparations were to be published in London and New York the very next day. The book was a long a.s.sault on reparations, the policy as Schacht described it of "bleeding Germany white" and "destroying Germany's credit." One excerpt in particular was heavily quoted in British and American newspapers: "Never has the incapacity of the economic leaders of the capitalist world so glaringly demonstrated as today. . . . A capitalism which cannot feed the workers of the world has no right to exist. The guilt of the capitalist system lies in its alliance with the violent policies of imperialism and militarism. . . . The ruling cla.s.ses of the world today have as completely failed in political leadership as in economic." Such criticism from "the head of one of the world's most powerful capitalist organizations" was somewhat unusual, commented the were to be published in London and New York the very next day. The book was a long a.s.sault on reparations, the policy as Schacht described it of "bleeding Germany white" and "destroying Germany's credit." One excerpt in particular was heavily quoted in British and American newspapers: "Never has the incapacity of the economic leaders of the capitalist world so glaringly demonstrated as today. . . . A capitalism which cannot feed the workers of the world has no right to exist. The guilt of the capitalist system lies in its alliance with the violent policies of imperialism and militarism. . . . The ruling cla.s.ses of the world today have as completely failed in political leadership as in economic." Such criticism from "the head of one of the world's most powerful capitalist organizations" was somewhat unusual, commented the New York Times. New York Times.

Speaking with his usual self-a.s.surance, Schacht urged the cabinet to suspend payments to the foreign creditors of Danatbank, forcing them to bear the consequences of their foolhardy and unsound lending practices. The government, believing that this would completely destroy any hope of a rescue from abroad, decided not to take his advice.

The cabinet meeting finished at 2:00 a.m. Later that morning Luther boarded yet another plane, this time for Basel, to make one last desperate plea to the central bankers gathered at the BIS. After being closeted in conference for twelve hours, they emerged to announce that no new credits would be forthcoming. At 11:20 p.m. Basel time, Harrison got through to Norman. The Englishman sounded "tired, disgruntled and discouraged." The problem was just "too big for the central banks," he reported. The only solution was for the whole structure of war debts and reparations that had weighed down the world for the last dozen years to be swept away.

On the morning of Monday, July 13, as Luther was setting off for Basel, the Danatbank had failed to open. On the locked doors of all its branches was posted a government decree guaranteeing its deposits. At a press conference, Jacob Goldschmidt revealed that the bank had lost 40 percent, some $240 million, in deposits over the last three months, about half of which were to foreigners. He blamed the run on wild rumors fueled by anti-Semitic agitation in the Nationalist press.

The Reichsbank, hoping that the impact might be contained, kept the rest of the banking system open that day. By lunchtime, branches of every bank in the country were besieged. The leading banks restricted withdrawals to no more than 10 percent of a depositor's balance. In the Berlin suburbs, savings banks were so overwhelmed that that they closed under heavy police guard. In Hamburg, sporadic riots were blamed on Communist agitators. That evening President Hindenburg proclaimed a two-day bank holiday. The authorities hoped that a short breathing s.p.a.ce would allow people to come to their senses. In the event, banks throughout Germany remained closed-except for the most essential business of paying wages and taxes-for another two weeks, during which commercial life in the country was brought to a virtual standstill.

All the banks in Hungary were closed for three days. In Vienna, another of the large banks shut its doors. In Danzig and Riga, in Poland, Yugoslavia, and Czechoslovakia, banks were suspended. German tourists across Europe, even in fashionable sophisticated cure resorts like Marienbad and Carlsbad, were stranded when no hotels or shops would accept their marks. The German government issued one decree after another. Despite the ma.s.sive unemployment, interest rates were hiked to 15 percent just to keep money in the country. All payments on Germany's short-term foreign debt were suspended. All foreign exchange had to be turned over to the Reichsbank and all movements of money out of Germany were tightly regulated, the practical equivalent to going off gold.

For the second time in less than eight years, Germany faced economic disaster. Despite the chaos, the country remained surprisingly peaceful, save for a few small riots in Leipzig and Dresden, Dusseldorf and Koblenz. There was an atmosphere of "resigned pa.s.sivity born of a weary submission to the inevitable," wrote the New York Times New York Times, the consequence of a decade of economic turmoil. The British amba.s.sador, returning after a few weeks' absence, noted that he was "much struck by the emptiness of the streets and the unnatural silence hanging over the city, and particularly by an atmosphere of extreme tension similar in many respects to that which I observed in Berlin in the critical days immediately preceding the war . . . an almost oriental lethargy and fatalism."

"In such circ.u.mstances," he continued, "Dr Schacht's financial reputation has revived and he has reappeared on the stage . . . there are small but widening circles which feel that Dr. Schacht, if only he could overcome his unpopularity abroad, and especially in the U.S.A. and with Social Democrats at home, might yet be the man to save Germany." The government did try to induce Schacht to return to power, offering him the position of the banking czar with responsibility for sorting out the whole mess caused by the meltdown. Fearing he was being offered a poisoned chalice, he refused and returned to his country estate to wait upon events.

The collapse of the German banking system in the summer of 1931 sent the economy lurching downward once again. Over the next six months production fell by another 20 percent. By early 1932, the industrial production index reached 60 percent of its 1928 level. Nearly six million men-a third of the labor force-were without work.

In October 1931, the parties of the right collectively staged a rally in the little mountain spa of Bad Harzburg, one of the few places where the wearing of brownshirt n.a.z.i uniforms had not been banned. It was a reunion of everyone who was or had ever been against democracy in Germany. The town was festooned with banners in the old imperial colors. Aged generals and admirals from the previous war turned out, as did two of the sons of the ex-kaiser, the princes Eitel Friedrich and August Wilhelm, rubbing shoulders with an a.s.sorted collection of industrialists, politicians, and five thousand goose-stepping paramilitary militia and storm troopers from various factions. The event was kicked off by an invocation for divine guidance by a Lutheran pastor and a Catholic priest. The star of the occasion was. .h.i.tler, who hogged the spotlight with his impromptu speeches.

An equally big stir occurred, however, when Schacht, in his first public appearance as an a.s.sociate of the n.a.z.is, ascended the stage to speak. He accused the government of misleading the country on the amount of foreign debts and gold reserves. As to the economic policies of the opposition, he was obscurely vague, saying only that "the program to be executed by a national government rests on a very few fundamental ideas identical to those of Frederick the Great after the Seven Years War."

The speech provoked outrage in the Reichstag and within the government. For the ex-president of the Reichsbank to declare publicly that the country was bankrupt-though this was essentially true-was viewed as an act of vindictive irresponsibility and betrayal that could only add to the economic turmoil. That most of the foreign debt had been ama.s.sed on Schacht's watch only added to the anger. There were even calls in parliament and in the press for his prosecution on a charge of high treason. Schacht had long since broken with the left. He had now estranged himself from the democratic center. His only home was with the n.a.z.is. And though the struggle against reparations was now essentially over, the fight for the future of Germany was still to enter its last act.

20. GOLD FETTERS.

1931-33.

Lo! thy dread empire Chaos! is restored: Light dies before thy uncreating word; Thy hand, great Anarch! lets the curtain fall, And universal darkness buries all.

-ALEXANDER Pope, The Dunciad

ON July 14, Norman returned from Basel to find the crisis now spreading to Britain. That evening Robert Kindersley, a director of the Bank of England and head of the London arm of the great investment house of Lazards, asked to see him in private and told him that Lazards itself was in serious trouble. Ironically enough it had little to do with the crisis ravaging Central and Eastern Europe. In the midtwenties, a rogue trader in the Brussels branch of the bank had made a wild bet on the collapse of the French franc and lost $30 million, almost double the bank's capital. He had managed to cover up the loss for years with the connivance of several members of the Brussels office, by issuing IOUs on behalf of Lazards to its counterparts. The extent of the problem had only recently come to light when these obligations were finally presented. When confronted with the evidence, the trader in question, a Czech, confessed, then suddenly pulled out a gun in the office and shot himself. Fearing that the failure of a merchant bank of Lazards' standing would set off a panic in the City, the Bank of England agreed to bail it out. The following week two other British merchant banks, Kleinworts and Schroders, informed Norman that they, too, were in trouble. Unable to prop up everyone, the Bank arranged for them to be rescued by loans from the commercial banks.

Meanwhile, on the heels of the closure of banks in Germany, a "blizzard" swept through the world's financial system. A bank holiday was imposed in Hungary, major financial inst.i.tutions failed in Romania, Latvia, and Poland. In Cairo and Alexandria, a run began on the German-owned Deustche Orientbank and police had to be called in to protect the management. Istanbul saw runs on the local branches of the Deutsche Bank, and the Banque Turque pour le Commerce et l'Industrie was closed.

The world economic crisis had already engulfed large tracts of South America-Bolivia had defaulted in January and Peru in March. In the last two weeks of July, the contagion extended to other Latin countries. On July 16, the government of Chile suspended payments on its foreign debt. Five days later, it fell and the head of the central bank took over as premier. He lasted barely three days. Over the next twenty-four hours, three different premiers were sworn in, until, fed up with the turmoil, the military took over. On July 25, the Mexican government announced that gold was no longer legal tender and that instead it was shifting to silver. The currency dropped 36 percent and after days of confusion a leading bank, the Credito Espanol de Mexico, was forced to close its doors.

As the world financial system ground to halt, the City of London, with tentacles that stretched into every corner of the globe, found itself especially vulnerable. On July 13, as the German crisis reached its denouement, the Macmillan Committee on the workings of the British banking system issued its report. Considering all that was going on in Europe, the press paid little attention to it. Nevertheless, hidden in the report was a set of figures that shook the City.

During London's heyday as a financial center, British industry and British banking had complemented each other. The large export surpluses generated by what was then "the workshop of the world" had provided the funds to finance Britain's long-term global investments and underpinned London's status as banker to the world. After the war and the return to the gold standard, Britain's manufacturing capacity had stagnated. Throughout the 1920s, however, London, determined to maintain its primacy in global finance, continued to lend $500 million a year to foreign governments and companies. But because Britain was unable to generate the same export surpluses as before the war, the City had to finance its long-term loans by relying more and more on short-term deposits. While everyone was dimly aware of this growing mismatch between liabilities and a.s.sets, no one had any idea of its magnitude.

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 const.i.tution. 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 Corsair IV, with its crew of fifty. Instead, on August 15, Norman set sail for Canada aboard the d.u.c.h.ess of York d.u.c.h.ess 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 circ.u.mstances. 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 doc.u.ment 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 Bank 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, pa.s.sed 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 Sat.u.r.day, August 22, the Morgan partners a.s.sembled 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 s.n.a.t.c.hed 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 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, a.s.sumed 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 New Statesman and Nation tried to describe the issue in the simplest of terms, as follows: 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 d.a.m.n 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 ma.s.s 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 pa.s.sion," 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 pa.s.sed 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 Sat.u.r.day, 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 amba.s.sador 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 d.u.c.h.ess of Bedford d.u.c.h.ess of Bedford, on his way home from Canada but still two days from sh.o.r.e. 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 a.s.sumed 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 a.s.sumed 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, 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. 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 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 h.o.a.rding 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." 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 h.o.a.rding 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 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 h.o.a.rding 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.

The one group who received a big shock was the small number of British people traveling abroad. Time Time magazine recounted how one man in an Old Etonian tie was sufficiently incensed at being offered only $3 for his pounds in New York-a "hold-up," he called it-that he stormed off muttering, "A pound is still a pound in England. I shall carry my pounds home with me." magazine recounted how one man in an Old Etonian tie was sufficiently incensed at being offered only $3 for his pounds in New York-a "hold-up," he called it-that he stormed off muttering, "A pound is still a pound in England. I shall carry my pounds home with me."

The recriminations began almost immediately. Snowden in his speech to the Commons on September 20 blamed the debacle on the gold policies of the United States and France. Though Americans came in for their fair share, the greatest vituperation was reserved for the French. Margot Asquith, in a letter to Norman wishing him well on his return, captured the country's mood when she wrote, "France will be heavily punished for her selfish short-sightedness. She has been the curse of Europe. . . ." Ironically, the one inst.i.tution upon which the devaluation wrought disaster was the Banque de France. For years an urban myth insisted that it had been French selling of the pound that had set off the debacle. In fact, the Banque had hung on to every penny of its $350 million in sterling deposits. So supportive had it been during the crisis that Clement Moret was later named an honorary Knight Commander in the Order of the British Empire. The Banque de France ended up losing close to $125 million, seven times its equity capital. A normal bank would have been driven under.

Other central banks, especially those of Sweden, the Netherlands, and Belgium, that had been persuaded during the 1920s to keep part of their reserves in sterling lost enormous amounts. The Dutch central bank lost all its capital-the bitterness ran particularly deep because a few days before the devaluation, its governor, forgetting that only simpletons ask a central banker about the value of his currency and expect an honest answer, had inquired whether his deposits were safe and had been unequivocally rea.s.sured. Norman was so embarra.s.sed by the losses sustained by his fellow central bankers that he contemplated submitting a letter of resignation to the BIS. It would have been a quaintly anachronistic gesture-like an ashamed bankrupt resigning from his club-but he was persuaded that it would be impractical for the inst.i.tution to operate without a Bank of England presence at its meetings.

No ONE HAD done more to prop up Europe that summer than George Harrison. It must have seemed to him at times that he had spent most of the summer on transatlantic telephone calls-at the height of the Central European crisis he and Norman must have spoken on the phone, not a simple matter in those days, more than twenty-five times. After the first Austrian loan back in May, when few could have foreseen how far the panic would go, the Fed had provided the Reichsbank with $25 million, been ready to throw in a mammoth $500 million for the second loan that never got off the ground, supplied a further $250 million to the Bank of England, and, finally, been instrumental in orchestrating the last $200 million loan from the Morgan consortium to the British government. It had all been to no effect. Europe's problems had proved to be much deeper, and its needs far larger, than the Fed was capable of handling.

After Britain left the gold standard, the financial crisis now spread across the Atlantic. Over the next five weeks, Europeans, fearing that the United States would be next to devalue, converted a ma.s.sive $750 million of dollar holdings into gold. While some popular accounts attributed the outflow of gold to "panicky millionaires" and speculators hoping to make a buck from such a collapse, it was not private investors who were princ.i.p.ally behind the flow but European central banks, the largest single mover of capital being the staid and upright Swiss National Bank, which transferred close to $200 million. The National Bank of Belgium moved $130 million; the already badly burned Netherlands Bank, $77 million; and the Banque de France, $100 million. Having lost its capital seven times over during the sterling devaluation out of a misplaced sense of "solidarity and politeness"-Governor Moret's words-and having been rewarded with a campaign of public vilification in Britain, the Banque de France had learned its lesson. The cost of being a responsible global citizen was just too great.

The outflow of gold came at a particularly crucial juncture for the U.S. banking system, then reeling under the wave of failures that had begun in the spring in Chicago. By September, the panic had swept Ohio and was circling back to Pittsburgh and Philadelphia. A committee of prominent Philadelphians, including the president of the University of Pennsylvania, the cardinal archbishop, and the mayor, published an appeal in the newspapers urging faith in local banks. To no avail-39 banks in the city with over $100 million dollars in deposits were forced to close down. In one month alone after the British departure from gold, 522 American banks went under-by the end of the year, a total of 2,294, one out of every ten in the country, with a total of $1.7 billion in deposits, would suspend operations.

The mounting bank failures intensified h.o.a.rding-$500 million dollars in cash was pulled from banks. While most of this was stashed away in traditional hiding places-socks, desks, safes, strongboxes under the bed, deposit vaults-some found its way to very unconventional spots, including, according to a congressional report, "holes in the ground, privies, linings of coats, horse collars, coal piles, hollow trees." Anywhere but bank accounts.

The Fed had begun 1931 with a ma.s.sive $4.7 billion in gold reserves. Even after the fall outflow, it had more than enough bullion and was never at any risk of being stripped bare as the Bank of England or the Reichsbank had been. Nevertheless, because of a strange technical anomaly in its governing laws, it found itself facing an artificial squeeze on its reserves.

By statute, every $100 in Federal Reserve notes had to be backed by at least $40 in gold, the remaining $60 by so-called eligible paper-that is, prime commercial bills used to finance trade. Even though the Federal Reserve banks were permitted to hold government securities, and the buying and selling of such securities-open market operations-was one of the mechanisms by which the Fed injected money into the system, government paper could not be employed as an a.s.set to back currency. Even when first introduced in the original 1913 legislation setting up the Fed, the restriction had been redundant, since the 40 percent gold requirement was enough to prevent the central bank from being used as an instrument of inflation. By 1931, with no risk of inflation-the country in fact facing a problem of deflation-the restriction served no purpose. Nevertheless, it remained obstinately on the books.

With the Depression and the ensuing stagnation in trade, prime bills were scarce and hard to find. The Fed had to rely on gold to back its currency. Thus, in the fall of 1931, instead of having $2 billion too much gold and being grateful that some of it was finally flowing back to Europe, it found itself scrambling to hold on to its reserves. It was a manufactured problem, the result of an anachronistic regulation that had no basis in economic reality but which tied up a large amount of U.S. gold unnecessarily.

And so early that October, in the midst of the Depression, as bank runs raged across the Midwest, thousands of businesses closed down, and industrial production contracted at an annualized rate of 25 percent, the Fed raised interest rates from 1.5 percent to 3.5 percent. With prices falling by 7 percent a year, this put the effective cost of money above 10 percent. So dominant was the view that abiding by these reserve requirements trumped every other consideration, there was no internal resistance at the Fed to jacking up the cost of credit. Even the two princ.i.p.al expansionists, Meyer and Harrison, went along.

The president still continued to cling to the notion that private sector initiatives were the best way to revive the economy. On the evening of Sunday, October 4, he secretly slipped out of the White House and made his way to Mellon's apartment at 1785 Ma.s.sachusetts Avenue, where Harrison of the New York Fed had a.s.sembled a group of nineteen New York bankers, among them Thomas Lamont and George Whitney of J. P. Morgan & Co., Albert Wiggin of Chase National, William Potter of Guaranty Trust, and Charlie Mitch.e.l.l of National City-in short, the usual suspects. Amid the Rubens and Rembrandts, which Mellon had so a.s.siduously collected, the president outlined a plan to try to break the vicious cycle whereby people were pulling cash out of banks and banks were having to cut credit.

Banks were going under in part because the a.s.sets they held on their books could not be used as collateral to borrow from the Fed. By the fall of 1931, the neat distinction between liquidity and solvency on which the Fed, following Bagehot, had placed so much emphasis, was becoming meaningless. Many banks experiencing withdrawals would have been fine under normal circ.u.mstance, but forced to call in loans and liquidate a.s.sets in a falling market at fire-sale prices, they were being driven into insolvency. Hoover proposed that a new fund of $500 million be created by the larger and stronger private banks to lend to smaller banks on collateral that the Federal Reserve was legally unable to accept.

That meeting went on long into the evening. The bankers were dubious about the idea and kept asking why the government or the Fed did not act-had not the Fed after all been created precisely to avoid such banking panics? Hoover returned to the White House after midnight "more depressed than ever before." The next day, prodded by Harrison, the bankers reluctantly agreed to try the plan. Over the next few weeks, the new fund lent a grand total of $100 million and then, paralyzed by its proprietors' ultraconservatism and fear of losing money, folded. The days of the great Pierpont Morgan, when large banks a.s.sumed responsibility for propping up smaller ones and for supporting the integrity of the entire financial system, were long gone.

The bank runs, the spike in currency h.o.a.rding, and now the rising cost of money imposed a ma.s.sive and sudden credit crunch upon an already fragile United States. Between September 1931 and June 1932 the total amount of bank credit in the country shrank by 20 percent, from $43 billion to $36 billion. As loans were called in, small businesses were driven into default. Lenders were forced to absorb losses and in turn lost their own cushion of capital, making depositors quite justly fearful for the security of their money and leading to further withdrawals from banks, which in turn forced more loan recalls and thus more defaults. Though depositors and bankers individually behaved quite rationally to protect themselves, collectively their actions imposed a vicious spiral of tightening credit and loan losses on the already depressed U.S. economy.

"If there is one moment in the 1930s that haunts economic historians," writes the economist J. Bradford DeLong, "it is the spring and summer of 1931-for that is when the severe depression in Europe and North America that had started in the summer of 1929 in the United States, and in the fall of 1928 in Germany, turned into the the Great Depression." The currency and banking convulsions of 1931 changed the nature of the economic collapse. As prices fell and businesses were unable to service their debts, bankruptcies proliferated, further chilling spending and economic activity. A corrosive deflationary psychology set in. Fearing that prices would fall further, consumers and businesses cut spending, adding to the downward spiral in consumption and investment. Great Depression." The currency and banking convulsions of 1931 changed the nature of the economic collapse. As prices fell and businesses were unable to service their debts, bankruptcies proliferated, further chilling spending and economic activity. A corrosive deflationary psychology set in. Fearing that prices would fall further, consumers and businesses cut spending, adding to the downward spiral in consumption and investment.

Every economic indicator seemed to fall off a cliff-1932 was the deepest year of depression in the United States. Between September 1931 and June 1932, production fell 25 percent; investment dived a stunning 50 percent; and prices dropped another 10 percent, reaching 75 percent of their 1929 level. Unemployment shot up beyond ten million-more than 20 percent of the workforce was now without jobs.

American corporations, which had made almost $10 billion in profits in 1929, collectively lost $3 billion in 1932. On July 8, 1932, the Dow, which had stood at 381 on September, 3, 1929, and was trading around 150 before the European currency crisis, hit a low of 41, a drop of almost 90 percent over the two and a half years since the bubble first broke. General Motors, which had traded at $72 a share in September 1929, was now a little above $7. And RCA, which had peaked at $101 in 1929, hit a low of $2. When, in August 1932, a reporter for the Sat.u.r.day Evening Post Sat.u.r.day Evening Post asked John Maynard Keynes if there had ever been anything like this before, he replied, "Yes. It was called the Dark Ages, and it lasted four hundred years." asked John Maynard Keynes if there had ever been anything like this before, he replied, "Yes. It was called the Dark Ages, and it lasted four hundred years."

In 1932, Meyer, having uncharacteristically allowed himself to be hamstrung by the Fed bureaucracy for his first year in office, finally took charge. In January, he persuaded the administration that its attempt to have the large banks voluntarily take responsibility for supporting the system had failed. The Reconstruction Finance Corporation (RFC) was established to channel public money-a total of $1.5 billion-into the banking system. Congress would agree to the new agency only if Meyer took on the chairmanship. For six months Meyer held two full-time posts: head of the RFC and chairman of the Federal Reserve Board. Eventually the toll on him became so great that his wife, Agnes, personally lobbied the president for him to resign one of the positions.

In February 1932, he pressed Congress to pa.s.s legislation that would make government securities an eligible a.s.set to back currency. At the stroke of a pen the gold shortage was lifted, allowing the Fed to embark on a ma.s.sive program of open market operations, injecting a total of $1 billion of cash into banks. The two new measures combined-the infusion of additional capital into the banking system and the injection of reserves-allowed the Fed finally to pump money into the system on the scale required. But Meyer had left it too late. A similar measure in late 1930 or in 1931 might have changed the course of history. In 1932 it was like pushing on a string. Banks, shaken by the previous two years, instead of lending out the money used the capital so injected to build up their own reserves. Total bank credit kept shrinking at a rate of 20 percent a year.

Bankers and financiers, the heroes of the previous decade, now became the whipping boys. No one provided a better target than Andrew Mellon. In January 1932, a freshman Democratic congressman from Texas, Wright Patman, opened impeachment hearings for high crimes and misdemeanors against the man once hailed as the "greatest Secretary of the Treasury since Alexander Hamilton." Mellon found himself accused of corruption, of granting illegal tax refunds to companies in which he had an interest, of favoring his own banks and aluminum conglomerate in Treasury decisions, and of violating laws against trading with the Soviet Union. During the ensuing investigations, it turned out that he had used Treasury tax experts to help him find ways to reduce his personal tax bill and that he had made liberal use of fict.i.tious gifts as a tax-dodging device. Being a member of the Federal Reserve Board, he had been required to divest his holdings of bank stock, with which he had duly complied-except that he had transferred the stock to his brother. In February, Hoover, recognizing that Mellon had now become a liability, packed him off as amba.s.sador to London.50 His place was taken by his undersecretary, Ogden Mills. His place was taken by his undersecretary, Ogden Mills.

On March 12, 1932, the world learned that Ivar Kreuger, the Swedish match king, who had bailed out so many penniless European countries, had shot himself in his apartment on the Avenue Victor Emmanuel III in Paris. At first it was a.s.sumed that he was just another victim of the times-he had recently suffered a nervous breakdown and his physician had warned him about the constant strain of his lifestyle on his heart. Within three weeks it became apparent that his whole enterprise had been a sham. His accounts were riddled with inflated valuations and bogus a.s.sets, including $142 million of forged Italian government bonds. When the losses to investors were eventually tallied, they amounted to $400 million.

Bankers were now increasingly viewed as crooks and rogues. In early 1932, the Senate Banking and Currency Committee began hearings on the causes of the 1929 crash. Designed at first to appease a public hungry for scapegoats, the hearings achieved little until, in March 1933, a young a.s.sistant district attorney from New York City, Ferdinand Pecora, took over as chief counsel. The public was soon riveted by the tales of financial skull-duggery in high places. It learned that Albert Wiggins, president of Chase, had sold the stock of his bank short at the height of the bubble and collected $4 million in profits when it collapsed during the crash; that Charles Mitch.e.l.l, old "Sunshine Charlie," of the National City Bank had lent $2.4 million to bank officers without any collateral to help them carry their stock after the crash, only 5 percent of which was repaid; that Mitch.e.l.l himself, despite earning $1 million a year, had avoided all federal income tax by selling his bank stock to members of his family at a loss and then buying it back; that J. P. Morgan had not paid a cent of income taxes in the three years from 1929 to 1931.

"If you steal $25, you're a thief. If you steal $250,000, you're an embezzler. If you steal $2,500,000, you're a financier," wrote the magazine the Nation Nation. Few critics went as far or tapped into as strong a vein of popular discontent as Father Charles Coughlin. Pastor of the Shrine of the Little Flower in Royal Oak, Michigan, Coughlin was the originator of right-wing radio. His Sunday afternoon broadcasts delivered in a soothing and intimate voice of mellow richness captivated millions as he held forth on the "banksters," as he called them, who had led the country into the Depression.

He actually did have some understanding of the driving forces in international finance. For example, in a broadcast delivered on February 26, 1933, he explained somewhat cogently that "the so-called depression, with its bank failures, is traceable to the inordinate, impossibl