Lords of Finance_ The Bankers Who Broke the World Part 16

The flight from the dollar was exacerbated by suspicions over the incoming president's currency intentions. Ever since he had been elected, Roosevelt had been floating trial balloons about abandoning gold. In January, he told an emissary from William Randolph Hearst, "If the fall in the price of commodities cannot be checked, we may be forced to an inflation of our currency." On January 31, his secretary-of-agriculture designate, Henry Wallace, was quoted as saying, "England has played us for a bunch of suckers. The smart thing to do would be to go off the gold standard a little further than England has. The British debtor has paid off his debts 50% easier than the U. S. debtor has."

Roosevelt was not alone in his talk of devaluation. At least six bills were circulating through the halls of Congress that involved the emergency issue of currency or a change in the value of the dollar. The Frazier-Sinclair-Patman bill provided for government financing of farm mortgages by the issue of Federal Reserve notes without gold backing; the Campbell bill would have allowed issue of full legal tender Treasury notes backed by munic.i.p.al bonds. Congress was considering one bill to devalue the dollar against gold by 50 percent and another one to reinstate silver as a monetary metal. The most extreme of the measures, the McFadden bill, called for the abolition of the gold standard and the Federal Reserve System and their replacement by a new monetary system based on units of "human effort."

Hoover had meanwhile convinced himself yet again that the economy had been on the verge of recovery before this last panic hit, which he attributed solely to fears over Roosevelt's inflationary policies. On February 17, Hoover composed a ten-page handwritten letter and had it delivered by Secret Service messenger to Roosevelt. What was needed to restore confidence, he wrote, was a formal statement from the president-elect pledging himself to a balanced budget and eschewing inflation or devaluation. If Hoover was trying to elicit Roosevelt's support for preemptive bipartisan action, this was a clumsy, inept, and transparently self-serving way to go about it. Hoover himself admitted in a private letter that it would have involved Roosevelt abandoning 90 percent of his "so called New Deal" program. The incoming president dismissed the letter as "cheeky" and chose simply to sit on it for a couple of weeks.

Until then, panics had mainly affected the smallest banks in the nation. But as the run took on an international dimension, the most important financial inst.i.tution in the country, banker to its largest banks, the New York Fed became the center of the storm. In the last two weeks of February, it lost $250 million, almost a quarter of its gold reserves. Though the Federal Reserve System as a whole had more than ample gold reserves, had the New York Fed run out of gold and been compelled to call in its loans to banks and shrink its balance sheet in a hurry, this would have created a disastrous situation for the banking system not only in New York but across the country. Theoretically, it could always have borrowed from other Federal Reserve banks in the system-but with every bank in every region under threat, there was no guarantee that its sister banks would have cooperated. There was a real fear that if it became a situation of every man for himself, even the Federal Reserve System might fall apart.

George Harrison had become convinced as early as mid-February that the only solution to the spreading panic caused by state-by-state bank closures was a nationwide bank holiday. In a visit to the White House, he urged the president to close all banks. Hoover tried to pa.s.s the buck back to the Fed, requesting that the Board come up with a set of proposals for saving the banking system short of shutting it down completely. Eugene Meyer had come to a similar conclusion to Harrison. He feared that if the Fed took inadequate measures that then failed, it would only make the situation worse and he would be blamed. So Meyer kicked the ball back to Hoover.

On the afternoon of Thursday, March 2, two days before the new president was to be inaugurated, Harrison called Meyer to inform him that the New York Fed had fallen below its minimum gold reserve ratio.

During the next forty-eight hours, as the nation's banking system unraveled by the hour, the Fed, unwilling to act on its own, tried to find someone else to take responsibility for the situation. But it was caught in the limbo between administrations. That same Thursday afternoon, Harrison called the president, begging him once again to declare a national banking holiday. Hoover replied that he "did not want his last official act in office to be the closing of the banks." Adolph Miller, Hoover's old friend and neighbor, also went to the White House to try to persuade the president. Hoover said he would do nothing unless Roosevelt also signed up.

Roosevelt traveled down to Washington that day, and no sooner had he checked into his suite at the Mayflower Hotel than the phone began ringing. It was Meyer calling to urge him to endorse a national proclamation closing all banks. Roosevelt refused to commit himself to any course of action until he was inaugurated-why box himself in at this stage? he quite justly thought.

On Friday, March 3, the New York Fed lost a total of $350 million-$200 million in wire transfers out of the country and $150 million in actual physical currency withdrawals from banks in the New York area. Now short some $250 million in reserves, it tried to borrow from the Chicago Fed but was turned down-the risk of the Federal Reserve System balkanizing and falling apart was becoming a reality.

March 3 was Hoover's last full day in office, and that afternoon Roosevelt and some of his family-Eleanor, his son James, and his daughter-in-law, Betsy-paid him a courtesy call. After a strained tea party of polite small talk, Hoover asked to see Roosevelt alone. They retired to Hoover's study where they were joined by Meyer; Secretary of Treasury Mills; and Roosevelt's aide, Raymond Moley. Meyer and Mills again tried to persuade the president-elect to join the outgoing Republican administration in some sort of bipartisan action. Roosevelt stood his ground. The sitting president should do what he had to-he himself would do nothing until after his inauguration at noon the next day. Eleanor heard s.n.a.t.c.hes of the conversation through the open door. At one point, Hoover asked, "Will you join me in signing a joint proclamation tonight, closing all the banks?" Roosevelt replied, "Like h.e.l.l, I will! If you haven't got the guts to do it yourself, I'll wait until I am President to do it!" It was now very obvious that Roosevelt's strategy was to withhold his cooperation in the hope that conditions would deteriorate so badly before he took office that he would get all the credit for any subsequent rebound.

That evening at the Roosevelt suite, the telephone would not stop ringing. Among the callers was Thomas Lamont who was at the New York Fed with sixteen of the most powerful bankers in the city. An old friend of Roosevelt's, Lamont had sent him a letter two weeks earlier warning him against closing the banks, "Urban populations cannot do without money. . . . It would be like cutting off a city's water supply. Pestilence and famine would follow. . . ." Lamont now reiterated this view, telling Roosevelt that he was sure that there would be a change in national psychology after the inauguration that would restore confidence.

The Fed made one last attempt to bridge the gap between Hoover and Roosevelt with Meyer calling Hoover and Miller calling Roosevelt. Hoover and Roosevelt even exchanged several calls, at 8:30 p.m., at 11:30 p.m., and at 1:00 a.m. Neither of them shifted their positions. Finally Roosevelt suggested that they both turn in and get some sleep.

Meyer, having been repeatedly rebuffed by the White House over the last two days and despite knowing that it was futile, decided to make one last effort-perhaps he wanted to protect himself and the Fed from the verdict of history. At 9:15 p.m. on March 3, he a.s.sembled his colleagues on the Board for the third time that day. Charles Hamlin was called out of the inaugural concert he was attending and despite the foul weather-it had been sleeting-George James was dragged from his sickbed. The Board drafted a formal request in writing to the president to proclaim a national bank holiday. It was 2:00 a.m before the letter was sent to the White House. The president had gone to bed. No one wanted to wake him up and the letter was slipped under his door. The next morning, he was furious at this ploy by his erstwhile friend, Meyer, to leave him holding the bag.

Having failed with the president, the Federal Reserve Board now focused on getting the governors of the two most important states to close their banks. Governor Horner of Illinois could not be found at first. When tracked down, he refused to move unless New York governor Herbert Lehman of the eponymous banking family acted first. In the middle of the night, Harrison, Lamont, and a group of bankers trooped over to Lehman's Park Avenue apartment. Lamont and the private banks tried to persuade Lehman to hold off doing anything while Harrison kept insisting that they had no choice-gold withdrawals had become unbearable, and if they did nothing, on Monday morning the New York Fed would run completely out of reserves. Finally at 2.30 a.m. Lehman relented and proclaimed a three-day bank holiday in New York. An hour later Governor Horner followed his lead. The governors of Ma.s.sachusetts and New Jersey moved to close their banks early the next morning. Fed officials tried to contact Governor Gifford Pinchot of Pennsylvania, who was in Washington for the inauguration and staying at a private residence, but no one would pick up the telephone. Finally a Fed official volunteered to go by his house to rouse him. He finally issued his proclamation to close the banks in his state as dawn was breaking, noting ruefully that he was only carrying 95 cents in his pocket.

That day as a hundred thousand people stood on the Mall to witness Roosevelt being sworn in on the steps of the Capitol, they were watched over by army machine guns. It was like "a beleaguered capital in wartime," wrote Arthur Krock of the New York Times New York Times.

Meanwhile, the credit and currency machinery of the country had come to grinding halt. The banking systems in twenty-eight states of the union were completely closed and in the remaining twenty partially closed. In three years, commercial bank credit had shrunk from $50 billion to $30 billion and a quarter of the country's banks had collapsed. House prices had gone down by 30 percent, leaving almost half of all mortgages in default. With the contraction in credit, mines and factories across the country had to shut down. Steel mills operated at less than 12 percent of their full capacity. Automobile plants, which had once churned out twenty thousand cars a day, were now producing less than two thousand. Industrial output had fallen in half, prices had tumbled 30 percent, and national income had contracted from over $100 billion to $55 billion. A quarter of the workforce-13 million men in all-were without jobs. In the richest nation in the world, 34 million men, women, and children out of a total population of 120 million had no apparent source of income.

More than half a century before, Karl Marx had predicted that as the boom and bust cycles of capitalism became progressively worse, it would eventually destroy itself. That day, it seemed that the back of the system had finally broken in one last stupendous crisis.

PART FIVE.

AFTERMATH.

1933-44.

21. GOLD STANDARD ON THE BOOZE.

1933.

In order to arrive at what you do not know You must go by a way which is the way of ignorance.

-T. S. ELIOT, Four Quartets, "East c.o.ker"

ONE DAY into office, the very first action that Roosevelt took was to close every bank in the country. Invoking an obscure provision of the 1917 Trading with the Enemy Act, designed to prevent gold shipments to hostile powers, he imposed a bank holiday until Thursday, March 9. Simultaneously, he suspended the export or private h.o.a.rding of all gold in the United States.

To the surprise of many, Americans adapted to life without banks remarkably well-the initial reaction was not chaos but cooperation. Store-keepers liberally extended credit, while doctors, lawyers, and pharmacists continued to provide services in return for personal IOUs. Harvard University allowed its students to obtain meals on credit. Across the country in El Paso, Texas, the First Baptist Church announced that personal promissory notes would be welcome in the Sunday collection plate instead of silver. Even taxi dancers at Manhattan's Roseland dance hall on Broadway agreed to take IOUs for the 11 cents that they charged per dance-provided their customers could produce bankbooks showing evidence of funds.

More than a hundred cities and towns, including Atlanta, Richmond, Knoxville, Nashville, and Philadelphia, issued their own scrip. The Dow Chemical Company coined magnesium into alternative coins. That prominent undergraduate newspaper, the Daily Princetonian Daily Princetonian rose to the occasion by a.s.suming the role of central bank of Princeton and issuing $500 of its own currency, in denominations of 25 cents, which local merchants agreed to accept-a reflection of how adaptable and elastic the notion of money can be. rose to the occasion by a.s.suming the role of central bank of Princeton and issuing $500 of its own currency, in denominations of 25 cents, which local merchants agreed to accept-a reflection of how adaptable and elastic the notion of money can be.

Other places resorted to barter. In Detroit, the Colonial Department Store agreed to accept farm produce in exchange for goods-a dress went for three barrels of Saginaw Bay herring, three pairs of shoes for a 500-pound sow, and other merchandise went for fifty crates of eggs or 180 pounds of honey. In Manhattan, the promoters of the Golden Globe amateur boxing tournament announced that fans would be admitted in return for anything a.s.sessed to be worth 50 cents-that night the box office took in hats, shoes, cigars, combs, soap, chisels, kettles, sacks of potatoes, and foot balm.

There were, of course, some disruptions. In Detroit, now in its fourth week without banks, merchants stopped extending credit, food disappeared from the shelves, and the City of Detroit defaulted on its bonds. In Reno, the divorce industry ground to a halt when women could not pay the filing fees. Tourists and traveling salesmen around the country found themselves stranded. In Florida, the American Express office agreed to cash checks up to a limit of $50 and was besieged by five thousand tourists. The first official task for the new secretary of state, Cordell Hull, was to placate the diplomatic corps in Washington, who argued that their money was ent.i.tled to immunity from sequestration and should be immediately released. The movie King Kong King Kong in its second week played to half-empty theaters-total box office receipts were down almost 50 percent. in its second week played to half-empty theaters-total box office receipts were down almost 50 percent.

The biggest problem was not cash but change. Nickels for use on the subway and on trolley and bus lines were so scarce that an officer of the Irving Trust Company declared that a "nickel famine" was in effect. Suddenly automats, where food was served from coin-operated vending machines and where a lot of coins changed hands, were besieged by women in mink desperate not for a meal, but for loose silver.

On Sunday, March 5, the day after the inauguration, William Woodin, the new secretary of the treasury, began organizing a team of experts to put together a bank rescue package. The diminutive Woodin, who had been the president of the American Car and Foundry Company, was a far cry from the austere Mellon. A Republican who had switched parties to support Roosevelt, he was as multifaceted as Charles Dawes of the Dawes Plan. An accomplished musician, having composed several orchestral pieces, including the Covered Wagon Suite Covered Wagon Suite, the Oriental Suite- Oriental Suite-and in honor of the inauguration, the "Franklin Delano Roosevelt March"-he liked to unwind at the office by playing the mandolin or strumming his guitar.

Woodin quickly recognized that neither he nor his aides had the knowledge or experience to handle the situation alone. He managed to persuade none other than his predecessor as secretary of the treasury, Ogden Mills, and Mills's deputy, Arthur Ballantine, to lead the bank rescue effort, even though Mills, who owned an estate in the Hudson Valley just five miles north of Roosevelt's home, Hyde Park, was no admirer of the new president-later he would become a very vocal critic of the New Deal. On the very last day of Hoover's presidency and his own tenure in office, Mills had prepared a draft, which now became the foundation of the Roosevelt plan. Even Roosevelt's proclamation closing the banks in the country was based on a draft of a statement that Ballantine had originally prepared for Hoover.

The team's other princ.i.p.al player was George Harrison, who came down to Washington that Sunday. Realizing that any bank plan would have to pa.s.s muster with bankers, Woodin wanted someone who could be a bridge to Wall Street, and as a former outside director of the New York Fed, he knew Harrison well. He also very deliberately kept the group of presidential advisers with a reputation for being left-wing-men such as Adolph Berle, Rex Tugwell, and Raymond Moley-well in the background.

During the next few days, as bankers came and went, the Treasury team, led by the trio of Woodin, Mills, and Harrison, considered and rejected numerous proposals. Some people wanted a nationwide issue of scrip-paper currency backed only by a government pledge. Others recommended that all state banks be incorporated into the Federal Reserve System. Yet others believed a federal government guarantee on all bank deposits was the solution. The president himself came up with the zaniest idea-that all government debt, $21 billion, be immediately convertible into currency, in effect doubling the money supply at a stroke.

By Thursday, March 9, the Emergency Banking Act was ready to be submitted to Congress. Most of it was based on the original Mills proposal. Banks in the country were to be gradually reopened, starting with those known to be sound, and progressively moving to the shakier inst.i.tutions, which would need government support. A whole cla.s.s of insolvent banks would never be permitted to reopen. The bill also granted the Fed the right to issue additional currency backed not by gold but by bank a.s.sets. And it gave the federal government the authority to direct the Fed to provide support to banks. The legislation was supplemented by a commitment from the Treasury to the Fed that the government would indemnify it for any losses incurred in bailing out the banking system. This unprecedented package finally forced the Fed to fulfill its role as lender of last resort to the banking system. But to achieve this, the government was in effect providing an implicit blanket guarantee of the deposits of every bank allowed to reopen.

For Harrison the transformation was almost too much to believe, leaving him constantly beset by doubts. Only a week before he had been dealing with a president who seemed incapable of taking action. He now had to contend with a president who would try anything. As a protege of Benjamin Strong, Harrison believed fervently in what he called the "separation of the central bank from the state"-the financial equivalent of the separation of the powers in the political sphere. The new legislation would give the president unprecedented control over the Fed. Harrison had also been to taught that currency should be backed either by gold or liquid a.s.sets readily convertible into cash. The new law expanded the category of a.s.sets against which the Fed could lend, compelling it to print money, Harrison agonized, against "all kinds of junk, even the bra.s.s spittoons in old-fashioned country banks." But at least the drift was over and something was finally being done.

At ten o'clock on the evening of Sunday, March 12, Roosevelt gave the first of his fireside chats over the radio. "My friends," he began in his easy patrician voice, "I want to talk for few minutes with the people of the United States about banking . . . I want to tell you what has been done in the last few days, why it was done, and what the next steps are going to be." In simple and clear language, he explained to the sixty million people listening in countless homes across the nation, "When you deposit money in a bank, the bank does not put the money in a safe deposit vault. It invests the money, puts it to work." "I know you are worried . . . ," he told them, "I can a.s.sure you, my friends, it is safer to keep your money in a reopened bank than under the mattress." The next day the comedian Will Rogers wrote to the New York Times New York Times, "Our President took such a dry subject as banking . . . [and] he made everyone understand it, even the bankers."

As the first banks prepared to open on Monday, March 13, no one could be sure what would happen. Many feared that after the measures restricting the convertibility of currency into gold, the panic might even continue and indeed become worse. As Harrison put it, "We had closed in the midst of a great bank run, and as far as we knew would reopen under the same conditions."

That morning, long lines of depositors formed outside the reopened banks. But instead of taking their money out, they were putting it back in. The combination of the bank holiday, the rescue plan, and Roosevelt's masterful speech-there is no way of distinguishing which was the more important-created one of those dramatic transformative shifts in public sentiment. As on other similar occasions where a new administration has taken charge in the middle of a crisis and introduced a radically new package of policies-for example, in Germany in November 1923 when hyperinflation was ended or in France in July 1926 when Poincare stabilized the franc-the mood of the nation changed overnight.

On March 15, when the New York Stock Exchange reopened after being closed for ten days, the Dow jumped 15 percent, the largest move in a single day in its history. By the end of the first week, a total of $1 billion in cash-half of everything that had been pulled out in the previous six weeks-had been redeposited in banks. By the end of March, two-thirds of the banks in the country, twelve thousand in total, had been permitted to resume business and the currency h.o.a.rd in the hands of the public had dropped by $1.5 billion.

This was one more bitter pill for Hoover to swallow. A bank rescue plan introduced by Roosevelt, a man he despised, drafted by Hoover's own people on principles he had originally proposed, had in the s.p.a.ce of a week restored confidence that had eluded poor old Hoover in three years of fighting the Depression.

Raymond Moley would later write of that week, "Capitalism was saved in eight days." He was only half right. The rescue plan may have saved the banking system. But the tasks of getting the factories across the country producing once again and of putting average Americans back to work still remained.

Over the next three months-the celebrated "first hundred days"-Roosevelt bombarded Congress and the country with new legislation. On March 20, Congress pa.s.sed the Economy Act, which cut the salaries of public employees by 15 percent, slashed department budgets by 25 percent, and cut almost a billion dollars in public expenditures. At the end of March, it approved the creation of the Civilian Conservation Corps to employ young men in flood control, fire prevention, and the building of fences, roads, and bridges in rural areas. In the middle of May came the Emergency Relief Act and that same day Congress pa.s.sed the Agricultural Adjustment Act, designed to push agricultural prices higher by controlling production and reducing acreage. The Tennessee Valley Authority was set up to build dams and construct public power plants. The National Industrial Recovery Act was pa.s.sed in the middle of June to permit price fixing. It also authorized $3.5 billion in public works programs. The Gla.s.s-Steagall Act, also pa.s.sed in the middle of June, divorced commercial and investment banking and guaranteed bank deposits up to a maximum of $2,500, while the Truth-in-Securities Act established disclosure provisions to govern the issue of new securities.

The string of measures was a strange mixture of well-meaning steps at social reform, half-baked schemes for quasi-socialist industrial planning, regulation to protect consumers, welfare programs to help the hardest hit, government support for the cartelization of industry, higher wages for some, lower wages for others, on the one hand government pump priming, on the other public economy. Few elements were well thought out, some were contradictory, large parts were ineffectual. While much of the legislation was very laudable, aimed as it was at improving social justice and bringing a modic.u.m of economic security to people who had none, it had little to do with boosting the economy. Tucked away, however, in this whole motley baggage, as a last-minute amendment to the Agricultural Adjustment Act, was one step that succeeded beyond anyone's wildest expectations in getting the economy moving again. This was the temporary abandonment of the gold standard and the devaluation of the dollar.

The rescue of the banks had been brought about by one of the oddest partnerships in the history of economic policy making-between a Democratic treasury secretary and his Republican predecessor. Devaluation involved one of the strangest confrontations in that history. On one side stood the top echelon of presidential economic advisers, a brilliant group of young men, most of them new to government, the "hard money" men, as they were colloquially referred to in the press. At Treasury was Woodin's undersecretary, the polished and urbane forty-year-old Dean Acheson, son of the Protestant Episcopal bishop of Connecticut, a graduate of Groton, Yale, and Harvard Law School, a protege of Felix Frankfurter and clerk for Justice Louis Brandeis at the Supreme Court. Though he knew little about economics-and with his British colonel's mustache and his tweed bespoke suits, he looked like an old fogy-Acheson had a reputation as an outstanding corporate lawyer, a pragmatist with an incisive brain and a talent for crafting solutions to complex problems.

The adviser to the president on monetary affairs was the thirty-seven-year-old James Warburg, son of Paul Warburg, the father of the Federal Reserve System. After graduating from Harvard, the debonair Warburg embarked upon a stellar career in banking, becoming the youngest chief executive on Wall Street while still finding time to publish his poetry in the Atlantic Monthly Atlantic Monthly and write the lyrics to a Broadway musical, and write the lyrics to a Broadway musical, Fine and Dandy. Fine and Dandy. He had turned down Acheson's job as undersecretary of the treasury, preferring to exert his influence as an unpaid and unt.i.tled adviser to the president, who liked to refer to him as "the white sheep of Wall Street." He had turned down Acheson's job as undersecretary of the treasury, preferring to exert his influence as an unpaid and unt.i.tled adviser to the president, who liked to refer to him as "the white sheep of Wall Street."

And finally, the hardest-currency man of them all was the thirty-eight-year-old budget director, Lewis W. Douglas. Scion of an Arizona mining family, Douglas had taught at Amherst and since 1927 had been in Congress, where he had championed the cause of government economy and balanced budgets during the Depression.

The spokesman for Wall Street should have been the head of the Federal Reserve Board, Eugene Meyer. But he found himself completely out of sympathy with the new administration and submitted his resignation at the end of March. As a consequence, Harrison of the New York Fed acted as the primary go-between for bankers and the White House.

Every one of Roosevelt's advisers, including Harrison, believed that having stabilized the banking system, they could rely on the traditional levers-expanding credit, undertaking open market operations-to get the economy moving again. Most important, none of them could see any reason for breaking with gold.

Pitted against this array of economic expertise was one man-the president himself. Roosevelt did not even pretend to grasp fully the subtleties of international finance; but unlike Churchill, he refused to allow himself to be in the least bit intimidated by the subject's technicalities-when told by one of his advisers that something was impossible, his response was "Poppyc.o.c.k!" Instead, he approached the subject with a sort of casual insouciance that his economic advisers found unnerving but which nevertheless allowed him to cut through the complications and go to the heart of the matter.

His simplistic view was that since the Depression had been a.s.sociated with falling prices, recovery could only come about when prices began going the other way. His advisers patiently tried to explain to him that he had the causality backward-that rising prices would be the result of recovery, not its cause. They were themselves only half right. For in an economy where everything is connected, there is often no clear distinction between cause and effect. True, in the initial stages of the Depression the collapse in economic activity had driven prices downward. But once in motion, falling prices created their own dynamic. By raising the real cost of borrowing, they had discouraged investment and thus caused economic activity to weaken further. Effect became cause and cause became effect. Roosevelt would have been unable to articulate all the linkages very clearly. But he had an intuitive understanding that the key was to reverse the process of deflation and kept insisting that the solution to the Depression was to get prices moving upward.

There still remained a chicken-and-egg problem. How to get prices up without first having to wait for economic recovery? Several years before when Roosevelt needed help with the trees on his estate in Hyde Park, his Hudson Valley neighbor and friend Henry Morgenthau introduced him to an obscure fifty-nine-year-old economist, George Warren, professor of farm management at Cornell, under whom Morgenthau had studied as an undergraduate.

The short and stocky professor, with his owlish spectacles, Quaker-like earnest demeanor and a bunch of pencils protruding from his top pocket, had none of the earthiness that one might a.s.sociate with an expert in farming. He had in fact grown up herding sheep on a Nebraska ranch and still lived firmly rooted to the soil on a five-hundred-acre working farm outside Ithaca, New York, where he raised cash crops and a large herd of Holstein cows. He had published a variety of books and pamphlets on agriculture, including a monograph t.i.tled Alfalfa Alfalfa and another, and another, An Apple Orchard Survey of Wayne and Orleans County, New York, An Apple Orchard Survey of Wayne and Orleans County, New York, which exhaustively doc.u.mented the various techniques for growing apples in upstate New York, down to which manures worked the best; a standard textbook, which exhaustively doc.u.mented the various techniques for growing apples in upstate New York, down to which manures worked the best; a standard textbook, Dairy Farming; Dairy Farming; and two seminal works, and two seminal works, The Elements of Agriculture The Elements of Agriculture and and Farm Management Farm Management. He had also devised a system for inducing chickens to lay more eggs. As a teacher, he was known to be dismissive of theories and made a point of taking his students out to working farms. His quaint pastoral homilies on these visits had become part of the Cornell folklore-"You paint a barn roof to preserve it. You paint a house to sell it. And you paint the sides of barn to look at"-although none of his students were quite sure what they meant.

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 t.i.tled Wholesale Prices for 213 Years: 1720- 1932, 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 doc.u.ment 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. which created enough of a stir that, in 1933, it was issued as a book. Warren was able to doc.u.ment 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 rea.s.sure 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 n.o.body asks me whether we are off the gold standard or gold basis, that is all right, because n.o.body 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 h.e.l.l 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 a.s.sistant 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, a.n.a.lyzing 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 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 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 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." 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."

When, he dropped the pseudonym on his visit to the United States the next year, the New York Post New York Post could not help poking fun: 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 inst.i.tution. . . . 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 bemus.e.m.e.nt 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 emigre, 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 compet.i.tive 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. Clement 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 compet.i.tors 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 att.i.tude 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. c.o.x, 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 pa.s.sionate 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.

The first big spat of the conference was over the chairmanship. Before they sailed for Europe, the Americans had been led to believe that they had been promised the chair. In London they discovered that the French finance minister, Georges Bonnet, coveted the post. After all, this was a conference about international money and France was the sole great power still on the gold standard. "With Washington committed to devaluation we cannot have an American as monetary chairman," declared Bonnet. "With France committed to repudiation," replied James c.o.x, referring to the French default on war debts, "we cannot have a Frenchman." It was all downhill from there.

In the first few days of the conference as more than a thousand people crammed into the small and poorly ventilated museum, each nation was permitted a fifteen-minute opening statement-which, allowing for translations, occupied four whole days. Supporting the American delegation was a team of financial experts, which included Warburg, Harrison, and Oliver Sprague, professor of economics at Harvard, Roosevelt's old economics teacher, a longtime adviser to the Bank of England and now an adviser to the U.S. Treasury. They had all arrived in London believing-perhaps because they wanted to believe it-that the president had given them a mandate to negotiate an arrangement to stabilize currencies. But recognizing that a debate about key currencies in a forum of a thousand delegates would quickly deteriorate into incoherence, they decided to take the discussion offstage. Led by the three major central bankers of the conference-Harrison of the New York Fed, Norman of the Bank of England, and Moret of the Banque de France-a select band gathered out of the limelight at the Bank of England to hammer out an arrangement for stabilizing currencies. For a few days it looked as if the "Most Exclusive Club in the World" was back in business.

They had almost reached agreement-it would have involved allowing the pound to remain some 30 percent below its original gold standard level, the dollar to be propped up at some 20 percent below its par value, and the franc to remain at parity, thus leaving Britain with a modest cost advantage and setting the floor to currencies, which the French were demanding-when word leaked out. Though they had only agreed to a temporary attempt at currency stability for a period limited to the duration of the conference, New York financial markets, fearing a return to the gold standard and the end of Roosevelt's experiment with inflation, took a tumble. Commodity prices fell 5 percent and the Dow swooned by 10 percent. Roosevelt, who by now had begun taking his cue from the commodity exchanges and stock markets, dispatched a cable to the American delegates curtly reminding them that they were there to focus on plans for economic recovery and were not to be sidetracked by the European obsession with currency stabilization.

Moreover, the White House went out of its way to disavow any knowledge of Harrison's activities, pointedly reminding reporters that he was not a representative of the government but of the New York Fed, an independent ent.i.ty. With the rug pulled out from underneath him and feeling betrayed, Harrison returned to New York-he told friends that "he felt as if he had been kicked in the face by a mule." It was a lesson that the old days of the "Most Exclusive Club in the World," when central bankers meeting in private could set credit and currency conditions without reference to politicians, were now gone.

The American experts in London still had a hard time getting the message. By the end of June, a new yet more innocuous agreement was negotiated with the British and the French, this time by Warburg and Moley. It committed no one to anything. It merely expressed the intention of the parties to return the pound and the dollar to the gold standard at an unspecified exchange rate and at an unspecified date when the time was right. Again as word of the new agreement came over the wires, New York financial markets expressed their discomfort.

Roosevelt was on his summer yachting holiday with Morgenthau aboard the schooner Amberjack II Amberjack II off the coast of New England. As he torpedoed this new agreement, he made sure on this occasion not to mince his words. "I would regard it as a catastrophe amounting to a world tragedy," he cabled from the naval destroyer off the coast of New England. As he torpedoed this new agreement, he made sure on this occasion not to mince his words. "I would regard it as a catastrophe amounting to a world tragedy," he cabled from the naval destroyer Indianapolis Indianapolis, which had been escorting his boat "if the greatest conference of nations, called to bring about a real and permanent financial stability . . . allowed itself a purely artificial and temporary expedient. . . ." Condemning the "old fetishes of so-called international bankers . . . ," he declared that the current plans for stabilization were based on a "specious fallacy." Though Roosevelt would later concede that his choice of words for a cable to be publicly released to the whole conference was a little too strong, he had at least finally got his point across with brutal clarity. He would not allow international considerations to stand in the way of getting the U.S. economy moving again, and devaluation of the dollar was the key to revival.

Maynard Keynes was among the few economists to applaud Roosevelt's decision. In an article in the Daily Mail Daily Mail headlined "President Roosevelt Is Magnificently Right," he hailed the message as an invitation "to explore new paths" and "to achieve something better than the miserable confusion and unutterable waste of opportunity in which an obstinate adherence to ancient rules of thumb has engulfed us." headlined "President Roosevelt Is Magnificently Right," he hailed the message as an invitation "to explore new paths" and "to achieve something better than the miserable confusion and unutterable waste of opportunity in which an obstinate adherence to ancient rules of thumb has engulfed us."

Thereafter the conference limped to a sad close. A disillusioned Warburg resigned, saying, "We are entering upon waters for which I have no charts and in which I therefore feel myself an utterly incompetent pilot."

Roosevelt was still not finished. By October 1933, though the dollar had fallen by more than 30 percent, commodity prices began to sink again and the economy started to stall once more. Roosevelt decided that it was time for a new initiative. Warren's original proposal to devalue the dollar had been controversial enough. Now the professor recommended that the government give the dollar another nudge downward by itself buying gold in the open market.

On October 22, Roosevelt told the country in another of his fireside chats, "Our dollar is altogether too greatly influenced by the accidents of international trade, by the internal policies of other nations and by political disturbances in other continents. Therefore the United States must take firmly in its own hands the control of the gold value of the dollar." Whereas the first fireside chat had brought clarity to a complex issue, this one was a masterpiece of obfuscation. The following day the government started to buy gold.

Every one of the president's economic advisers was opposed to the policy. Secretary Woodin had fallen fatally ill with cancer and Undersecretary Acheson was acting for him. Though the punctilious Acheson believed that the new policy was in fact against the law, he decided to sit on his objections temporarily in the hope of heading off even worse policies. Even so he was contemplating resigning when Roosevelt, falsely suspecting that he might be the source of newspaper leaks critical of the gold purchases, fired him. In a surprise appointment, Henry Morgenthau, the man who had first brought George Warren to Washington, became acting secretary of the treasury. In the following weeks, Professor Sprague also resigned from the Treasury, no doubt disappointed at his former student's failure to grasp the fundamentals of monetary economics.

Every morning at nine o'clock, Morgenthau; Jesse Jones, the head of the RFC; and George Warren would meet with the president over his breakfast of soft-boiled eggs, to determine the price of gold for that day. They began at $31.36 an ounce. The next morning this increased to $31.54, then $31.76 and $31.82. No one had a clue how they went about setting the price, although everyone presumed that some subtle a.n.a.lyses of the world bullion and foreign exchange markets went into their calculations. In fact, the choice of price was completely random. All they were trying to do was push the price a little higher than the day before. The exercise brought out the juvenile in Roosevelt. One day he picked an increase of 21 cents, and when asked why, replied that it was a lucky number, three times seven.