The First New Deal
Dollar Nationalism
The international monetary framework of the 1920s collapsed in the storm of the Great Depression.
Or rather, it collapsed of its own inner contradictions in a depression which it had helped to bring about.
For one of the most calamitous features of the depression was the international wave of banking failures.
and the banks failed from the inflation and overexpansion which were the fruits of the managed international gold exchange standard.
Once the Jerry Bill pyramiding of bank credit had collapsed, it brought down the banking system of nation after nation as inflation led to a piling up of currency claims abroad.
The cashing in of the claims led to a well founded suspicion of the solvency of other banks
Banks, and so the failures spread and intensified.
The failures in the weak currency countries led to the accumulation of strains in other
weak currency nations and ultimately on the basis of the shaky pyramid, Britain and the
United States.
The major banking crisis began with the near bankruptcy in 1929 of the Baden-Kreditanstalt
of the World, Altavienna, the major bank in Austria which had never recovered from its
dismemberment at Versailles.
Desperate attempts by J.P. Morgan, the House of Rothschild and later the New York Fed
to shore up the bank only succeeded in a temporary rescue which committed more financial resources
to an unsound bank and thereby made its ultimate failure in May 1931 all the more catastrophic.
Rather than permit the outright liquidation of their banking systems, Austria, followed
by Germany and other European countries, went off the gold standard during 1931.
But the key to the international monetary situation was Great Britain, the nub and the
base for the world's gold exchange standard.
British inflation and cheap money, and the standard that had made Britain the base of
of the World's Money, put enormous pressure on the pound sterling, as foreign holders
of sterling balances became increasingly panicky and called on the British to redeem their
sterling in either gold or dollars.
The heavy loans by British banks to Germany during the 1920s made the pressure after the
German monetary collapse still more severe, but Britain could have saved the day by using
In the classical gold standard medicine in such crises, by raising bank interest rates
sharply, thereby attracting funds to Britain from other countries.
In such monetary crises, furthermore, such temporary tight money and checks to inflation
give foreigners confidence that the pound will be sustained, and they then continue
to hold sterling without calling on the country for redemption.
In earlier crises, for example, Britain had raised its bank rate as high as 10% early
in the proceedings and temporarily contracted the money supply to put a stringent check
to inflation.
But by 1931, deflation and hard money had become unthinkable in the British political
climate.
And so Britain stunned the financial world by keeping its bank rate very low, never raising
in it above 4.5% and in fact continuing to inflate sterling still further to offset gold
losses abroad.
As the run on sterling inevitably intensified, Great Britain cynically repudiated its own
gold exchange standard, the very monetary standard that it had forced and cajoled Europe
to adopt by coolly going off the gold standard in September 1931.
Its own international monetary system was sacrificed on the altar of continued domestic inflation.
The European monetary system was thereby broken up into separate and even warring currency
blocks, replete with fluctuating exchange rates, exchange control and trade restrictions.
The major countries followed Britain off the gold standard, with the exception of Belgium,
Holland, France, Italy, Switzerland and the United States.
Currency blocks formed with the British Empire forming a sterling block with parities mutually
fixed in relation to the pound.
It is particularly ironic that one of the earliest effects of Britain's going off
gold was that the overvalued pound, now free to fluctuate, fell to its genuine economic
and so Britain's grand experiment in returning to a form of gold at an overvalued par had
ended in disaster for herself as well as for the rest of the world.
In the last weeks of the Hoover administration, a desperate attempt was made by the US to restore
and International Monetary System.
This time the offer was made to Britain to return to the gold standard at the current
eminently more sensible par in exchange for substantial reduction of the British war debt.
No longer would Britain be forced by overvaluation to be in a chronic state of depression of
its export industries.
But Britain now had the nationalist bit in its teeth and it insisted on outright quote
reflation of prices back up to the pre-depression 1929 levels.
It had become increasingly clear that the powerful quote price stabilizationists were
interested not so much in stabilization as in high prices and now they would only be
satisfied with an inflationary return to boom prices.
Britain's rejection of the American offer proved to be fatal for any hopes of international
The world's monetary fate finally rested with the United States, the major gold standard
countries still remaining.
Federal Reserve attempts to inflate the money supply and to lower interest rates during
the depression further weaken confidence in the dollar, and gold outflows combined with
runs and failures of the banks to put increasing pressure on the American banking system.
Finally, during the interregnum between the Hoover and Roosevelt administrations, the
nation's banks began to collapse in earnest.
The general bank collapse meant that the banking system, always unsound and incapable of paying
more than a fraction of its liabilities on demand, could only go in either of two opposite
directions.
A truly laissez-faire policy would have allowed the failing banks to collapse and thereby
The other poll was for the government to declare massive bank holidays, that is, to relieve
the banks of the obligation to pay their debts, and then move on to the repudiation
of the Gold Standard and its replacement by inflated fiat paper issued by the government.
It is important to realize that neither the Hoover nor the Roosevelt administrations had
any intention of taking the first route.
While there was a considerable split on whether or not to stay on the gold standard, no one
endorsed the rigorous laissez-faire route.
The new Roosevelt administration was now faced with the choice of retaining or going off
While most everyone supported the temporary quote, bank holidays, there was a severe split on the longer run question of the monetary standard.
While the bulk of the nation's academic economists stood staunchly behind the gold standard, the indefatigable Irving Fischer redoubled his agitation for inflation, spurred onward by his personal desire to reinflate stock prices.
Since the Stable Money Association had been supposedly dedicated to price stabilization,
and what Fisher and the inflationists wanted was a drastic raising of prices, the association
liquidated its assets into the new and frankly inflationist Committee for the Nation to Rebuild
Prices and Purchasing Power.
The Committee for the Nation, founded in January 1933, stood squarely for the quote, reflation
of Prices back to their pre-1929 levels.
Stabilization of the price level was to proceed only after that point had been achieved.
The Committee for the Nation, which was to prove crucially influential on Roosevelt's
decision, was composed largely of prominent businessmen.
The committee was originated by Vincent Bendix, president of Bendix Aviation, and General
Robert E. Wood, head of Sears, Roebuck & Company.
They were soon joined in the fall of 1932 by Frank A. Vanderlip, long close to Fisher
and former president of the National Citibank of New York, by James H. Rand Jr. of Remington
Rand and by Magnus W. Alexander, head of the National Industrial Conference Board.
Other members of the Committee for the Nation included Fred H. Tick-Sauer, president of
The Dairyman's League Cooperative Association, Frederick H. Frazier, Chairman of the Board
of the General Baking Company, Automobile Magnet E.L.
Cord, Lestig J. Rosenwald, Chairman Sears Roebuck, Samuel S. Fells of Fells & Company,
Philip K. Wrigley, President of William Wrigley Company, John Henry Hammond, Chairman of the
Board of Bangor and Aroostook Railroad, Edward A. O'Neill, head of the American Farm Bureau
Federation, L. J. Tauber, head of the National Grange, F. R. Wurlitzer, vice president of
Rudolf Wurlitzer Manufacturing Company, William J. McAveaney, president of Hudson Motor Company,
Frank E. Gannett of Gannett Newspapers, and Indiana banker William A. Wirt.
Interestingly enough, this same group of highly conservative industrialists was later
to become the Committee for Constitutional Government, the major anti-New Deal propaganda
group of the late 1930s and 1940s.
Yet the Committee was the major proponent of the inflationist policy of the early New
Deal in reflating and abandoning the gold standard.
Also associated with the Committee for the Nation was another great influence on Franklin
and Roosevelt's Decision, Agricultural Economist George F. Warren of Cornell, who, along with
his colleague Frank A. Pearson, was the inspiration for the reflationist Roosevelt program of
continually raising the buying price of gold.
The Committee for the Nation at first included several hundred industrial and agricultural
leaders, and within a year its membership reached over 2,000.
The recommendations, beginning with going off gold and embargoing gold exports and continuing
through devaluing the dollar and raising the price of gold, were fairly closely followed
by the Roosevelt administration.
For his part, Irving Fisher, in response to a request for advice by President-elect Roosevelt,
had strongly urged at the end of February a frankly inflationist policy of reflation,
devaluation and leaving the gold standard without delay.
By April 19th, when Roosevelt had cast the die for this policy, Fischer exalted, quote,
Now I am sure, as far as we can ever be sure of anything, that we are going to snap out
of this depression fast.
I am now one of the happiest men in the world, end quote.
In the same letter to his wife, an heiress of the substantial hazard family fortune,
Bisher added, quote,
My next big job is to raise money for ourselves.
Probably we'll have to go to sister, his wife's sister Carolyn, again.
I have defaulted payments the last few weeks, because I did not think it was fair to ask
sister for money when there was a real chance that I could never pay it back.
I mean that if FDR had followed Glass, we would have been pretty surely ruined.
So would a lied chemical, in which much of his wife's family fortune was invested, and
the U.S. government.
Now I can go to sister with a clean conscience."
If Irving Fisher's interest was personal as well as ideological, economic interests
also underlay the concern of the Committee for the Nation.
The farm groups wanted farm prices driven up, including farm export prices, which necessarily
increase in terms of other currencies whenever a currency is devalued.
As for the rest of the committee and other inflationists, Herbert Feis notes,
By the spring of 1933, diverse organizations and groups were crying aloud for some kind
of monetary inflation or devaluation or both.
Most effective, probably, was the Committee for the Nation.
Among its members were prominent merchants such as the head of Sears Roebuck, some journalists,
some Wall Street operators, and some foreign exchange speculators.
Their purpose was to get the United States off the gold standard and to bring about devaluation
of the dollar from which they would profit either as speculators in foreign exchange
or as businessmen.
Another group, more conservative, who stood to gain by devaluation were those who had
already exported gold or otherwise acquired liquid deposits in foreign banks.
They conceived that they were merely protecting the value of their capital.
Then there were the exporters, especially of farm products, who had been at a disadvantage
ever since Great Britain had gone off the gold standard and the value of sterling had
fallen much below its previous parity with the dollar."
Also advocating and endorsing the decision to inflate and leave the gold standard were
such conservative bankers as James P. Warburg of Kuhn-Leb and Company, one of Roosevelt's
Leffingwell told Roosevelt that his action, quote, was vitally necessary and the most
I welcome the reported action of the President and the Secretary of the Treasury in placing
an embargo on gold exports.
It has become evident that the effort to maintain the exchange value of the dollar at a premium
as against appreciated foreign currencies was having a deflationary effect upon already
Other prominent advocates of going off gold were publishers J. David Stern and William
from Randolph Hearst, financier James H.R. Cromwell and Dean Wallace Donham of the Harvard
Business School.
Conservative Republican senators such as David A. Reed of Pennsylvania and Minority Leader
Charles L. McNary of Oregon also approved the decision.
And Senator Arthur Vandenberg, Republican of Michigan, happily declared that Americans
could now compete in the export trade, for the first time in many, many months.
Vandenberg concluded that, abandonment of the dollar externally may prove to be a complete
answer to our problem, so far as the currency factor is concerned.
Amidst this chorus of approval from leading financiers and industrialists, there was still
determined opposition to going off gold.
Aside from the bulk of the nation's economists, the lead in opposition was taken again by
two economists with close ties to the banking community, who had been major opponents of
the strong Morgan policies during the 1920s, Dr. Benjamin M. Anderson of the Rockefeller-oriented
Chase National Bank and Dr. H. Parker Willis, editor of the Journal of Commerce and chief
Chief Advisor to Senator Carter Glass, Democrat of Virginia, who had been Secretary of the
Treasury under Wilson.
The Chamber of Commerce of the United States also vigorously attacked the abandonment of
gold as well as price level stabilization, and the Chamber of Commerce of New York State
called for prompt return to gold.
From the financial community, leading opponents of Roosevelt's decision were Winthrop W. Aldrich,
A Rockefeller kinsman and head of Chase National Bank and Roosevelt's budget director, Lewis
W. Douglas of the Arizona mining family, who was related to the J. Henry Schroeder International
Bankers and was eventually to become head of Mutual Life Insurance Company and ambassador
to England.
Douglas fought valiantly but in vain within the administration against going off gold
and against the remainder of the New Deal program.
By the end of April 1933, the United States was clearly off the gold standard and the
dollar quickly began to depreciate relative to gold and the gold standard currencies.
Britain, which a few weeks earlier had loftily rejected the idea of international stabilization,
now became frightened.
Currency blocks and a depreciating pound to aid British exports were one thing.
of the dollar to spur American exports and injure British exports was quite another.
The British had the presumption to scold the United States for going off gold.
They now rested their final hope for a restored international monetary system on the World
Economic Conference scheduled for London in June 1933.
Preparations for the conference had been underway for a year under the guidance of the League
of Nations, in a desperate attempt to aid the world economic and financial crisis by attempting
the quote, restoring of the currencies on a healthy basis, end quote.
The Hoover administration was planning to urge the restoration of the international
gold standard, but the abandonment of gold by the Roosevelt administration in March and
April 1933 changed the American position radically.
As the conference loomed ahead, it was clear that there were three fundamental positions.
The gold block, the countries still on the gold standard, headed by France, which desired
immediate return to a full international gold standard with fixed exchange rates between
the major currencies and gold, the United States, which now placed greatest stress on
domestic inflation of the price level, and the British, supported by their dominions
who wished some form of combination of the two.
What was still unclear was whether a satisfactory compromise between these divergent views could
be worked out.
At the invitation of President Roosevelt, Prime Minister Ramsay MacDonald of Great Britain
and leading statesmen of the other major countries journeyed to Washington for individual talks
with the president.
All that emerged from these conversations were vague agreements of intent, but the most
Most interesting aspect of the talks was an American proposal, originated by William C.
Bullitt and rejected by the French, to establish a coordinated worldwide inflation and devaluation
of currencies.
There was serious discussions of a proposal, sponsored by the United States and vigorously
opposed by the gold countries, that the whole world should embark upon a quote, cheaper
for Money Policy, not only through a vigorous and concerted program of credit expansion
and the stimulation of business enterprise by means of public works, but also through
a simultaneous devaluation by a fixed percentage of all currencies which were still at their
pre-depression parities."
The American delegation to London was a mixed bag, but the conservative gold standard forces
Mises could take heart from the fact that staff economic advisor was James P. Warburg,
who had been working eagerly on a plan for international currency stabilization based
on gold at new and realistic parities.
Furthermore, conservative Professor Oliver M. W. Sprague and George L. Harrison, Governor
of the New York Fed, were sent to discuss proposals for temporary stabilization of the
major currencies.
In contrast, the president paid no attention to the petition of 85 congressmen, including
10 senators, that he appoint as his economic advisor to the conference, the radical inflationist
and anti-gold priest, Father Charles E. Coughlin.
The World Economic Conference, attended by delegates from 64 major nations, opened in
London on June 12.
The first crisis occurred over the French suggestion for a temporary, quote, currency
truce, a de facto stabilization of exchange rates between the franc, dollar and pound
for the duration of the conference.
Surely eminently reasonable, the plan was also a clever device for an entering wedge
toward a hopefully permanent stabilization of exchange rates on a full gold basis.
The British were amenable, provided that the pound remained fairly cheap in relation to
On June 16, Sprague and Harrison concluded an agreement with the British and French for
temporary stabilization of the three currencies, setting the dollar sterling rate at about
$4 per pound and pledging the United States not to engage in massive inflation of the
currency for the duration of the agreement.
The American representatives urged Roosevelt to accept the agreement, with Sprague warning
that, quote, a failure now would be most disastrous, end quote, and Warburg declaring that without
stabilization, quote, it would be practically impossible to assume a leading role in attempting
to bring about a lasting economic peace, end quote.
But Roosevelt quickly rejected the agreement on June 17th, giving two reasons.
that the pound must be stabilized at no cheaper than $4.25 and that he could not accept any
restraint on his freedom of action to inflate in order to raise domestic prices.
Roosevelt ominously concluded that, quote, it is my personal view that far too much importance
is being placed on existing and temporary fluctuations, end quote, unless the American
American delegation take his reasoning as a stimulus to renegotiate the agreement, Roosevelt
reminded Hull on June 20th, quote, Remember that far too much influence is attached to
exchange stability by banker-influenced cabinets, end quote.
Upon receiving the presidential veto, the British and French were indignant and George
Harrison quit and returned home in disgust.
But the American delegation went ahead and issued its official statement on temporary
currency stabilization on June 22nd.
It declared temporary stabilization impermissible, quote, because the American government feels
that its efforts to raise prices are the most important contribution it can make, end quote.
With temporary stabilization scuttled, the conference settled down to long-range discussions,
The most important being centered in the Sub-Commission on, quote, immediate measures of financial
reconstruction of the Monetary and Financial Commission of the Conference.
The British delegation began by introducing a draft resolution, one, emphasizing the importance
of, quote, cheap and plentiful credit in order to raise the world level of commodity prices,
And two, stating that quote, the central banks of the principal countries should undertake
to cooperate with a view to securing these conditions and should announce their intention
of pursuing vigorously a policy of cheap and plentiful money by open market operations.
End quote.
The British thus laid stress on coordinated inflation, but said nothing about the sticking
point, exchange rate stabilization.
The Dutch, the Czechoslovaks, the Japanese and the Swiss criticize the British advocacy
of inflation and the Italian delegate warns that, quote,
To put one's faith in immediate measures for augmenting the volume of money and credit
might lead to a speculative boom followed by an even worse slump.
A hasty and unregulated flood of credit would lead to destructive results.
End quote.
When the French delegate stressed that no genuine recovery could occur without a sense
of economic and financial security, quote, Who would be prepared to lend with the fear
of being repaid in depreciated currency always before his eyes?
Who would find the capital for financing vast programs of economic recovery and abolition
of unemployment, as long as there is a possibility that economic struggles would be transported
to the Monetary Field.
In a word, without stable currency there can be no lasting confidence, while the hoarding
of capital continues there canivid no solution."
The American delegation then submitted its own draft proposal, which was similar to the
British, ignored currency stability, and advocated close cooperation between all governments
Alliance and Central Banks for the carrying out of a policy of making credit abundantly
and readily available to sound enterprise, especially by open market operations that
expanded the money supply.
Also, government expenditures and deficits should be synchronized between the different
nations.
The difference of views between the nations on inflation and prices, however, precluded
In both the American and British proposals, however, even the eventual gold standard would
would be considerably more inflationary than it had been in the 1920s.
For all domestic gold circulation, whether coin or bullion would be abolished, and gold
used only as a medium for settling international balances of payment.
And all gold reserves ratios to currency would be lowered.
As could have been predicted before the conference, there were three sets of views on gold and
currency stabilization.
The United States, backed only by Sweden, favored cheap money in order to raise domestic prices,
with currency stabilization to be deferred until a sufficient price rise had occurred.
Whatever international cooperation was envisaged would stress joint inflationary action to
raise price levels in some coordinated manner.
The United States, moreover, went further even than Sweden in calling for reflating
The Gold Block attacked currency and price inflation, pointed to the early post-war experience
of severe inflation and currency depreciation, and hence insisted on stabilization of exchanges
and the avoidance of depreciation.
In the confused middle were the British and the Sterling Block, who wanted price reflation
and Cheap Credit, but also wanted eventual return to the gold standard and temporary
stabilization of the key currencies.
As the London Conference foundered on its severe disagreements, the gold block countries
began to panic.
For on the one hand, the dollar was failing in the exchange markets, thus making American
goods and currency more competitive.
And what is more, the general gloom at the conference gave international speculators
The idea that in the near future many of these countries would themselves be forced to go
off gold.
In consequence, money began to flow out of these countries during June, and Holland and
Switzerland lost more than 10% of their gold reserves during that month alone.
In consequence, the gold countries launched a final attempt to draft a compromise resolution.
The proposed resolution was a surprisingly mild one.
It committed the signatory countries to re-establishing the gold standard and stable exchange rates,
but it deliberately emphasized that the parity and date for each country to return to gold
was strictly up to each individual country.
The existing gold standard countries were pledged to remain on gold, which was not difficult
since that was their fervent hope.
The non-gold countries were to reaffirm their ultimate objective to return to gold, to try
their best to limit exchange speculation in the meanwhile, and to cooperate with other
central banks in these two endeavors.
The innocuousness of the proposed declaration comes from the fact that it committed the
United States to very little more than its own resolution of over a week earlier to return
The Joint Declaration was agreed upon by Sprague and Warburg, by James M. Cox, head of the
Monetary Commission of the Conference, and by Raymond Moly, who had taken charge of the
delegation as a freewheeling White House advisor.
Molley was Assistant Secretary of State and had been a monetary nationalist.
Molley, however, sent the declaration to Roosevelt on June 30th, urging the president to accept
it, especially since Roosevelt had been willing, a few weeks earlier, to stabilize at a $4.25
pound while the depreciation of the dollar during June had now brought the market rate
up to $4.40.
Across the Atlantic, Undersecretary of the Treasury Dean G. Atchison, influential Wall
Street financier Bernard M. Baruch and Louis W. Douglas also strongly endorsed the London
Declaration.
Not hearing immediately from the President, Moley frantically wired Roosevelt the next
morning that, quote, success, even continuance of the conference depends upon United States
agreement, end quote.
Roosevelt cabled his rejection on July 1st, declaring that quote, a sufficient interval
should be allowed the United States to permit a demonstration of the value of price lifting
efforts which we have well in hand, end quote.
Roosevelt's rejection of the innocuous agreement was in itself startling enough, but he felt
that he had to add insult to injury, to slash away at the London conference so that no danger
Roosevelt began by lambasting the idea of temporary currency stabilization, which he
He termed a, quote, species fallacy, a, quote, artificial and temporary diversion.
Instead, Roosevelt declared that the emphasis must be placed on, quote, the sound internal
economic system of a nation.
In particular, quote, old fetishes of so-called international bankers are being replaced by
efforts to plan national currencies, with the objective of giving to those currencies
In short, the President was now totally committed to the Nationalist-Fisher Committee for the
The World Economic Conference limped along aimlessly for a few more weeks, but the Roosevelt
Roosevelt bombshell message effectively killed the conference and the hope for a restored
international monetary order was dead for a fateful decade.
From here on in the 1930s, monetary nationalism, currency blocks and commercial and financial
warfare would be the order of the day.
The French were bitter and the English stricken at the Roosevelt message.
The chagrined James P. Warburg promptly resigned as financial advisor to the delegation, and
this was to be the beginning of the exit of this highly placed economic advisor from the
Roosevelt administration.
A similar fate was in store for Oliver Sprague and Dean Acheson.
As for Raymond Moly, who had been repudiated by the president's action, he tried to restore
himself in Roosevelt's graces by a fawning and obviously insincere telegram, only to
to be ousted from office shortly after his return to the States.
Playing an ambivalent role in the entire affair, Bernard Baruch, who was privately in favor
of the old gold standard, praised Roosevelt fulsomely for his message.
Quote, until each nation puts its house in order by the same Herculean efforts that you
are performing, Baruch wrote the president, quote, there can be no common denominators
Expressions of enthusiastic support for the President's decision came, as might be expected,
from Irving Fisher and George F. Warren, who urge Roosevelt to avoid any possible agreement
that might limit, quote, our freedom to change the dollar any day, end quote.
James A. Farley has recorded in his memoirs that Roosevelt was prompted to send his angry
message by coming to suspect a plot to influence Molley in favor of stabilization by Thomas
W. Lamont, partner of J.P. Morgan & Company, working through Molley's conference aide
and White House advisor, Herbert Bayard Swope, who was close to the Morgans and also a long-time
This might well account for Roosevelt's bitter reference to the so-called international bankers.
The situation is curious, however, since Swope was firmly on the anti-stabilizationist side
and Roosevelt's London message was greeted enthusiastically by Russell Leffingwell of
Morgan's, who apparently took little notice of its attack on international bankers.
Leffingwell wrote to the President, quote, You were very right not to enter into any
temporary or permanent arrangements to peg the dollar in relation to sterling or any
other currency, end quote.
From the date of the torpedoing of the London Economic Conference, monetary nationalism
prevailed for the remainder of the 1930s.
The United States finally fixed the dollar at $35 an ounce in January 1934, amounting
into a two-thirds increase in the gold price of the dollar from its original moorings less
than a year before and to a 40% devaluation of the dollar.
The gold nations continued on gold for two more years, but the greatly devalued dollar
now began to attract a flood of gold from the gold countries and France was finally
forced off gold in the fall of 1936.
With the other major gold countries, Switzerland, Belgium and Holland, following shortly thereafter.
While the dollar was technically fixed in terms of gold, there was no further gold coin
or bullion redemption within the US.
Gold was used only as a method of clearing balances of payments, with only fitful redemption
to foreign countries.
The only significant act of international collaboration after 1934 came in the fall of 1936, at about
the time France was forced to leave the gold standard.
Partly to assist the French, the United States, Great Britain and France entered into a tripartite
agreement with France, beginning on September 25, 1936.
The French agreed to throw in the exchange rate sponge and devalued the franc by between
One-fourth and one-third.
At this new par, the three governments agreed not to stabilize their currencies, but to
iron out day-to-day fluctuations in them, to engage in mutual stabilization of each
other's currencies only within each 24-hour period.
This was scarcely stabilization, but it did constitute a moderating of fluctuations, as
As well as politico-monetary collaboration, which began with the three Western countries
and soon expanded to include other former gold nations, Belgium, Holland and Switzerland.
This collaboration continued until the outbreak of World War II.
At least one incident marred the harmony of the tripartite agreement.
In the fall of 1938, while the United States and Britain were hearing out a trade agreement,
The British began pushing the pound below $4.80.
At the threat of this cheapening of the pound, U.S. Treasury officials warned Secretary of
the Treasury Henry Morgenthau Jr. that if, quote, Sterling drops substantially below
$4.80, our foreign and domestic business will be adversely affected, end quote.
In consequence, Morgenthau successfully insisted that the trade agreement with Britain must
must include a clause that the agreement would terminate if Britain should allow the pound
to fall below $4.80.
Here we may only touch on a fascinating historical problem which has been discussed by revisionist
historians of the 1930s.
To what extent was the American drive for war against Germany the result of anger and
conflict over the fact that, in the 1930s' world of economic and monetary nationalism,
The Germans, under the guidance of Dr. Holmar Schacht, went their way successfully on their
own, totally outside of Anglo-American control or of the confinements of what remained of
the cherished American open door?
A brief treatment of this question will serve as a prelude to examining the aim of the war-born
quote, second New Deal, of reconstructing a new international monetary order, an order
German economic nationalism in the 1930s was, first of all, conditioned by the horrifying
experience that Germany had with runaway inflation and currency depreciation during the early
1920s, culminating in the monetary collapse of 1923.
Though caught with an overvalued par as each European country went off the gold standard,
No German government could have politically succeeded in engaging once again in the dreaded
act of devaluation.
No longer on gold, and unable to devalue the mark, Germany was obliged to engage in strict
exchange control.
In this economic climate, Dr. Schacht was particularly successful in making bilateral
trade agreements with individual countries, agreements which amounted to direct quote
Barter Arrangements that angered the United States and other Western countries in totally
bypassing gold and other international banking or financial arrangements.
In the anti-German propaganda of the 1930s, the German barter deals were agreements in
which Germany somehow invariably emerged as coercive victor and exploiter of the other
country involved, even though they were mutually agreed upon and therefore presumably mutually
Beneficial Exchanges Part of the essence of the barter arrangements
has been neglected by historians.
The deliberate overvaluation of the exchange rates of both currencies involved in the deals.
The German mark, as we have seen, was deliberately overvalued as the alternative to the specter
of currency depreciation.
The situation of the other currencies was a bit more complex.
Thus, in the border agreements between Germany and the various Balkan countries, especially
Romania, Hungary, Bulgaria and Yugoslavia, in which the Balkans exchanged agricultural
products for German manufactured goods, the Balkan currencies were also fixed at an artificially
overvalued rate vis-à-vis gold and the currencies of Britain and the other Western countries.
This meant that Germany agreed to pay higher than world market rates for Balkan agricultural
products while the latter paid higher rates for German manufactured products.
For the Balkan countries, the point of all this was to force Balkan consumers of manufactured
goods to subsidize their own peasants and agriculturalists.
The external consequence was that Germany was able to freeze out Britain and other Western
In the 1930s, Britain and the West were deprived of raw materials and markets for their manufacturers
by the astute policies of Hallmar Schacht and the mutually agreeable Barter Agreements between
Germany and the Balkan and other, including Latin American, countries.
May not Western anger at successful German competition through bilateral agreements and
Western desire to liquidate such competition have been important factors in the Western
drive for war against Germany?
Lloyd Gardner has demonstrated the early hostility of the United States toward German economic
controls and barter arrangements, its attempts to pressure Germany to shift to a multilateral
quote, open door system for American products and the repeated American rebuffs to German
proposals for bilateral exchanges between the two countries.
As early as June 26th, 1933, the influential American Consul General at Berlin, George
Messersmith, was warning that such continued policies would make, quote, Germany a danger
to world peace for years to come, end quote.
In pursuing this aggressive policy, President Roosevelt overrode Agricultural Adjustment
Administration Chief George Peek, who favored accepting bilateral deals with Germany and,
Perhaps not coincidentally, was to be an ardent, quote, isolationist in the late 1930s.
Instead, Roosevelt followed the policy of the leading interventionist and spokesman
for a quote, open door to American products, Secretary of State Cordell Hull, as well as
his assistant secretary, Francis B. Sayre, son-in-law of Woodrow Wilson.
By 1935, American officials were calling Germany a, quote, aggressor because of its successful
bilateral trade competition and Japan was similarly castigated for much the same reasons.
By late 1938, J. Pierpont Moffat, head of the Western European Division of the State
Department was complaining that German control of Central and Eastern Europe would mean,
And, more specifically, in May 1940, Assistant Secretary of State Breckenridge Long warned
that a German-dominated Europe would mean that, and shortly before American entry into
With German control of the buyers of Europe and her practice of governmental control of
all trade, it would be well within her power, as well as the pattern she has thus far displayed,
to shut off our trade with Europe, with South America and with the Far East."
Not only were Hull and the United States ardent in pressing an anti-German policy against
its bilateral trade system, but sometimes Secretary Hull had to whip even Britain into
line.
Thus, in early 1936, Cordell Hull warned the British ambassador that the, quote, clearing
Banking arrangements reached by Britain with Argentina, Germany, Italy and other countries
were handicapping the efforts of this government to carry forward its broad program with the
favored nation policy underlying it.
The tendency of these British arrangements was to drive straight toward bilateral trading,
and they were therefore milestones on the road to war.
One of the United States government's biggest economic worries was the growing competition
of Germany and its bilateral trade in Latin America.
As early as 1935, Cordell Hull had concluded that Germany was quote, straining every tendon
to undermine United States trading relations with Latin America, end quote.
A great deal of political pressure was used to combat German competition.
Thus, in the mid-1930s, the American Chamber of Commerce in Brazil repeatedly pressed the
State Department to scuttle the Germany-Brazil barter deal, which the chamber termed the
quote, greatest single obstacle to free trade in South America.
Brazil was finally induced to cancel its agreement with Germany in exchange for a $60 million
loan from the U.S.
America's exporters, grouped in the National Foreign Trade Council, issued resolutions
against German trade methods and pressured the government for stronger action.
And in late 1938, President Roosevelt asked Professor James Harvey Rogers, an economist
and disciple of Irving Fisher, to make a currency study of all of South America in order to
to Minimize German and Italian Influence on this Side of the Atlantic.
It is no wonder that German diplomats in Brazil, Chile and Uruguay reported home that the United
States was exerting very strong pressure against Germany commercially, which included economic,
commercial and political opposition designed to drive Germany out of the Brazilian and
and other South American markets.
In the spring of 1935, the German ambassador to Washington, desperately anxious to bring
an end to American political and economic warfare, asked the United States what Germany
could do to end American hostilities.
The American answer, which amounted to a demand for unconditional economic surrender, was
that Germany abandon its economic policy in favor of America.
The American reply, quote, really meant, noted Pierpont Moffatt, quote, a fundamental acceptance
by Germany of our trade philosophy and a thoroughgoing partnership with us along the road of equality
of treatments and the reduction of trade barriers, end quote.
The United States further indicated that it was interested that Germany accept not so
much the principle of the most favored national clause in all international trade, but specifically
Especially for American Exports
When war broke out in September 1939, Bernard Baruch's reaction was to tell President Roosevelt
that, quote, If we keep our prices down, there is no reason why we shouldn't get the customers
of the belligerent nations that they have had to drop because of the war.
And in that event, Baruch exalted, quote, Germany's barter system will be destroyed,
But particularly significant is the retrospective comment made by Secretary Hull,
War did not break out between the United States and any country with which we had been able
to negotiate a trade agreement.
It is also a fact that, with very few exceptions, the countries with which we signed trade agreements
joined together in resisting the Axis.
The political line-up follows the economic line-up."
Considering that Secretary Hull was a leading maker of American foreign policy throughout
the 1930s and through World War II, it is certainly a possibility that his remarks should
be taken not as a quaint testimony to Hull's Idée fixe on reciprocal trade, but as a positive
causal statement of the thrust of American foreign policy.
Set in that light, Hull's remark becomes a significant admission rather than a flight
of speculative fancy.
Reinforcing this interpretation would be a similar reading of the testimony before the
House of Representatives in 1945 of top Treasury aide Harry Dexter White defending the Bretton
Woods Agreement.
White declared, quote, I think it, a Bretton Woods system, would very definitely have made
a considerable contribution to checking the war and possibly might have prevented it.
A great many of the devices which Germany and Japan utilized would have been illegal
in the international sphere had these countries been participating members."
Is White saying that the Allies deliberately made war upon the Axis because of these bilateral
exchange control and other competitive devices, which a Bretton Woods, or for that matter
under a 1920s system would have precluded?
We may take as our final testimony to the possible economic causes of World War II the
assertion by the influential times of London well after the start of the war.
One of the fundamental causes of this war has been the unrelaxing efforts of Germany
since 1918 to secure wide enough foreign markets to straighten her finances.
At the very time when all her competitors were forced by their own debts to adopt exactly
the same course, continuous friction was inevitable.