5. Operating the Golden Goose (Post Moratorium)

(POST MORATORIUM)

“The Federal Reserve System has been threatened with raids upon its gold supply by foreign nations, notably by France. There has been that threatening situation, the conjecture—and it is a conjecture—being that that country wanted to affect our situation with respect to reparations and with respect to her indebtedness to the United States. I do not make the assertion. I say that it is conjecture. The officials of the Bank of France have simply outwitted the officials of the Federal Reserve System of this country.”

—SENATOR CARTER GLASS,

Formerly Secretary of the Treasury, moving in the United States Senate, February 17, 1932, the Glass-Steagall bill, an emergency act to protect the American gold reserve.

To the further education of American credit abroad enter these autumnal sights and experiences, videlicet:

1. The gold honor of the American dollar impugned in Europe, where our lending of it had been so prodigal. Our credit impugned by our debtors! And for what reason? For the reason that we had been too free with it; precisely for the reason that our debtors knew they had borrowed too much on poor security.

2. The rationally impossible spectacle of debtor nations raiding the gold reserves of a creditor nation while the creditor is self-bound and helpless under an agreement not to collect its debts from them.

3. The strange experience of a creditor nation finding itself beholden to one of its principal debtors, the debtor undertaking on grounds of generosity and helpfulness to stop raiding the creditor’s gold reserves short of the point at which the creditor’s own gold solvency might seem to be in jeopardy.

4. The sight of public ovations in this the creditor country to the premier of one of its principal debtors when he comes to tell us that more of Europe’s war debts must be charged to the American taxpayer in a spirit of international friendship; more public ovations as he departs with our promise to consider it.

5. Experience of numbness and a sense of ill-being in the body of American credit, probably psychic.

And for all of this the narrative, beginning abruptly.

What with the American moratorium for a year on war debt payments owing to the United States Treasury, the relending of 700 or 800 millions of short-term American credit in Germany to save her from wretched default, a cash loan at the same time to the Reichsbank, then a cash loan to the Bank of England to save the gold honor of the pound sterling and immediately another to the British Treasury for the same purpose—with all of this we put no less than a billion and a half of American gold credit into Europe during the summer of 1931, thinking thereby to avert the disaster of a total financial collapse.

The specific intent of our loans to the Bank of England and to the British Treasury was to keep the mighty pound sterling on a gold basis—keep it, that is to say, at its full traditional gold value. This the British themselves were heroically resolved to do, for if the Bank of England should be unable to pay its notes in gold on demand that would mean repudiation, inflation, a depreciated British currency no longer worth its face in gold. It would mean, naturally, a terrific humiliation of British credit over the whole world. Nevertheless, this was bound to happen. There was no stopping the run on the Bank of England. Its borrowing in New York was too desperate and only increased the alarm. This American gold credit was like bundles of currency piled in the window of a doomed bank to put the depositors off when it has the opposite effect, because nobody believes it will be enough. After the Bank of England had borrowed all the American gold credit it could get on its own signature and two weeks after the British Treasury had itself borrowed 200 million more in New York to save the pound sterling, the Bank of England suspended gold payments. The gold value of the pound sterling immediately declined one quarter and Great Britain was on a paper money basis.

Now, with Great Britain off the gold basis, Germany financially frozen, Austria and Hungary bankrupt, and all war debt payments owing by Europe to the United States Treasury suspended for a year, the situation was simply this—that what Europe owed us she could either pay in depreciated paper currency or need not pay at all, whereas anything we owed or might owe to Europe was payable in gold on demand, because the United States was still on a gold basis.

To make it clear, suppose you have at your bank two separate accounts. In one account you owe the bank a million dollars on a long-term promissory note which you have undertaken to pay off gradually with interest. The other account is current. You have there a credit, say, of fifty thousand dollars. That is the account in which you transact your daily business. Now suppose you go to your bank and say: “I cannot pay the interest on that million-dollar note. I am bankrupt if you make me pay.” Saying this, you put yourself in the hands of the bank. It can demand payment and sell you out, foreclose on your business, take all your property. But the bank does not want to do that. It says: “All right. These are hard times. Let the interest go for a year and let the note run.” You say: “But how about my current account in which I have fifty thousand dollars? What will you do with that?” The bank says: “Well, of course you have to go on doing business. We will treat that account as if you were solvent. Go on drawing your checks against it as before and keep your business going. All of this will work out in time.” Very good. It is a reasonable arrangement. But suppose the next day you walk into that bank and say: “I’m afraid of this institution. It’s too loose with its credit. I’m afraid my current account is not safe. I am closing it out. Here is my check for fifty thousand dollars and I want it in gold, please.”

That would be difficult behaviour on the part of a debtor, owing his bank a million dollars on which he is unable to pay the interest, yet demanding $50,000 in gold. Yet, strange as the fact is, having made this arrangement with him, the bank is obliged to pay him his credit balance of fifty thousand, and pay it in gold if he demands gold, or confess itself insolvent.

Between an individual and his bank such a case would be preposterous. Between Europe and this country it is in the same nature preposterous, though the fact may be somewhat obscured by its own magnitude and by the high language surrounding it.

Owing this country more than ten billions of dollars—less than half of it war debts, the rest of it representing private and public borrowing from American investors and American banks—Europe nevertheless had very large credit balances here, payable on demand. You might put the sum of them at one billion. These balances had originated in various ways. While American banks had been putting deposits in European banks, especially German banks, because the rate of interest was high, European banks at the same time had been putting deposits in American banks for an opposite reason. They wanted safety. So there were credit balances of that character, payable to Europe on demand. Then European exporters had been in the habit of leaving their profits on deposit in American banks, thinking the money was safer here than in Europe, especially German exporters, who were quite right. More or less for the same reason private European capitalists had been sending money to New York to be employed in short-term paper which they could sell at a moment’s notice. And some of Europe’s credit balances in this country were simply the untouched proceeds of recent American loans; even the ambulance loans we had made in the summer to avert a financial collapse in Europe. And now what happened to these European credit balances, or rather what they did to us, is what we are about to see.

The Bank of England suspended gold payments for the reason at the very last that as fast as the New York banks could write in their books, “Item, gold credit set aside for the Bank of England on the security of her promissory notes”, the European raiders ran to the Bank of England and took the actual gold away, in coin and bullion. The Bank of England in that case was a sieve. When the New York banks stopped writing that item down in their books—“Item, gold credit set aside for the Bank of England”—then immediately the Bank of England stopped paying out her own gold to anybody. She decided, instead, to hoard what she had left, the gold itself in her vaults and also the gold credits on the books of the New York banks.

What followed was a revelation in the abnormal possibilities of international finance. Europe looked westward. The historic habit. For nearly four and a half centuries she has been looking westward for gold. There lay the great American gold reserve, five billions of it, exposed and unprotected. She had keys to it. The keys were those credit balances in New York banks, payable in gold on demand. And where these balances represented, as many of them did, the untouched proceeds of recent American loans to Europe, the keys she had to the American gold reserve were keys we had unwittingly handed away. The American gold reserve was defenseless. There was no way to stop Europe from using those keys, no matter how she had got hold of them. We were foreclosed from making such demands upon Europe as would offset her demands upon us for gold. True, we had enormous bank balances in Europe, but these were either frozen, as in Germany, or now payable in paper money, as in England. In no case could we get gold for them. But Europe could demand all her credit balances in New York to be paid forthwith in gold. True, Europe was owing to the United States Treasury $250,000,000 a year on account of her war debts, and that would have been a large offset against her demands upon us for gold, but we had granted her a one-year moratorium on that obligation, wherefore it was no offset at all. True, we had immense investments in Europe, principally in Germany, but if we sold them we could not get gold for them, whereas German investments in this country could be sold and converted at once into gold. True, we could have sold dollars in Germany or dollars in London, but we could not get gold for them, whereas Germany could sell “paper” marks in New York and get gold for them; England could sell paper pounds in New York and get gold for them. The curious and final illustration would be this: that a British holder of a pound sterling note could not go to his own Bank of England and get gold for it, but he could send it to New York, sell it in the foreign exchange market and take the proceeds in gold.

A gold money country must be prepared to honor every kind of paper obligation, not in gold equivalent, not in gold credit, not in something that may be sold somewhere else for gold, but in the gold itself, when, if and as the gold is demanded; and it must do this without demur or hesitation. Therefore, the only protection a gold country has against a run on its gold reserve is to be steadily receiving from its debtors as much as it pays out altogether; its income from foreign countries must equal its outgo to foreign countries, for otherwise it will lose its gold. But we had relieved our debtors. We had eased them of their obligations to us without limiting in any way our obligations to them. One way grace. Thus the abnormity that owing us more than ten billions in the form of public debt on which we had granted a one-year moratorium, in the form of private debt on which we could get nothing in gold even where it was not in default, in the form of overdue short-term credits in Germany and Austria which we had agreed not to demand payment of, in the form of bank balances all over Europe that were simply frozen—owing us all of this, Europe nevertheless could demand payment forthwith and payment in gold of all her credit balances in New York, amounting, as we have supposed, to a billion dollars more or less. And we were obliged either to give up the gold or leave the gold basis ourselves. If we refused the gold in a single case, that instant we were off the gold standard.

How preposterous! Debtors owing us in all manner of ways much more than they can pay, themselves protected by grace, by moratorium or by insolvency, are yet able to descend upon the American gold reserve and deplete it wholesale. During July and August Europe swallows up a billion and a half of American gold credit, much of it without security, simply because she is in despairing need of it; in September she is making a run on the American bank system for gold, and the American bank system is helpless.

We were complacently prepared to lose some gold. We were thinking of Europe and her problems and of ways in which we might help to build England back to the gold standard. One way of helping would be to set no obstacles against a natural movement of gold from this country to Europe. We were willing to sell and lend what gold we could spare. But we were not prepared for a raid.

Not only did Europe demand her deposits with American banks to be paid immediately in gold; she began selling out her short-term American investments, even her American bonds and stocks, and to demand the proceeds in gold, and this at a time when our own internal liquidation was running at flood and the whole American banking structure was under a terrific strain. One of the principal reasons for our own internal liquidation was the frozen and moribund condition of American investments in Europe. For example, American banks were obliged to sell high-class American bonds, even government bonds, because their enormous assets in Europe, especially in Germany, could not be liquidated. Now on top of it all comes this selling of American things by Europe with but one idea, and that is to get the proceeds in gold.

In six weeks we lost $750,000,000 of actual gold coin and bullion. That was nearly one sixth of our entire stock of monetary gold. In less than a year at that rate we should be bare of it.

And it was not simply that Europe’s need for this gold was greater than ours, not that the mere possession of it would cure any of her economic ills. The raid was motivated much more by fear and panic than by any economic necessity; nor was that all. Europe wanted the gold for its own sake, wanted it while she could get it—while she had Shylock by the hair. The gold itself! The power of possessing it! The American gold! The temptation to raid us was irresistible.

This strange phase of the situation was presently made clear by the daily figures on where it was going. England did need gold; there was no doubt of that. But to our astonishment, England was not getting it. Of the $750,000,000 we lost out of the American reserve in the first six weeks, France alone took more than one third,—nearly one half—and she did not need it at all, for already she had actually more gold in her possession than any other country, save only the United States, and relatively more than we ourselves possessed.

When the Bank of England suspended gold payments our stock of monetary gold was five billions; the French had two and one third billions. But our population is threefold that of France; our national wealth may be easily five- or sixfold greater. Therefore, France had more gold than this country, in proportion to her economic weight and rank. Our stock of monetary gold was less than $42 per capita; hers was more than $57 per capita. Yet it was France from the beginning that led the run on the American gold reserve.

Why did she want the gold? Was she fearful that the United States would abandon the gold standard? If so, did that fear seize her all at once? That would not be like French bankers. Take their record for it, they see far and straight for France.

In any case, all that France could do with the gold would be to hoard it; and for that purpose she has built since the war a treasure chamber unique in the world. Every country, of course, has massive burglar-proof vaults for its gold reserves. But France decided to make one so deep and strong and mysterious that not even a victorious modern army could break into it. You might blow the Bank of France away with bombs and its gold would be all the safer. The chamber is two and one half acres big; it lies two hundred feet deep in the earth. Over it, first, is forty feet of water, which is a lake they made by damming the subterranean river that flows beneath Paris, and then above the water fifty feet of solid rock. The way to it is through six steel towers with revolving doors moved by electric engines, and the passage of descent can be flooded at a moment’s notice. At the signal of alarm a detail of defenders would instantly vanish through this passage, pull the water in after them, and be forgotten—safely forgotten for an indefinite time, or for the duration of a war, because everything has been thought of beforehand. They would find in the gold chamber a kitchen, provisions enough for two or three arctic expeditions, dishes, linen, beds, all the facilities for comfortable housekeeping.

Beginning on or about September 20th, every fast ship from New York for French ports carried gold on its way to this hiding place. The same fast ships or others carried gold also for Holland, Switzerland, Belgium and Germany. Even Germany, where three quarters of a billion of American money was frozen in the form of bank balances and overdue short-term credits—even Germany could take gold from New York.

To lose three quarters of a billion of gold in six weeks, with no saying when or where the run would end and no way of stopping it, was a very serious matter for this country, especially in view of its own condition of internal stress. No country, under any conditions, could lose gold at that rate or in that proportion for long and hold to the gold standard. That would be true if to begin with it had all the gold in the world.

We had only ourselves to blame. One-way grace; no means of self-protection reserved. We were caught by our gold heel in a trap we had built for ourselves. We made it and walked straight in. It was not inevitable that we should have exposed our gold reserve, without protection, to an unlimited foreign attack. Once we had done it, however, the attack, all the natural consequences, were inevitable. But this is not to say the total of Europe’s behavior was only such as we might have expected. By instance, who could have foreseen that parallel to the raid on the American gold reserve there would run in Europe a campaign of rumor, innuendo and propaganda against the value of the American dollars? That also happened, and it certainly was not inevitable, not even from our naïve point of view.

In France the campaign was subtle and ingenious; in England frank and brutal. As the Bank of France took gold from New York, rumors of an imminent financial collapse in the United States spread from Paris throughout Europe and the French papers kept saying with one voice that the franc was the sound gold money of the world. Then came the news that President Hoover had called upon American bankers to mobilize the credit resources of the American banking system against the tide of liquidation that was running in New York—much of it foreign liquidation in order to produce gold for Europe—and instantly, upon the raw news, without waiting for details, the leaders of current opinion in France pronounced a sensational judgment. The United States, they said, had entered the path to inflation. This was the beginning of the end of the gold dollar. Would the people now believe it? The franc was the good gold money of the world.

Immediately in all the financial capitals of Europe the value of the American dollar declined. In Poland, where the dollar had been for years a standard unit of value, serving even as security for the Polish currency, there was a dollar panic. The New York Times correspondent at Warsaw cabled, October 9: “A flight from the dollar started here this morning on the heels of alarming reports from Paris that the United States Government had decided to abandon the gold standard and that an increase in the issue of dollar notes was being discussed in Washington.” In one day the Polish people, remembering what inflation was like, sold one million American dollars to the Bank of Warsaw at ninety-nine cents. The panic lasted several days and then subsided in a bewildered realization that the Paris rumors were false.

The British campaign was led by the Rothemere newspapers, which have a combined daily circulation of five millions. Day after day these papers printed under big headlines the editorial opinion that the downfall of American credit was at hand, together with the exhortation to sell dollars and dollar securities while yet there was time to convert them into gold. Examples: “BRING YOUR MONEY BACK TO BRITAIN.—Advices from America indicate a serious state of affairs. This, therefore offers a favorable moment to sell dollar securities and bring back the money to this country.” Again: “SELL DOLLAR AND FRANC SECURITIES.—Don’t be trapped. When the break on Wall Street comes, the reaction may be far-reaching.” Another day: “WHO WILL GO OFF THE GOLD STANDARD NEXT?—The American banking position shows no sign of improvement.” And so on, in such taste and meaning, day after day, with the Bank of England and the British Treasury together owing New York 350,000,000 gold dollars.

The financial nerves of the world are taut. They have been plucked and frayed to the snapping point. All the shapes of insolvency are dim. At this moment the premier of France must pay a visit to the President of the United States to examine with him the problems of the world and explore all solutions.

What is it France wants? We already know in principle, even in some particulars, what she wants. First, she wants to get rid of her war debts to the United States Treasury. She wishes the American Government to forgive her these debts and charge them to the American taxpayer. Until this can happen she wants to continue receiving reparations from Germany. Therefore, she wants to save the Young Plan, which Germany, England and many Americans, too, have taken for dead since the London conference last summer, especially since the report of the Wiggins Committee of Experts. The reason why she wants to save the Young Plan is that it stipulates for certain large unconditional annuities to be paid by Germany to France before any one else shall receive reparations at all. She does not want the Hoover war debt holiday to be extended beyond its year; she prefers to be receiving more money from Germany on account of reparations than she pays to the United States Treasury on account of her war debts, as it was before. The holiday came very near to costing her $100,000,000 a year, which was the excess of her German reparations over her payments to the United States Treasury; and it would have cost her that if she had not demanded special treatment as a preferred German creditor. Then in principle France wants anything else that will increase her power and prestige in the world.

What has any of this to do with the gold crisis? Well, what it all has to do with the gold crisis now immediately appears.

With the premier of France on the high seas in this direction, and with the newspapers running big headlines on the momentous nature of his visit, suddenly we are astonished by the news that the Bank of France has served an ultimatum on the American banking system. The ultimatum is this: France cannot afford to leave her credit balances in New York any longer unless the rate of interest is raised. If the rate of interest is not raised she will feel obliged to call the remainder of her credit balances home. And the remainder of these credit balances is $600,000,000.

This is as the news appeared in the New York Times on the morning of October 20: “The Bank of France, which has about $600,000,000 of short-term balances in this market, yesterday notified New York banks that the 1½ per cent, rate of interest now being paid on foreign central bank deposits by local institutions was unsatisfactory. The French bank of issue indicated that unless a higher rate was provided it would seek other employment for its huge dollar balances.

“The French demand for a higher rate of interest, carrying with it the implied threat of withdrawal of French dollar balances in the form of gold, aroused a mixed reaction in Wall Street. Some bankers, who interpreted the move as an attempt to dictate to this market the terms under which France would refrain from recalling her money, flatly declared that they were willing to see the funds go. They said, despite the heavy gold losses recently sustained by the country, the United States had nothing to fear from such action on the part of France and much to gain by getting rid of an unwieldy obligation that, under other circumstances, might prove embarrassing. Other important bankers expressed the belief that the Bank of France would be satisfied with a slightly higher rate, possibly two per cent., and were inclined to stress this viewpoint as an indication that amicable arrangements for maintaining French balances here intact could be reached.”

Firstly, the figure was astounding. For a long time France had been doing here what she did in England, namely, accumulate enormous credit balances. The amount of them was much more than we realized, much more than Wall Street itself knew, since of course they were not all in one place.

Secondly, what did these French credit balances represent? Besides the normal proceeds of trade left on deposit with American banks, they represented (a) dollar checks cashed by American tourists in France, and (b) American money loaned to Germany to pay reparations to France. These transactions are easily understood. As the French banks cashed the dollar checks of American tourists they took credit for them in American banks. This credit in American banks was gold credit; therefore the Bank of France treated it as gold reserve, as if it were gold actually in hand, and issued French currency against it for circulation in France. And the same way with American credit loaned to Germany to pay reparations. The Germans transferred it to France on the books of American banks and the French left it here at interest.

Thirdly, how oblique that France, our debtor, owing us in one pocket 3¾ billions of dollars on which she is paying us this year nothing, may yet demand 600 millions of gold from another pocket! She has that right. If she insists, we shall have to give her the gold. But she can do this only because her payments to the United States Treasury are suspended for a year by grace of an American moratorium.

Fourthly, such a thing as the central bank of one country serving notice on the banking system of another country that because the rate of interest is too low, or for any reason, it may feel obliged to call its aggregate credit balances away in gold, was hitherto unheard of. No one could have imagined it. That is not the way it happens in the normal course of international finance. Credit balances are continually shifting. If the rate of interest is higher in New York than in London, credit balances move automatically to New York, or if the rate of interest is higher in London they shift from New York to London, and nothing is ever said about it. The only news of it will be in the bank statistics.

Now, the Bank of France very well knew that suddenly to lose $600,000,000 more gold, on top of what we had already lost to Europe—and the bulk of it to France—would create a very grave situation in this country. And mark this, that if the French themselves believed what they had been saying in Europe about the dollar and about the American financial situation in general they must have believed that to demand $600,000,000 more gold all at once from New York would pitch this country off the gold standard. Well, of course, in that event—in the event of the dollar going the way of the pound sterling—then the French franc assuredly would be the premier gold money and govern the world of finance.

Did she mean it? That is a very interesting question. As a proposition in pure finance you would suppose that if the Bank of France had really meant to call away her $600,000,000 credit balance in gold she would not have been so stupid as to announce her whole intention beforehand. Any village banker would know better. Actually, therefore, the Bank of France was probably bluffing. The Bank of France is to France what the Bank of England is to Great Britain. In finance it is France. Therefore it would have been France that was bluffing and this carries it at once beyond finance into high politics.

Under pretence of being dissatisfied with the rate of interest in New York the Bank of France revealed to us, to Europe, to the whole world, the amazing fact that France had the power, almost if not quite, to throw the American banking system off the gold standard! To send the American dollar after the pound sterling!

That was something for the premier of France to have in his hand when he should begin to examine the problems of the world and explore solutions with Mr. Hoover in the White House. But it was at the same time a revelation in no way calculated to relieve the tension then existing here and elsewhere or to check the hoarding of gold by individuals—a dread movement that was already world-wide and threatening to become uncontrollable.

There were some very anxious moments in Washington. Public utterances were guarded and censored and hushed, lest something should get said out loud to offend the feelings of France. What would Wall Street do? What could it do? If it were willing to raise the rate of interest, on the ultimatum of the Bank of France, still, to do so would be to acknowledge the power of France. But if it refused, then what would happen? Would France really demand the gold?

But there was only one right thing for Wall Street to say. May it be long remembered to the credit of Wall Street that it did say it. To this effect: “We pay here the New York rate of interest, whatever that may be. If France wants her credit balances, let her take them. If she demands them in gold, the gold will be ready.”

The right honorable Financial Chronicle, with its Biblical prestige in Wall Street, said: “The move was resented as an attempt to bring financial pressure to bear on the United States after the fashion that has been followed from time to time in recent European political manœuvers.

“Bankers here are confident that the country has nothing to fear from such a move, provided the American people themselves remain undisturbed. We think this is a proper attitude for our banking institutions to take. France contributed in no unimportant degree to the financial breakdown in Germany by withdrawing large amounts of short-term credits which it had employed in that country, its action then being followed by general withdrawal of credits and deposits by other foreign governments. It was then supposed that its purpose was mainly political. But later it began also to indulge in withdrawals of capital and of funds from Great Britain, though when the French bank became alarmed as to the possible consequences it once more began to coöperate to extend new credits to the Bank of England and to Great Britain. But it was now too late to save Great Britain from suspension of gold payments.

“In like manner France is now engaged in huge withdrawals from New York, though we cannot get ourselves to believe that the Bank of France has any ulterior purpose in doing this. At all events, the effect has been to create a feeling of distrust all over Europe and to lead to large withdrawals here by other important European countries, and more particularly Holland, Belgium and Switzerland. In these circumstances the best course is unquestionably to ignore all threats (if such have really been made) and to let France do her worst if she is really bent on doing so.”

Any other way of speaking to the Bank of France would have stultified American credit in the eyes of the world. The effect of that way of speaking was immediate. In all foreign financial capitals the dollar rose to new prestige and its value increased. When the disordered events of 1929 come to be viewed in perspective, it may well appear that Wall Street’s strong-minded behavior at this point was of crucial importance, not only to this country but to a world that needed more than anything else just then a point of stability whereon to rest its confidence.

So it turned out that when the premier of France landed in New York what he had in his hand was not the bolt it was when he started with it. Nevertheless, he could not help using it for magnanimous effect. He pledged France to assist the United States in maintaining the gold standard.

In the joint statement issued from the White House on October 25 by President Hoover and Premier Laval this paragraph occurred: “Particularly are we convinced of the importance of monetary stability as an essential factor in the restoration of the normal economic life in the world, in which the maintenance of the gold standard in France and the United States will serve as a major influence.”

And what would be the French contribution to the monetary stability of the world? What would France do to assist the United States in maintaining the gold standard? This, to wit: Pending a reëxamination of her war debt to the United States Treasury, pending further a reexamination of Germany’s capacity to pay under the Young Plan which makes France the preferred creditor, France would make no more abnormal demands upon the American gold reserve.

In his news report of the Hoover-Laval conversations the Washington correspondent of the New York Times, October 26, wrote: “In a cautious way the joint statement made known that President Hoover and Premier Laval had determined that their two governments should stand together in their maintenance of the gold standard. Among the things accomplished were the reassurance by Premier Laval that abnormal movements of gold from New York would be stopped, and that reëxamination of Germany’s capacity to pay reparations should be made under the existing provisions of the Young Plan, with the United States deferring action on a survey of European debts to determine the capacity of debtor nations to pay until after a Young Plan committee has reported on Germany’s financial position.”

Abnormal is a strange word to be appearing in respect to the demands of one nation upon the gold reserves of another. In respect to the demands of a debtor nation upon the gold reserves of its creditor it grows stranger. And that the debtor nation should be able to oblige the creditor nation by a pledge to restrain itself from making abnormal demands upon the creditor’s gold reserve is more than strange. Why any possibility of abnormal demands by France upon the American gold reserve?

Then again, what is abnormal? Did M. Laval mean abnormal in principle, perhaps? He sailed away on Monday, October 26. On that day the Bank of France took $20,000,000 more gold from New York, on Tuesday $18,000,000, but on Wednesday only $3,500,000. Yet $41,500,000 gold in three days is certainly a great deal. However, there were signs by then that the tide was beginning to turn. Still losing gold heavily to France we were again receiving gold at the same time because the dollar at last was thinking to mind its own welfare and the world’s confidence in American credit was rising.

A gold country is like a bank. Its first responsibility is to itself, for the integrity of its money, its credit and its assets, and if it suffers this imperative to be overcome by a sense of responsibility to others, no matter with what intention, it will fail in its responsibility to others because it has forgotten that first responsibility to itself. There is no other law.

In one of the bad moments last October a member of the Federal Reserve Board was heard to say: “Not only is this the worst financial crisis in all history. Something is missing that was always there before. All over the world there is this sense of something missing, like a familiar rock, an immovable principle, a wheel of balance. And what is it? The Bank of England is missing. The value of the pound sterling is uncertain, changing from hour to hour. We never had that to contend with before.”

So it was. And that is why the suspension of gold payments by the Bank of England was an appalling financial event. No longer was the pound sterling worth $4.86 in gold anywhere in the world. No longer was it the universal unit of value in which all other things were priced. Now the pound sterling itself has to be priced in other things—in American dollars, for example. Then suppose the same thing should happen to the dollar, which had recently become the next most stable unit of value in the world’s opinion. Suppose the dollar, instead of being worth one hundred cents in gold anywhere in the world, should have to be priced at ninety cents, eighty cents, seventy cents, in terms of something else, maybe the French franc.

The long and familiar preëminence of the pound sterling as a universal unit of value in any kind of financial weather, war only excepted, had been worth to Great Britain an income of three or four hundred millions a year from the rest of the world in the form of banking profit, meaning discounts, commissions, interest and fees. Preëminence of the American dollar in the trade and exchange of the world, in place of the pound sterling, would be worth 300 or 400 millions a year to this country. Or, if such preeminence passed to the French franc, it would be worth 300 or 400 millions a year to France.

So you may see what was involved as between the dollar and the franc, merely in terms of national income; you may see also what Great Britain had lost. You may understand at the same time that when the British say it was a good thing for England to leave the gold standard they mean only that it was good for England that she embraced a bitter necessity in time, for if she had waited, her fortunes might have become irretrievable. Now she will work harder, trade harder, spend less, live a little less, until she is quite solvent again. Her export of goods will increase for several reasons. They will be priced in the depreciated pound sterling, which means they will be cheaper for the world to buy, or, to say it another way, other people’s gold money will buy more in England than before. Prices will rise in England, but not as much as the value of the pound sterling declines outside; as prices rise in England, real wages will fall, wherefore the labor cost of producing British goods will fall, and so will the standard of living in England, temporarily at least. And this must all happen to any country that loses the integrity of its money.

True, you will hear some British economists say it was not England that failed the gold standard; it was the gold standard that failed the world. Therefore, they say, the world may do well to try something in place of the gold standard and see if that will work any better. This is a novel way of thinking in England, yet elsewhere very old—putting the blame on money! If England had not lost her hold on the gold standard she would be the last to say the gold standard had not been working—in a remorseless manner, to be sure, yet nevertheless working as it should—in the last three years. If she had not lost her hold on it and other countries were losing theirs, the Bank of England would be saying: “This is hard, but it is the way the gold standard works.” It would be a grim thing to say, a selfish thing, perhaps, and yet quite right. For how did the pound sterling come to have preeëminence throughout the world in the first place? Its prestige was from the fact that the British had always a primary sense of their responsibility to themselves, that is to say, again, for the integrity of their own money and their own credit; and it turned out, as the law is, that the more jealous they were in this first sense of responsibility to themselves the more certain they were not to fail the world in their responsibilities to it, including the responsibility to keep the balance wheel running true. Thus the pound sterling became a symbol of stability that was a great asset to the whole world.