WEBVTT NOTE 61. The Background of the 1920s 1 00:00:00.000 --> 00:00:04.000 The Background of the 1920s 2 00:00:04.000 --> 00:00:18.000 It is impossible to understand the first New Deal decision for dollar nationalism without setting that choice in the monetary world of the 1920s, from which the New Deal emerged. 3 00:00:18.000 --> 00:00:25.240 Similarly, it is impossible to understand the monetary system of the 1920s without reference 4 00:00:25.240 --> 00:00:32.140 to the pre-World War I monetary order and its break-up during the war, for the world 5 00:00:32.140 --> 00:00:39.500 of the 1920s was an attempt to reconstitute an international monetary order, seemingly 6 00:00:39.500 --> 00:00:45.980 one quite similar to the status quo ante, but actually based on very different principles 7 00:00:45.980 --> 00:00:48.180 and Institutions. 8 00:00:48.180 --> 00:00:53.820 The pre-war monetary order was genuinely, quote, international. 9 00:00:53.820 --> 00:01:00.420 That is, world money rested not on paper tickets issued by one or more governments, but on 10 00:01:00.420 --> 00:01:07.980 a genuine economic commodity, gold, whose supply rested on market supply and demand 11 00:01:07.980 --> 00:01:08.980 principles. 12 00:01:08.980 --> 00:01:15.300 In short, the international gold standard was the monetary equivalent and corollary 13 00:01:15.300 --> 00:01:18.980 of International Free Trade and Commodities. 14 00:01:18.980 --> 00:01:24.460 It was a method of separating money from the state, just as enterprise and foreign trade 15 00:01:24.460 --> 00:01:26.900 had been so separated. 16 00:01:26.900 --> 00:01:33.300 In short, the gold standard was the monetary counterpart of laissez-faire in other economic 17 00:01:33.300 --> 00:01:34.860 areas. 18 00:01:34.860 --> 00:01:39.420 The gold standard in the pre-war era was never, quote, pure. 19 00:01:39.420 --> 00:01:42.740 No more than was laissez-faire in general. 20 00:01:42.740 --> 00:01:48.420 Every major country, except the United States, had central banks which tried their best to 21 00:01:48.420 --> 00:01:51.780 inflate and manipulate the currency. 22 00:01:51.780 --> 00:01:57.620 But the system was such that this intervention could only operate within narrow limits. 23 00:01:57.620 --> 00:02:02.380 If one country inflated its currency, the inflation in that country would cause the 24 00:02:02.380 --> 00:02:09.980 banks to lose gold to other nations, and consequently the banks, private and central, would before 25 00:02:09.980 --> 00:02:12.660 long be brought to heel. 26 00:02:12.660 --> 00:02:17.460 And while England was the world financial center during this period, its predominance 27 00:02:17.460 --> 00:02:23.220 was market rather than political, so it too had to abide by the monetary discipline of 28 00:02:23.220 --> 00:02:25.120 the gold standard. 29 00:02:25.120 --> 00:02:28.140 As H. Parker Willis described it, 30 00:02:28.140 --> 00:02:34.180 Prior to the World War, the distribution of the metallic money of gold standard countries 31 00:02:34.180 --> 00:02:39.560 had been directed and regulated by the central banks of the world, in accordance with the 32 00:02:39.560 --> 00:02:45.040 The generally known and recognized principles of international distribution of the precious 33 00:02:45.040 --> 00:02:46.200 metals. 34 00:02:46.200 --> 00:02:50.920 Free movement of these metals and freedom on the part of the individual to acquire and 35 00:02:50.920 --> 00:02:53.880 hold them were general. 36 00:02:53.880 --> 00:02:59.520 Regulation of foreign exchange existed only sporadically and was so conducted as not to 37 00:02:59.520 --> 00:03:06.280 interfere in any important degree with the disposal of holding of species by individuals 38 00:03:06.280 --> 00:03:09.840 or by Banks. 39 00:03:09.840 --> 00:03:15.320 The advent of the World War disrupted and rendered this economic idol, and it was never 40 00:03:15.320 --> 00:03:17.160 to return. 41 00:03:17.160 --> 00:03:21.900 In the first place, all of the major countries financed the massive war effort through an 42 00:03:21.900 --> 00:03:28.420 equally massive inflation, which meant that every country except the United States, even 43 00:03:28.420 --> 00:03:33.740 including Great Britain, was forced to go off the gold standard since they could no 44 00:03:33.740 --> 00:03:51.740 The International Order not only was sundered by the war, but also split into numerous separate, competing, and warring currencies, whose inflation was no longer subject to the gold restraint. 45 00:03:51.740 --> 00:04:00.740 In addition, the various governments engaged in rigorous exchange control, fixing exchange rates and prohibiting outflows of gold. 46 00:04:00.740 --> 00:04:06.740 Monetary warfare paralleled the broader economic and military conflict. 47 00:04:06.740 --> 00:04:18.740 At the end of the war, the major powers sought to reconstitute some form of international monetary order out of the chaos and warring economic blocks of the war period. 48 00:04:18.740 --> 00:04:25.740 The crucial actor in this drama was Great Britain, which was faced with a series of dilemmas and difficulties. 49 00:04:25.740 --> 00:04:44.740 On the one hand, Britain not only aimed at re-establishing its former eminence, but it meant to use its victorious position and its domination of the League of Nations to work its will upon the other nations, many of them new and small, of post-Versailles Europe. 50 00:04:44.740 --> 00:04:50.740 This meant its monetary as well as its general political and economic dominance. 51 00:04:50.740 --> 00:04:58.220 Furthermore, it no longer felt itself bound by old-fashioned laissez-faire restraints 52 00:04:58.220 --> 00:05:04.420 from exerting frankly political control, nor did it any longer feel bound to observe the 53 00:05:04.420 --> 00:05:08.860 classical gold standard restraints against inflation. 54 00:05:08.860 --> 00:05:14.900 While Britain's appetite was large, its major dilemma was its weakness of resources. 55 00:05:14.900 --> 00:05:20.520 The racking inflation and the withdrawal from the gold standard had left the United States 56 00:05:20.520 --> 00:05:26.900 not Great Britain as the only, quote, hard gold standard country. 57 00:05:26.900 --> 00:05:32.020 If Great Britain were to dominate the post-war monetary picture, it would somehow have to 58 00:05:32.020 --> 00:05:37.340 take the United States into camp as its willing junior partner. 59 00:05:37.340 --> 00:05:45.060 From the classic pre-war pound-dollar par of $4.86 to the pound, the pound had fallen 60 00:05:45.060 --> 00:05:53.580 on the international money markets to $3.50, a substantial 30% drop, a drop that reflected 61 00:05:53.580 --> 00:05:58.380 the greater degree of inflation in Great Britain than in the US. 62 00:05:58.380 --> 00:06:03.780 The British then decided to constitute a new form of international monetary system, the 63 00:06:03.780 --> 00:06:10.680 quote, gold exchange standard, which had finally completed in 1925. 64 00:06:10.680 --> 00:06:17.160 In the classical pre-war gold standard, each country kept its reserves in gold and redeemed 65 00:06:17.160 --> 00:06:22.260 its paper and bank currencies in gold coin upon demand. 66 00:06:22.260 --> 00:06:27.380 The new gold exchange standard was a clever device to permit Britain and the other European 67 00:06:27.380 --> 00:06:33.680 countries to remain inflated and to continue inflating while enlisting the United States 68 00:06:33.680 --> 00:06:37.080 as the ultimate support for all currencies. 69 00:06:37.080 --> 00:06:43.480 Specifically, Great Britain would keep its reserves, not in gold, but in dollars, while 70 00:06:43.480 --> 00:06:48.880 the smaller countries of Europe would keep their reserves, not in gold, but in pounds 71 00:06:48.880 --> 00:06:50.400 sterling. 72 00:06:50.400 --> 00:06:56.880 In this way, Great Britain could pyramid inflated currency and credit on top of dollars, while 73 00:06:56.880 --> 00:07:03.040 Britain's client states could pyramid their currencies, in turn, on top of pounds. 74 00:07:03.040 --> 00:07:09.880 Clearly, this also meant that only the United States would remain on a gold coin standard, 75 00:07:09.880 --> 00:07:15.080 the other countries, quote, redeeming, only in foreign exchange. 76 00:07:15.080 --> 00:07:20.780 The instability of this system, with pseudo gold standard countries pyramiding on top 77 00:07:20.780 --> 00:07:28.120 of an increasingly shaky dollar gold base, was to become evidence in the Great Depression. 78 00:07:28.120 --> 00:07:33.140 But the British task was not simply to induce the United States to be the willing guarantor 79 00:07:33.140 --> 00:07:39.120 of all the shaky and inflated currencies of war-torn Europe, for Great Britain might well 80 00:07:39.120 --> 00:07:45.480 have been able to return to the original form of gold standard at a new, realistic, depreciated 81 00:07:45.480 --> 00:07:50.300 parity of $3.50 to the pound. 82 00:07:50.300 --> 00:07:56.440 But it was not willing to do so, for the British dream was to restore, even more glowingly 83 00:07:56.440 --> 00:08:03.640 Only then before British financial preeminence, and if it depreciated the pound by 30%, it 84 00:08:03.640 --> 00:08:10.400 would thereby acknowledge that the dollar, not the pound, was the world financial center. 85 00:08:10.400 --> 00:08:13.240 This it was fiercely unwilling to do. 86 00:08:13.240 --> 00:08:18.800 For restoration of dominance, for the saving of financial face, it would return at the 87 00:08:18.800 --> 00:08:24.580 good old $4.86 or bust in the attempt. 88 00:08:24.580 --> 00:08:27.340 and bust it almost did. 89 00:08:27.340 --> 00:08:36.780 Or to insist on returning to gold at $4.86, even on the new, vitiated gold exchange basis, 90 00:08:36.780 --> 00:08:41.900 was to mean that the pound would be absurdly expensive in relation to the dollar and other 91 00:08:41.900 --> 00:08:48.780 currencies, and would therefore mean that at current inflated price levels, Britain's 92 00:08:48.780 --> 00:09:03.220 And indeed, Britain suffered a severe depression in her export industries, particularly coal 93 00:09:03.220 --> 00:09:07.100 and textiles, throughout the 1920s. 94 00:09:07.100 --> 00:09:14.260 If she insisted on returning at the overvalued $4.86, there was only one hope for keeping 95 00:09:14.260 --> 00:09:17.060 Between Her Exports Competitive and Price 96 00:09:17.060 --> 00:09:23.020 A Massive Domestic Deflation to Lower Price and Wage Levels 97 00:09:23.020 --> 00:09:29.140 While a severe deflation is difficult at best, Britain now found it impossible, for the new 98 00:09:29.140 --> 00:09:34.660 system of national unemployment insurance and the newfound strength of trade unions 99 00:09:34.660 --> 00:09:38.460 made wage cutting politically unthinkable. 100 00:09:38.460 --> 00:09:43.580 But if Britain would not or could not make her exports competitive by returning to gold 101 00:09:43.580 --> 00:09:50.100 at a Depreciated Par or by deflating at home, there was a third alternative which it could 102 00:09:50.100 --> 00:09:55.660 pursue and which indeed marked the key to the British international economic policies 103 00:09:55.660 --> 00:09:57.900 of the 1920s. 104 00:09:57.900 --> 00:10:04.740 It could induce or force other countries to inflate or themselves to return to gold at 105 00:10:04.740 --> 00:10:07.180 overvalued pars. 106 00:10:07.180 --> 00:10:13.140 In short, if it could not clean up its own economic mess, it could contrive to impose 107 00:10:13.140 --> 00:10:16.260 messes upon everyone else. 108 00:10:16.260 --> 00:10:22.740 If it did not do so, it would see inflating Britain lose gold to the United States, France 109 00:10:22.740 --> 00:10:29.460 and other quote, hard money countries, as indeed happened during the 1920s. 110 00:10:29.460 --> 00:10:35.780 Only by contriving for other countries, especially the US, to inflate also, could it check the 111 00:10:35.780 --> 00:10:50.560 In the short run, the British scheme was brilliantly conceived, and it worked for a time. 112 00:10:50.560 --> 00:10:53.280 But the major problem went unheeded. 113 00:10:53.280 --> 00:10:58.620 If the United States, the base of the pyramid and the sole link of all these countries to 114 00:10:58.620 --> 00:11:05.300 gold and hard money, were to inflate unduly, the dollar too would become shaky. 115 00:11:05.300 --> 00:11:11.620 would lose gold at home and abroad and the dollar would itself eventually collapse, dragging 116 00:11:11.620 --> 00:11:14.740 the entire structure down with it. 117 00:11:14.740 --> 00:11:19.140 And this is essentially what happened in the Great Depression. 118 00:11:19.140 --> 00:11:24.620 In Europe, England was able to use its domination of the powerful financial committee of the 119 00:11:24.620 --> 00:11:31.920 League of Nations to cajole or bludgeon country after country to one, established central 120 00:11:31.920 --> 00:11:42.760 2. Return to gold not in the classical gold coin standard but in the new gold exchange 121 00:11:42.760 --> 00:11:49.800 standard which would permit continued inflation by all the countries, and 3. Return to this 122 00:11:49.800 --> 00:11:56.600 new standard at overvalued pars so that European exports would be hobbled vis-a-vis the exports 123 00:11:56.600 --> 00:11:58.540 of Great Britain. 124 00:11:58.540 --> 00:12:03.780 The Financial Committee of the League of Nations was largely dominated and run by Britain's 125 00:12:03.780 --> 00:12:09.820 major financial figure, Montague Norman, head of the Bank of England, working through such 126 00:12:09.820 --> 00:12:15.860 close Norman associates on the committee as Sir Otto Niemeyer and Sir Henry Strakusch, 127 00:12:15.860 --> 00:12:22.580 leaders in the concept of close central bank collaboration to, quote, stabilize, in practice 128 00:12:22.580 --> 00:12:26.660 to raise, price levels throughout the world. 129 00:12:26.660 --> 00:12:32.100 The distinguished British economist Sir Ralph Autry, Director of Financial Studies at the 130 00:12:32.100 --> 00:12:37.900 British Treasury, was one of the first to advocate this system, as well as to call for 131 00:12:37.900 --> 00:12:42.460 the general European adoption of a gold exchange standard. 132 00:12:42.460 --> 00:12:48.420 In the spring of 1922, Norman induced the League to call the Genoa Conference, which 133 00:12:48.420 --> 00:12:50.980 urged similar measures. 134 00:12:50.980 --> 00:12:56.240 But the British scarcely confined their pressure upon European countries to resolutions and 135 00:12:56.240 --> 00:13:00.560 and Conferences Using the carrot of loans from England and 136 00:13:00.560 --> 00:13:07.200 the United States and the stick of political pressure, Britain induced country after country 137 00:13:07.200 --> 00:13:12.960 to order its monetary affairs to suit the British, that is, to return only to a gold 138 00:13:12.960 --> 00:13:19.200 exchange standard at overvalued pars that would hamper their own exports and stimulate 139 00:13:19.200 --> 00:13:21.520 imports from Great Britain. 140 00:13:21.520 --> 00:13:28.220 Furthermore, the British also use their inflated, cheap credit to lend widely to Europe in order 141 00:13:28.220 --> 00:13:32.100 to stimulate their own flagging export market. 142 00:13:32.100 --> 00:13:38.060 A trenchant critique of British policy was recorded in the diary of Emile Moreau, Governor 143 00:13:38.060 --> 00:13:44.420 of the Bank of France, a country that clung to the gold standard and to a hard-money policy, 144 00:13:44.420 --> 00:13:49.460 and was thereby instrumental in bringing down the pound and British financial domination 145 00:13:49.460 --> 00:13:58.360 in 1931, Moreau wrote, England, having been the first European country to reestablish 146 00:13:58.360 --> 00:14:05.180 a stable and secure money, has used that advantage to establish a basis for putting Europe under 147 00:14:05.180 --> 00:14:08.420 a veritable financial domination. 148 00:14:08.420 --> 00:14:14.100 The Financial Committee of the League of Nations at Geneva has been the instrument of that 149 00:14:14.100 --> 00:14:15.240 policy. 150 00:14:15.240 --> 00:14:21.120 The method consists of forcing every country in monetary difficulty to subject itself to 151 00:14:21.120 --> 00:14:25.280 the committee at Geneva, which the British control. 152 00:14:25.280 --> 00:14:30.680 The remedies prescribed always involve the installation in the central bank of a foreign 153 00:14:30.680 --> 00:14:36.820 supervisor who is British or designated by the Bank of England, and the deposit of a 154 00:14:36.820 --> 00:14:42.060 part of the reserve of the central bank at the Bank of England, which serves both to 155 00:14:42.060 --> 00:14:54.060 To guarantee against possible failure, they are careful to secure the corporation of the Federal Reserve Bank of New York. 156 00:14:54.060 --> 00:15:05.060 Moreover, they pass on to America the task of making some of the foreign loans, if they seem too heavy, always retaining the political advantage of these operations. 157 00:15:05.060 --> 00:15:15.020 England is thus completely or partially entrenched in Austria, Hungary, Belgium, Norway and Italy. 158 00:15:15.020 --> 00:15:19.940 She is in the process of entrenching herself in Greece and Portugal. 159 00:15:19.940 --> 00:15:26.560 She seeks to get a foothold in Yugoslavia and fights as cunningly in Romania. 160 00:15:26.560 --> 00:15:30.360 The currencies will be divided into two classes. 161 00:15:30.360 --> 00:15:35.760 Those of the first class, the dollar and the pound sterling, based on gold, and those of 162 00:15:35.760 --> 00:15:41.320 the second class based on the pound and the dollar, with a part of their gold reserves 163 00:15:41.320 --> 00:15:46.320 being held by the Bank of England and the Federal Reserve Bank of New York. 164 00:15:46.320 --> 00:15:51.800 The latter monies will have lost their independence." 165 00:15:51.800 --> 00:15:57.400 Inducing the United States to support and bolster the pound and the gold exchange system 166 00:15:57.400 --> 00:16:00.160 was vital to Britain's success. 167 00:16:00.160 --> 00:16:05.680 And this cooperation was ensured by the close ties that developed between Montague Norman 168 00:16:05.680 --> 00:16:12.200 and Benjamin Strong, Governor of the Federal Reserve Bank of New York, who had seized effective 169 00:16:12.200 --> 00:16:18.460 and nearly absolute control of Federal Reserve operations from his appointment at the inception 170 00:16:18.460 --> 00:16:24.220 of the Fed in 1914 until his death in 1928. 171 00:16:24.220 --> 00:16:29.120 This control over the Fed was achieved over the opposition of the Federal Reserve Board 172 00:16:29.120 --> 00:16:36.900 Board in Washington, which generally opposed or grumbled at Strong's anglophile policies. 173 00:16:36.900 --> 00:16:42.020 Strong and Norman made annual trips to visit each other, all of which were kept secret 174 00:16:42.020 --> 00:16:47.220 not only from the public but from the Federal Reserve Board itself. 175 00:16:47.220 --> 00:16:51.780 Strong and the Federal Reserve Bank of New York propped up England and the gold exchange 176 00:16:51.780 --> 00:16:54.780 standard in numerous ways. 177 00:16:54.780 --> 00:17:01.600 One was direct lines of credit, which the New York Bank extended, in 1925 and after, 178 00:17:01.600 --> 00:17:08.180 to Britain, Belgium, Poland and Italy, to subsidize their going to a gold exchange standard 179 00:17:08.180 --> 00:17:10.840 at overvalued pars. 180 00:17:10.840 --> 00:17:16.960 More directly significant was a massive monetary inflation and credit expansion, which strong 181 00:17:16.960 --> 00:17:24.400 generated in the United States in 1924 and again in 1927, for the purpose of propping 182 00:17:24.400 --> 00:17:46.400 The idea was that gold flows from Britain to the United States would be checked and reversed by American credit expansion, which would prop up or raise prices of American goods, thereby stimulating imports from Great Britain and also lower interest rates in the US as compared to Britain. 183 00:17:46.400 --> 00:17:52.480 The fall in interest rates would further stimulate flows of gold from the US to Britain and thereby 184 00:17:52.480 --> 00:17:58.160 check the results of British inflation and overvaluation of the pound. 185 00:17:58.160 --> 00:18:03.680 Both times, the inflationary injection worked and prevented Britain from reaping the results 186 00:18:03.680 --> 00:18:06.700 of its own inflationary policies. 187 00:18:06.700 --> 00:18:11.840 But at the high price of inflation in the United States, a dangerous stock market and 188 00:18:11.840 --> 00:18:16.320 real estate boom, and an eventual depression. 189 00:18:16.320 --> 00:18:23.080 At the secret central bank conference of July 1927 in New York, called at the behest of 190 00:18:23.080 --> 00:18:29.520 Norman, Strong agreed to this inflationary credit expansion over the objections of Germany 191 00:18:29.520 --> 00:18:35.360 and France, and Strong gaily told the French representative that he was going to give, 192 00:18:35.360 --> 00:18:40.240 quote, a little coup de whisky to the stock market. 193 00:18:40.240 --> 00:18:45.240 It was a coup for which America and the world would pay dearly. 194 00:18:45.240 --> 00:18:51.600 The Chicago business and financial community, not having Strong's ties with England, protested 195 00:18:51.600 --> 00:18:58.120 vigorously against the 1927 expansion and the Federal Reserve Bank of Chicago held out 196 00:18:58.120 --> 00:19:03.040 as long as it could against the expansion of cheap money and the lowering of interest 197 00:19:03.040 --> 00:19:04.560 rates. 198 00:19:04.560 --> 00:19:10.100 The Chicago Tribune went so far as to call for Strong's resignation and perceptively 199 00:19:10.100 --> 00:19:15.140 strongly charged that discount rates were being lowered in the interest of Great Britain. 200 00:19:15.140 --> 00:19:21.540 Strong, however, sold the policy to the Middle West with the rationale that its purpose was 201 00:19:21.540 --> 00:19:26.260 to help the American farmer by means of cheap credit. 202 00:19:26.260 --> 00:19:31.660 In contrast, the English financial community hailed the work of Norman in securing strong 203 00:19:31.660 --> 00:19:36.700 support and the banker of London lauded Strong as, quote, 204 00:19:36.700 --> 00:19:58.700 One of the best friends England ever had, the banker praised the, quote, energy and skillfulness he, Strong, has given to the service of England, and exalted that, quote, his name should be associated with that of Mr. Walter Hines Page as a friend of England in her greatest need, end quote. 205 00:19:58.700 --> 00:20:04.200 A blatant example of Strong's intervention to help Norman and his policy occurred in 206 00:20:04.200 --> 00:20:10.660 the spring of 1926, when one of Norman's influential colleagues proposed a full gold 207 00:20:10.660 --> 00:20:13.340 coin standard in India. 208 00:20:13.340 --> 00:20:19.220 At Norman's request, Strong and a team of American economists rushed to England to ward 209 00:20:19.220 --> 00:20:26.140 off the plan, testifying that a gold drain to India would check inflation in other countries 210 00:20:26.140 --> 00:20:32.700 and instead they successfully backed the Norman policy of a gold exchange standard and domestic 211 00:20:32.700 --> 00:20:39.040 quote, economizing of gold to permit domestic expansion of credit. 212 00:20:39.040 --> 00:20:44.780 The intimate Norman strong collaboration for joint inflation and the gold exchange standard 213 00:20:44.780 --> 00:20:48.560 was not at all an accident of personality. 214 00:20:48.560 --> 00:20:53.540 It was firmly grounded on the close ties that both of them had with the House of Morgan 215 00:20:53.540 --> 00:20:55.940 and the Morgan interests. 216 00:20:55.940 --> 00:20:59.740 Strong himself was a product of the Morgan Nexus. 217 00:20:59.740 --> 00:21:04.480 He had been the head of the Morgan-oriented Banker's Trust Company before becoming Governor 218 00:21:04.480 --> 00:21:10.580 of the New York Fed, and his closest ties were with Morgan partners Henry P. Davidson 219 00:21:10.580 --> 00:21:16.620 and Dwight Morrow, who induced him to assume his post at the Federal Reserve. 220 00:21:16.620 --> 00:21:17.620 J.P. 221 00:21:17.620 --> 00:21:22.100 Morgan and Company, in turn, was an agent of the British governments and of the Bank 222 00:21:22.100 --> 00:21:28.160 Bank of England and its close financial ties with England, its loans to England and tie-ins 223 00:21:28.160 --> 00:21:34.060 with the American export trade had been highly influential in inducing the United States 224 00:21:34.060 --> 00:21:38.060 to enter World War I on England's side. 225 00:21:38.060 --> 00:21:43.060 As for Montague Norman, his grandfather had been a partner in the London banking firm 226 00:21:43.060 --> 00:21:49.840 of Brown, Shipley & Company and of the affiliated New York firm of Brown Brothers & Company, 227 00:21:49.840 --> 00:21:55.480 A powerful investment banking firm long associated with the House of Morgan. 228 00:21:55.480 --> 00:22:00.480 Norman himself had been a partner of Brown Shipley and had worked for several years in 229 00:22:00.480 --> 00:22:04.280 the offices of Brown Brothers in the United States. 230 00:22:04.280 --> 00:22:11.240 Moreover, J.P. Morgan & Company played a direct collaborative role with the New York Fed, 231 00:22:11.240 --> 00:22:19.320 lending $100 million of its own to Great Britain in 1925 to facilitate its return to gold and 232 00:22:19.320 --> 00:22:24.720 and also collaborating in feudal loans to prop up the shaky European banking system 233 00:22:24.720 --> 00:22:28.640 during the financial crisis of 1931. 234 00:22:28.640 --> 00:22:34.160 It is no wonder that in his study of the Federal Reserve System during the pre-New Deal era, 235 00:22:34.160 --> 00:22:36.760 Dr. Clark concluded that, 236 00:22:36.760 --> 00:22:42.680 The New York Reserve Bank, in collaboration with a private international banking house, 237 00:22:42.680 --> 00:22:49.220 JP Morgan & Company, determined the policy to be followed by the Federal Reserve System 238 00:22:49.220 --> 00:22:56.700 The major theoretical rationale employed by Strong and Norman was the idea of governmental 239 00:22:56.700 --> 00:23:01.180 collaboration to, quote, stabilize the price level. 240 00:23:01.180 --> 00:23:06.260 The laissez-faire policy of the classical pre-war gold standard meant that prices would 241 00:23:06.260 --> 00:23:12.460 be allowed to find their own level in accordance with supply and demand and without interference 242 00:23:12.460 --> 00:23:15.360 by central bank manipulation. 243 00:23:15.360 --> 00:23:21.320 In practice, this meant a secularly falling price level, as the supply of goods rose over 244 00:23:21.320 --> 00:23:25.640 time in accordance with the long-run rise in productivity. 245 00:23:25.640 --> 00:23:32.440 And in practice, price stabilization really meant price raising, either keeping prices 246 00:23:32.440 --> 00:23:38.800 up when they were falling, or quote, reflating prices by raising them through inflationary 247 00:23:38.800 --> 00:23:41.920 action by the central banks. 248 00:23:41.920 --> 00:23:46.880 Price stabilization, therefore, meant the replacement of the classical laissez-faire 249 00:23:46.880 --> 00:23:54.220 gold standard by, quote, managed money, by inflationary credit expansion stimulated by 250 00:23:54.220 --> 00:23:56.420 the central banks. 251 00:23:56.420 --> 00:24:03.540 In England, it was, as we have seen, no accident that the lead in advocating price stabilization 252 00:24:03.540 --> 00:24:09.540 was taken by Sir Ralph Hawtrey and various associates of Montague Norman, including Sir 253 00:24:09.540 --> 00:24:15.360 Sir Josiah Stamp, Chairman of Midland Railways and a Director of the Bank of England and 254 00:24:15.360 --> 00:24:21.500 two other prominent directors, Sir Basil Blackett and Sir Charles Addis. 255 00:24:21.500 --> 00:24:27.740 It long has been a myth of American historiography that bankers and big businessmen are invariably 256 00:24:27.740 --> 00:24:33.740 believers in quote, hard money as against cheap credits or inflation. 257 00:24:33.740 --> 00:24:39.500 This was certainly not the experience of the New Deal or the pre-New Deal era. 258 00:24:39.500 --> 00:24:44.880 While the most articulate leaders of the price stabilizationists were academic economists 259 00:24:44.880 --> 00:24:51.220 led by Professor Irving Fisher of Yale, Fisher was able to enlist in his stable money league 260 00:24:51.220 --> 00:24:59.220 founded in 1921 and its successor, the Stable Money Association, a host of men of wealth, 261 00:24:59.220 --> 00:25:04.220 bankers and businessmen as well as labor and farm leaders. 262 00:25:04.220 --> 00:25:10.480 Among those serving as officers of the League and Association were Henry Agard Wallis, editor 263 00:25:10.480 --> 00:25:17.300 of Wallis's Farmer and Secretary of Agriculture in the New Deal, the wealthy John G. Winant, 264 00:25:17.300 --> 00:25:23.500 later Governor of New Hampshire, George Eastman of the Eastman-Kodak family, Frederick H. 265 00:25:23.500 --> 00:25:30.100 Goff, head of the Cleveland Trust Company, John E. Ravinsky, Executive Vice President 266 00:25:30.100 --> 00:25:38.140 of the Bank of America, Frederick Delano, Uncle of Franklin D. Roosevelt, Samuel Gompers, 267 00:25:38.140 --> 00:25:45.080 John P. Frey, and William Green of the American Federation of Labor, Paul M. Warburg, partner 268 00:25:45.080 --> 00:25:53.340 of Kuhn Lab & Company, Otto H. Kahn, prominent investment banker, James H. Rand Jr., head 269 00:25:53.340 --> 00:25:58.900 of Remington Rand Company, and Owen D. Young of General Electric. 270 00:25:58.900 --> 00:26:06.500 Furthermore, the heads of the following organizations agreed to serve as ex officio honorary vice 271 00:26:06.500 --> 00:26:13.060 presidents, the American Association for Labor Legislation, the American Bar Association, 272 00:26:13.060 --> 00:26:19.500 the American Farm Bureau Federation, the Brotherhood of Railroad Trainmen, the National Association 273 00:26:19.500 --> 00:26:26.660 of Credit Men, the National Association of Owners of Railroad and Public Utility Securities, 274 00:26:26.660 --> 00:26:32.880 The National Retail Dry Goods Association, the United States Building and Loan League, 275 00:26:32.880 --> 00:26:38.860 the American Cotton Growers Exchange, the Chicago Association of Commerce, the Merchants 276 00:26:38.860 --> 00:26:45.100 Association of New York, and the heads of the Bankers Associations of 43 states and 277 00:26:45.100 --> 00:26:47.400 the District of Columbia. 278 00:26:47.400 --> 00:26:52.240 Irving Fisher was unsurprisingly exultant over the supposed achievement of Governor 279 00:26:52.240 --> 00:27:16.160 Fischer was particularly critical of the minority of skeptical economists who warned of over-expansion 280 00:27:16.160 --> 00:27:20.080 in the stock and real estate markets due to cheap money. 281 00:27:20.080 --> 00:27:26.120 And even after the stock market crash, Fisher continued to insist that prosperity, particularly 282 00:27:26.120 --> 00:27:30.280 in the stock market, was just around the corner. 283 00:27:30.280 --> 00:27:35.000 Fisher's partiality towards stock market inflation was perhaps not unrelated to his 284 00:27:35.000 --> 00:27:40.560 own personal role as a millionaire investor in the stock market, a role in which he was 285 00:27:40.560 --> 00:27:44.620 financially dependent on a cheap money policy. 286 00:27:44.620 --> 00:27:50.800 In the general enthusiasm for strong and the new era of monetary and stock market inflation, 287 00:27:50.800 --> 00:27:56.540 the minority of skeptics was led by the Chase National Bank, affiliated with the Rockefeller 288 00:27:56.540 --> 00:28:02.400 interests, particularly A. Barton Hepburn, economic historian and chairman of the board 289 00:28:02.400 --> 00:28:09.260 of the bank, and Chase Nationals chief economist, Dr. Benjamin M. Anderson Jr. 290 00:28:09.260 --> 00:28:15.260 Another highly influential and indefatigable critic was Dr. H. Parker Willis, editor of 291 00:28:15.260 --> 00:28:21.680 the Journal of Commerce, formerly aide to Senator Carter Glass, Democrat from Virginia, 292 00:28:21.680 --> 00:28:27.660 and professor of banking at Columbia University, along with Willis' numerous students, who 293 00:28:27.660 --> 00:28:35.540 included Dr. Ralph W. Robey, later to become economist at the National Association of Manufacturers. 294 00:28:35.540 --> 00:28:41.500 Another critic was Dr. Rufus S. Tucker, economist at General Motors. 295 00:28:41.500 --> 00:28:47.140 On the Federal Reserve Board, the major critic was Dr. Adolph C. Miller, a close friend of 296 00:28:47.140 --> 00:28:51.980 Herbert Hoover, who joined in the criticisms of the strong policy. 297 00:28:51.980 --> 00:28:58.140 On the other hand, Treasury Secretary Andrew W. Mellon, of the powerful Mellon Interests, 298 00:28:58.140 --> 00:29:02.180 enthusiastically backed the inflationist policy. 299 00:29:02.180 --> 00:29:07.360 This split in the nation's leading banking and business circles was to foreshadow the 300 00:29:07.360 --> 00:29:12.540 split over Franklin Roosevelt's monetary departures in 1933.