62. The First New Deal: Dollar Nationalism

0:00The 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.

0:48The 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.

1:48Rather 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.

2:53In 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.

3:46As 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.

4:35Currency 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.

5:22This 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.

6:11Britain'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.

7:05A 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.

7:51While 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.

8:54The 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.

9:51Other 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.

10:50Interestingly 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.

11:35The 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.

12:33I 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."

13:22If 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.

14:15Their 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.

15:55It 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.

16:49And 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.

17:56The 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.

18:44By 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.

19:31Preparations 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.

20:35What 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."

21:46The 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.

22:37The 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.

23:41The 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.

24:55Upon 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.

25:42The 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.

26:47A 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."

27:36The 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.

28:49For 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.

29:35The 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.

30:22For 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.

31:21The 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.

32:18Molley 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.

33:14Roosevelt 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.

34:16Instead, 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.

35:39From 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.

36:29Playing 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.

37:21James 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.

38:11Leffingwell 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.

39:05With 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.

39:54The 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.

40:41At 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.

41:29Here 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.

42:40Though 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.

43:25In 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.

44:12The 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.

45:03The 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?

46:00Lloyd 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.

46:59Instead, 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."

48:44Not 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.

49:31One 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.

50:24America'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.

51:17In 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.

52:34And 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.

53:35Set 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?

54:35We 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.