Lords of Finance_ The Bankers Who Broke the World Part 8

The comparison between Britain and France was striking. Solid conservative Britain had pursued the most orthodox and prudent financial policies of any European power, refusing to inflate its way out of debt or to allow its currency to collapse, and had been rewarded with the highest unemployment rate in Europe and a limping economy. By contrast, France had been invaded during the war, suffered the highest ratio of casualties of any country other than Serbia, and seen large tracts of its most productive land leveled and destroyed. After the war, the French had resorted to inflation to lighten the burden of debt and to a weak franc to steal a march on the British by cheapening their goods. Though the government had continuously staggered on the edge of insolvency since the war, the overall economy had done well; exports had boomed. The number of unemployed in France was a fraction of that in Britain. As one contemporary journalist summarized it, "While England is financially sound and economically sick, France is economically sound and financially sick."

All of this self-inflicted pain might have been worthwhile if in the process Britain had been able to achieve its overriding postwar economic objective: the restoration of the pound to its prewar pedestal. But even here the rewards of virtue proved to be elusive By the fall of 1924, the pound was stuck. Having floated at around $4.35 for two years, it seemed unable to rise any further. Despite ma.s.s unemployment and high interest rates, prices in Britain still remained stubbornly elevated compared to the United States. Even if by most calculations the discrepancy was only 10 percent, that last 10 percent was proving to be the hardest.

Facing an economy in poor shape, prices that were too high, and a currency apparently stuck some 15 percent below its prewar parity, one school of economists argued that the authorities should abandon their dogged attempt to depress prices further and with it the goal of restoring the prewar exchange rate. Any attempt in the current circ.u.mstances to return to gold at the old parity would just throw hundreds of thousands more people out of work. They argued that a new level for the pound should be selected that reflected the realities of postwar Britain: the changed international environment, the new compet.i.tion, Britain's higher cost structure, and the transformation in its international balance sheet brought about by war.

FIGURE 3.

To Norman and the purists within the Bank of England, this was unacceptable. They continued to press for a return to the old gold rate of $4.86, seeing it as a moral commitment on the part of the British nation to those around the world who had placed their a.s.sets, their confidence, and their trust in Britain and its currency.

Even the most orthodox among them-like Norman, who in 1918 had wanted to return to gold the moment the guns stopped firing-conceded that the time was not right. The Cunliffe committee of 1918 had originally estimated that it might take as much as a decade for Britain to return to the gold standard. In 1924, another committee, under the chairmanship of Austen Chamberlain, also recommended a delay of some years. Britain's economy was still not in shape to withstand the harsh medicine of a rise in its currency and the strictures of the gold standard.

The success of the Dawes Plan had been seen as a giant step in restoring financial order to continental Europe. The spotlight now shifted to Britain and the pound. With the mark stabilized and now fixed against gold, the universal question was: When would sterling follow? It was an uncomfortable position for Norman. He hated the prospect of having to operate under the white light of publicity. As he complained to Strong, "You know how controversial a subject it is-and how it is everybody's business."

He did worry that Britain was being left behind. Germany, Sweden, Poland, Austria, and Hungary had already returned to gold, while the Netherlands, Canada, Australia, New Zealand, and South Africa were all making plans to do so in the near future. Once all these currencies were stabilized, it would be hard to retain the pound's financial and trading preeminence. Merchants and investors would soon begin looking for an alternative. His fears that the newly stabilized mark might become the strongest on the Continent and supplant the pound were echoed by others in the City who warned that further delay would "hand over to Germany the financial scepter in Europe." Even Strong began kidding him that sterling was "rather far behind in the procession."

In November 1924, the political situation changed suddenly and dramatically. Since the war, Britain had faced an unusual series of fragile coalition and minority governments. The immediate postwar coalition of Conservatives and Lloyd George Liberals was followed in 1922 by a Conservative government, initially led by the dying Bonar Law, and six months later by Stanley Baldwin. In January 1924, a minority Labor government under Ramsay MacDonald took over, but that November, a wave of anti-communist sentiment, fueled by the publication of a fraudulent letter linking the Labor Party to the Soviet Union, led to a Conservative landslide. Norman's close friend Stanley Baldwin resumed the reins of power.

To everyone's surprise, Winston Churchill was appointed chancellor of the exchequer, the second most powerful position in government.

No ONE WAS more taken aback by the appointment than Churchill himself. He was then a few days shy of fifty. After a spectacular early career-home secretary at the age of thirty-five and first lord of the admiralty in 1911-he had fallen on hard times. The debacle at Gallipoli in 1915 had been a turning point. Politically damaged, he had gone off to fight on the Western Front, continued to deliver his brilliant speeches, and had become a follower of Lloyd George; when the "Welsh Wizard" was ousted in 1922, Churchill had lost his seat in Parliament and spent the next two years trying to rehabilitate himself.

It was a daunting task. Within political circles, he was almost universally distrusted as a man who had changed parties not just once, but twice. In 1903, after the Tories had split over free trade and their political fortunes seemed bleak, he had crossed the floor to join the Liberals, becoming a junior minister in barely two years. Now again, in 1924, as the Liberals were being shunted into the political wilderness, he had abandoned them-although for the sake of form he did not formally join the Conservatives for several more years. Many people thought that vaulting ambition and poor judgment were hereditary traits of the Churchills, echoing Gladstone's verdict, "There never was a Churchill, from John Marlborough down, that had either morals or principles."

When Baldwin first offered him the chancellorship, Churchill himself was caught so much by surprise that, for a moment, he thought he was being offered the position of chancellor of the Duchy of Lancaster, a sinecure office that served (and still serves) as a general utility post for junior ministers. So keen was he to return to power that he even toyed with the idea of accepting this position, which he had held a decade earlier in the aftermath of the Gallipoli disaster and had resigned in despair. When his appointment as chancellor was finally announced, there was outrage in the Conservative ranks, one minister complaining that he could not understand "how anybody can put their faith in a man who changes sides, just when he thinks it is to his own personal advantage to do so," and lamenting that the "turbulent pushing busybody Winston will split the party." But Baldwin was willing to weather the reaction of his many diehards, because, it was said, he wanted Churchill inside the government where he could keep an eye on him rather than outside, where he could only cause mischief.

Though everyone acknowledged his talents-formidable energy, exuberance, and restless imagination-many, particularly the more reactionary Tories, viewed Churchill as a pushy, self-promoting, ambitious political adventurer. The louche circle of friends with which he surrounded himself during those years only intensified doubts about his judgment. His three great cronies were Max Aitken, Lord Beaverbrook, the charming and manipulative press lord and a master of political intrigue; F. E. Smith, Lord Birkenhead, a dazzlingly clever lawyer, witty and articulate, who might have become the leader of the Conservative Party had he not been an alcoholic with a proclivity for seducing teenage girls; and Brendan Bracken, MP, an Australian-Irish rogue who fed the rumor that he was Churchill's illegitimate son.

Despite Norman's natural conservatism and his friendship with Baldwin, he did not particularly welcome the new Conservative government, fearing that it would allow its economic policies to fall into the hands of "traders and manufacturers, who, while they profess a remote affection for gold and a real affection for stability, always want a tot of brandy (in the shape of inflation)." And he naturally distrusted flamboyant characters like Churchill. The previous chancellor in the minority Labor government had been Philip Snowden, an intensely moralistic teetotaler, crippled by tuberculosis of the spine, who could only get around supported by two walking sticks. With his thin lips, icy eyes and bloodless skeletal face, his black suit and black Turkish cigarettes, he looked like an undertaker in a horror movie. But despite Snowden's fervent belief that capitalism was doomed and his suspicion of bankers, he had espoused the cause of orthodox finance and the gold standard with all the fervor of the old puritan radical stock from which he sprang and had developed an exceptionally close relationship with Norman.

Churchill and Norman could not have been more different. Churchill avidly sought publicity and had a terrible reputation for grandstanding. Norman chose to wrap himself in enigma, and shunned the limelight. Churchill courted the press lords. Norman considered them part of the vanguard of a new barbarism that preyed on the emotions of the expanded electorate. Churchill was naturally gregarious, loved company, and hated to be alone. Norman rarely socialized, buried himself in his work, and claimed that the Bank of England was "his only mistress." Churchill liked to argue and debate. Norman was reserved and uncommunicative, oddly inarticulate in public, and when confronted by opposition, he retreated into a sh.e.l.l of sullenness.

Their personal habits were also poles apart. Churchill was addicted to high living. He had a Rolls-Royce and a chauffeur and by his own admission had never been on a bus or on the Underground.26 He kept an enormous retinue of twenty-four servants, and pampered himself with the finer things of life-silk underwear, champagne at every meal, Havana cigars, strings of polo ponies, and bouts at the gaming tables of Monte Carlo and Biarritz-and was predictably in perpetual debt. Norman, despite his inherited wealth and his grand house in Holland Park, lived an existence of almost monkish simplicity, sleeping on a plain iron bed in a bare room with paintings propped up against the wall and taking the Underground to work every day, with the ticket jauntily protruding from his hatband. He kept an enormous retinue of twenty-four servants, and pampered himself with the finer things of life-silk underwear, champagne at every meal, Havana cigars, strings of polo ponies, and bouts at the gaming tables of Monte Carlo and Biarritz-and was predictably in perpetual debt. Norman, despite his inherited wealth and his grand house in Holland Park, lived an existence of almost monkish simplicity, sleeping on a plain iron bed in a bare room with paintings propped up against the wall and taking the Underground to work every day, with the ticket jauntily protruding from his hatband.

About the only things the two men shared was a common disdain for the parochial "Little Englanders," who would see Britain retreat from its role in the world, and a particular sympathy for the United States, an unusual trait among upper-cla.s.s Englishmen who had reached maturity in the high noon of Edwardian England.

IN THE LAST few months of 1924, the pound began to rise, buoyed by speculators betting that the new Conservative government would return to gold. But the fundamental discrepancy between British prices and American prices remained, and Norman was still unsure whether to press for an early return to gold. Nothing was more symbolic of the change in Britain's financial position than that before he could even think about doing so, he first had to go to New York to consult with Strong.

He arrived in New York aboard the S.S. Carania Carania on December 28, having managed to slip out of Britain "undetected, like a shadow in the dead of night," as one magazine put it. But he was quickly unmasked by reporters, provoking the usual speculation. One story had it that he was there to renegotiate the war debt; another hinted that he was on a secret but unspecified mission for the British government. One rumor even had him preparing U.S. bankers for the imminent return of sterling to gold. When pushed by the press for a statement, the bank's official spokesman expressed complete astonishment at his chief's appearance in New York, but glossed over it with the observation that because Norman was in the habit of taking a vacation at this time of year, his absence had gone "unremarked." on December 28, having managed to slip out of Britain "undetected, like a shadow in the dead of night," as one magazine put it. But he was quickly unmasked by reporters, provoking the usual speculation. One story had it that he was there to renegotiate the war debt; another hinted that he was on a secret but unspecified mission for the British government. One rumor even had him preparing U.S. bankers for the imminent return of sterling to gold. When pushed by the press for a statement, the bank's official spokesman expressed complete astonishment at his chief's appearance in New York, but glossed over it with the observation that because Norman was in the habit of taking a vacation at this time of year, his absence had gone "unremarked."

The emba.s.sy in Washington was more inventive. Two months earlier, the New York Fed had moved into new headquarters on Liberty Street, which boasted not only a giant vault for the bank's very considerable gold reserves, carved out of the solid bedrock of Manhattan and protected by doors ten feet thick and weighing 230 tons each, but also new mechanized coin-handling machines that sorted the twenty tons of nickels, dimes, quarters, and half dollars that clinked in every day. Because the Bank of England was itself about to embark on a construction project to expand its venerable London headquarters, Norman had obviously come to the United States to pick up points.

Norman had not been in the United States for two years. Buoyed by new industries such as automobiles, radios, household appliances, electrical machinery, and plastics, the U.S. economy was just embarking on the spectacular boom of the 1920s. The physical transformation of the city was remarkable. Most noticeable was the number of cars on the road, which had doubled since he was last there-there were now as many on the streets of New York City alone as there were in the whole German republic. Despite the introduction of traffic signals in Manhattan earlier that year, there were still constant jams and everyone complained about the congestion. It was not only the automobile. There had been a dizzying revolution in the types of goods available-household appliances such as washing machines and vacuum cleaners, new materials such as rayon and cellophane, radios and talking movies-that were changing the whole texture of life. The contrast between the gaudy prosperity of the United States, where a typical worker was earning close to $6 a day, with the dingy poverty of postwar Europe, where workers earned less than $2 a day, was another reminder of the terrible price exacted by the war.

Strong was waiting enthusiastically at the pier. He was the U.S. official with the deepest understanding of international financial issues, the widest network of friends and contacts in European banking circles, and the strongest commitment to European reconstruction. Nevertheless, a combination of his ill health and the administration's official hands-off toward European financial affairs had left him relegated to the sidelines. In 1922, he had tried to involve himself in crafting a solution to German hyperinflation but had been expressly warned off by the secretary of state. For much of 1923 he had been ill. Then, earlier in 1924, he had again been excluded from the Dawes Plan negotiations by administration officials, except for a few informal discussions on a brief spring visit to London and Paris. He had fallen ill again on his return and had to spend part of the fall once more recuperating in Colorado.

But he remained convinced that given the importance of the pound to world trade, a global return to the gold standard would only be possible if Britain took the lead: "The great problem is sterling, the others will come along easily if sterling could be dealt with," he kept telling his colleagues.

Strong, who had just moved into a more s.p.a.cious residence in the Maguery, an elegant apartment hotel located at Forty-eighth and Park Avenue, insisted that Norman stay with him. Over the next two weeks, during the day and in the evenings, Norman was subjected to an intense campaign by the Americans, especially by Strong and the Morgan bankers, to get the pound back on gold as soon as possible.

Strong did not have to persuade Norman of the consequences should Britain not return to gold. They agreed that this could only lead to "a long period of unsettled conditions too serious to contemplate. It would mean violent fluctuations in the exchanges, with probably progressive deterioration in the values of foreign currencies vis-a vis-the dollar; it would prove an incentive to all those who were advancing novel ideas for nostrums and expedients other than the gold standard to sell their wares; and incentives to governments at times to undertake various types of paper money expedients and inflation; it might indeed result in the United States draining the world of gold." It could but end, they believed, "with a terrible period of "hardship, and suffering, and . . . social and political disorder," culminating in some kind of "monetary crisis."

Strong stressed that the British had only a few weeks, at best months, to act. The pound was for the moment supported by the positive political developments at home; American capital was currently very optimistic about Europe in the wake of the Dawes Plan, and the Fed had been able to help Britain out by easing U.S. credit conditions in mid-1924. He warned that this narrow window would soon close, as Britain commenced war-debt payments, an outflow that was certain to weaken sterling. The Fed's easing of credit during 1924 had suited America's own domestic needs-the U.S. economy having suffered a mild and short-lived recession in the summer. But the time was fast approaching when the Fed would be forced to tighten credit for domestic reasons, making it difficult and more expensive for Britain to attract capital to support its currency. There were already murmurs within the corridors of the Fed that Strong was too greatly influenced by his friends in London.

He was acutely aware that British prices were still 10 percent too high, and that further deflation to cut them would bring further hardship. But he had become increasingly convinced that the British needed to be pushed into making the big decision-force majeur, he called it. The shock therapy of forcing Britain to compete in world markets, while painful, would bring about the necessary realignment in prices more efficiently than a long drawn-out policy of protracted tight credit. he called it. The shock therapy of forcing Britain to compete in world markets, while painful, would bring about the necessary realignment in prices more efficiently than a long drawn-out policy of protracted tight credit.

The Americans recognized that if Britain did go back to gold, it was imperative that the link not snap at the first signs of trouble. Otherwise, the credibility of the whole system might be called into question, throwing all the world's currencies into turmoil. The government of the United States was in no position to lend money to any country-it had had enough of government-to-government lending during the war and was now saddled with renegotiating the terms of those loans. To ensure that Britain had adequate reserves to draw upon, Strong promised $200 million from the New York Fed. From the partners of J. P. Morgan came a further tentative commitment of $300 million.

Strong did impose one important condition: not, as might be supposed, a restriction on the economic policy of the Bank of England-how much credit it could provide or the level of interest rates it could set. The sole condition was that this loan would be available only while Norman remained governor.

As Norman set off homeward, perhaps because of the half-billion-dollar commitment that he metaphorically carried in his coat pocket, perhaps because of the powerful vote of confidence that he personally had received from the Americans, he was in an unusually sentimental mood. From on board the S.S. perhaps because of the half-billion-dollar commitment that he metaphorically carried in his coat pocket, perhaps because of the powerful vote of confidence that he personally had received from the Americans, he was in an unusually sentimental mood. From on board the S.S. France France he scribbled Strong a note: he scribbled Strong a note: My dear Ben,You won't be expecting me to write you a letter. This beast of a ship rolls so much that I can hardly sit on a chair-much less write at a table. But whatever this year may bring forth for us, I am glad to have begun it with you: it is always true to say that we don't meet often enough. . . . We ought ought indeed to get together once a quarter if we are to keep together all the year; that much we shall hardly manage; I guess once in 6 months is more probable. At least we have made good beginning for 1925. . . . And you know, Ben, I am grateful for all your welcome and hospitality: and for all you do for me and are to me. G.o.d bless you. indeed to get together once a quarter if we are to keep together all the year; that much we shall hardly manage; I guess once in 6 months is more probable. At least we have made good beginning for 1925. . . . And you know, Ben, I am grateful for all your welcome and hospitality: and for all you do for me and are to me. G.o.d bless you.

NORMAN GOT BACK to London in the middle of January to find resistance building against any early return to gold. Even some of his closest allies at the Bank were beginning to resent the American pressure tactics, fearing that Britain might be borrowing too much money for an uncertain payoff.

The most articulate critic of resumption continued to be Maynard Keynes, who railed at those in charge at Threadneedle Street for acting like "the Louis XVI of the monetary revolution," and for "attacking the problems of the post-war world with unmodified pre-war views and ideas." But his own proposals for a managed currency, outlined in the Tract, Tract, had been largely ignored or disparaged. Recognizing that no one was taking his idea of managed money seriously, he beat a tactical retreat and began urging instead that any return to the gold standard be at least delayed until the discrepancy between British and American costs had narrowed. had been largely ignored or disparaged. Recognizing that no one was taking his idea of managed money seriously, he beat a tactical retreat and began urging instead that any return to the gold standard be at least delayed until the discrepancy between British and American costs had narrowed.

His main point was that under current arrangements, given that U.S. gold reserves were so dominant, to tie the pound to gold in effect meant tying it to the dollar and the British economy to that of the United States-and by implication, to Wall Street. He did not attempt to conceal his distaste for what he, and all Bloomsbury with him, considered the cra.s.s materialism of the United States or for the prospect of having Britain's economic future determined by the needs of an America, imprisoned in its own insularity. "We should run the risk of having to curtail . . . credit to our industries," he wrote in one article, "merely because an investment boom in Wall Street had gone too far, or because of a sudden change in fashion amongst Americans towards foreign bond issues, or because banks in the Middle West had got tied up with their farmers or because of the horrid fact that every American had ten motor-cars and a wireless set in every room of every house had become known to manufacturers of these articles."

In article after article he returned to the same theme-that Britain, suffering from a slow rate of growth, exhausted finances, and "faults in her economic structure," was simply too weak to tether itself to a United States that seemed to "live in a vast and unceasing crescendo." The United States, with all its strength and dynamism, could "suffer industrial and financial tempests in the years to come, and they will scarcely matter to her; but England if she shares them, may almost drown." Few people, however, paid much attention to such gloomy prognostications.

Much more significant than Keynes's polemics was the opposition of Lord Beaverbrook. This elflike man with a larger-than-life personality was at the time the most dominant and successful newspaper proprietor in England. A Scots-Canadian by birth and a minister's son, though one might not have guessed it, he was a self-made millionaire many times over by the age of thirty-one, when he moved to England, in 1910. Seeing in the power of the press his path to the top, he acquired the Daily Express, Daily Express, a small loss-making newspaper with a circulation of some 200,000. By giving the public what it wanted-a bold and simply written paper full of gossip, sports, women's features, and articles about spiritualism and other social trends-he won it the largest circulation in the country with close to 1.5 million subscribers. Beaverbrook was an outsider to Britain, and like his paper, which appealed to all cla.s.ses, he transcended the British cla.s.s system. But as a Canadian, he retained a certain suspicion of the United States, and believed that a British return to gold would represent surrender to the Americans, who, according to him, were "pressing the return to the gold standard in order to mobilize the useless gold hordes [sic] of the United States." His view of the gold standard was incisive in its simplicity: "It is an absurd and silly notion that international credit must be limited to the quant.i.ty of gold dug up out of the ground. Was there ever such mumbo-jumbo among sensible and reasonable men?" a small loss-making newspaper with a circulation of some 200,000. By giving the public what it wanted-a bold and simply written paper full of gossip, sports, women's features, and articles about spiritualism and other social trends-he won it the largest circulation in the country with close to 1.5 million subscribers. Beaverbrook was an outsider to Britain, and like his paper, which appealed to all cla.s.ses, he transcended the British cla.s.s system. But as a Canadian, he retained a certain suspicion of the United States, and believed that a British return to gold would represent surrender to the Americans, who, according to him, were "pressing the return to the gold standard in order to mobilize the useless gold hordes [sic] of the United States." His view of the gold standard was incisive in its simplicity: "It is an absurd and silly notion that international credit must be limited to the quant.i.ty of gold dug up out of the ground. Was there ever such mumbo-jumbo among sensible and reasonable men?"

Beaverbrook and Churchill were both adventurers who, though the best of friends, rarely agreed.27 On January 28, 1925, Beaverbrook came to see Churchill and his advisers, only to have his arguments casually dismissed by the Treasury officials. The following day he launched a front-page campaign against the gold standard in the On January 28, 1925, Beaverbrook came to see Churchill and his advisers, only to have his arguments casually dismissed by the Treasury officials. The following day he launched a front-page campaign against the gold standard in the Daily Express Daily Express.

In reaction, Churchill decided one evening to compose a memorandum t.i.tled "The Return to Gold." He had found that one of the best ways for him to get his arms around a subject was to debate his own way through the issues. The chancellorship had been a mixed blessing. By his own admission, Churchill never had much interest in finance or economics and knew little about the subjects. He cheerfully liked to recount how his father, Lord Randolph Churchill, chancellor for six months in 1886, when confronted with a report full of figures with decimal points, declared he "never could make out what those d.a.m.ned dots mean." Winston himself, once chancellor, complained about the mandarins at the Treasury, "If they were soldiers or generals, I would understand what they were talking about. As it is they all talk Persian."

His memorandum, patronizingly nicknamed "Mr. Churchill's Exercise" within the Treasury, was a brilliant testament to his talent for self-education that should have put to rest the accusation that he was out of his depth when it came to finance. Circulated among senior Treasury officials and to Norman, it argued that the use of gold as the prime reserve was a "survival of a rudimentary and transitional stage in the evolution of finance and credit." Though the United States seemed "singularly anxious to help" the British return to the gold standard, the source of this "generosity is not perhaps remarkable when we consider her own position. She has by her hard treatment of her Allies, acc.u.mulated . . . probably nearly three quarters of the public gold in the world. She is now suffering from that glut of Gold," a large part of which was "lying idle in American vaults, playing no part whatever in the economic life of the United States." Naturally, the Americans, so laden with the metal, had an incentive to ensure that it continued to play "as powerful and dominant a part" in world finance as possible. Churchill, however, questioned whether this was also to Britain's advantage and worried that while the return to gold was in the interest of City financiers, it might not be equally in the interest of the rest of Britain: "the merchant, the manufacturer, the workman, and the consumer." It was a doc.u.ment that could almost have been written by Maynard Keynes.

Norman tended to treat Churchill as one of those clever but erratic forces of nature who has to be carefully managed. Teddy Grenfell, the head of Morgan Grenfell, the House of Morgan's London arm, and a director of the Bank of England, summed it up the best: "We, and especially Norman, feel that the new Chancellor's cleverness, his almost uncanny brilliance, is a danger. At present he is a willing pupil but the moment he thinks he can stand on his own legs and believes that he understands economic questions he may, by some indiscretion, land us in trouble."

Norman's response to the memorandum was characteristic-a point-by-point a.n.a.lysis of the pros and cons of a policy was just not his style. Instead, he wrote to Churchill, "The Gold Standard is the best 'Governor' that can be devised for a world that is still human rather than divine." He warned the chancellor that if he were to choose to return to gold he might be "abused by the ignorant, the gamblers and the antiquated Industrialists," but if he were to choose against it, he "will be abused by the instructed and by posterity."

But Churchill had endured too hard a career in politics to be so easily intimidated by slogans. Over the next few days he zeroed in on the key social and political issue: that for all its benefits, gold, if restored, would end up exacting a heavy cost for those thrown out of work in British industries priced out of world markets. "The Governor of the Bank of England shows himself perfectly happy with the spectacle of Britain possessing the finest credit in the world simultaneously with a million and a quarter unemployed," he growled to his advisers.

Norman had never believed much in the benefits of economic policy a.n.a.lysis-he would later famously instruct the Bank of England's chief economist, "You are not here to tell us what to do, but to explain to us why we have done it"-and was now beginning to find the protracted debate irritating. Feeling "so weary and done up" that he "had to go to bed for 8 days," Norman chose this critical moment to take two weeks off in the south of France. Sometimes his behavior could be frustrating to even his closest friends. As Teddy Grenfell wrote, "Norman elaborates his own schemes by himself and does not take anyone into his counsel unless he is obliged to do so in order to combat opposition. . . . Monty works in his own peculiar way. He is masterful and very secretive."

Meanwhile, Churchill, who, if anything, could usually be counted on to act too hastily, was uncharacteristically having trouble reaching a decision. Both sides in the debate had marshaled a bewildering acc.u.mulation of data and arguments. "None of the witch doctors can see eye to eye and Winston cannot make up his mind from day-to day," wrote Otto Niemeyer, his princ.i.p.al adviser. The advice he was getting from within the Treasury and the Bank of England was, however, all one way. He must have been aware that opposing the return to gold would put him in direct confrontation with Norman, whose close friendship with Stanley Baldwin was no secret-Norman often stopped by 10 Downing Street at the end of the day for a quiet chat and was a frequent weekend visitor to Chequers, the prime minister's new official country residence. For the moment, Baldwin had kept out of the gold debate, but Churchill feared that Norman might go around him directly to the prime minister, whom he neither wanted nor was in a position to take on. Nevertheless, the criticisms raised by Beaverbrook and Keynes had a certain unsettling resonance.

Finally, on March 17, Churchill decided to convene a sort of brain trust. His wife, Clementine, was away in the south of France, and so, because he did his best thinking late at night over port, brandy, and cigars, he organized an intimate dinner at his official residence, 11 Downing Street. Norman, just back from the Riviera, was not invited. He was known to dislike these debates and would have just sat there silent and chilling. To represent orthodoxy, Churchill invited his two princ.i.p.al advisers at the Treasury, Otto Niemeyer and John Bradbury, both men well established in the Norman camp. The case against gold was to be represented by Reginald McKenna, himself a former Liberal chancellor of the exchequer, now chairman of the Midland Bank, and Maynard Keynes.

Dinner began at 8:30 p.m. The small group seated around the table in the intimate oak-paneled dining room on the first floor of 11 Downing Street were all old acquaintances with a long a.s.sociation with one another. When Keynes had been a young Treasury official during the war, McKenna had been chancellor of the exchequer in the first coalition government, with Bradbury as his permanent secretary. Niemeyer, at the age of forty-two, was the controller of the Treasury, its second most powerful official, and the chancellor's chief adviser on matters of domestic and international finance. Behind his disheveled exterior lay a formidable intelligence. Of German Jewish extraction, he had earned a double first at Balliol College, Oxford, and had taken the civil service entrance exams in 1906, the same year as Maynard Keynes, whom he had beaten into second place. As a result, he had joined the Treasury while Keynes had had to settle for the India Office.

As the evening wore on and the alcohol flowed-Churchill was known for his ability to consume prodigious amounts without any apparent impairment of his faculties-the discussion went round and round. The same old arguments echoed off the vaulted ceilings and across the room. Keynes was not on his best form or at his most persuasive. He and McKenna kept returning to the argument that with prices in Britain still 10 percent too high, a return to gold would inevitably involve a great deal of pain, unemployment, and industrial unrest. Sir John Bradbury kept pressing the point that the virtue of the gold standard was that it was "knave-proof. It could not be rigged for political . . . reasons." Returning to the gold standard would prevent Britain from "living in a fool's paradise of false prosperity."

No one changed his mind that night. There was considerable agreement about the facts. All accepted that British prices were too high and that to bring them down would involve some pain, although they disagreed about its extent. All acknowledged that tying Britain to the gold standard would mean tethering it to the United States, with all the risks that entailed. But whereas the "gold bugs" believed that the costs were worth bearing in order to reinstate the automatic mechanism of the gold standard, Keynes and McKenna thought otherwise. There were too many imponderables for anyone to be sure of the answer. Both parties were making a leap of faith. In that sense, the debate that evening, though dressed up as a technical discussion among experts, reflected, at bottom, a philosophical divide between those who believed that governments could be trusted with discretionary power to manage the economy and those who insisted that government was fallible and therefore had to be circ.u.mscribed with strict rules.

Finally, as the dinner stretched into the early hours of the morning, Churchill turned to McKenna: "You have been a politician. Given the situation as it is, what decision would you make?"

To Keynes's disgust, McKenna replied, "There is no escape. You will have to go back; but it will be h.e.l.l."

The gold bugs had won.

After a few more days of agonizing, Churchill decided for the gold standard. Orthodox economic opinion and the country's banking establishment were so strongly in favor that for once in his life, he lacked the necessary confidence in his own judgment to risk another policy. On his way to stay with the prime minister at Chequers one weekend, Norman dropped in at Chartwell, Churchill's country house in Kent, and tried to rea.s.sure him, "I will make you the golden Chancellor."

BUDGET DAY WAS until recently something of an occasion in the British parliamentary calendar. The event was traditionally surrounded with its own rituals-the buildup of suspense about the contents, the press speculation, the picture on the actual day of the chancellor emerging from No. 11 Downing Street, conspicuously brandishing the battered red dispatch box, the grand and excessively long speeches in Parliament about the minutiae of taxation and spending.28 It was, in short, a perfect opportunity for Churchill to display his talent for playing to the gallery. It was, in short, a perfect opportunity for Churchill to display his talent for playing to the gallery.

On April 28, he rose before the Commons at 4:00 p.m. to great applause. Everyone knew what he was about to say, but there were nevertheless tremendous cheers when, in the first few minutes of his speech, he announced the return to gold. Ever the showman, at one point during his two-hour speech, he paused, declaring, "It is imperative that I should fortify the revenue, and I shall now, with the permission of the Commons, proceed to do so," and proceeded to pour himself a gla.s.s of "an amber-coloured liquid," that from the press gallery appeared to be stronger than water.

For all his ambivalence about the decision to return to gold, Churchill put on a great show. He seems to have been most swayed in his decision by the fear that not to return now would be seen as a very public admission of Britain's diminished position in world affairs. Almost every other country was either now on gold-the United States, Germany, Sweden, Canada, Austria, and Hungary-or about to be-Holland, Australia, and South Africa-and "like ships in harbor whose gangways are joined together and who rise and fall together with the tide," they were all linked by a common standard of value. As he would articulate a few days later in committee, "If the English pound is not to be the standard which everyone knows and trusts, the business not only of the British Empire but also of Europe as well might have to be transacted in dollars instead of pounds sterling. I think that would be a great misfortune."

While Churchill was speaking, Norman sat in the distinguished strangers' gallery of the House of Commons, savoring what all London saw as his personal triumph. As Churchill himself would later put it, it was Norman's "greatest achievement . . . the final step without which all those efforts and sufferings [that is, the years since 1920] would have gone for naught."

The decision was received with resounding applause both in the City and in the press, the Times Times commenting that it was "a signal triumph for those who have controlled and shaped our monetary policy, notably the Governor of the Bank." The commenting that it was "a signal triumph for those who have controlled and shaped our monetary policy, notably the Governor of the Bank." The Economist Economist described it as "the crowning achievement of Mr. Montagu Norman." Only Beaverbrook's chain of papers dissented. described it as "the crowning achievement of Mr. Montagu Norman." Only Beaverbrook's chain of papers dissented.

For a few months, McKenna's ominous prediction proved to be wrong. The initial consequences of the move were relatively benign. Britain, with its higher interest rates, attracted enough money that the credits provided by the Federal Reserve and J. P. Morgan were never needed. Britain's gold reserves actually increased during 1925.

For Keynes, borrowing hot money from foreigners was only a way for Britain to buy time. In a three-part series of articles, initially published in late July in Beaverbrook's Evening Standard, Evening Standard, and later issued as a pamphlet, and later issued as a pamphlet, The Economic Consequences of Mr. Churchill, The Economic Consequences of Mr. Churchill, Keynes reminded his readers that Britain would have to "use the breathing s.p.a.ce to effect what are euphemistically called the 'fundamental adjustments'" in the economic life of the nation. At its new exchange rate, the pound was overvalued by more than 10 percent. To remedy this would require cuts in wages and prices across the economy that could be achieved "in no other way than by the deliberate intensification of unemployment" through a policy of tight credit and higher interest rates. It seemed perverse to him to inst.i.tute a regime of credit restrictions at a time when unemployment stood already above one million. "The proper object of dear money is to check an incipient boom. Woe to those whose faith leads them to use it to aggravate a depression!" Keynes reminded his readers that Britain would have to "use the breathing s.p.a.ce to effect what are euphemistically called the 'fundamental adjustments'" in the economic life of the nation. At its new exchange rate, the pound was overvalued by more than 10 percent. To remedy this would require cuts in wages and prices across the economy that could be achieved "in no other way than by the deliberate intensification of unemployment" through a policy of tight credit and higher interest rates. It seemed perverse to him to inst.i.tute a regime of credit restrictions at a time when unemployment stood already above one million. "The proper object of dear money is to check an incipient boom. Woe to those whose faith leads them to use it to aggravate a depression!"

Though Keynes could not resist a typically malicious poke at Churchill-"because he has no instinctive judgment to prevent him from making mistakes . . . [and] because, lacking this instinctive judgment he was deafened by the clamorous voices of conventional finance"-the pamphlet was more an attack on the Bank of England and the Treasury.

Certainly, Churchill seems to have seen it that way. In 1927, he invited Keynes to become a member of The Other Club, a private and highly exclusive dining society started by him and Birkenhead in 1911. Its members, restricted to no more than fifty, had to be both "estimable and entertaining." It had twelve rules, which were read aloud at the beginning of each meeting, held every alternate Thursday while Parliament was in session. Churchill and Birkenhead determined who was to be invited to join. Rule 12 read, "Nothing in the rules or intercourse of the Club shall interfere with the rancour or asperity of party politics." Its members read like a Who's Who of British history between the wars and included all of Churchill's pals-Birkenhead, Beaverbrook, and Bracken-but also such diverse figures as Lord Jellicoe, H. G. Wells, Arnold Bennett, P. G. Wodehouse, and Edwin Lutyens.

By the late summer, the rise in the exchange rate began taking its toll on the staple export industries of coal, steel, and shipbuilding. Particularly hard hit was the weakest of these, coal, much of which was threatened with bankruptcy after the resumption of production in the Ruhr and the squeeze on prices from the rise in the exchange rate. The owners demanded a cut in wages and an increase in hours from the coal miners. In The Economic Consequences of Mr. Churchill, The Economic Consequences of Mr. Churchill, Keynes had railed against the social injustice of a policy where miners were being asked to be "the victims of the economic Juggernaut." They were representatives "in the flesh [of] the fundamental adjustments engineered by the Treasury and the Bank of England to satisfy impatience of the City fathers to bridge the moderate gap between $4.40 and $4.86." Keynes had railed against the social injustice of a policy where miners were being asked to be "the victims of the economic Juggernaut." They were representatives "in the flesh [of] the fundamental adjustments engineered by the Treasury and the Bank of England to satisfy impatience of the City fathers to bridge the moderate gap between $4.40 and $4.86."

A national strike was averted only when the government at the last minute agreed to give the coal industry a ma.s.sive subsidy of over $100 million. But this could only be a stopgap measure. By 1926, attempts to cut costs led to a long and bitter strike in the coal industry, and in May 1926, boiled over into a countrywide ten-day general strike. That this did not lead to a flight of capital from Britain and a crisis in the exchange market was only because the underlying weakness of Britain's international position was masked by continued inflows of capital taking advantage of high interest rates in the London market and escaping the escalating crisis in France.

The return to gold proved to be a costly error. That the money attracted by the high interest rates was speculative-"hot"-and not a source of permanent investment left a constant threat hanging over the currency. Just to prevent it from flooding back out again, interest rates had to be kept significantly higher than that in other countries for the balance of the decade. With prices falling at around 5 percent per annum, the burden of these charges on borrowers was heavy. Meanwhile, British manufacturing, hobbled in world markets by its high prices, limped painfully along for the next few years while elsewhere in the world industry boomed.

Though Churchill remained chancellor until 1929, by 1927 he had come to realize that the return to gold at the old prewar exchange rate had been a misjudgment. But by then there was little he could do about it except fulminate in private about the evil effects of the gold standard. In later life, he would claim that it was "the biggest blunder in his life." He blamed it on the bad advice he had received. In an unpublished draft of his memoirs, he wrote that he had been "misled by the Governor of the Bank of England [and] by the experts of the Treasury. . . . I had no special comprehension of the currency problem and therefore fell into the hands of the experts, as I never did later where military matters were concerned." He reserved his greatest venom for Norman. It took only the slightest provocation for him to begin to rant on about "that man Skinner," as he disparagingly referred to the governor. In a cabinet meeting in June 1928, one of his colleagues remembered him "to everyone's surprise exploding on Montagu Norman and deflation."

In his speech before Parliament during the debate on the Gold Standard Bill, Churchill had claimed that the move would "shackle Britain to reality." And a shackle it did prove to be, but not so much to reality as to an outmoded way of thinking and to a hopelessly obsolete mechanism for controlling the international finances of the country. As Keynes had written in May 1925: The gold standard party have had behind them much that is not only respectable but worthy of respect. The state of mind that likes to stick to the straight old-fashioned course, rather regardless of the pleasure or the pain . . . is not to be despised. . . . Like other orthodoxies it stands for what is jejeune and intellectually sterile; and since it has prejudice on its side, it can use claptrap with impunity.

The most damaging consequence was that in a futile attempt to retain the primacy of the Bank of England and the City of London, Britain had now tied itself irretrievably to the United States. During Norman's visit to New York in January 1925, Strong had warned him, "In a new country such as ours with an enthusiastic, energetic and optimistic population, where enterprise at times was highly stimulated and returns upon capital much greater than in other countries, there would be times when speculative tendencies would make it necessary for the Federal Reserve Banks to exercise restraint by increased discount rates, and possibly rather high money rates in the market. Should such times arise, domestic considerations would likely outweigh foreign sympathies." Norman cannot have realized how prescient those words were and how cruelly one day they would come back to haunt him.

13. LA BATAILLE.

FRANCE: 1926.

Only peril can bring the French together. One can't impose unity out of the blue on a country that has 265 265 different kinds of cheese. different kinds of cheese.

-CHARLES De GAULLE

April 1925 might have been a good month for Governor Norman and the Bank of England, but in Paris, Governor Georges Robineau and the Banque de France were being simultaneously vilified and mocked in the press. Earlier that month, the French public had learned that for the past year, senior officials at the French central bank had conspired with their opposite numbers at the French treasury to cook the Banque's books.

The deception had begun as far back as March 1924. The government, finding it difficult to attract new buyers for its short-term debt, was forced to ask the Banque for an advance to cover some of its maturing bonds. But the amount of currency that the Banque could issue was limited by law and, in the embattled climate of the time, the government did not wish to face the political embarra.s.sment of asking the National a.s.sembly to raise the ceiling. Obliging officials at the Banque had found a way of issuing extra currency but disguising the fact with an accounting ruse, at first a technical, almost trivial adjustment, which no doubt those involved thought a temporary and justifiable expedient. But the scope of the operation had progressively grown and by April 1925, the "fake balances"-les faux bilans -amounted to some 2 billion francs, equivalent to 5 percent of the currency in circulation. -amounted to some 2 billion francs, equivalent to 5 percent of the currency in circulation.

Strong, Strong's daughter Katherine, and Norman at Biarritz, 1925 The doctored accounts were first discovered in October 1924 by the Banque's deputy governor, who promptly informed Governor Robineau; the minister of finance, etienne Clementel; and the prime minister, edouard Herriot. Although the governor kept pressing the government to correct the situation by repaying the Banque some of what it owed, the ministers vacillated and did nothing for six months, hoping against hope that public finances might turn around. When news of the falsified statements finally leaked out, the government was forced to go to the National a.s.sembly to ask for an increase in the legal limit. Though the nationalist press called for the prosecution of Governor Robineau, he managed to hang on to his job because at least he had resisted the ensuing cover-up; but the humiliated government fell to a vote of no confidence after a debate in the Senate that was unusually bitter even by the rancorous standards of French political discourse of the time.

The drama hit the headlines at a particularly sensitive moment. France was finally beginning to get its finances in order. The reconstruction of the war-ravaged departments of northeastern France had cost a total of $4 billion, but was now largely complete and the budget deficit had been cut from the equivalent of $1 billion in 1923, over 10 percent of GDP, to under $50 million, less than 0.5 percent. After the Dawes Plan, the government had also become much more realistic in its budgeting of how much it could truly hope to recover in reparations. And since the war, the Banque had been firm about restricting government borrowing from it. The currency ceiling of 41 billion francs established in 1920, a powerful symbol of the Banque's independence, had been scrupulously respected for four whole years.

But French finances balanced on a knife-edge. A large part of the public debt was short-term in nature, which made its refinancing an annual ordeal for the franc as French savers underwent an agonizing reappraisal of their government's solvency. The fact that the Banque de France, of all inst.i.tutions, should now have fallen from grace and was implicated in this sordid scandal, albeit one in which no individual seemed to have profited financially, provoked a minor crisis of confidence among French investors.

For MUCH of the nineteenth century, the Banque de France had been by far the most conservative financial inst.i.tution in all Europe, far more cautious, for example, than its cousin the Bank of England. Although it was not legally bound, as was the English central bank, to hold a minimum amount of gold, it had adopted the practice of retaining an unusually large gold reserve to back its currency notes-in 1914, the largest in Europe, totaling over $1 billion. On a number of occasions it had even been asked to come to the aid of the Bank of England-for example, during the crises of 1825 and 1837; in 1890, when Barings Brothers faced bankruptcy over its ill-considered loans in South America, and finally, during the panic of 1907. In effect, the Banque played the role of backstop to the Bank of England.

While the Bank of England was a solidly bourgeois inst.i.tution, egalitarian in the way that an exclusive men's club is democratic among its members, the Banque de France was from its birth an aristocratic place, even if the aristocracy was only a few years old. Among its first few governors were the comte Jaubert, the comte de Gaudin, the duc de Gaete, the comte Apollinaire d'Argout, and the baron Davillier. Even after 1875, when the republic was brought into being for the third and final time and the French aristocracy abandoned political life, the Banque de France continued to be a haven for the n.o.bility.

The Banque itself remained a private inst.i.tution owned by shareholders. Though the governor and deputy governors by this time tended to be drawn from the ranks of the higher civil service, they were still ultimately responsible to the twelve-man Council of Regents. In addition, the governor, though appointed by the government, was also required to own one hundred shares, which in the 1920s cost the franc equivalent of $100,000. Since few government officials, even the very highest, had that much free capital, the purchase money was lent by the regents, making the average governor very much their agent.

In 1811, the Banque moved into the magnificently flamboyant Hotel de la Vrilliere, just north of the Louvre near the Palais Royal. It had once been the town palace of the comte de Toulouse, b.a.s.t.a.r.d son of Louis XIV and Madame de Maintenon. Every year at 12:30 in the afternoon, on the last Thursday of January, the pinnacle of French society would gather there for the Banque's Annual General a.s.sembly. Though it had more than forty thousand shareholders, only the top two hundred were eligible to attend the meeting and choose the regents. The conclave was held in the Galerie Doree, the long rococo hall running down the center of the hotel. There, beneath the gorgeous paintings on the vaulted ceiling, the carved and sumptuously gilded woodwork, the opulent wall mirrors, seated in alphabetical order would be some of the oldest and most aristocratic families in France: Clerel de Tocqueville, La Rochefoucauld, Noailles, Talleyrand-Perigord.

To be invited to this gathering was one of the most highly coveted emblems of social standing in France. n.o.blemen, who might otherwise care nothing about banking, treasured their family holdings in the Banque, valued typically at several hundred thousand francs, equivalent then to about a hundred thousand dollars, and held for generations as a prized part of their patrimony.

With an electorate of two hundred of the richest and grandest families in France, it was not surprising that seats on the Council of Regents came to be almost hereditary. Five out of the twelve elected regents were descendants of the original founders and a disproportionately large number were Protestants of Swiss extraction. In 1926, the twelve included Baron Ernest Mallet, Baron edouard de Rothschild, Baron Jean de Neuflize, Baron Maurice Davillier, M. Felix Vernes, and M. Francois de Wendel. The Mallet family, Protestant bankers originally from Geneva, proprietors of a concern bearing their name, had the distinction of having sat on the council continuously for four generations, since it was first convened in 1800. The Rothschilds, the only Jewish family on the council, had sat there since 1855, when Baron Alphonse de Rothschild, managing partner of Rothschild Freres, the French arm of the banking empire, had been chosen. On his death in 1905, his seat had been pa.s.sed to his son Baron edouard.

The Davilliers, like so many other regent families elevated to the baronage under Napoleon, were primarily industrialists, although they also operated an eponymous private bank. Baron Maurice Davillier was the fourth member of his family to serve on the council. Although Baron Jean de Neuflize was the first member of his clan to be elected, the Neuflizes, who owned one more eponymous bank, had been enn.o.bled by Louis XV. Baron Jean, an avid sportsman who had represented France as an equestrian at the 1900 Olympics, was president of the Society of Steeplechasers and the even more exclusive Casting Club of France; his daughter was married to the wonderfully named English grandee Vere Brabazon Ponsonby, ninth Earl of Bessborough.

Over the 120 years since the Banque's foundation, France itself had experienced no fewer than three revolutions; transformed its political system five times; had had seventeen different heads of state, including one emperor, three kings, twelve presidents, and a president who then made himself emperor; and had changed governments on the average of at least once a year. Meanwhile, the Banque and the same few families that wielded power within its council had remained unmolested. So great was the inst.i.tution's authority that it had continued to function unhindered during the Paris Commune and had met the currency needs of both sides-not only of the legitimate government at Versailles but of the Commune itself. "The hardest thing to understand," wrote Friedrich Engels, amazed at the deference of those first Communists, "is the holy awe with which they remained standing outside the gates of the Banque de France." The mystique attached to the regents and the top two hundred shareholders would give rise in the 1930s to the legend that France was controlled by a financial oligarchy of les deux cents familles les deux cents familles, a potent myth that would become a rallying cry for the left.

When war broke out in 1914 and the very survival of the nation was threatened, the Banque, like all the other European central banks, voluntarily subordinated itself to its government, and obligingly printed whatever money was needed to finance the colossal effort. But unlike the Reichsbank, within a few months of the end of the war, it rea.s.serted its independence and refused to go on filling the gap between government spending and tax revenues. In April 1919, the National a.s.sembly fixed a limit on the its advances to the state and in September 1920, imposed a ceiling of 41 billion francs on the Banque's note circulation. There things stood until the crisis of 1925.