Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World by Liaquat Ahamed Page A
Authors: Liaquat Ahamed
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world will be put into bankruptcy,” he exclaimed. Roosevelt and Morgenthau both roared with laughter at the thought of “old pink whiskers”—Roosevelt’s nickname for Norman—and the other “foreign bankers, with everyone of their hairs standing on end with horror.”
During November and December 1933, Harrison and the president would talk on the telephone several times a week, sometimes several times a day. Though Harrison thought that Warren’s ideas were complete bunkum, he gradually found himself succumbing to Roosevelt’s seductive charm, even becoming an honorary associate member of the president’s circle. And so while all the other hard-currency men who had come in with the new administration—Warburg, Sprague, Acheson, Moley—resigned or were fired, Harrison hung in there, convinced that if he went, Roosevelt might come up with some even more harebrained scheme; or even worse, that Congress would get into the act. And he feared the inflationists in Congress more than Roosevelt’s predilection for wacky ideas.
THE THREE-MONTH interlude in which Roosevelt spent his breakfast hours managing the world’s gold price represents one of the more bizarre episodes in the history of currency policy. It undermined the dignity of the office of president and diminished respect for him abroad. Even Maynard Keynes, who was in favor of managed currencies, dismissed the exercise as “the gold standard on the booze 750 .” But at least the dollar staggered in the right direction.
By the end of the year, Roosevelt had begun to tire of the game; and in January 1934 he agreed to stabilize gold at $35 to the ounce. The dollar had now been devalued by over 40 percent. And while the high priests of WallStreet had prophesied chaos, Roosevelt’s instincts were vindicated. Devaluation changed the whole dynamic of the economy.
This worked in two ways. First, as Warren had predicted, the fall in the dollar did get prices moving upward—by roughly 10 percent per annum. Once prices began rising, the burden of interest payments and the real cost of money were automatically reduced, making businesses more willing to borrow and consumers more ready to spend. By thus shaking the country out of its funk, the dollar move reversed expectations out of their vicious and self-fulfilling downward spiral into a virtuous circle pointing the other way. For as the economy developed momentum, the recovery fed on itself.
Devaluation not only changed the dynamic of spending, it also supplied the fuel to power those expenditures. In the four years after 1933, the value of gold 751 held by the Fed almost tripled, to $12 billion, in part due to the higher value of the existing stock of gold, in part to new inflows of gold from abroad—over $5 billion of additional bullion arrived in the country. Some of this was drawn from other central banks. But most came from the ground, as the higher price spurred the mining industry—worldwide gold production added almost $1 billion a year to world reserves. A high fraction of this additional liquidity went into building up the reserves of banks, which, scarred by the years from 1931 to 1933, took a long time to regain their nerve. Nevertheless, there was enough money flooding through the system that it percolated through to the rest of the economy.
As a consequence, during Roosevelt’s first term, U.S. industrial production doubled and GDP expanded by 40 percent—the largest peacetime increase in economic activity in a presidential term. The expansion did not occur in a straight line and was not uniform. Confidence was still fragile and recovery thus subject to fits and starts. Investment did not rebound as much as consumption—for many of the New Deal policies to support wages hurt both profits and general business confidence. The economic indicator, which took the longest to recover, was employment. Even while production doubled in four years, the number of unemployed remained stubbornly high—by
During November and December 1933, Harrison and the president would talk on the telephone several times a week, sometimes several times a day. Though Harrison thought that Warren’s ideas were complete bunkum, he gradually found himself succumbing to Roosevelt’s seductive charm, even becoming an honorary associate member of the president’s circle. And so while all the other hard-currency men who had come in with the new administration—Warburg, Sprague, Acheson, Moley—resigned or were fired, Harrison hung in there, convinced that if he went, Roosevelt might come up with some even more harebrained scheme; or even worse, that Congress would get into the act. And he feared the inflationists in Congress more than Roosevelt’s predilection for wacky ideas.
THE THREE-MONTH interlude in which Roosevelt spent his breakfast hours managing the world’s gold price represents one of the more bizarre episodes in the history of currency policy. It undermined the dignity of the office of president and diminished respect for him abroad. Even Maynard Keynes, who was in favor of managed currencies, dismissed the exercise as “the gold standard on the booze 750 .” But at least the dollar staggered in the right direction.
By the end of the year, Roosevelt had begun to tire of the game; and in January 1934 he agreed to stabilize gold at $35 to the ounce. The dollar had now been devalued by over 40 percent. And while the high priests of WallStreet had prophesied chaos, Roosevelt’s instincts were vindicated. Devaluation changed the whole dynamic of the economy.
This worked in two ways. First, as Warren had predicted, the fall in the dollar did get prices moving upward—by roughly 10 percent per annum. Once prices began rising, the burden of interest payments and the real cost of money were automatically reduced, making businesses more willing to borrow and consumers more ready to spend. By thus shaking the country out of its funk, the dollar move reversed expectations out of their vicious and self-fulfilling downward spiral into a virtuous circle pointing the other way. For as the economy developed momentum, the recovery fed on itself.
Devaluation not only changed the dynamic of spending, it also supplied the fuel to power those expenditures. In the four years after 1933, the value of gold 751 held by the Fed almost tripled, to $12 billion, in part due to the higher value of the existing stock of gold, in part to new inflows of gold from abroad—over $5 billion of additional bullion arrived in the country. Some of this was drawn from other central banks. But most came from the ground, as the higher price spurred the mining industry—worldwide gold production added almost $1 billion a year to world reserves. A high fraction of this additional liquidity went into building up the reserves of banks, which, scarred by the years from 1931 to 1933, took a long time to regain their nerve. Nevertheless, there was enough money flooding through the system that it percolated through to the rest of the economy.
As a consequence, during Roosevelt’s first term, U.S. industrial production doubled and GDP expanded by 40 percent—the largest peacetime increase in economic activity in a presidential term. The expansion did not occur in a straight line and was not uniform. Confidence was still fragile and recovery thus subject to fits and starts. Investment did not rebound as much as consumption—for many of the New Deal policies to support wages hurt both profits and general business confidence. The economic indicator, which took the longest to recover, was employment. Even while production doubled in four years, the number of unemployed remained stubbornly high—by
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