Re: [CTRL] Anyone have any articles on the Federal Reserve System?

[Linda Minor]

-Caveat Lector-

Here's another source--written by Webster Tarpley, author of The
Unauthorized Biography of George Bush--at
http://www.tarpley.net/29crash.htm


Excerpted from
AGAINST
OLIGARCHY
Essays & speeches
1970-1996
by Webster G. Tarpley

PART 7

BRITISH FINANCIAL WARFARE: 1929; 1931- 33
HOW THE CITY OF LONDON CREATED THE GREAT DEPRESSION

by Webster G. Tarpley
December, 1996
The thesis of this paper is that the great economic and financial cataclysm
of the first half of the twentieth century, which we have come to know as
the Great Depression, was caused by the Bank of England, the British
government, and the City of London. The potential for the Great Depression
derived from the economic and human destruction wrought by World War I,
which was itself a product of British geopolitics and especially of the
British policy, exemplified by King Edward VII, of creating an encircling
anti-German alliance in order to wage war. The economic destruction of
Europe was continued after 1918 by the Peace of Paris (Versailles, St.
Germain, Trianon, Neuilly, Sevres) imposed by the Allies on the defeated
Central Powers. Especially important here were the 55 billion gold dollars
in reparations inflicted on defeated Germany, along with the war debt burden
of the supposedly victorious powers themselves. Never during the 1920's did
world trade surpass the levels of 1913. Reparations and war debt were a
recipe for economic stagnation.

The ravaged post-war, post-Versailles world of the 1920's provides the main
backdrop for the following considerations:

1. The events leading to the Great Depression are all related to British
economic warfare against the rest of the world, which mainly took the form
of the attempt to restore a London- centered world monetary system
incorporating the gold standard. The efforts of the British oligarchy in
this regard were carried out by a clique of international central bankers
dominated by Lord Montagu Norman of the Bank of England, assisted by his
tools Benjamin Strong of the New York Federal Reserve Bank and Hjalmar
Schacht of the German Reichsbank. This British-controlled gold standard
proved to be a straightjacket for world economic development, somewhat along
the lines of the deflationary Maastricht "convergence criteria" of the late
1990's.

2. The New York stock exchange speculation of the Coolidge-Hoover era was
not a spontaneous phenomenon, but was rather deliberately encouraged by
Norman and Strong under the pretext of relieving pressure on the overvalued
British pound sterling after its gold convertibility had been restored in
1925. In practice, the pro-speculation policies of the US Federal Reserve
were promoted by Montagu Norman and his satellites for the express purpose
of fomenting a Bubble Economy in the United States, just as later central
bankers fostered a Bubble Economy in Japan after 1986. When this Wall Street
Bubble had reached gargantuan proportions in the autumn of 1929, Montagu
Norman sharply cut the British bank rate, repatriating British hot money,
and pulling the rug out from under the Wall Street speculators, thus
deliberately and consciously imploding the US markets. This caused a violent
depression in the United States and some other countries, with the collapse
of financial markets and the contraction of production and employment. In
1929, Norman engineered a collapse by puncturing the bubble.

3. This depression was rendered far more severe and, most importantly,
permanent, by the British default on gold payment in September, 1931. This
British default, including all details of its timing and modalities, and
also the subsequent British gambit of competitive devaluations, were
deliberate measures of economic warfare on the part of the Bank of England.
British actions amounted to the deliberate destruction of the pound sterling
system, which was the only world monetary system in existence at that time.
The collapse of world trade became irreversible. With deliberate prompting
from the British, currency blocs emerged, with the clear implication that
currency blocs like the German Reichsmark and the Japanese yen would soon
have to go to war to obtain the oil and other natural resources that orderly
world trade could no longer provide. In 1931, Norman engineered a
disintegration by detonating the gold backing of the pound sterling.

4. In the United States, the deliberate British default of September 1931
led, given the do-nothing Hoover Administration policies, directly to the
banking crisis of 1932-33, which closed down or severely restricted
virtually every bank in the country by the morning of Franklin D.
Roosevelt's inauguration. If Roosevelt had not broken decisively with
Hoover's impotent refusal to fight the depression, constitutional government
might have collapsed. As it was, FDR was able to roll back the
disintegration, but economic depression and mass unemployment were not
overcome until 1940 and the passage of Lend-Lease.

As we have already hinted, we consider that these matters are not solely of
historical interest. The repertoire of central bank intrigue, speculative
bubbles, defaults, devaluations, bank rate manipulations, deflations and
inflations constitute the essential arsenal being used by British economic
warfare planners today.

The Maastricht "convergence criteria" with their insane deflationary thrust
are very similar in effect to the rules of the gold exchange standard as
administered by London, 1925-1931. For that matter, the policies of the
International Monetary Fund are too. The parallel extends even to the detail
of Perfidious Albion's gambit of opting out of the European Currency Union
while watching its victims writhe in an deflationary straightjacket tailored
between Threadneedle Street and Saville Row.

Since the summer of 1995 hot money generated by the low interest rates of
the Bank of Japan has been used by hedge fund operators of the Soros school
to puff up the world bubble. If the Bank of England's late 1996 switch to
bank rate increases turns out to be a harbinger of world tight money, then
it is possible that the collapse and disintegration of the world financial
system will recapitulate other phases of the interwar years.

Lord Montagu Norman was always obsessed with secrecy, but the British
financial press has often practiced an arrogant and cynical bluntness in its
self-congratulatory accounts of its own exploits. Therefore, wherever
possible we have let the British, especially the London Economist magazine
and Lord Keynes, speak for themselves and indict themselves. We have also
drawn on the memoirs of US President Herbert Hoover, who had moments of
suprising lucidity even as he, for the sake of absurd free-market,
laissez-faire ideology, allowed his country to drift into the abyss. As we
will see, Hoover had everything he needed to base his 1932 campaign for
re-election on blaming the Federal Reserve, especially its New York branch,
for the 1929 calamity. Hoover could have assailed the British for their
September 1931 stab in the back. Hoover would have been doing the country a
permanent service, and he might have done somewhat better in the electoral
college. But Hoover was not capable of seriously attacking the New York Fed
and its master, Lord Montagu Norman.

ECONOMIC DECLINE AFTER WORLD WAR I

The roots of the crash of 1929 are to be sought in the economic consequences
of World War I, which was itself a product of the British geopolitical
machinations of King Edward VII and his circles. The physical impact of
World War I was absolutely devastating in terms of human losses and material
damage. This destruction was then greatly magnified by the insistence of
London and Paris on reparations to be paid by defeated and prostrate
Germany.

After a few years of haggling, these reparations were fixed at the
astronomical sum of 32 billion gold-backed US dollars, to be paid over 62
years at an interest rate of 5%. Even Lord Keynes, in his "Economic
Consequences of the Peace," compared this to the imposition of slavery on
Germany and her defeated allies, or to squeezing a lemon until the pits
squeak.

The reparations issue was complicated by the inter-allied war debts, owed
especially by France and Britain to the United States. For a time a system
emerged in which Wall Street made loans to Germany so that Germany could pay
reparations to France, which could then pay war debts to Britain and the US.
But this system was based on usury, not production, and was therefore
doomed.

The most dramatic evidence available on economic stagnation during the
1920's is the fact that during this decade world trade never attained the
pre-war level of 1913.

THE CABAL OF CENTRAL BANKERS

A dominant personality of the City of London during these years was Sir
Montagu Norman, the Governor of the Bank of England during the period
1920-1944. Norman came from a line of bankers. His grandfather was Sir Mark
Wilks Collet, who had himself been Governor of the Bank of England during
the 1880's. Collet had also been a partner in the London firm of Brown,
Shipley & Co., and also in the New York bank of Brown Brothers & Co., later
Brown Brothers, Harriman, one of the most evil and most powerful banks in
modern American history. The managing partner of Brown Brothers, Harriman
during the 1930's was Prescott Bush, father of President George Herbert
Walker Bush, and a financial backer of Hitler. The dominant figure at Brown
Brothers, Harriman was W. Averell Harriman, Roosevelt's special envoy to
Churchill and Stalin, head of the Marshall Plan, and the adviser to
President Truman who was most responsible for starting the Cold War with
Russia and for prolonging the Korean War.

Acting by himself and relying only on his own British resources, Montagu
Norman could hardly have aspired to play the role of currency dictator of
Europe. Norman's trump card was his ability to manipulate the policies of
the United States Federal Reserve System through a series of Morgan-linked
puppets.

Morgan's key puppet was Benjamin Strong of the New York Federal Reserve
Bank, which then as now represented the flagship of the entire Fed system.
Strong was Governor of the New York Federal Reserve Bank between 1914 and
his death in 1929. Strong was an operative of the House of Morgan who had
worked at Bankers Trust. In addition to what he could do himself, Strong had
great influence over Andrew Mellon, who served as Secretary of the Treasury
between 1921 and 1929 under Presidents Harding, Coolidge, and Hoover.

Montagu Norman also owned a large piece of Hjalmar Schacht, Governor of the
German Reichsbank and later Finance Minister in governments in which Adolf
Hitler was chancellor. Montagu Norman himself, along with King Edward VIII,
Lady Astor and Sir Neville Chamberlain, was one of the strongest supporters
of Hitler in the British aristocracy. Norman put his personal prestige on
the line in September, 1933 to support the Hitler regime in its first
attempt to float a loan in London. The Bank of England's consent was at that
time indispensable for floating a foreign bond issue, and Norman made sure
that the "Hitler bonds" were warmly recommended in the City.

THE FEDERAL RESERVE: CAUSE OF DEPRESSION

One of the main causes for the Great Depression was the Federal Reserve
System of the United States. Many naive persons think of the Federal Reserve
System as a part of the United States government, which it emphatically is
not. Probably this is because the only money we have nowadays is marked
"Federal Reserve Note." The Federal Reserve is a privately owned and
privately managed institution. Those who can remember the 1960's can recall
that there were one dollar silver certificates as well as United States
Notes, the descendants of Lincoln's greenbacks, in several denominations.
But after the Kennedy assassination, the private Federal Reserve established
a monopoly on printing American money, shutting out the US Federal
Government from this important function.

In this way the Federal Reserve System violates the letter and spirit of the
United States Constitution. There, in Article I, Section 8, Clause 5 we read
that the Congress shall have the power "to coin money, regulate the value
thereof, and of foreign coin, and fix the standard of weights and measures."

The Federal Reserve was created in December, 1913 when Woodrow Wilson signed
the Glass-Owen Federal Reserve Act. That bill had been the product of
cloak-and-dagger machinations by Wall Street financiers and their political
mouthpieces, many of them in league with the City of London. Wall Streeter
Frank A. Vanderlip, in his autobiography "From Farm Boy to Financier"
narrates that the secret conference which planned the Federal Reserve was
"as secret - indeed, as furtive - as any conspirator." Vanderlip was one of
the insiders invited to the Jekyl Island Club on the coast of Georgia in the
autumn of 1910 by the Senator Nelson Aldrich, the father-in-law of John D.
Rockefeller Jr. Aldrich also invited Henry Davison of J.P. Morgan & Co., and
Benjamin Strong, the future Governor of the New York Federal Reserve Bank.
Also on hand was Paul Warburg of the notorious international banking family,
descended from the Del Banco family of Venice. As Vanderlip recounted, "We
were instructed to come one at a time and as unobtrusively as possible to
the railway terminal on the New Jersey littoral of the Hudson, where Senator
Aldrich's private car would be in readiness, attached to the rear end of a
train for the South."

On Jekyl Island this crew began to decide the main features of the central
bank of the United States: "We worked morning, noon, and night....As we
dealt with questions I recorded our agreements...If it was to be a central
bank, how was it to be owned - by the banks, by the Government or jointly ?
When we had fixed upon bank ownership and joint control, we took up the
political problem of whether it should be a number of institutions or only
one." In the end, says Vanderlip, "there can be no question about it:
Aldrich undoubtedly laid the essential, fundamental lines which finally took
the form of the Federal reserve law."

Today each of the twelve Federal Reserve Banks - Boston, New York, Chicago,
San Francisco, and so forth - is a private corporation. The shares are held
by the member banks of the Federal Reserve System. The Class A and Class B
Directors of each Federal reserve Bank are elected by the shareholders from
among bankers and the business community, and other Directors are appointed
by the Federal Reserve Board in Washington.

Members of the Board of Governors of the Federal Reserve System in
Washington are chosen by the President and must be approved by the Senate,
for what that is worth. But when we come to the vital Federal Reserve Open
Market Committee, which sets short-term interest rates and influences the
size of the money supply by buying or selling government securities, the
picture is even worse. The FOMC comprises 7 Fed Governors from Washington
plus 5 presidents of Federal Reserve Banks appointed by the respective
Directors of these banks. In practice, 5 Federal Reserve district presidents
who have never been seen by the President or the Congress have a vote on
setting the credit policy and money supply of the United States. Public
policy is made by a private cabal of self-appointed plutocrats.

How was this sleazy product marketed to the Congress ? Interestingly, the
Congressmen were told that the Federal Reserve System would prevent panics
and depressions like those of the 1870's and 1890's. Here is a sampling
compiled by Herbert Hoover of selling points used by lobbyists seeking votes
for the Federal Reserve Act:

We shall have no more financial panics....Panics are impossible....Business
men can now proceed in effect confidence that they will no longer pu their
property in peril....Now the business man may work out his destony without
living in terror of panic and hard times....Panics in the future are
unthinkable....Never again can panic come to the American people.

[The Memoirs of Herbert Hoover, p.7]

The verdict of history must be that the Federal Reserve has utterly failed
to deliver on these promises. The most potent political argument against
this arrangement is that it has been a resounding failure. Far from making
financial crises impossible, the Fed has brought us one Great Depression,
and it is about to bring us a super-depression, a worldwide disintegration.

The Federal Open Market Committee was not part of the original legislation
that created the Federal Reserve System. But in the early 1920's, some
regional Federal Reserve Bank presidents, inevitably dominated by New York,
formed a committee outside of any law to coordinate their activities in
determning the money supply and interest rates through buying and selling of
government securities - i.e., open market operations. This was a very
successful power grab by the regional Reserve Bank leaders, all directly
chosen by bankers and the private sector, and not subject to approval by
anyone in Washington. In 1935 Franklin D. Roosevelt very unwisely signed a
Banking Act which legalized the Federal Open Market Committee in its present
form, with a formal majority for Federal Reserve Board Governors in
Washington, the ones proposed by the President and approved by the Senate.
But at the same time the Secretary of the Treasury, who used to be a member
of the central Board, was ousted from that position.

THE BRITISH RECORD OF STARTING WALL STREET PANICS

The British had a long track record of using the London Bank Rate (that is,
the rediscount rate of the Bank of England) for financial and economic
warfare against the United States. The periodic panics of the nineteenth
century were more often than not caused by deliberate British sabotage. A
few examples:

* In the Panic of 1837, the stage had been set for depression by outgoing
President Andrew Jackson's and Secretary of the Treasury Roger Taney's
abolition of the Second Bank of the United States, by their cultivation of
the state "pet" banks, by their imbecilic Specie Circular of 1836, which
demanded gold payment to the federal government for the purchase of public
lands, and by their improvident distribution of the Treasury surplus to the
states. London's ultinmate weapon turned out to be the Bank of England bank
rate. With all the American defenses sabotaged, the Bank of England sharply
raised its discount rates, sucking gold specie and hot money liquidity back
across the Atlantic, while British merchants and trading houses cut off
their lines of credit to their American customers. In the resulting chaos,
not just private banks and businesses went bankrupt, but also the states of
Mississippi, Louisiana, Maryland, Pennsylvania, Indiana, and Michigan, which
repudiated their debts, permanently impairing US credit in the world.
Internal improvements came to a halt, and the drift towards secession and
civil war became more pronounced.

* The Panic of 1873 resuted from a British-directed effort to ruin the
banking house of Jay Cooke and Company, which had served Lincoln and his
successors as a quasi-governmental agency for the marketing of United States
Treasury securities and railroad bonds during and after the Civil War. The
Cooke insolvency had been preceded by a massive dumping of US staocks and
bonds in London and the rest of Europe. This was London's way of shutting
down the Civil War boom that Lincoln's dirigist and protectionist policies
had made possible. Instead, a long US depression followed.

* The Panic of 1893 was prepared by the 1890 "Baring panic" in London,
caused by the insolvency of Barings Bank, the same one which went bankrupt
and was sold off in the spring of 1995. In the resulting depression, the US
Treasury surplus was reduced to almost nothing, and a budget defecit loomed.
Using this situation as a pretext, British speculators drove the exchange
rate of the dollar down to the point where owners of gold began exporting
their gold to London. Treasury gold stocks dipped below $100,000,000, and
then kept falling to $68,000,000; US national bankruptcy threatened. In
response to this crisis, subversive President Grover Cleveland gave control
of the US public debt to the New York banking houses of Morgan and Belmont,
themselves British agents of influence. Cleveland "sold out to Wall Street"
by selling US gold bonds to Morgan and Belmont at reduced prices, with the
taxpayers picking up the tab; Morgan and Belmont promised to "use their
influence" in London to prevent further British bear raids against the US
dollar and gold stocks. All of this caused another long depression.

The economics profession is totally bankrupt today, with every Nobel Prize
winner in economics with the sole exception of Maurice Allais qualifying for
committment to a psychiatric institution. One of the reasons for the
depravity of the economists is that their assigned task has always been one
of mystification, especially the job of covering up the simple and brutal
fact that American depressions have generally been caused by Bank of England
and City of London bankers. All the mystical mumbo-jumbo of curves, cycles,
and epicycles a la Schumpeter has always had the purpose of camouflaging the
fact that the Bank of England bank rate was the nineteenth century's closest
equivalent to the hydrogen bomb.

DEFLATION CRISIS OF 1920-21

The New York panic of 1920-21 represents yet another example of British
economic warfare. The illusion that the existence of the Federal Reserve
System might serve as a barrier against new financial panics and depressions
received a nasty knock with the immediate postwar depression of 1920, which
was a co-production of the Bank of England and the New York Federal Reserve.
The British deliberately provoked this Wall Street panic and severe
depression during a period of grave military tension between London and
washington occasioned by the naval rivalry of the US and UK. The British
Bank Rate had been at 6% from November 1919 until April 15, 1920, when it
was raised to 7%. The bust in Wall Street began in the late summer of 1920.
The UK Bank Rate was lowered to 6.5% in April 1922, and it went down all the
way to 3% by July, 1922.

The Federal Reserve, as usual, followed London's lead, gradually escalating
the discount rate to 7% in June, 1920 to detonate the bust, and descending
to 6.5% about a year later. The argument used by the central bankers' cabal
to justify their extreme tight money policy was the climate of postwar
inflation, speculation, expansion and the freeing of consumer demand that
had been pent up in wartime. This depression lasted about two years and was
quite sharp, with a New York composite index of transaction indices falling
13.7% for the sharpest contraction since 1879. In many other countries this
was the fiercest depression on record. As Keynes later complained, the US
recovered much more rapidly than the British, who scarcely recovered at all.
For the rest of the interwar period, the United Kingdom was beset by
permanent depression.

The fact that this depression was brought on deliberately by the
Norman-Strong duo is amply documented in their private correspondence. In
December 1920, Strong and Norman agreed that "the policy of making money
dearer had been successful, though it would have been better six months
earlier. They agreed, too, that deflation must be gradual; it was becoming
now too rapid and they favored a small reduction in rates both in London and
New York." [Clay, Lord Norman, p. 132]

THE CRASH OF 1929

The panic of 1929 is a prime example of a financial collapse which was not
prevented by the Federal Reserve. In fact, the 1920's speculaltive bubble
and subsequent crash of 1929 was directly caused by Federal Reserve
policies. Those policies in turn had been dictated by the world of British
finance, which had been decisive in shaping the Federal Reserve to begin
with.

During World War I, all the industrialized nations except the United States
had left the gold standard. Only the United States had been able to stay
with gold, albeit with special controls. During the 1920's about two thirds
of the world's supply of monetary gold, apart from Soviet holdings, was
concentrated in two countries - the United States and France. The British,
who were fighting to preserve their dominance of the world financial system,
had very little gold.

The British were determined to pursue their traditional economic
imperialism, but they had emerged from the war economically devastated and,
for the first time, a debtor nation owing war debts to the United States. At
the same time, the British were fighting to keep their precious world naval
supremacy, which was threatened by the growth of the United States Navy. If
the US had merely built the ships that were called for in laws passed in
1916, the slogan of "Brittania Rules the Waves" would have gone into the
dust- bin of history early in the 1920's.

The pre-war gold parity had given a dollar to pound relation of $4.86 per
pound sterling. As an avid imperialist Montagu Norman was insisting by the
mid-1920's that the pound return to the gold standard at the pre-war rate. A
high pound was a disaster for British exports, but gave the British great
advantages when it came to buying American and other foreign real estate,
stocks, minerals, food, and all other external commodities. A high pound
also maximized British earnings on insurance, shipping, and financial
services -- London's so-called "invisible exports" and earnings.

LORD NORMAN'S GOLD EXCHANGE STANDARD, 1925-1931

The nineteenth century gold standard had always been an instrument of
British world domination. The best economic growth achieved by the United
States during the century had been registered between 1861 and the
implementation of the Specie Resumption Act in 1879. During that time the
United States enjoyed the advantage of its own nationally controlled
currency, Lincoln's greenbacks. Specie resumption meant re-opening the
Treasury window where holders of paper dollars could have these dollars
exchanged for gold coins. The United States in 1879 thus returned to a gold
coin standard, under which paper money circulated side by side with $20 and
$50 gold pieces. This practice proved to be deflationary and detrimental to
economic development, while it increased American vulnerability to British
currency manipulations.

The post-1918 gold standard de-emphasized the circulation of gold coins,
although this still went on. It was rather a gold exchange standard, under
which smaller countries who chose the gold standard could hold some of their
reserves in the leading gold-backed currencies like the pound sterling or
the dollar. These currencies were counted as theoretically as good as gold.
The advantage to the smaller countries was that they could keep their
reserves on deposit in London and earn interest according to the British
bank rate. As one London commentator noted at the time, "...many countries
returning to gold "have had such confidence in the stability of the system,
and in particular in the security of the dollar and of sterling, that they
have been content to leave part of the reserves of their currencies in
London." [Economist, September 26, 1931, p. 549]

The post-1918 gold exchange standard included the workings of the so-called
gold points. This had to do with the relation of currency quotations to the
established gold parity. Norman wanted the pound sterling to be worth $4.86.
If the pound strengthened so as to trade for $5, let us say, then the pound
was said to have exceeded the gold import point. American and other gold
would be shipped to London by those who owned gold. That gold would be
deposited in London and would earn interest there. If, as later happened,
the pound went down to 4 dollars to the pound, then the pound was said to
have passed the gold export point, and British gold would be physically
shipped to New York to take advantage of the superior earnings there. This
meant that if Norman wanted to keep a strong pound, he needed to weaken the
dollar at the same time, since with a strong dollar the British gold would
flee from London, forcing Norman to devalue the pound sterling, lowering its
the gold parity. Notice that gold movements were to a very large degree
based on the decisions of individual banks and investors.

(During the later 1930's, after the a period in which the dollar floated
downward in terms of gold, the United States under Franklin D. Roosevelt
established a gold reserve standard, also called by FDR's critics a
"qualified external bullion standard," in which gold transactions were
limited to settlements with foreign central banks, while private citizens
were barred from holding gold. This was similar to the gold reserve
provisions of the Bretton Woods system of 1944-1971.)

Norman's problem was that his return to the pre-1914 pound rate was much too
high for the ravaged post-1918 British economy to support. Both the US and
the British had undergone an economic downturn in the early 1920's, but
while the US soon bounced back, the British were never able to recover.
British manufactures were now considered low-quality and obsolete.

THE GOLDEN CHANCELLOR

Nevertheless, Norman insisted on a gold pound at $4.86. He had to convince
Winston Churchill, the Chancellor of the Exchequer. Norman whispered into
Churchill's ear: "I will make you the golden chancellor." Great Britain and
the rest of the Empire returned to the gold standard in April, 1925. Norman
himself craved the title of "currency dictator of Europe." And indeed, many
of the continental central banks were in his pocket.

It was much easier to return to the gold standard than it was to stay there.
British industrial exports, including coal, were priced out of the world
market, and unemployment rose to 1.2 million, the highest since Britain had
become an industrial country. Emile Moreau, the governor of the Bank of
France, commented that Norman's gold standard had "provoked unemployment
without precedent in world history." British coal miners were especially
hard hit, and when the mine owners announced wage reductions, Britain
experienced the 1926 general strike, which was defeated with Winston
Churchill as chief scab and strike-breaker.

But Norman did not care. He was a supporter of the post- industrial society
based on the service sector, especially financial services. The high pound
meant that British oligarchs could buy up the world's assets at bargain
basement prices. They could buy US and European real estate, banks, and
firms. Norman's goal was British financial supremacy: "...his sights
remained stubbornly fixed on the main target: that of restoring the City to
its coveted place at the heart of the financial and banking universe. Here
was the best and most direct means, as he saw it, of earning as much for
Britain in a year as could be earned in a decade by plaintive indsutrialists
who refused to move with the times. The City could do more for the country
by concentrating on the harvest of invisible exports to be reaped from
banking, shipping, and insurance than could all the backward industrialists
combined." [Boyle, 222]

Montagu Norman's golden pound would have been unthinkable without the puppet
role of Benjamin Strong of the New York Federal Reserve Bank. Since the
pound was grotesquely overvalued, the British were running a balance of
payments defecit because of their excess of imports over exports. That meant
that Norman had to ship gold from the Bank of England in Threadneedle Street
across the Atlantic. The British gold started to flow towards New York,
where most of the world's gold already was.

The only way to stop the flow of gold from London to New York, Norman
reasoned, was to get the United States to launch a policy of easy money, low
interest rates, reflation, and a weak dollar - in short, a policy of
inflation. The key to obtaining this was Benjamin Strong, who dominated the
New York Fed, and was in a position to dominate the entire Federal Reserve
system which was, of course, independent of the "political control" of the
US government which these oligarchs so much resented.

In essense, Norman's demand was that the US should launch a bubble economy.
The newly-generated credit could be used for American loans to Germany or
Latin America. Or, it could be used to leverage speculative purchases of
stocks. Very soon most of the new credit was flowing into broker call loans
for margin buying of stocks. This meant that by advancing a small percentage
of the stock price, speculators could borrow money to buy stocks, leaving
the stocks with the broker as collateral for the loans. There are many
parellels between the measures urged for the US by Norman in 1925 and the
policies urged on Japan by London and Wall Street in 1986, leading to the
Japanese bubble and their current banking crisis.

In 1925, as the pound was returning to gold, Montagu Norman, Hjalmar Schacht
and Charles Rist, the deputy governor of the Banque de France visited
Benjamin Strong in New York to mobilize his network of influential insiders
for easy money and low interest rates in the US. Strong was able to obtain
the policies requested by Norman and his European puppets. Norman & Co. made
a second pilgrimage to Wall Street between 28 June and 1 July 1927 to
promote American speculation and inflation. On this second lobbying trip,
Norman exhibited grave concern because the first half of 1927 had witnessed
a large movement of gold into New York. Strong and his cabal immediately
went into action.

The second coming of Norman and Schacht in 1927 motivated Strong to force
through new reflation of the money supply in July and a further cut in the
US discount rate in August of that same year. The rediscount rate of the New
York Fed was cut from 4% to 3.5%. This was the credit which stoked the
culminating phase of the Coolidge Bull Market during 1928 and 1929. Strong
also got the FOMC to begin buying US Treasury securities in open market
operations, leaving the banks flush with cash. This cash soon wandered into
the broker call loan market, where it was borrowed by stock speculators to
buy stock on margin, fueling a growing stock speculation. Interest rates in
London were supposed, according to Norman, to be kept above those in New
York - although Norman later deviated from this when it suited him.

In his essay "The Economic Consequences of Mr. Churchill," Lord Keynes noted
that the British had returned to gold at a rate that was at least 10% too
high; Keynes showed that the British government had also chosen a policy of
deliberately increasing unemployment, especially in the export industries in
order to drive down wages. In order to stem the flow of gold out of London,
Keynes observed, the Bank of England's policy was to "encourage the United
States to lend us money by maintaining the unprecedented situation of a bill
rate 1 per cent higher in London than in New York." [Essays in Persuasion,
p. 254]

One alarmed observer of these events was, ironically, Secretary of Commerce
Herbert Hoover of the Coolidge administration, who condemned the Fed
policies as "direct inflation." "In November, 1925," recounts Hoover, "it
was confirmed to me by Adolph Miller, a member of the Reserve Board, that
Strong and his European allies proposed still more 'easy money policies,'
which included continued manipulation of the discount rates and open market
operations - more inflation." Hoover says he protested to Fed chairman
Daniel Crissinger, a political appointee left over from the Harding era who
was in over his head. "The other members of the board," says Hoover, "except
Adolph Miller, were mediocrities, and Governor Strong was a mental annex of
Europe."

Hoover had to some extent struggled behind the scenes in 1925 against
Norman's demands, but by 1927 he had begun to defer in matters of high
finance to Ogden Mills, who was willing to go along with the Bank of England
program. After the crash, Hoover's friend Adolph Miller of the Fed Board of
Governors told a committee of the US Senate:

In the year 1927...you will note the pronounced increase in these holdings
[US Treasury securities held by the Fed] in the second half of the year.
Coupled with the heavy purchases of acceptances it was the greatest and
boldest operation every undertaken by the Federal Reserve System, and, in my
judgment, resulted in one of the most costly errors committed by it or any
other banking system in the last 75 years....
What was the object of the Federal Reserve Policy in 1927? It was to bring
down money rates, the call rate among them, because of the international
importance the call rate had come to acquire. The purpose was to start an
outflow of gold - to reverse the previous inflow of gold into this country.

[Senate Hearings pursuant to S.R. 71, 1931, p. 134 in Lionel Robbins, The
Great Depression (London, 1934), p. 53.]

A few years later the British economist Lionel Robbins offered the following
commentary on Miller's testimony: "The policy succeeded....The London
position was eased. The reflation succeeded. But from that date, the
situation got completely out of control. By 1928 the authorities were
throughly frightened. But now the forces they had released were too strong
for them. In vain they issued secret warnings. In vain they pushed up their
own rates of discount. Velocity of circulation, the frenzied anticipation of
speculators and company promoters, had now taken control. With resignation
the best men in the system looked forward to the inevitable smash."
[Robbins, pp. 53-54]

Robbins contends that the Wall Street bubble of 1925-1929 was built on top
of an economy that was sinking into recession in 1925. The Norman-Strong
bubble masked that recession until the panic exploded in 1929. Robbins
places the responsibility for the Crash at the door of the Federal Reserve
and its European counterparts: "Thus, in the last analysis, it was
deliberate co-operation between Central bankers, deliberate 'reflation' on
the part of the Federal Reserve authorities, which produced the worst phase
of this stupendous inflation." [Robbins, p. 54]

The evolution of the Norman's tactics shows clearly enough that he did not
provoke a crash in New York out of legitimate self defense, to protect the
Bank of England's gold from being exported to Manhattan. Norman was willing
to sacrifice massive quantities of gold in order to feed the New York bubble
and thus be sure that when panic finally came, it would be as devastating as
possible. Between July 1928 and February, 1929, the New York Fed lending
rate was 5%, half a point higher than the 4.5% that was the going rate at
the Bank of England. As the London Economist commented, "two years ago [in
early 1927] no one would have believed New York could remain half a point
above London for more than a few weeks without London being forced to follow
suit." [Economist, February 9, 1929, p. 275] All during the autumn of 1928
the Bank of England hemorrhaged gold to Manhattan, as British pounds hurried
to cash in on the 12% annual interest rates to be had in the Wall Street
brokers' call loan market. Even in January and February of 1929, months when
the Bank of England could normally expect to take in gold, the gold outflow
continued.

During the first week of February, 1929, Norman raised the London bank rate
to 5.5%. The Economist snidely commented:

Finally, the 5.5 per cent. rate comes as a definite signal to America. It
must not be supposed that Continental centres will remain indifferent to
London's lead, and its cumulative effect may well be a definite
pronouncement that Europe is not prepared to stand idly by and see the
world's stocks sucked into a maelstrom. Wall Street can scarcely remain
indifferent to such a pronouncement, especially if the New York Reserve Bank
follows by a sharp increase in its own rate. In any case, the establishment
of European interest rates upon a new and higher level may well draw gold
back from New York before long; and if so the 5.5 per cent. rate will have
done its work.

[Economist, 9 February 1929, p. 275]

The higher British bank rate scared a number of Wall Street speculators. In
two days the Dow Jones average declined by about 15 points to 301. On the
day Norman hiked the rates, the volume went over 5 million shares, at that
tme an extraordinary level. But within a few days the momentum of
speculation reasserted itself.

The signal sent by the higher London Bank Rate was underlined in March 1929
by the Anglophile banker Paul Warburg. This was once again the scion of the
notorious Anglo-Venetian Del Banco family who had been the main architect of
the Federal Reserve System. Warburg now warned that the upward movement of
stock prices was "quite unrelated to respective increases in plant,
property, or earning power." In Warburg's view, unless the "colossal volume
of loans" and the "orgy of unrestrained speculation" could be checked,
stocks would ultimately crash, causing "a general depression involving the
entire country." [Noyes, p. 324]

Between February and April 1929, the Bank of England was able slightly to
improve its gold stocks. By late April the pound began to weaken, and the
Banque de France, true to Moreau's hard line policy, siphoned off more of
Norman's gold. July 1929 was a bad month for Threadneedle Street's gold. By
August 21, 1929 the Bank of England had paid out 24 million pounds' worth of
gold since the start of the year. In August and September, however, the gold
outflow slowed.

On the morning of 4 September 1929, the New York hedge fund operator Jesse
Livermore received a message from a source in London according to which a
"high official" of the Bank of England - either Montagu Norman or one of his
minions - had told a luncheon group of City of London men that "the American
bubble has burst." The same official was also quoted as saying that Norman
was looking for an excuse to raise the discount rate before the end of the
month. The message concluded by noting that a financier by the name of
Clarence Hatry was in big financial trouble. [Thomas and Morgan-Witts, pp.
279-280]

The New York Federal Reserve Bank had raised its discount rate to 6% on
August 8. Soon therafter, the market began to run out of steam. The peak of
the Coolidge bull market was attained on September 3, 1929, when many
leading stocks reached their highest price quotations. So Livermore's Bank
of England source had been right on te money. On Sept. 5, the market broke
downward on bearish predictions from economic forecaster Roger Babson, who
on this day won his nickname as "the Prophet of Loss." During the following
weeks, the market drifted sideways and downward.

On September 20, 1929 it became known in the City of London that the
Clarence Hatry group, which supposedly had been worth about 24 million
pounds, was hopelessly insolvent. On that day Hatry and his leading
associates confessed to fraud and forgery in the office of Sir Archibald
Bodkin, the Director of Public Prosecutions, went to have lunch at the
Charing Cross Hotel, and were jailed. Hatry later asserted that in late
August, he had made a secret visit to the Bank of England to appeal to
Montagu Norman for financing to allow him to complete a merger with United
Steel Company, a UK firm. Norman had adamantly refused Hatry's bid for a
bridge loan. By 17 September, when Hatry stock began to fall on the London
exchange, Hatry had liabilities of 19 million pounds and assets of 4 million
pounds.

When, on 19 September, Hatry approached Lloyd's Bank in last a desperate bid
for financing, the wayward financier had told his story to Sir Gilbert
Garnsey, a chartered accountant. Garnsey had made a second approach to
Norman for emergency financing, and had also been rebuffed. At this point
Norman had informed the chairman of the London Stock Exchange that the Hatry
group was bankrupt; in this conversation it was agreed that trading in Hatry
shares would be suspended on 20 September.

Norman thus wanted the Hatry bankruptcy; he could have prevented it if he
had wanted to. How many times did Norman, who operated totally in the dark
as far as the British government and public were concerned, bail out other
tycoons who happened to be his friends and allies? The Hatry affair was
useful to Norman first of all because it caused a rapid fall in the London
stock market. London stockjobbers who were caught short on cash were forced
to liquidate their New York holdings, and the Economist spoke of "forced
sales" on Wall Street occasioned by the "Hatry disclosures." [London
Economist, 23 November, 1929, p. 955] More important, Norman could now
pretend that since confidence in London had been rudely shaken, he needed to
raise the bank rate to prevent a further flight of funds.

Less than a week after the Hatry group's debacle, Norman made his final and
decisive bid to explode the New York bubble. He once again raised the Bank
of England discount rate. As the New York Times reported from London, "the
atmosphere was tense in the financial district and exciting scenes were
witnessed outside the Royal Exchange. Ten minutes before noon a uniformed
messenger rushed into the corridor of the Bank carrying a framed notice over
his head. The notice read: 'Bank rate 6 1/2 per cent.' A wild scramble
ensued as messengers and brokers dashed back to their offices with the
news." One of the subtitles of the Times's article was "BUSINESS FEARS
RESULTS". [NYT, 27 September 1929] And well they might have.

6.5% was a very high discount rate for London in those days, and a full
point had been a big jump. The London rate had not been so high since 1921,
during the so-called deflation panic of 1920-21. The British move towards
higher rates was imitated within two days by the central banks of smaller
continental states where British influence was high: Austria, Denmark,
Norway, Sweden, and the Irish Republic all hiked their discount rate. On
October 10 the British monetary authorities in India also raised the
discount rate there by a full point. Added to the steps already taken by the
Bank of England, these actions generated a giant sucking sound as money was
pulled out of New York and across the Atlantic.

The Economist approved Norman's maneuver, while blaming "the continuance of
Stock Exchange speculation in America, with its concomitant high call rates"
for the need to go 6.5%. Such a high rate would of course be highly
destructive to British factories and farms, but this, as we have already
seen, counted for nothing in Norman's machinations. The Economist commentary
ended with a very sinister prophecy:

Still, on the whole, few will doubt that the Bank was right this week to
change over to its...alternative of imposing dearer money rates at home. It
has decided to do so at a moment when the fates are becoming propitious to
an early success, which should permit of a relaxation of the present tension
before too long a period has elapsed.

[28 September 1929, p. 557]

What the Economist meant by success, as we will see, was the detonation of a
collossal panic in New York. By abruptly pulling millions of pounds out of
New York, Norman turned the sagging Coolidge bull market into the biggest
rout in stock market history up to that time. Then, as the Economist
suggests, the British bank rate could come down again.

John Kenneth Galbraith, in his much-quoted study The Great Crash, curiously
manages to avoid mentioning the raise in the British Bank Rate as the
immediate detonator of the Crash of 1929. But then, Galbraith is a Canadian
and an Anglophile. But a few old American textbooks had the story somewhat
better: "The stovck-market collapse came in October, 1929 when English
interest rates were raised to six and one-half per cent in order to bring
home needed capital that had been attracted to the United States by the high
speculative profits," wrote hicks and Mowry in their 1956 Short History of
American Democracy".

Various London outlets now began feverishly signalling that it was time to
pull the rug out from under the New York market. A prominent signaller was
Philip Snowdon, the Chancellor of the Exchequer in the Labour Party
government of Ramsay MacDonald which had come into power in the spring of
1929 on a platform which had included the need for better relations with the
United States. On October 3, 1929, Snowdon addressed the Labour Party's
annual conference in Brighton. Snowdon's audience was understandably not
happy with a higher bank rate, since they would be the main victims of
unemployment.

Snowdon, while stressing that Norman's actions were independent of the
Exchequer, genially told the delegates that "there was no other recourse."
Why not? Snowdon first repeated the argument about defending London's gold
stocks: "Monetary conditions in America, Germany, and France have been such
as to create a great demand for the currencies of those countries, dollars,
marks, and francs, and a consequent selling of sterling, with the result
that the rates of exchange have gone against us recently, reaching points
where payments were taken in gold." The US, in particular, was the culprit:
"In New York, with America's plethora of liquid capital and high rates,
there has been a usual year's orgy of speculation, draining money away from
England." "There has been a raid on the financial resources of this country
which the increased bank rate is now intended to check" Snowdon ranted. "The
object of the increased rate is to draw money back to England," Snowdon
stressed. The hardship of high rates must be blamed on the US: "...there
must be something wrong and requiring our attention when such an orgy 3,000
miles away can so dislocate the financial system of this country and inflict
injury on our workers and employers." It was time to bail out of New York
and come home to London, Snowdon urged: "British credit is the best in the
world. The British market is the safest in the world for those who are
satisfied with reasonable investments and not lured into wild speculations."
[NYT, 4 October 1929]

When J.P. Morgan read this speech, he was reportedly apoplectic that Snowdon
had repeated his catchphrase of "orgy of speculation" so many times. But
J.P. Morgan was also in the process of going short.

Snowdon's speech was widely applauded in the City of London, the New York
Times reported the next day, and his "reference to the effect of the
American speculation on the international situation was also approved...the
feeling is that such movements must be allowed to bring their own
correction." [NYT, 6 October 1929] The "correction" was now only a few weeks
away.

On October 21, 1929 the Great Crash began. On October 24, at the height of
the panic, Winston Churchill appeared briefly in the visitors' gallery of
the New York Stock Exchange to view the boiling trading floor and savor the
chaos he had wrought. On October 29, the principal market index lost 40
points on a volume of almost 12.9 million shares, an all-time record in that
epoch.

One of the remarkable features of October 29 was the large number of immense
block lots of stock that were dumped on the market, in contrast to the
previous days when the panic had mainly involved smaller margin-leveraged
investors. In those days the financial editor of the New York Times was the
veteran journalist Alexander Dana Noyes, who had played the role of
Anglophile Cassandra of the Coolidge market: at every periodic convulsion in
the speculative fever, Noyes had proclaimed that the day of reckoning had
finally come. In his later autobiography, The Market Place: Reminiscences of
a Financial Editor (Boston: Little Brown, 1938), Noyes admits in passing
that the British had played a key role in the dumping of these large blocks
of stock: "Afterward, it came to be known that the forced selling was not
only stock which had been bought for the rise by the hundreds of of
thousands of outside speculators, but represented also the closing-out of
professional speculators who had been individually 'carrying' immense lines
of stock. Possibly London, which after its habit had been joining in the
American speculation...started indiscriminate foreign selling." [p. 330]

By the end of October, the total value of stocks listed on the New York
Exchange had declined by 37%. That, it turned out, was only the beginning.
By the time the bottom was finally reached in March, 1933, stocks had
declined in price by more than 80%. By 1932 commodity prices had fallen by
30 to 40%. World manufacuring production was down by 30 to 50%. World trade
declined by two thirds. The International Labor Office in 1933 said that
approximately 33 million persons were out of work.

By Halloween, Norman was able to reduce the London rate from 6.5% to 6%. The
Economist gloated:

"Seldom has the country received a more agreeable surprise than that sprung
upon it by the Bank of England when at, twelve o'clock on Thursday morning,
it announced that its rate had been reduced from 6 1/2 to 6 per cent. Five
weeks ago, when Bank rate was raised from 5 1/2 to 6 1/2 per cent., doubts
were freely expressed lest the new rate might not prove effective in
correcting the exchanges and stemming the flow of gold from this country;
and voices were heard foreboding that 6 1/2 per cent. might have to be
followed by 7 1/2 per cent. in a few weeks' time. Less than three weeks
sufficed to confound the school of extreme pessimists, for by the middle of
October [when the New York panic began] it was plain that all danger of a
higher Bank rate had passed. The dollar was nearer the import than the
export gold point, the mark was back to par, and London and the sterling was
proving a magnet for the world's floating balances.

"The final collapse of the Wall Street boom under the avalanche of selling
which began on Thursday of last week, and which must be regarded as the main
factor in the Bank's decision, has confounded optimists and pessimists
alike. ...it must be borne in mind that the Bank rate was raised to 6 1/2
per cent. last September solely to make London an attractive centre for
short money. ...the crux of the situation lay in the attraction of the New
York market both for floating balances to be lent at call, and for the funds
of private investors anxious to participate in the profts of a boom which
appeared to have no end. Steps had to be taken by the Bank of England to
counter a situation which threatened to become critical for its own
reserves.

"Even before Wall Street's 'Black Thursday,' events showed that the new Bank
rate was achieving its objects to an extent surpassing expectations....With
the final collapse of the Wall Street boom, and the definite end of a
critical phase in the world's monetary history, in which New York had been
an inconveniently overwhelming competitor for international funds, the Bank
of Ebgland decided...to lose no time in allowing Bank rate to drop to the
level of the market rate....

"...it would be premature to jump to the conclusion that the Wall Street
break has cleared the world's monetary and commercial horizon of every
cloud...there is warrant for hoping that the deflation of the exaggerated
balloon of American stock values will ultimately be for the good of the
world....we look for a gradual improvement in the international monetary
situation as the huge balances hitherto concentrated in New York
redistribute themselves over the rest of the world - thus greatly easing the
strain on the British banking system and opening possibilities for a further
reduction in Bank rate in the not very distant future....

"The cessation of the westward flow of funds, even if the reversal of the
process does not lead to the early recovery by London of all, or nearly all,
her lost gold, should greatly ease the difficulties presented by the
problems of international debt payments and the interrelated Reparations
issue...The 6 1/2 per cent. rate HAS DONE ITS WORK AND DONE IT WELL."
[London Economist, 2 November 1929, pp. 805-806, emphasis added]

On November 23, when the smoke had cleared on Wall Street and the wreckage
there was more clearly visible, the Economist catalogued "Reactions to the
Wall Street Slump." Again they recurred to Montagu Norman's interest rate
hike of September 26: "That advance...was a by no means negligible factor in
turning into the opposite direction the tide of funds which had been flowing
so strongly toward New York, and in causing the edifice of the American
speculation to totter." [London Economist, 23 November 1929, p. 955]

By mid-December the London discount rate was down to 5%. The Economist in
its year-end review of 1929, repeated its praise for Norman's bank rate
strategem: "In the financial world we faced and met a crisis which, in the
opinion of the doubters, threatened even to endanger the gold standard in
this country. But after enduring a long-continued drain of gold...the Bank
at a critical moment took a course as bold as it was successful, and in the
event it proved necessary only to put up with acutely dear money for a
matter of weeks." In that holiday season of 1929 the Economist saw "a
depression from across the Atlantic of cyclonic force" but since "Great
Britain's monetary position in regard to gold need give rise to no anxiety"
and British "industry starts a New Year ...on more even terms with our
competitors than for many years past," Norman had scored a "success."

Norman had succeeded in torpedoing the US economy, but he had also unleashed
a world depression. The British had been in a depression anyway, so getting
the rest of the world to join them in their misery was a highly positive
development. As for Benjamin Strong, he had died in October, 1928.

FROM COLLAPSE TO DISINTEGRATION

During 1930, levels of employment and production declined sharply in most of
the world. British unemployment went from a colossal 1.34 million at the end
of 1929 to an astronomical 2.5 million at the end of 1930. By late in the
year Lord Keynes was writing of the "Great Slump of 1930," as a result of
which mankind was living "this year in the shadow of one of the greatest
economic catastrophes of modern history." [Essays in Persuasion, p. 135]
Keynes estimated that the level of new capital investment in the United
States was by late 1930 already 20% to 30% less than it had been in 1928.
[p. 145]

1930 also saw a series of post-crash banking failures, especially among
smaller banks of the rural south. These bank failures struck Kentucky,
Tennessee, Arkansas, and North Carolina. There was also the insolvency of
the Bank of United States in the New York City garment district.

With Wall Street crippled, London quickly became the center of what today
would be called international hot money, with short term sterling balances
that were ready to rush anywhere in the world a better rate of return could
be obtained. During the period of uncertainty about the fate of the French
franc between 1924 and 1926, large amounts of French hot money had shifted
into London and had remained there. This money would exit with particular
abruptness in case of trouble in London. This meant that a sudden collapse
of confidence in London could easily lead to panic and the massive flight of
capital.

THE COLLAPSE OF EUROPE

In late 1929 and 1930, the British financiers noticed very little change in
their usual depression routine. But the explosion in New York cut off loans
and wrecked the banking system in central Europe, as signalled by the
Kreditanstalt banruptcy in Vienna in May 1931, and the fall of the Danatbank
and the rest of the German banks in July of the same year.

Vienna had been chronically troubled because of its status as the full-sized
head of a truncated body after the breakup of the Austro- Hungarian Empire.
The Kreditanstalt, a Rothschild property, was the survivor among the Vienna
banking houses, which had succumbed one by one to the post-Versailles slump.
As a result, Kreditanstalt owed $76 million abroad, mainly to UK and US
investors. An international effort to bail out the Kreditanstalt with the
help of the Rothschilds, the Bank for International Settlements, the Bank of
England, and others availed nothing.

Failure of the Kreditanstalt meant the bankruptcy of much of central Europe.
The crisis of the German banks took center stage. Even more than in Austria,
the drying up of New York as a source of lending was the main culprit here.
It was estimated that Germany had to meet yearly foreign payments of $800
million, including the onerous reparations. A run on the Berlin banks
developed. Within a short time Germany was forced to export two fifths of
her gold reserves for a total of $230 million.

The crisis in Berlin inevitably had immediate and serious repercussions in
London. Some believed that British financial houses had been too slow to
pull their money out of Berlin, and that large sums owned by the British had
been frozen in Berlin when the banks there were shut down. Part of the panic
travelled to London by way of Amsterdam: the Dutch banks had loaned heavily
in Germany, and the Dutch withdrew their considerable assets from London to
stay afloat. Now the tremors unleashed by the Crash of 1929 had undermined
the entire banking system in Germany, Austria, Romania, Hungary, and the
rest of central Europe.

It was at this point, with a cynical treacherous reversal of their entire
policy, that the British decided to wreck the sterling- centered
international monetary system which they had re-assembled after World War I.
Their gesture was similar to the speculative attacks on the pound mounted by
George Soros and other British- backed speculators in September, 1992, which
aimed at destroying the European Exchange Rate Mechanism, a grid of
relatively fixed parities among the continental currencies. In soccer terms
it was an "autogol" or own goal, scored against one's own purported team.

In the midst of the German crisis the fact that German reparations and
interallied war debts could not be payed was finally recognized by US
President Herbert Hoover, who was realistic enough to proclaim the debt
moratorium which bears his name - the Hoover moratorium of June, 1931, which
froze all reparations and war debt payments for 1 year. This moratorium was
approved by the US Congress with sweeping majorities in December, 1931. But
the Hoover moratorium was too little and too late. By the time Hoover had
made up his mind to act, Schacht's Reichsbank was just a few weeks away from
defaulting on gold payment and imposing strict controls on all currency
transfers to the outside world. Another problem with the Hoover moratorium
was that it was announced for only one year - it should have been for the
duration of the crisis. The Hoover Moratorium also contained a domestic
political trick: if the European governments were not required to pay their
debt to the United States government, then those same Europeans might still
have enough liquidity to pay back their loans American privately owned banks
and businesses. So the US Treasury would have suffered, for the benefit of
the private sector. In December, 1932 France, Belgium and other debtors
defaulted, and the Hoover Moratorium became permanent in practice.

Under the guidance of Schacht and Montagu Norman, the Germany of Chancellor
Heinrich Bruening rapidly evolved into the prototype of the autarkical
currency bloc of the 1930's. Most of the classical Schachtian apparatus
later employed by Hitler was already in place before Hitler ever came to
power.

The emergence of the mark zone was also assisted by Hoover's Secretary of
State, the notorious Anglophile Henry Stimson -- the ego ideal of the
youthful George Bush. It was in fact Simson who, while attending the London
Conference on the German crisis, proposed the so-called Standstill
Agreements, which stated that creditors owed money by the German government
or by German banks and businesses would be obliged to refrain from demanding
payment, and in any case not to take their money out of Germany. This gambit
was found especially appalling by Jacques Rueff, who was in attendance. A
debt moratorium for the duration of the crisis would have been simpler and
far more effective. As it was, the ability of German residents to buy and
spend abroad was throughly curtailed. Soon all trade was restricted, and
frozen and blocked accounts were instituted. The Reichsbank rediscount rate
went to a strangulating 10%, and the rate on collateral loans went to 15%.
In the domestic economy, deflation and austerity were the order of the day.
All of this played politically into the hands of Hitler and the Nazis, which
was precisely the intention of Montagu Norman.

LONDON'S SINGAPORE DEFENSE OF THE BRITISH POUND, 1931

The surrender to Japan of the British naval base and fortress of Singapore
on February 15, 1941 was the culmination of one of the most absurd military
farces in the history of Perfide Albion. This was the result of a long-term,
conscious and deliberate committment to surrender Singapore as soon as
possible if attacked by Japan, combined with the need to make a sham of
defending the place so as not unduly to arouse the suspicions of the bloody
Yanks. The British were looking ahead to the postwar world. They wanted the
Japanese to have plenty of time to attain and fortify their defense
perimeter, so that the US losses in rolling back Nippon would be nothing
short of catastrophic. At the same time, the British wantesd to hide this
treachery from the US public. It had to look as if they were caving in to
force majeure.

At the time, every schoolboy knew that the British had fortified their coast
defense artillery so that the guns could only point out to sea, and not to
the land approaches, which were the axis of attack chosen by the Japanese.
The British troops present, mainly imperial conscripts, were more or less
overtly told not to fight. Once the needs of dramaturgy for the US market
had been satisfied, Gen. Percival, the British commander, surrendered with
all deliberate speed.

The feeble efforts to save the pound mounted by Montagu Norman's Bank of
England and by Ramsay MacDonald's national unity cabinet in the summer of
1931 can be usefully summed up as a "Singapore defense" avant la lettre -- a
bungling bogus sham that was deliberately designed to fail.

NORMAN INTENDED TO DEFAULT ALL ALONG

There is sold evidence that Montagu Norman's decision to provoke a British
default on gold payment dated back to mid-July, 1931, well before the pound
got into trouble. The following is an account of Montagu Norman's meeting
with the German delegation during the London Conference of July, 1931, which
had been called together to deal with the crisis of the German banks and
currency. Norman's preferred recipe for Germany was default on gold payment,
standstill agreements, and a possible debt moratorium. As we see here,
Norman told German State Secretary Schaeffer that in a few weeks it would be
clear what he was driving at -- which in retrospect was understood by all
concerned as an allusion to Norman's own coming British default on gold
payment:

"Zur fuer die ganze Konferenz entscheidenden internen Sitzung kam es am 21.
[Juli 1931] in der britischen Treasury, an der Reichskanzler Bruening,
Ministerialdirektor Schwerin-Krosigk, Staatssekretaer Schaeffer und
Geheimrat Vocke auf deutscher und Montague Norman, Sir William Leith-Ross
und Waley auf britischer Seite teilnahmen. In dieser Sitzung erklaerte
Montague Norman mit aller Offenheit, dass er bei vollem Verstaendinis fuer
die deutsche Lage nicht imstande sei, ueber die Bank von England zu helfen,
da dise selbst durch die anhaltende Geldabzuege der letzten Tage (taeglich
bis zu 2 Mill. Pfund) unter schwerstem Druck stehe. Sein einziger - und
unter den gegebenen Verhaeltnissen auch einzig moeglicher - Rat waere, die
Konferenz schnell zu beenden, deutscherseits selbst private
Stillhaltevereinbarungen mit den Auslandsglauebigern zu treffen,
gegebenfalls ein Auslandsmoratorium - und im Inneren Suspendierung der
Goldeinloesungs- und Golddeckungspflicht, mit anderen Worten genau das, was
England acht Wochen spaeter selbst zu tun gezwungen war. Dass Norman dabei
bereits an diese spaetere eigene Politik dachte, geht daraus hervor, dass er
im Anschluss an die Sitzung Staatssekretaer Schaeffer persoenlich erklaerte,
dass Schaeffer ihn in wenigen Wochen wohl verstehen wuerde." [Rolf E. Lueke,
Von der Stabilisierung zur Krise (Zuerich: Polygraphischer Verlag, )

This report not only illuminates the timing of Norman's decision to default.
It also shows how explicitly Norman pushed Germany into the status of an
autarkical currency bloc, with all international payments subject to strict
government controls.

On August 23, Norman (who was nursing one of his periodic nervous breakdowns
in Canada) talked by telephone with Harrison of the New York Fed. Harrison
asked Norman if he though that the austerity program proposed by the new
British National Government were adequate. Norman replied that he believed
that the austerity program was not adequate, and that any inadequate program
was bound to cause trouble within a year or so. Norman recommended
exploiting the current crisis to force through an economic adjustment
featuring a drastic reduction in wages and in the cost of production, so as
to make British goods competitive again. If this were done, Norman thought,
there would be no need for any loans. Harrison objected that it might be
risky to rely exclusively on a balanced budget to defend a currency. Norman
was signalling a new defeatist policy for the Bank of England -- one that
impotently called on the British government to impose more austerity.

HARVEY LIES TO THE CABINET

The Deputy Governor of the Bank of England, Sir Ernest Harvey - the man who
actually terminated the British gold standard - was uniformly defeatist
throughout the crisis. At a cabinet meeting on September 3, Harvey expressed
his conviction that "the future course of events depended largely upon the
attitude of the British public towards the Government's proposals." This
view, expressed at the height of the crisis, was at odds with the entire
Bank of England and postwar central bank ideology, which stressed the
autonomy and power of the central banks over the flailing of the politicians
and governments. For three centuries the Bank of England had considered
itself responsible for the fate of the pound; now Harvey was talking out of
the other side of his mouth. This reversal of attitude was also expressed in
Lord Norman's constant refrain that the crisis of the pound had to be solved
by a balanced budget on the part of the British government, and not by an
increase in the Bank Rate of other measures which only the Bank of England
itself could take.

As contemporary observer Palyi writes, "several 'eyewitnesses' have told
this writer that both those in the Treasury and in the Bank had convinced
themselves that Britain's house could not be brought into order without
first 'teaching a lesson' to a public which was either indifferent or
indolent." [Palyi, p. 269] But that was a cover story for deliberately
scuttling the pound.

At that same cabinet meeting of September 3, Sir Ernest Harvey told the
cabinet that total losses by the Bank of England since the beginning of the
crisis amounted so far to 130 million pounds in gold and foreign exchange.
Harvey then deliberately lied to the cabinet, stating that since the loans
made to London by the foreign central banks would have to be repaid in gold
if they could not be paid any other way, this "amounted in effect to a lien
on a portion of their existing gold holding and reduced their actual free
holding to little more than 80 million pounds or about the equivalent of the
new government credit." As one historian comments, "This alarming exposition
of the credit agreements was...seriously misleading. They did not provide
for a lien on the Bank of England's gold or anything close to it. Rather
they contained a gold payment clause which required that payment be made in
gold." [Kunz, p. 122]

LONDON REFUSES TO RAISE BANK RATE TO CRISIS LEVEL

As Robbins notes, the monetarist orthodoxy of British financial experts
between the two world wars was that if a country got into economic trouble,
"You must put up your bank rate and you must limit your fiduciary issue.
Anything else is bad finance." Curiously, when the terminal crisis of
Montagu Norman's much-vaunted gold standard finally arrived, the British did
neither of these things.

British monetarist ideology featured the faith that an increase in the Bank
of England's bank rate could pull gold up out of the ground, or even attract
gold to London from the moon. The bank rate was at the heart of the entire
British fetish of usury.

Fiduciary issue of currency was a means used to regulate the supply of
credit. These were extra bank notes issued by the central bank. Cutting
fiduciary issue would have meant a credit contraction - tight money. In the
midst of the summer, 1931 pound and gold crisis, the British actually
increased their fiduciary issue, when their own orthodoxy would have
dictated a sharp cut. But the Norman's Bank of England persistently
increased fiduciary issue in the face of the crisis.

NORMAN'S REFUSAL TO HIKE THE BANK RATE

As for the Bank Rate, the Bank of England acted in violent contradiction to
its own monetarist orthodoxy. As one scholar later summed up:

"On May 14 [1931], immediately after the collapse of the Kredit-Anstalt, the
Bank Rate was actually lowered, from 3 to 2 1/2 per cent. It was not changed
until July 23rd, when at last it was raised to 3 1/2 per cent. During the
last week or so of July the Bank of England lost over 25 million pounds in
gold. On July 30th the Bank Rate was again raised, but only to 4 1/2 per
cent, and there it remained until September 21st. Great Britain had always
advocated a high Bank Rate as the remedy for a financial crisis and a drain
of gold. She had been on the gold standard, in effect, for over two hundred
years, with only two breaks - one during the Napoleonic wars and one during
the last war [1914-1925]. Now for the first time in her history she
suspended gold payments in time of peace and with a Bank Rate of 4 1/2 per
cent ! Does it follow that the British monetary authorities were secretly
glad to leave the gold standard? ....why was the Bank Rate not raised but
actually lowered after the Kredit Anstalt closed? Why was it not raised to 8
per cent or perhaps 10 per cent in July or even in August?" [Benham,
Monetary Policy, pp. 9-11] These are good questions.

Back in 1929, when Montagu Norman had been concerned with precipitating the
New York stock market panic, 6.5% had not seemed too high a Bank rate in
view of the desired result. In April 1920, when the Norman had wanted to
undercut New York, the Bank Rate reached 7%, and had stayed there for a full
year. But now, 4.5% was the nec plus ultra.

A worried J.P. Morgan of New York cabled on September 7 to Morgan Grenfel in
London:

"Are the British Treasury and the Bank of England satisfied that the present
method of dealing with the sterling exchange is the best that can be
devised? In this connection the question naturally arises as to why the Bank
of England does not use the classic remedy of Bank Rate instead of
apparently pegging the exchange." [Kunz, p. 126]

Apologists for Norman and his retainers have advanced various lame arguments
to explain the gross treachery of Threadneedle Street. One argument was that
the British domestic economy was already too depressed to survive a rise in
the Bank Rate. But on September 21, after defaulting on gold, the Bank of
England raised the Bank Rate to 6% and left it there for five months,
regardless of the impact on the credit-starved domestic British economy.

Then there is the argument of "prestige," which claims that radically to
raise the Bank Rate under the pressure of foreign gold demands would have
undermined the prestige of the pound sterling. Was it then more prestigious
to default?

"It had been intimated that the decision to devalue was due to British
'sensitivity': the Treasury and the Bank found it 'undignified' to balance
the national budget under pressure of foreign bankers. Was their dignity
better served by defaulting?" [Palyi, p. 294]

As the same author sums it up, "the reluctance to use the discount weapon
was at the root of the widely disseminated charge that 'perfidious Albion'
had intentionally 'trapped its creditors," especially given the fact that
British foreign obligations were denominated in pounds, not in the currency
of the lending country. So these foreign obligations could be paid off in
cheaper pounds after a default and devaluation.

THE FRANCO-AMERICAN LOANS

The British judged that their sham defense of the pound required at least
some semblance of support operations for their own currency in the
international markets. For this purpose, it was decided to procure loans
from the United States and France for these support operations. The main
effect of these loans was to make the lquidity crisis that followed the
British default more acute in both Paris and New York.

British representative H.A. Siepmann arrived in Paris on August 24 to begin
negotiating the French loan. Given the fast pace of the crisis, Siepmanm
should have been a man in a hurry. But Siepmann "took the approach that the
question of a credit was not a top priority matter, a rather suprising one
in the cirumstances and one that not only confused Governor Moret but
diverged totally from the viewpoint held by Morgan's (N.Y.) and Harrison" at
the New York Federal Reserve. [Kunz, p. 113]

Morgan's for its part had been reluctant to undertake the British loan. The
mood among other American banks was shown by the unprecedented number of
refusals to participate in the underwriting of the loan which arrived in
response to the offer cable sent out by Morgan's. Banks refusing such an
offer ran the risk of being excluded from future Morgan loan syndications.
The refusals show the extreme liquidity anxieities already besetting the US
bankers.

This state of affairs is reflected in the following cable from Morgan, New
York to Chancellor of the Exchequer Philip Snowden in London:

"In reference to the proposed interest rate in America we may emphasize that
there is not a single institution in our whole banking community which
actually desires the British Treasury Notes on any terms either as to
commission or interest.....Every institution is probably making strenuous
endeavours to get its position more liquid." [Kunz, p. 116-117]

As it was, the British took in the loans, which were obtained by the British
Exchequer from New York and Paris. Starting on August 1, the British
government organized a loan of $250 million, mainly from the United States.
On August 26, the British requested and were granted a further US loan of
$400 million. [Hoover, pp. 81-82]

The British loan was the biggest made by Morgan between the world wars. The
loan took the form of a pledge by Morgan and 109 other American banks to
purchase dollar-denominated Treasury Bills of the British government for
periods of 30, 60 and 90 days.

AUGUST 4 CRISIS- NO INTERVENTION BY BANK OF ENGLAND

During the first days of August, the British authorities announced that they
would receive loans from foreign central banks for the purpose of conducting
support operations for the pound sterling. But on August 4, the Bank of
England and its agents were inexplicably absent from the currency markets,
and the pound quotation collapsed below the gold export point to New York.
Norman and his crew had "forgotten" to defend the pound that day -- clearly
a conscious decision to sabotage their own pound. The confidence-building
effect of the central bank loans was completely dissipated. To make matters
worse, support operations seem to have been virtually "forgotten" again two
days later.

GOLD SOVEREIGNS SUSPENDED

Around the middle of September, the Bank of England suddenly discontinued
its habitual practice of paying out gold sovereigns -- that is, gold
coins -- to those who wanted to exchange pound sterling banknotes. This
measure came at a time when gold bullion was still freely available for
those who wanted to trade in larger sums. This amounted to the transition to
a gold bullion standard. Bu the effect on market psychology turned out to be
catastrophic. The suspension of official payment in gold sovereigns was seen
for what it was - the immediate prelude to the default on all gold payment.

AFTERNOON POUND BREAKS IN NEW YORK

On August 29, Morgan partner Thomas Lamont send a cable to Grenfel in London
commenting on the loss of confidence in the British government that was
spreading on Wall Street. A cable two days later stressed the concern felt
at Morgan's New York about "the poor handling of the sterling exchange, a
symptom of which was the frequent breaks in the value of sterling in the New
York market after the London market had closed. It apppeared that the Bank
of England agents in New York were setting their watches to London time, and
knocking off for the day after lunch. When the pound crashed just before
tea-time, Norman's minions were at home.

NO ATTACKS ON BEARS A LA POINCARE

In the same missive, Morgan's (N.Y.) also suggested better liaison between
the Bank of England, the Bank of France and the FRBNY so that the credits
would become an offensive weapon rather than a sitting duck for rapacious
financiers." [Kunz, p. 120] To be effective in stopping speculation, the
monetary resources obtained by the Bank of England had to be employed
dynamically. The Bank of England could not just sit there, buying unlimited
quantities of pounds at the floor price. Rather, the money had to be used
aggressively to buy pound futures so as to drive the pound quotation up, if
only temporarily, with the result that some of the specualtors who had sold
the pound short would have been severely burned. The pound would have
received additional support through short covering purchases. The Bank of
England needed to organize a short squeeze or bear squeeze so as to create
genuine doubt about whether shorting the pound was a sure way to lock in
profits. Bear squeezes and short squeezes had been actively organized by
French Premier Poincare' during his defense of the French franc some years
earlier.

ONLY 2 SMALL BANKS USED

Another feature of Norman's Singapore defense was the method used to
organize support operations for the pound. All support operations were
conduited through two small banks. Support operations against the dollar
were done through the British Overseas Bank, and support operations against
the franc were done through the Anglo- International Bank. This absurd
method guaranteed that everyone in the markets knew exactly when and in what
amount the Bank of England was interveneing, and that everyone also soon
knew exactly how much of the various French and American support loans
remained unused. If it had wished to be effective, the Bank of England would
have intervened in its own name, and would also have conduited other
operations through the big British clearing banks. The small size of the
banks actually used also limited the amount of pound futures they could buy,
since their credit was so limited.

LOW FORWARD PRICE OF POUNDS

On September 1, Morgans (N.Y.) cabled their London partners an analysis of
the London and New York sterling markets with special focus on the weakness
and lack of depth of the forward market. [Kunz, p. 121] The elementary
strategy for defending the pound would have been to keep the price of pound
futures above the spot price for pounds in the cash market. If that could be
accomplished, arbitrageurs would have been impelled to sell the pound
futures and buy the spot pounds, generating an updraft around the pound
quotations. But if pound futures were allowed to sink lower than current
pounds, financiers would obviously sell pounds and buy pound futures to lock
in their profit.

POUND PEGGED TOO HIGH

Harrison of the FRBNY cabled Harvey on September 3 that in his opinion the
British were attempting to peg the pound/dollar rate much too high. The
British were attempting to support sterling at $4.86 to $4.86125, which was
considerably above British gold export point. In Harrison's view, the
artifically high peg only encouraged sales of sterling. Harrison wanted the
pound to fluctuate just above that currency's gold export point. Harvey
declined to make this change, saying that although he was in general
agreement this was not the time to change tactics. [Kunz, p. 121]

DUTCH GUILDER RATE NEGLECTED

In yet another deliberate British fiasco, while the pound to dollar and
pound to franc rates were supported, the pound to Dutch guilder quotation
received no support of all. Given the considerably importance of the Dutch
currency at the time, this was insane folly. The pound/guilder exchange rate
went below the gold export point in September, and significant amounts of
British gold were shipped to Amsterdam during the final phase of the bogus
defense of the pound.

FOREIGN SECURITIES NOT USED

Lord Reading, the Foreign Secretary, suggested to Snowden between September
10 and September 14 that the Treasury prepare a plan for the mobilization of
foreign securities held in Britain for the purpose of depending the pound.
Reading thought that this operation could be modeled on the methods used for
the same purpose during the First World War. Lord Reading also wanted
MacDonald to order the Bank of England to prepare detailed financial data
for the use of the Financial Subcommittee of the cabinet, composed of
MacDonald, Snowden, Reading, and Neville Chamerlain. [Kunz, p. 129] None of
this was carried out.

BRITISH SPECULATORS: OWN GOAL

On Monday, September 14, there was the first meeting of the Financial
Subcommittee of the cabinet. Lord Reading wanted to determine exactly who it
was that was dumping all the pounds on the international markets. Reading
thought that many sales appeared to be British-inspired, and that the
cabinet ought to consider a method of cracking down on such transactions.
Harvey, who was present, expressed pessimism about the ability of the
Government or the Bank to halt British flight capital, and "he further made
the false statement that the sale of sterling by British citizens was not
really an important problem."

Harvey himself knew this was nonsense. In reality, "Harvey had been
sufficiently alarmed about British sales of sterling to write to various
culprits such as Lord Bradbury to ask them not to continue to purchase
dollars. Also Fisher had told [US diplomat] Atherton that internal capital
flight was one of the causes of Britain's problems. As the Bank of England,
not the Treasury, kept track of currency movements, Fisher could only have
known this if the Bank so informed him." [Kunz, p. 143]

The London Daily Star was upset enough about flight capital to write that if
the National Government were really national, "it could act at once against
the traitors who are sending their gold abroad...." [New York Times,
September 18, 1931]

On the fateful Default Day of September 21, 1931, the New York Times related
the comments of the London correspondent of Le Matin of Paris. This
journalist, Stephane Lauzanne, is quoted as saying:

"The most recent purchases of foreign exchange were not undertaken for
foreigners, as is stated in the official British statement, but in fact by
British subjects. There were considerable withdrawals of foreign capital,
but these took place mostly several weeks ago. During the past few days I
have been assured by one of the most influential representatives of French
banking circles in London that to his personal knowledge orders for the sale
of sterling and purchases of dollars were given to the London banks by great
numbers of British clients. Even as late as Saturday [September 19]
10,000,000 pounds left the Bank of England's vaults." [New York Times,
Monday September 21, 1931] Even on the eve of the default, London was still
exporting capital - getting the most out of available pounds to buy up
assets around the world.

THE INVERGORDON FARCE

In late September 1929, Norman had used the Hatry bankruptcy as a pretext
for raising the Bank Rate, which he had wanted to do for reasons of economic
warfare against the USA. In 1931, an indispensable part of the orchestration
of the British default was an alleged "mutiny" in the Royal Navy in protest
over pay cuts.

On Tuesday, September 15, Sir Austen Chamberlain, the First Lord of the
Admiralty, informed MacDonald of a trifling incident which had taken place
at Invergordon. About 500 sailors of the Royal Navy had assembled for
meetings to discuss the pay cut for experienced seamen which the National
Government was proposing. The seamen ignored orders to return to their ships
until their protest meetings were over. In response, the Admiral of the
British Atlantic Fleet announced the postponement of the scheduled naval
maneuvers, and also the dispersal of the Atlantic fleet to its various home
ports. It was these latter actions which "elevated what might have remained
a small incident into a mjor occurrence. Sensational headlines around the
world pointed to the parallels to the Russian revolution of 1905 and 1917
and the German revolution of 1918, both of which had been marked in their
early phases by fleet mutinies. The Revolution was about to overpower the
Royal Navy itself! In addition to this hysterical hype, there was also the
sense that the austerity program would have rough sledding from other groups
in Britain as well. [Kunz, p. 131]

THE BANK OF ENGLAND DEMANDS DEFAULT

A despatch of September 17, 1931 to the New York Times reported that Sir
Ernest Harvey, Deputy Governor of the Bank of England, and other financial
leaders had gone that evening to the House of Commons to convey to Prime
Minister Ramsay MacDonald "a grave warning that the stability of the pound
was again imperiled." "It is stated that they gave two reasons for this
emergency - first, the naval unrest, and, second, the report that a general
election was imminent."

Saturday September 18 was the day the British cabinet officially decided to
default on Britain's gold obligations. MacDonald called it the most solemn
conference ever held at 10 Downing Street. True to form, it was the Bank of
England that proposed the abrogation of the gold standard through the mouth
of its Deputy Governor, who announced that the only course of action left
was for Britain to leave the gold standard. [Kunz, p. 135] Harvey
deliberately created the false impression that he had discussed the
situation after the close of trading on Friday with Harrison of the New York
Fed. This was not true. Harvey, in response to a question from MacDonald,
added that he did not think it worthwhile to raise even 100 million pounds
($450 million) if people were only going to withdraw it. MacDonald quickly
agreed to default, and the rest of the cabinet meeting was devoted to
technical details of how to terminate the gold standard. [Kunz, p. 135]

It was only on Saturday, September 19 that Harvey informed Harrison of the
New York Fed of what the British government was now doing. Harrison was
described as greatly shocked by this decision, which came as a surprise to
him. Harrison persisted for a time in exploring possible alternatives to
London's default, and offered further loans. [Kunz, p. 137] But the Bank of
England remained committed to immediate default. More help could have been
obtained from Paris as well. Then there is the embarrassing fact that during
the last week of the gold standard the Bank of England's gold stocks
INCREASED from 133,300,000 to 135,600,000 pounds. [Palyi, p. 277]

THE END OF THE WORLD

On Sunday, September 20, 1931, the British government issued its statements
announcing its decision to "suspend for the time being" the clause of the
Gold Standard Act of 1925 requiring the Bank of England to sell gold at the
fixed price. All the other elements of the official British mythology were
also present. "His Majesty's Government have no reason to believe that the
present difficulties are due to any substantial extent to the export of
capital by British nationals. Undoubtedly the bulk of withdrawals has been
for foreign accounts." The bloody wogs, as we see, were once again the root
of the problem. Furthermore: "His Majesty's Government have arrived at their
decision with the greatest reluctance. But during the last few days
international markets have become demoralized and have been liquidating
their sterling assets regardless of their intrinsic worth. In the
circumstances there was no alternative but to protect the financial position
of this country by the only means at our disposal." As we have seen, there
were other means. Finally, there was the obligatory stiff upper lip: "The
ultimate resources of this country are enormous and there is no doubt that
the present exchange difficulties will prove only temporary." [New York
Times, September 21, 1931]

The worldwide shock was severe. In the words of Jackson E. Reynolds. then
President of the First National Bank of New York, "when England went off
gold it was like the end of the world."

THE BANKERS' RAMP

With the help of demagogic headlines in the London afternoon tabloids, the
British oligarchy placed the blame for the fall of the mighty pound on a
"bankers' ramp" led by foreign central bankers. A favorite target was poor
George Harrison of the New York Federal Reserve, who was rewarded with
slander and obloquy for his pathetic and servile devotion to the currency of
British imperialism. Another fall-guy was the Banque de France.

One British chronicler of these times sums up the official line of
scapegoating the foreigners as follows: "It was basically the American trade
cycle, and not British monetary policy, that made life so wretched for us."
[R.S. Sayers, 97]

JACQUES RUEFF ATTACKS BRITISH HANDLING OF CRISIS

During the weeks of the British crisis, the economist Jacques Rueff was
serving as the Financial Attache at the French Embassy in London. This meant
that Rueff was in practice the manager of the French sterling balances.

Palyi cites the "'posthumous' charge by Rueff that the "Bank of England
defaulted intentionally in order to damage the creditor central banks, the
Bank of France in particular...." [Palyi, p. 268]

On October 1, 1931, Rueff completed his memorandum entitled "Sur les causes
et les enseignements de la crise financière anglaise," which was intended to
be read by French Finance Minister P.-E. Flandin and the French Prime
Minister, Pierre Laval.

Rueff first described the modes of intervention of the Bank of England:
"Elle avait...deux instruments: le taux d'escompte et la politique dite
d''open market'....Depuis 1929 la Banque d'Angleterre a constamment utilisé
ces deux instruments pour maintenir aussi bas que possible les taux en
vigeur sur le marché de Londres. Elle a toujours retardé aux maximum les
élévations de taux d'escompte qui s'imposaient, cependant qu'elle cherchait
à augmenter, par ses achats de valuers d'Etat, l'abondance monétaire du
marche." [Jacques Rueff, De L'Aube au Crépuscule, p. 301]

For Rueff, the British were guilty of violating the implicit rules of the
gold exchange standard, since they tried to maintain their liquidity despite
a gold outflow. "on peut affirmer notamment qu'en 1929 et 1930, presque sans
exception, la politique d''open market' de la Banque d'Angleterre a été
faite à contresens. Les mouvements d'or, en effet, tendent à se corriger
eux-mêmes, puisque toute sortie de métal tend à provoquer une restriction de
crédit, qui hausse les taux du marche. Or, en 1929 et 1930, toutes les fois
que de l'or sortait de la Banque d'Angleterre, celle-ci achetait des valeurs
d'Etat sur le marché, remplacant ainsi les disponibilites qui venaient de
dispara&itremas;tre." [302]

"Autrement dit, pendant les deux années 1929- 1930, la Banque d'Angleterre a
constamment paralysé le jeu des phénomenes qui tendaient à adapter la
balance des paiements anglais aux nécessites résultant de la politique
économique suivie par le pays." [p. 303]

Because of these policies, Rueff found, the British had weakened themselves
even before the German crisis had begun: "Or, en 1931, ces fautes ont été
commises, provoquant des mouvements de capitaux qui ont été mortels pour le
change anglais. Il est très probable que l'Angleterre aurait pu y résister,
si elle n'avait pas été mise préalablement dans un état de paralysie
économique et financière, interdisant à son organisme les réactions
spontanées d'un marche normal." [p. 303]

Rueff repeatedly condemns Stimson's intervention at the London Conference of
July, 1931 with the proposal for standstill agreements which immediately
created a liquidity crisis and put world banking in difficulty: "Toutes les
banques du monde, voyant soudain immobilisé une fraction très importante de
leurs capitaux a court terme, ont cherché à récupérer toutes les réserves
qu'elles pouvaient rendre disponibles." [304}

But the British always blamed the wogs:


"...l'opinion britannique ...recherche a l'exterieur la cause de ses
difficultés." [305]

The British had been wallowing in a depression since 1918, and that for them
made it a world economic crisis: "Il faut d'abord remarquer que, pour
l'opinion britannique, la crise économique d'après guerre n'est pas chose
nouvelle. Depuis que l'Angleterre souffre du chomage permanent - c'est-
à-dire depuis la guerre - l'opinion britannique et les experts anglais
affirment que le monde est en état de crise. Depuis la guerre, même lorsque
le monde, sauf l'Angleterre, était en pleine prospérite, les représentants
britanniques ne cessaient de demander à la Société des Nations de trouver un
remède à la crise économique, qualifiée de mondiale parce qu'elle affectait
les intérêts du Royaume-Uni de Grande-Bretagne et d'Irlande." [307]

A key British problem was their high unemployment, which they had chosen to
deal with by means of payments to the unemployed, called the dole: "Et cela
explique que la hausse des prix soit pour l'Angleterre, dans le régime ou
elle s'est volontairement placée, une nécessité vitale. Ayant fixe une
catégorie des prix, elle est conduite à vouloir y adapter tour les
autres....Cette hausse des prix anglais peut, il est vrai, être réalisée
sans hausse des prix mondiaux, par la dépréciation de la livre sterling et
aussi - bien que dans une mesure probablement insuffisante - par un tarif
douanier. D'ou des diverses solutions envisagées en Angleterre, l'une
d'entre elles - la dépréciation monétaire - étant déjà en voie de
réalisation...." [308-309]

For Rueff, all British proposals for international monetary cooperation were
strategems designed to shift the crisis from Britain to the rest of the
world: "Il reste enfin à évoquer la dernière des formules par lesquelles
l'Angleterre prétend que le monde devrait etre reconstruit: la cooperation
financière internationale. C'est là un programme dont le sens n'a jamais été
défini, probablement parce qu'il n'en a aucun....Il n'est pas douteux que
tous les plans présentés à Genève ou a Bale, plan Norman, plan Kindersley,
plan Francqui, tendent seulement a réaliser le trust des entrprises en
faillite et a y investir des capitaux qui sans cela se seraient refusés. Par
là, ils sont un merveilleux instrument pour transférer les difficultes
financières des Etats qui les ont provoqués, a ceux qui ont été assez sages
ou assez prudents pour s'en préserver...Tel est d'ailleurs le sens profond
et l'objet véritable de tous les efforts tendant a réaliser la solidarité
internationale, solidarité que l'on invoque toujours lorsque l'on veut
profiter de la prosperité des Etats voisins, mais jamais lorsque l'on peut
leur venir en aide." [318-319]

Rueff suggested a Franco-American accord capable of putting an end to the
British game.

THE BANK OF ENGLAND'S DUTCH TREAT

By September 20, most of the sterling balances held by foreigners who were
disposed to liquidate them had already been liquidated. The exception were
sterling balances held by foreign central banks, like the Dutch, and these
would be loyal to London, partly because their estimate was that the crisis
was not so severe as to force the British off gold. The little people of the
British public were proving docile enough to make no attempt to turn in
their pound notes for gold. The Big Five clearing banks were undisturbed by
panic runs or the specter of insolvency.

There is no doubt that during the weeks before default, the Bank of England
practiced the most cynical deception on other central banks. The Bank of
England twice assured the Bank of South Africa that it would do everything
in its power to maintain gold payments. The Bank of England acted with great
treachery towards the Netherlands Bank, the central bank which had shown
itself to be the truest friend of the pound, supporting it in crisis after
crisis. The president of the Netherlands Bank, Mr. Vissering, telephoned the
Bank of England on September 18, 1931 to enquire whether there was any truth
to the rumors about a forthcoming sterling devaulation. The Bank of England
official who answered the phone emphatically denied that there would be a
devaluation, and offered to pay off the Netherlands Bank sterling balances
in gold on the spot. The Dutch decided to keep their gold in London.

A few days after the call summarized above, "Dr. G. Vissering of the
Netherlands' Central Bank called Harvey to request that the Dutch gold held
by the Bank of England be earmarked [separated from the Bank of England
stocks as a preliminary to shipment to the Netherlands]. Harvey huffily
refused, saying that the Dutch could either take their gold back to
Amsterdam or keep it in London but if they chose the latter course they
would not be placed in the position of a preferred creditor. Vissering
backed down. To assuage Vissering's fears Harvey wrote him about the credits
and stressed the total committment of the National Government to the
maintenance of the gold standard [Kunz, pp. 119- 120] As a result, "the
Netherlands Bank felt, and for good reason so, that it had been deceived by
the Bank of England, a turn that was scarcely befitting Norman's idea of
central bank cooperation, or the 'ethics' of the gold standard." [Palyi, p.
278]

The Netherlands Bank thought that the Bank of England should safeguard the
Netherlands Bank against all the sterling losses to which it was subjected.
A discussion of this British betrayal is found in the 1931-32 Annual Report
of the Netherlands Bank. [see Brown, vol, 2, pp. 1170-1172]

Montagu Norman claimed that he had personally not been a participant in the
decision to default on gold. As we have noted, Norman's cover story was that
he had suffered a nervous breakdown, and had taken a vacation at the Chateau
Frontenac in Quebec, Canada. When the Bank of England suspended gold
payment, Norman was on board ship in the middle of the Atlantic. Norman
claims that he knew nothing of the decision to go off gold until he landed
at Liverpool on September 23. Norman was thus able to blame the default on
one of his resident whipping-boys, Deputy Governor Sir Ernest Harvey. Harvey
himself suffered a nervous breakdown because of the stress of serving under
Norman.

When the British stopped paying in gold, they were quickly followed by
Denmark, Sweden, Norway, Holland, Bolivia, and India - most of whom were
candidates for inclusion in the sterling bloc. Other countries, including
Greece, Italy, Germany, Austria, and Hungary were already operating under
exchange controls and other measures which effectively prevented gold
outflow. [Hoover, p. 82]

The British strategy for saving the golden pound had included histrionic
international appeals from Prime Minister Ramsay MacDonald, who pleaded with
other countries not to drain off the last of the British gold. After the
British had defaulted, MacDonald's perfidy caused much resentment abroad. In
the words of an American economist, "Hardly had Ramsay MacDonald stopped
sobbing over the international radio that Britannia should not be forced to
sacrifice her honor, than he began to smile broadly because the fall of the
pound gave her marked advantage in exports." [Mitchell, p. 14]

THE BRITISH GAME

A British estimate of the London predicament of the early 1930's reads as
follows: "...Great Britain is a highly populated industrial country,
carrying a terrific burden of internal debt, dependent predominantly for
existence on foreign trade, enjoying the benefits of being the world's chief
banking centre, possessed of a large net income from long-term investments
abroad, but heavily indebted (in her role as world's banker) to other
centres on short- term account." [Economist, September 26, 1931, p. 548]

The British racket up until September 1931 had been to use a high pound to
maximize their buying up of the world's productive assets and resources.
After September, 1931, a devalued pound meant that pound-denominated foreign
claims on the British financial system - and these were the vast majority -
were automatically reduced.

Five months after the British default, Norman and the British oligarchy
embarked on a policy of cheap money. At this time a series of Bank Rate
reductions was started which soon brought the discount to 2.5%, where it
stayed for many years. Montagu Norman himself, the former gold addict,
became the main theoretician of Cheap Money in the new era of competitive
monetary devaulations. The British stock market quickly recovered amd kept
rising during most of the 1930's. But unemployment hovered around 2.5
million until the beginning of the Second World War.

"For years, Continental opinion had been coming to the view that the British
system was dying of ossification," wrote Lionel Robbins [p. 93] "Now the
British had increased their own relative importance compared to their
continental rivals, who had joined them in perdition."

The post-1931 British strategy also included Imperial Preference and trade
war: "Britain entered the lists with the Import Duties Act of March, 1932
(reaching 33 1/3 per cent), and the later Ottawa Agreement establishing
empire tariff preferences spurred other countries in the process of
retaliation. Sterling losses of so many countries spread deflation through
the struggle for liquidity. The contest between economies that remained on
gold and those that had left it became acute." [Mitchell, p. 14]

Soon, US exports to the rest of the world had dropped to about one third of
their 1929 level. [Hoover, p. 83] European purchases of American
agricultural products ceased almost entirely. US unemployment increased
rapidly. Tax revenue fell by 50%. [Hoover, p. 89]

BRITISH DEFAULT: TEN MORE YEARS OF WORLD DEPRESSION

The Gibraltar of British Empire finance had crashed. The old saying, "as
safe as the Bank of England" was now a mockery. "It was only vaguely
understood, if at all, that at stake was what is called today the 'world
monetary system.' It was still a sterling system. The likely alternative
to...the gold standard, at the old sterling parity, may have been the
breakdown of that system. That is what happened after September, 1931.'
[Palyi, p. 86] "The cooperation of the central banks in the 1920's ended in
a breakdown of the entire system, having been essentially a cloak that
masked the ultimate purpose of its chief ingredient, the gold exchange
standard, which was to maintain Britain's gold standard without obeying the
rules of the gold standard." [p. 146]

During the 18-month period after the British default, most world currencies
also terminated gold payments through external default. Until March, 1933
the US dollar and some of its satellite currencies in central America were
able to keep up payments on gold. Otherwise, the gold standard was
maintained by a group of countries called the "gold bloc," comprehending
France, Holland, Belgium, Switzerland, Italy, Poland, and Estonia. Estonia
was forced off gold, and Italy and Poland imposed gold export controls. The
Belgian franc was devalued in March, 1935. France imposed a gold embargo in
September, 1936. Switzerland and Holland announced devaluations immediately
thereafter.

Of the fifty-four nations that had been on the gold standard at some timne
between 1925 and 1931, none remained on gold in 1937. The world monetary
system had indeed disintegrated.

CHART: COUNTRIES LEAVING THE GOLD STANDARD

APRIL 1929 - APRIL 1933

1929

APRIL - URUGUAY

NOVEMBER - ARGENTINA

DECEMBER - BRAZIL

1930

MARCH - AUSTRALIA

APRIL - NEW ZEALAND

SEPTEMBER -VENEZUELA

1931

AUGUST - MEXICO

SEPTEMBER - UNITED KINGDOM, CANADA, INDIA, SWEDEN, DENMARK, NORWAY, EGYPT,
IRISH ,FREE STATE BRITISH MALAYA, PALESTINE

OCTOBER - AUSTRIA ,PORTUGAL, FINLAND ,BOLIVIA, SALVADOR

DECEMBER - JAPAN

1932

JANUARY - COLOMBIA, NICARAGUA, COSTA RICA

APRIL - GREECE, CHILE

MAY - PERU

JUNE - ECUADOR ,SIAM

JULY - YUGOSLAVIA

1933

JANUARY - UNION OF SOUTH AFRICA

APRIL - HONDURAS, UNITED STATES

[See Brown, 1075]

---------------------------------------------------------

BEYOND BREAKDOWN TO DISINTEGRATION

The year 1931 is thus a turning point in the financial history of Europe
analogous to 1914 in political-military history: "...because of the profound
influence of the war upon the structure of the world's credit system and
upon the economic environment in which it operated, 1914-19 was a period
that marked the breakdown, rather than the suspension or modification, of
the pre-war international gold standard system.......when England suspended
the convertibility of sterling in 1931 the international gold standard as a
world institution entered into an historical phase which must be described
by a stronger term than breakdown. SEPTEMBER 1931 MARKED THE BEGINNING OF
ITS DISINTEGRATION." [Brown, p. 1052, emphasis added]

Current historians and economists are fixated on 1929, but there can be no
doubt that September 1931 was the more important watershed by far.
"Britain's devaluation in 1931 had a psychological and political impact on
Europe, and beyond, that can hardly be overestimated. In final analysis, the
break-up of the international financial and commercial system was a decisive
factor in balkanizing Europe and preparing the ground for World War II."
[Palyi, p. 270] Another writer noted that among the "consequences [of 1931]
were an increase of international suspicion and hatred, an inflamed
nationalism in Europe and, finally, war." [Giuseppi, p. 164] Indeed.

CURRENCY BLOCS AND THE IMPULSION TOWARDS A NEW WORLD WAR

The scuttling of the pound-based, gold exchange international monetary
system of the 1920's was perhaps the most potent underlying factor in the
universal renewal of armed conflict that soon followed. When the pound fell,
a series of currency blocs emerged somewhat along the prototype of what had
emerged under the guidance of Norman and Schacht as the German mark area.
These currency blocs included the British pound sterling bloc, the US dollar
bloc, the gold bloc (which broke up, leaving a franc bloc along with some
other shards), the Soviet ruble area, the Japanese yen zone. The currency
chaos meant that there was no reliable means of settling commercial payments
among these blocs. World trade atrophied. The situation was difficult for
everyone, but it was worst for those blocs which had the greatest dependency
on exports and on importing oil, metals, rubber, and strategic raw
materials. The pound sterling, dollar, franc and ruble each had some raw
materials backing. But the German mark, Japanese yen and Italian lira had
virtually none. Each of these states embarked on an economic regime of
autarky so as to conserve foreign exchange. For Germany, Italy, and Japan,
aggressive territorial expansion towards possible sources of oil and metals
became the only available surrogate for foreign trade. The ascendancy of
fascism was favored in each case by the penury of world trade, and in each
case the British stood ready to promote fascist leaders who would ruthlessly
act out this logic, as exemplified by Montagu Norman's role as the premier
international patron of Hitler and the Nazis, and as the point man for the
pro- Hitler directives which were carried out by Sir Henry Deterding,
Averell Harriman, and Prescott Bush.

BEGGAR-MY-NEIGHBOR

The British were aware at the time of the colossal magnitude of what they
had wrought, and were certainly aware of how rival states might suffer far
greater consequences than the British themselves: "The facts must be faced
that the disappearance of the pound from the ranks of the world's stable
currencies threatens to undermine the exchange stability of nearly every
nation on earth; that even though London's prestige as an international
centre may gradually recover from the blow which the sterling bill has
received, banking liquidity throughout the world has been seriously
impaired, much more so in other countries than this; that international
trade must be temporarily paralysed so long as the future value of many
currencies is open to grave uncertainty; and that, though the memory of the
disastrous effects of post-war inflations should be a useful deterrent,
there is an obvious risk lest we may have started an international
competititon in devaluation of currencies motived [sic] by the hope of
stimulating exports and leading to a tragic reversion to the chaotic
conditions which existed five or six years ago." ["The End of an Epoch,"
London Economist, September 26, 1931, p. 547]

The entire edifice of world trade and world banking had imploded: "The
sterling bill enters so deeply into the whole mechanism of international
trade, and so many foreign banks, including central banks, have been
accustomed to keep a large portion of their reserves in the form of sterling
balances in London, that the shock caused by the depreciation of sterling to
some 80 per cent. of its value has necessarily been profound....the
depreciation of the pound means that the currency reserves of many countries
which are kept in the form of sterling balances have been seriously
impaired, and the pre-existing strain on the banking system of many centres
is bound temporarily at least to be aggravated by the universal shock which
confidence has suffered....By our action, the value of the legal backing of
a number of currencies has suddenly shrunk." [Economist, September 26, 1931,
pp. 550-551]

By October, Perfide Albion was positively gloating about the massive gold
outflow from the United States, which many now considered on te verge of a
dollar crisis: "The suspension also of the gold standard in Great Britain
had three important results. Firstly, it gave a further shock to confidence.
Secondly, it prevented foreign banks from drawing upon their sterling
balances except at a heavy loss, and so drove them back on their dollar
balances. Finally, it destroyed all faith in the safety and efficacy of the
gold exchange standard, for foreign central banks found that the sterling
exchange which they had legitimately held as part of their legal reserve had
lost part of its value, thereby undermining their own stability, and
inflicting upon them losses in many cases commensurate with their own
capital." [London Economist, "America's Money Problems," October 10, 1931,
p. 646] In other words, London's planned default had bankrupted a series of
central banks who had deposited their reserves in the Bank of England.

A few weeks later, The Economist commented further: "It was inevitable that
the suspension of gold payments in England should have a profound effect
upon the position of leading central banks. Some who were engaged in
operating the gold exchange standard were in possession of susstantial
holdings of sterling as part of their legal reserve against their notes and
other sight liabilities while others - such as the Banque de France - held
equally large quanities of sterling, even though they were operating on the
full gold standard. All these central banks have had to face a 20 per cent.
depreciation of their holdings of sterling, which for many of them means a
substantial proportion of their legal currency reserves.

"This situation has already had several far-reaching results. Many countries
have summarily abandoned the gold exchange standard as a snare and a
delusion, and their central banks have begun hurriedly to convert their
devisen into gold. The general tendency has been to leave their sterling
holdings intact, but to exchange their dollar balances and bills for gold;
and this is a major cause of the recent efflux of gold from the United
States. Again, commercial banks have not been immune from the consequences
of the crisis, and have had to meet the suspicion and distrust of their
customers. fostered by very numerous (if not individually very important)
bank failures all over the world. They have had to face the immobilisation
under the 'standstill' agreement of such part of their assets as they had
ventured in Germany and central Europe; they have suffered, in common with
the central banks, a 20 per cent. depreciation of their sterling holdings;
and, last but not least, they have had to deal with the widespread
dislocation to trade caused by the depreciation of sterling, which is the
currency of world commerce. Thus commercial banks have, on the one hand,
witnessed an outflow of notes into the hands of distrustful customers, and,
on the other hand, they have had to mobilize their available assets, both at
home and abroad, in preparation for further demands for currency." ["The Gol
d Rush," Economist, October 24, 1931, p. 746]

BRITISH DEFAULT PRECIPITATES US BANKING PANIC OF 1932-33

By August of 1931, Keynes estimated that commodity prices on the world
market had fallen since 1929 by an average of 25%, with some commodities
falling as much as 40 to 50%. Common stock shares had fallen worldwide by
40% to 50%, he reckoned. Investment-grade bonds were down by only 5%, but
lower rated bonds were down by 10% to 15%, and the bonds of many governments
had "suffered prodigious falls." When it came to real estate, the picture
was more differentiated. Great Britain and France had been able to maintain
relative firmness in real estate values, with the result that "mortgage
business is sound and the multitude of loans granted on the security of real
estate are unimpaired." The worst crash of real estate prices had occurred
in the United States, Keynes found. Farm values had suffered a great
decline, and newly developed urban commercial real estate was depressed to
60% to 70% of its cost of construction, and often less. Finally, Keynes
estimated that the commercial loan portfolios held by banks were in the
worst shape of all. Keynes evaluated this 2-year collapse as the worst
world-wide deflation in the money values of real assets in history. [Essays
in Persuasion, pp. 172-175]

Keynes pointed especially to something far worse yet to come, namely the
potential world banking crisis that was implicit in the price collapses he
had summed up. He concluded that in most of the non-British world, if bank
assets were conservatively re-evaluated, "quite a significant proportion of
the banks of the world would be found to be insolvent; and with the further
progress of Deflation this proportion will grow rapidly." London had the
least to worry about, since "fortunately our own domestic British Banks are
probably at present - for various reasons - among the strongest." Once again
the Americans would bear the brunt of the crisis:

...in the United States, the position of the banks, though partly concealed
from the public eye, may be in fact the weakest element in the whole
situation. It is obvious that the present trend of events cannot go much
further without something breaking. If nothing is done, it will be amongst
the world's banks that the really critical breakages will occur.

["The Consequences to the Banks of the Collapse of Money Values," (Aug.
1931) in Essays in Persuasion, p. 177]

During October, 1931, the British default had provoked a flurry of bank
failures worldwide:the Comptoir Lyon-Alemand closed; Handels Bank of Denmark
needed to be bailed out by central bank, the Bank fuer Handel und Gewerbe,
Leipzig, suspended payment, as did the Dresden Volksbank, the Franklin Trust
Company of Philadelphia and 18 smaller US banks.

The central banks were so strapped for cash that there was a run on the Bank
for International Settelements, which had to sell great masses of its own
assets assets in order to meet the cash demands of its members, the central
banks.

KEYNES: THE CURSE OF MIDAS

Keynes was very explicit that the most destructive consequences of the
British default were going to be visited upon the United States, which was
still on the gold standard:

"...the competitive disadvantage will be concentrated on those few countries
which remain on the gold standard. On these will fall the curse of Midas. As
a result of their unwillingness to exchange their exports except for gold
their export trade will dry up and disappear until they no longer have
either a favourable trade balance or foreign deposits to repatriate. This
means in the main France and the United States. Their loss of export trade
will be an inevitable, a predictable, outcome of their own action. [...] For
the appreciation of French and American money in terms of the money of other
countries makes it impossible for French and American exporters to sell
their goods. [...] They have willed the destruction of their own export
industries, and only they can take the steps necessary to restore them. The
appreciation of their currencies must also gravely embarrass their banking
systems. ["The End of the Gold Standard, (Sept. 27, 1931) in Essays in
Perusasion, pp. 292-293]

One possible outcome contemplated with eager anticipation by London was that
the gold outflow experienced by the United States after the British default
would lead to the short-term collapse of the US dollar. By law, the Federal
Reserve in those days had to have sufficient gold to cover 40% of the value
of all outstanding Federal Reserve dollar notes. At first glance, that 40%
of Federal Reserve notes might have seemed to set the minimum gold stock
necessary for the survival of the dollar in its then-current form. But in
reality the gold requirements of the US were far greater, precisely because
of the ongoing economic depression. The London Economist was aware of this
grave vulnerability of the American currency:

"The real crux of the Reserve system's position is that, while the ratio of
the gold cover to its notes need be only 40 per cent., the remaining 60 per
cent. of the notes must be covered either by gold or by eligible paper, and
this last excludes Government securities bought in the open market, and in
practice consists of rediscounted Treasury bills and also of acceptances and
other credit instruments based upon trade. Now the depressed state of trade
has reduced the Reserve Banks' holdings of assets of this last kind and has
forced then en defaut de mieux to add enormously to their holdings of
Government securities. The actual figure for the last-named was $728
millions last August, against only $150 million two years before, while
during the same period 'eligible paper' had fallen from $1.141 to $316
millions. Add to this the actual and potential increase in the note
circulation, and it is clear that this is the major factor in any
calculation of the minimum gold requirements of the United States."
[Economist, October 10, 1931, p. 647]

THE BRITISH CAST THE CURSE OF MIDAS ON AMERICA

In the event, the impact of the British gold default of Sept. 21, 1931 on
the United States banking system was nothing short of catastrophic. Within
six weeks, the United States was drained of about $700,000,000 worth of
gold. "The rush from abroad to convert dollar balances into gold frightened
American depositors, and they began to withdraw currency from their banks."
[Kennedy, p. 30] Bank withdrawals were $400,000,000 during these same six
weeks [Mitchell, p. 128]. By November, "almost half a billion dollars had
gone into hiding," - meaning hoarding, with individuals putting their cash
in a safety deposit box, mattress, or old sock. [Kennedy, p. 30]

As soon as the British had carried out their own default, the attention of
the City of London turned to the potential for an outflow of American gold:
"...Wall Street generally has stood up well to the shock. It would be
premature, however, to jump to the conclusion that the full eventual
repercussions have yet begun to be experienced in the United States. For one
thing, the volume of short-term credits held by France, Holland, and other
European countries in New York is very great, and it is significant that
already gold in large sums has begun to be withdrawn on foreign account from
the Federal Reserve system." [Economist, September 26, 1931, p. 550]

Within just a few weeks, the US gold hemorrhage had become so serious as to
threaten the gravest consequences: "The present crisis resembles the
onslaught of a thunderstorm in a mountain range, when the lightning strikes
first one peak and then a neighbour....Now it is apparently the turn of the
United States, for in the middle of September a drain of gold began on a
scale comparable only with the gold losses incurred by Germany and Great
Britain in earlier months....the total loss is indicated by the contraction
of $449 millions in the Federal Reserve Banks' gold reserve between
September 17th and October 8th." [Economist, October 10, 1931, p. 646]

And: "It is true that in certain respects the American banking position has
been arousing misgivings. The increase in the note circulation shows that
hoarding is definitely taking place, and this hoarding is evidence of public
distrust in the stability of American banks. The steady stream of bank
failures corroborates this. Again, it is realised that depressed trade, and
the collapse of security and real estate values during the past two years,
has undermined the value of banking collateral and impaired the liquidity of
the banks. Still, allowing for these somewhat ominous signs, it is probably
true to say that the need of foreign banks to strenghten these home
resources was a more cogent cause of the withdrawals." [Economist, October
10, 1931, p. 646]

The Economist was also busy calculating the point at which financial
necrosis would set in:


"...the United States could, at last gasp, part with $1,700 millions of
gold, though the National City Bank very pertinently calls this a
theoretical maximum." "A rough calculation, however, shows that European
central banks together still hold foreign exchange equal to some $1,400
millions." [Economist, October 10, 1931, p. 646]

In 1928, there had been 491 US bank failures. In 1929, the figure had risen
to 642. By 1930, as the collapse of the domestic real estate bubble began to
take its toll, bank failures had risen to 1,345. In the wake of the British
default, American "bank runs and failures increased spectacularly: 522
commercial banks with $471 million in deposits suspended during October
1931; 1,860 institutions with deposits of $1.45 billion closed between
August 1931 and January 1, 1932. At the same time, holdings by the 19,000
banks still open dropped appreciably through hoarding and deterioration of
their securities." [Kennedy, p. 30] Thus, the disintegration of the London
gold standard represented a qualitative turning point in the development of
the US banking panic. In terms of individual bank failures, 1931, the year
of the British default, was the worst year in American banking history.

The decisive role of the pound sterling crisis in detonating the domestic US
banking panic is stressed by another chronicler of the Great Depression:
"...in all of 1931, a peak number of 2,298 banks with deposits of $ 1.692
billion succumbed to insolvency. As we have seen, about three quarters of
these failures came during or after the British crisis, and the vast
majority of the damage to the depositors ($1.45 billion out of $ 1.692
billion) was inflicted during and after the London default." [Mitchell, p.
128]

The shock waves from the London default were felt first and most severely
among the American banks of Chicago, Ohio, and other parts of the Midwest,
followed by Pennsylvania, New York, and then New England.

The US banking system was now being subjected to the kind of speculative
attack foreshadowed by the analysis of Lord Keynes. While some of the
demands for gold were coming from France, it is evident that a very large
proportion were coming from London, whether directly or indirectly. This was
an attack which the Anglophile Hoover, deluded by his personal meeting with
Ramsay MacDonald, was ideologically incapable of understanding.

It was in October, 1931 that Hoover broke his long immobilism on the banking
question and launched the ill-starred National Credit Corporation, his
unsuccessful public-private partnership to bail out the banks. This timing
shows that in Hoover's view as well, the London default had been a major
milestone on the road to US banking panic.

On the evening of October 6, 1931 Hoover met with 32 Congressional leaders
of both parties at the White House. Hoover summarized the world economic
situation in the wake of the British default:

"The British... are suffering deeply from the shocks of the financial
collapse on the Continent. Their abandonment of the gold standard and of
payment of their external obligations has struck a blow at the foundations
of the world economy. The procession of countries which followed Britain off
the gold standard has left the United States and France as the only major
countries still holding to it without modification. The instability of
currencies, the now almost world-wide restrictions on exchange, the
rationing of imports to protect these currencies and the default of bad
debts, have cut deeper and deeper into world trade."

Hoover was forced to concede that the once-prosperous US had been dragged
down to the same wretched level as the chronically depressed British: "We
are finding ourselves in much the same position as the British, but in
lesser degree. Long-term loans which we made to Europe and the mass of kited
bills bought from them are affecting us sadly with each new default. Like
the British, we too are increasingly unable to collect moneys due us from
abroad. Extensive deposits in our banks owned by foreigners are demand
liabilities on our gold reserves and are becoming increasingly dangerous.
After the British abandoned the gold standard, even the dollar came under
suspicion. Out of an unreasoning fear, gold is being withdrawn from our
monetary stocks and bank reserves. These devitalizing drains and the threat
of them hang like a Damoclean sword over our credit structure. Banks,
fearing the worst, called in industrial and commercial loans, and beyond all
this the dwindling European consumption of goods has decreased purchases of
our farm products and other commodities and demoralized our prices,
production, and employment. We are now faced with the problem, not of saving
Germany or Britain, but of saving ourselves." [Hoover, p. 90]

A day earlier, in a letter to George Harrison at the New York Federal
Reserve, Hoover had described the problems created by the British crisis for
the individual American banker: "There have been in some localities foolish
alarms over the stability of our credit structure and considerable
withdrawals of currency. In consequence, bankers in many other parts of the
country in fear of such unreasoning demands of depositors have deemed it
necessary to place their assets in such liquid form as to enable them to
meet drains and runs. To do this they sell securities and restrict credit.
The sale of securities demoralizes their price and jeopardizes other banks.
The restriction on credit has grown greatly in the past few weeks. There are
a multitude of complaints that farmers cannot secure loans for their
livestock feeding or to carry their commodities until the markets improve.
There are a multitude of complaints of business men that they cannot secure
the usual credit to carry their operations on a normal basis and must
discharge labor. There are complaints of manufacturers who use agricultural
and other raw materials that they cannot secure credits beyond day to day
needs with which to to lay in their customary seasonal supplies. The effect
of this is to thrust back on the back of the farmer the load of carrying the
nation's stocks. The whole cumulative effect is today to decrease prices of
commodities and securities and to spread the relations of the debtor and the
creditor." [Hoover, p. 87]

On February 7, 1932, Secretary of the Treasury Ogden Mills informed Hoover
that the United States was about two weeks away from defaulting on gold
payment because of the continued flow of gold out of this country. To this
had to be added the dwindling gold stocks of banks, which generally stood
ready to convert paper money into gold when depositors asked for it. This
gold disappeared domestically as it was added to private hoards.

In principle, the end of the gold standard at this time would have been a
blessing in disguise. But given the laissez-faire obsessions of the Hoover
administration, it is possible that such a move, especially if carried out
in isolation from a general policy reversal in the form of a recovery
program, would have engendered chaos. Hoover dodged the main issues by
getting the Congress to allow the Fed to use more US Treasury securities in
place of part of the gold. With this, the immediate post-British-default
gold shortage was averted.

HOOVER IN THE DEPRESSION

Hoover at first attempted to organize the bankers to take care of their own.
This attempt was called the National Credit Corporation, a private Delaware
firm launched in October, 1931. Upon joining, member banks suscribed 2% of
their assets, in return for which they could obtain loans on their sound
assets which were not eligible for rediscount at the Federal Reserve
branches. But the bankers in charge of thius venture were so reluctant to
make loans that the National Credit Corporation proved to be an exercise in
futility. Despite new waves of bank failures in December 1931 and January
1932, the NCC lent out only one third of its available funds.

Next, Hoover tried the Reconstruction Finance Corporation, a creature of the
federal government set up by Congress with $3.5 billion of stock and cash in
Jaunary, 1931. In June 1932, the banking crisis again struck Chicago in the
wake of the bankruptcy of the Insull group, with 25 suburban banks and 15
downtown institutions closing their doors in the face of panic withdrawals.
Only 5 big banks in the Loop remained. To complicate matters, the Democratic
National Convention was about to convene in Chicago. The closure of all
Chicago banks would have undermined Hoover's claim that propsperity was just
around the corner. The RFC quickly provided a loan which temporarily saved
the Central Republic National Bank; this rescue prevented panic runs which
would have submerged the other four surviving Loop banks.

The Federal Reserve Board took the attitude that it had no responsibility at
all for banks that were not members of the Fed system. From 1929 to 1932 the
Fed did virtually nothing to stem the depression. In 1932 Hoover wanted the
Federal Reserve banks to start providing the economy with credit in the form
of direct lending to businesses, as practised by most European central
banks. The Federal Reserve Board feared that issuing such loans would open
the door to panic runs on the Federal Reserve banks. The Fed finally agreed
to make direct loans, but the new lar carried the proviso that this could be
done only in an emergency. In July, 1932, as soon as the direct loan
facility had been legalized, Hoover asked the Fed to declare a state of
emergency so as to enable the direct loans. But the Fed refused to declare
the state of emergency. Senator Carter Glass wanted to prevent Fed credit
and loans from being used for speculation, but the New York Fed rejected the
idea that the Fed could regulate the uses of the credit it issued. A good
summary of the Fed's immobilism and impotence, verging on outright sabotage
was offered by one student of the banking crisis:

"The Federal Reserve stipulated that borrowers must prove they could not
receive credit elsewhere but also decided that borrowers did not deserve
loans which they would not get elsewhere." [Kennedy, p. 49]

BANKING PANIC: NEVADA

In the last days of the 1932 presidential campaign, the first shutdown of
the banking system of an entire state occurred. This was detonated by the
insolvency of the Wingfield group, which controlled almost all of the banks
in the state. Wingfield was done in by an endless series of bankruptcies and
forecosures among cattle and sheep ranchers, whose assets usually brought
about 25 cents on the dollar when put up for auction. On October 31, the
lieutenant governor of Nevada declared a 12-day bank holiday during which
all state banks could remain closed. It was hoped that during this lapse of
time some solution could be found to permit business to resume. In reality,
the Nevada banks remained closed for about four months, and re-opened only
within the framework of Frankiln D. Roosevelt's bank holiday of March, 1933.

Many schemes were tried to revive the Nevada banks. One plan was based on
the depositors' takeover of ownership of some banks. Wingfield tried several
times to get loans from the Reconstruction Finance Corporation, but these
never came to fruition. There were attempts to mobilize the "private sector"
through loans from California investors and Nevada industrialists, but these
proved equally vain. Nevada as a state was unable to re-open its banks. And
as it turned out, no state was able permanently to re- open its banks after
they had been closed. The Nevada banking crisis was a small episode in terms
of the dollar values involved, its modest dimension only made it loom larger
as a public proof of the impotence of all levels of government to act.

In late 1932, increasing numbers of rural banks came under the intense
pressure of panic runs by depositors. The RFC was able to stem the tide for
a while, and made loans to banks in Wisconsin, Pennsylvania, Minnesota, and
Tennessee. During December, 1932, and during the first six weeks of 1933,
numerous banks with large aggregate deposits closed their doors in New
Jersey, the District of Columbia, Tennessee, Illinois, Iowa, Missouri, and
California. Internal documents of the Hoover administration made public
later show that lame duck Hoover had been concerned about fighting off
imminent panic in such larger cities as Cleveland, Chattanooga, Little Rock,
Mobile, St. Louis, and Memphis.

LOUISIANA

The beginning of the end came in Louisiana in early February. Here a large
insurance company had succumbed in January, despite some support from the
RFC. The key banking institution in trouble was the Hibernia Bank and Trust
Company. US Senator from Louisiana Huey Long tried to raise cash from other
bankers to prevent banks from closing on because of depositor panic during
the morning of Saturday, February 4, 1933. long hurriedly consulted with
Governor Allen of Louisiana, his political ally. Sen. Long decided that a
bank holiday was in order, and got the New Orleans city librarian to search
the history books for some momentous event that had occurred on February 4.
The librarian could find nothing on February 4, but did determine that the
United States had broken diplomatic relations with Germany on February 3,
1917. Long proclaimed that such a momentous event deserved two days of
commemoration, and not just one. Gov. Allen signed the appropriate order,
making February 4 a legal holiday across the state. Many people had no idea
why the new holiday had been created; one newspaper which did reveal the
link to the banking crisis was seized by the state militia under Sen. Long's
orders. Thanks to this surcease, the Hibernia Bank was able to announce $24
million in loans on Sunday morning, heading off the panic that might have
broken out on Monday.

MICHIGAN: VALENTINE'S DAY BANK HOLIDAY

The final disintegration of the American banking system began with the
explosion of a banking panic in Detroit, Michigan. The 1920's had seen the
powerful emergence of automobile production as the leading sector of the US
economy, and the Motor City was widely viewed as the most successful,
dynamic, and forward-looking metropolis of American capitalism. The shock
was all the greater when, at 1:32 AM of February 14, 1933, Governor William
A. Comstock signed an order imposing an 8-day bank holiday for all of
Michigan. The epicenter of the Detroit crisis was the Guardian banking
group, which was personally dominated by celebrated automobile tycoon Henry
Ford, with some help from his son Edsel. But if Guardian was rotten, its
larger rival, the Detroit Bankers Company, which at the time was the third
largest US bank outside of New York City, was putrid. When the
Reconstruction Finance Corporation was brought in to save Guardian, the RFC
board pronounced itself willing to offer loan assistance - but only if Henry
Ford lent Guardian some millions of his own money, and agreed to keep the
Ford Motor Company's deposits at Guardian at their current level. Walter P.
Chrysler of Chrysler Motors, Alfred P. Sloan, Jr. of General Motors, and
Hudson Department Stores were ready to lend money to Guardian, but Henry
Ford started feuding with the RFC and with his estranged business partner,
millionaire US Senator James Couzens. After days of haggling, Ford agreed to
provide $8.25 million in new capital for a merged Guardian-Detroit Bankers.
Banners appeared on the streets of Detroit attempting to build confidence in
the proposed merger with the slogan "Bank with Hank."

But this Ford loan was contingent on an RFC loan, and the RFC now refused to
make their loan because Wall Street banks had refused to renew their
oustanding loans to a component of the Detroit Bankers group. So this entire
scheme fell apart around February 28, 1933. Starting on March 1, Senator
Couzens tried to get Michigan bankers to propose a plan under which the
state's banks might re-open. But the bankers were unable to agree on any
plan before the state legislature in Lansing had adjourned. Therefore the
Michigan banks stayed closed through the end of Herbert Hoover's term in
office.

Now the hammer-blows of panic fell thick and fast on the reeling US banks.
The RFC was forced by a meddling and impotent Congress to publish the names
of the banks that had received RFC loans, most of which were quickly
submerged by panic runs once their identities were known to the public.

The Wall Street banks and especially their stock dealings were during this
period subjected to an investigation by the Senate Banking and Currency
Committee, chaired by Senator Peter Norbeck, with Sen. Frederick Walcott as
ranking Republican. This probe was a political move requested by President
Hoover to show that the Wall Street crowd, and not the President, was
responsible for the 1929 crash and was now obstructing necessary reforms.
Hoover also thought that, unless Congress launched an investigation, bear
raids might be launched on the stock exchange by pro-Democratic financiers
to get Hoover out of office.

This committee came to be known as the Pecora committee because of the
prominent role played by Ferdinand Pecora, a former New York City assistant
district attorney in Manhattan, who became the counsel for the committee.
Very damaging to bankers in general was the testimony of Charles E.
Mitchell, chairman of the board of National City Bank, the ancestor of
today's Citibank. Mitchell's testimony documented a series of unscrupulous
stockjobbing practices carried out at the expense of a gullible public. The
testimony also suggested that the greedy Mitchell was guilty of federal tax
evasion, although he was later acquitted in his criminal trial - but
convicted in a 1938 civil suit and forced to pay about $1.4 million in back
taxes and interest. As one observer put it, these hearings marked the
eclipse of the financier as a folk hero in American life. Confidence in the
banking system and its managers had received another crushing blow.

Bankers began flailing in desperation. In New Jersey, Maryland, New York,
and the District of Columbia, they reduced the interest rates paid on
savings account deposits. A number of states allowed banks to limit the
amount of money that could be withdrawn from accounts. Even individual
cities declared bank holidays to stave off further panic: this was the case
in Huntington, Indiana, and Mt. Carmel, Illinois. In other states, some
cities began allowing the local banks to issue scrip - paper certificates to
be used in lieu of money during the crisis, or, more bluntly, funny money.
Indiana declared a bank holiday on February 23; Maryland followed suit on
February 25, followed by Arkansas on February 27, and Ohio on February 28.

The chaos in the hinterland increased the pressure on Chicago, and even more
on the pre-eminent money center of New York City. Local bankers, strapped
for cash, pulled half a billion dollars of their deposits out of New York,
undermining the liquidity of the largest commercial banks and even of the
flagship New York Federal Reserve Bank.

On March 1, Alabama and Louisiana imposed obligatory bank holidays, while
Kentucky and West Virginia left it up to individual banks to decide whether
they would open or not. Idaho empowered its governor to declare bank
holidays, and Minnesota allowed the commissioner of banking of suspend
banking for 15 days when he deemed it necessary. March 2 brought a new
harvest of bank holidays across the west, with Arizona, California,
Mississippi, Oklahoma, Oregon, and Nevada ordering their banks to close. In
Baltimore and the rest of Maryland, the bank holiday was being extended day
by day. In the District of Columbia and in several states savings banks
began enforcing the rule that 60 days' advanced notice had to be given by
depositors if they wanted to withdraw money.

It was also on March 2 that the Federal Reserve Board in Washington finally
advised Hoover to declare a federal bank holiday. This advice was long
overdue, but the Federal Reserve Board did not want to share responsibility
for a bank holiday or for other measures that might still be considered
drastic; they wanted Hoover to take the fall for them. Now their own system
was breaking apart, and they had to strong-arm the Chicago Fed to make a
loan to the hard-pressed New York branch. The Fed Board now suggested a bank
holiday covering March 3-6, 1933. Their assumption was that emergency
enabling legislation ratfying the closure would be in place before March 7.

On March 3, 1933 - Hoover's last full day in office - state governors in
Georgia, New Mexico, Utah, and Wisconsin declared bank holidays. North
Carolina, Virginia, and Wyoming limited withdrawals. By the end of the day
5.504 banks with deposits of $3.4 billion had shut down.

Attention was now concentrated on the battered banks of New York and
Chicago, which had kept serving customers until the close of the business
day on Friday, March 3. It was now clear that the last currency and gold
reserves of these two money centers would inevitably be cleaned out during
the Saturday morning banking hours of March 4, Inauguration Day. At 11:30 PM
Hoover called Roosevelt and repeated his demand that the President-elect act
together with him and endorse the actions they might agree to take.
Roosevelt repeated his refusal of such an approach. Hoover went to bed at
midnight. At 1 AM a courier arrived at the White House from the Federal
Reserve Board with the draft of an executive order for a nation-wide banking
holiday, and a formal letter urging Hoover to take this step at once. But
Hoover slept.

During the early hours of Saturday, March 4, Governor Herbert Lehman of New
York, himself a Wall Street investment banker, met with representatives of
the banking establishment at his Manhattan apartment. Present were the New
Yor State superintendent of banks, executives from the Morgan group and from
the other big clearinghouse banks, and George Harrison, boss of the New York
Federal Reserve Bank. Harrison had been in touch with Hoover during the day
to request a nationwide holiday, but Hoover had replied by shifting the
responsibility to Gov. Lehman. Lehman wanted a formal request for bank
closure from the clearinghouse banks, but these bankers stalled, hoping to
escape responsibility. Lehman refused to act until the big banks had signed
a petition asking for the bank holiday. With this request in hand, Gov.
Lehman at 2:30 AM signed an order suspending banking in New York State
through Monday, March 6.

The Chicago bankers had undergone large withdrawals on March 3. They were
hoping that Illinois Governor Horner would act alone to impose a bank
holiday. But when news of Lehman's action arrived, the Chicago bankers
joined in asking Gov. Horner for a bank holiday. Horner signed the bank
closure order at 3:22 AM local time. Herbert Hoover still had more than
seven hours left in his term in office, but the financial heart of the
United States, the credit system, had stopped beating. If Hoover's policies
had been continued under his successor, the very fabric of civilization
would have torn to pieces in this country within a matter of weeks.

It is instructive today to recall which institutions and economic groups had
tried and failed to deal with the banking panic of 1932- 33:

* The private sector failed in a spectacular way to stop the banks from
closing and to re-open them after they were shut down by individual
bankruptcy or by the state bank holidays. Bankers were unable to form
consortia to help their brethren banks. They were unable to provide credit
for the recovery of agricultural and industrial production. They were
impotent both as ad hoc groups of private bankers, and also when they acted
undet the aegis of a government-initiated, private corporation like the
National Credit Corporation. The Michigan crisis proved to be the epiphany
of the private sector's failure: here men with names like Ford, Chrysler,
and Sloan were unable to save the banks they themselves controlled and
relied on. In short, there was no private sector, free-market solution to
the disintegration of 1931-33.

* The Federal Reserve System was first of all one of the principal guilty
parties in the Coolidge-Hoover speculative bubble, and in the Crash of 1929.
Under the leadership of Benjamin Strong (himself subjected to the hypnotic
powers of Lord Montagu Norman), the Federal Reserve System provided the
cheap credit which stoked the fiery furnaces of speculation. The Fed did
nothing to restrain speculation, but only covered its own posteriors
somewhat with a mild obiter dictum in the spring of 1929 -- of which some
observers were reminded when Alan Greenspan issued his "irrational
exuberance" comment of December, 1996. The Fed virtually disowned all banks
that were not members of its own system, and was unable to do anything to
help the larger banks that were members. The Fed refused to recommend that
Hoover declare a nationwide bank holiday until March 2 -very late in the
day. The Fed attempted at every turn to duck its responsibilities, trying to
shunt them off on the flailing Hoover - as in the Fed's 1932 refusal to
declare a state of emergency to permit Fed loans to nonbank institutions.
Under Eugene Meyer, the father of Katherine Meyer Graham of today's
Washington Post, the Federal Reserve System displayed an intertia that was
the practical equivalent of sabotage. This abysmal record contrasts most
vividly with the extravagant claims of pro-Fed lobbyists cited above: that
the Fed would make panics and bank failures impossible, that depressions no
longer need be feared, and so forth. Private central banking as exemplified
by the Fed was an accomplice in both collapse and disintegration.

* The states were tragic in their impotence to save the banks. State
governors were able to prevent bank insolvencies by shutting down all banks
with a bank holiday. But no state was ever able permanently to re-open its
banks.

* Congress acting by itself also failed. A lame duck Congress was in session
for many weeks in January and February, 1933, and produced no measures
capable of keeping the banks open nor of re- opening the ones that were
shut. The law forcing RFC loan recipients into the public eye for panic runs
was arson. Senator Borah said that he had never seen a Congress spend so
much time on trivialities during a crisis. According to Senator Hiram
Johnson: "We're milling around here utterly unable to accomplish anything of
real consequence." [Leuchtenburg, 27-28] This inaction generated a
widespread public disgust with the legislative branch that was almost as
great as the popular hatred of Hoover. Fascist ideologues seized on the
failure of the Congress to argue for dictatorship.

* Federal agencies were unable to do save the banks and fight the depression
by themselves. This included the Reconstruction Finance Corporation, which
had been specifically designed to do so. The RFC's piecemeal efforts
temporarily staved off the demise of a bank here and there, but in the end
it proved unable to hold off panic. The RFC's failure in Michigan, refusing
to act unless Henry Ford made pledges of loans and deposits, was abysmal.

* The Hoover cabinet was unable to stop the crisis. The overall tone was set
by Secretary of the Treasury Andrew Mellon, who wanted to liquidate stocks,
bonds, and everything in sight. Mellon was no better in his capacity as a
leading banker. In September 1931 President Hoover had turned to Mellon and
asked him to contribute $1 million to an effort to bail out the Bank of
Pittsburgh. Mellon had rejected President Hoover's request. Mellon's
successor Ogden Mills and especially Undersecretary Arthur Ballantine
provided plans for Roosevelt which stopped the disinegration but failed to
roll back the depression, which went on until 1940.

* President Herbert Hoover was the most obvious failure of all. This was due
to Hoover's narrow construction of the powers and responsibilities of the
presidency, and his refusal to use the implied emergency powers of the
office. Hoover first tried voluntary corporatism among bankers. When this
failed, he mustered the feeble activism of the RFC. After his election
defeat, Hoover refused to take any action that had not been approved in
advance by Roosevelt. Roosevelt neither refused nor agreed, but did nothing
until he had taken office, when he acted quickly with a nationwide bank
holiday and other measures.

In sum, the only institution able to combat the banking panic and the
disintegration effectively proved to be the activist presidency of
Roosevelt. A detailed analysis of Roosevelt's actions lies beyond the scope
of this paper. But what this present study has revealed is already enough to
refute as absurd the various theories of states' rights and of Congressional
primacy that have circulated during the first two years of the Newt Gingrich
Speakership. When the new crisis comes, it will take an activist president
to deal with it.

STATUS OF US BANKING BY STATE, MARCH 4, 1933

ALABAMA - CLOSED INDEFINITELY

ARIZONA - CLOSED UNTIL MARCH 13

ARKANSAS - CLOSED UNTIL MARCH 7

CALIFORNIA - MOST CLOSED UNTIL MARCH 9

COLORADO - CLOSED UNTIL MARCH 8

CONNECTICUT - CLOSED UNTIL MARCH 7

DELAWARE - CLOSED INDEFINITELY

DISTRICT OF COLUMBIA - 3 BANKS LIMIT WITHDRAWALS TO 5%; 9 SAVINGS BANKS
INVOKE 60 DAYS' NOTICE

FLORIDA - WITHDRAWALS RESTRICTED TO 5% PLUS $10 UNTIL MARCH 8

GEORGIA - CLOSED ON BANKS' OPTION UNTIL MARCH 7

IDAHO - CLOSED ON BANKS' OPTION UNTIL MARCH 18

ILLINOIS - CLOSED UNTIL MARCH 8, THEN 5% LIMIT FOR 7 DAYS

INDIANA - HALF RESTRICTED TO 5% WITHDRAWALS INDEFINITELY

IOWA - CLOSED 'TEMPORARILY'

KANSAS - 5% WITHDRAWALS INDEFINITELY

KENTUCKY - MOST ON 5% WITHDRAWALS UNTIL MARCH 11

LOUISIANA - MANDATORY CLOSING UNTIL MARCH 7

MAINE - CLOSED UNTIL MARCH 7

MARYLAND - CLOSED UNTIL MARCH 6

MASSACHUSETTS - CLOSED UNTIL MARCH 7

MICHIGAN - CLOSED INDEFINITELY

MINNESOTA - CLOSED 'TEMPORARILY'

MISSISSIPPI - 5% WITHDRAWALS INDEFINITELY

MISSOURI - CLOSED UNTIL MARCH 7

MONTANA - CLOSED INDEFINITELY

NEBRASKA - CLOSED UNTIL MARCH 8

NEVADA - CLOSED UNTIL MARCH 8

NEW HAMPSHIRE - CLOSED INDEFINITELY

NEW JERSEY - CLOSED UNTIL MARCH 7

NEW MEXICO - MOST CLOSED UNTIL MARCH 8

NEW YORK - CLOSED UNTIL MARCH 7

NORTH CAROLINA - SOME ON 5% WITHDRAWALS

NORTH DAKOTA - CLOSED 'TEMPORARILY'

OHIO - MOST ON 5% WITHDRAWALS INDEFINITELY

OKLAHOMA - CLOSED UNTIL MARCH 8

OREGON - CLOSED UNTIL MARCH 7

PENNSYLVANIA - CLOSED UNTIL MARCH 7 (EXCEPT FOR PITTSBURGH MELLON BANKS)

RHODE ISLAND - CLOSED MARCH 4

SOUTH CAROLINA - SOME CLOSED, SOME RESTRICTED ON BANKS' OWN OPTION

TENNESSEE - SOME CLOSED, SOME RESTRICTED UNTIL MARCH 9

TEXAS - MOST CLOSED; SOME RESTRICTED TO $10 PER DAY UNTIL MARCH 8

UTAH - MOST CLOSED UNTIL MARCH 8

VERMONT - CLOSED UNTIL MARCH 7

VIRGINIA - CLOSED UNTIL MARCH 8

WASHINGTON - SOME CLOSED UNTIL MARCH 7

WEST VIRGINIA - 5% MONTHLY WITHDRAWALS INDEFINITELY

WISCONSIN - CLOSED UNTIL MARCH 17

WYOMING - 5% WITHDRAWLS INDEFINITELY

[see Kennedy, pp.
155-156] ----------------------------------- ------------------------------

LORD NORMAN

If Herbert Hoover was hated in the United States, the Mephistophelean Lord
Montagu Norman was hated all over Europe and all over the world with even
better reason. Something of the feelings of the normal working bloke of the
Clyde or the Midlands comes through in this summation by a British academic,
made a quarter century ago: "[Norman's] career must surely rank as one of
the most complete failures in public life in this century. His often-stated
aim was to make London a successful, leading and powerful financial centre;
to keep the pound sterling strong and stable; and to maintain the
independence of the Bank, if possible in a leading role in an association
with other similarly constituted central banks." [Sidney Pollard, p. 19]

But this partakes too much of the superficiality of the man in the street.
If we compare Norman's achievements to his real goals in economic and
financial warfare against the United States, France, and the rest of the
world, Norman was highly successful. The British Establishment and the
finance oligarchy of the City of London left no doubt that they were well
pleased with Norman.

Norman was Governor of the Bank of England from 1920 until 1944. His was the
longest term for a Bank of England boss during the twentieth century. Notice
that more than half of Norman's tenure at the Bank of England came AFTER the
British default of September, 1931. It was in fact in 1931 that Norman was
rewarded with his reappointment as Governor of the Bank of England without
time limit. In practice, Norman might have stayed on as Governor for life.
After 1939, according to various accounts, the British oligarchy considered
Norman's services even more indispensable in wartime because of his
matchless expertise in economic and financial warfare. As it turned out,
Norman retired from the Bank of England only in 1944 and only on medical
advice after he had injured himself in a fall.

But there was no doubt at all of the oligarchy's glowing approval of Norman.
His highest honor came when he was inducted into the House of Lords as the
first Baron of St. Clere in 1944. The hereditary peerage for Norman was an
accolade bestowed for his service in orchestrating the Crash of 1929 and the
1931 Disintegration of the world financial system. Montagu Norman lived to
see the dawn of the Bretton Woods era. Norman's stepson is Peregrine
Worthshorne, the stridently fascist and anti-American columnist of Conrad
Black's Hollinger Corporation paper, the London Sunday Telegraph. After Lord
Norman's death, his marble bust was unveiled in one of the courtyards of the
fortress on Threadneedle Street. So Norman's genocidal plotting was never
disowned, only glorified, by those who counted most in Perfide Albion.

BIBLIOGRAPHY

Frederic Benham, British Monetary Policy (London: King, 1932)

Andrew Boyle, Montagu Norman (London: Cassell, 1967)

Costantino Bresciani-Turroni, The Economics of Inflation (London, 1937)

William Adams Brown, Jr., The International Gold Standard Reinterpreted,
1914-1934 (New York: National Bureau of Economic Research, 1940)

Alec Cairncross and Barry Eichengreen, Sterling in Decline (Oxford:
Blackwell, 1983).

Lester V. Chandler, Benjamin Strong, Central Banker (Washington DC:
Brookings Institution, 1958)

Stephen V.O. Clarke, Central Bank Cooperation, 1942-1931 (New York: Federal
Reserve Bank of New York, 1967).

Barry Eichengreen, Golden Fetters: The Gold Standard and the Depression,
1919-1939 (New York: Oxford University Press, 1992).

Paul Einzig, The Tragedy of the Pound (London: Kegan Paul, 1932)

John Kenneth Galbraith, The Great Crash (Boston; Houghton, Mifflin, 1954)

William Guttman, The Great Inflation (London: Gordon and Cremonesi, 1975)

John Hargrave, Montagu Norman (New York: The Greystone Press)

Herbert Hoover, The Memoirs of Herbert Hoover (1952)

Giuseppi, Bank of England

Susan Estabrook Kennedy, The Banking Crisis of 1933 (Lexington, Kentucky:
University Press of Kentucky, 1973)

John Maynard Keynes, Essays in Persuasion (New York: Norton, 1963)

Diane B. Kunz, The Battle for Britain's Gold Standard in 1931 (Bechenham,
UK: Croom Helm, 1987).

William E. Leuchtenburg, Franklin D. Roosevelt and the New Deal (New York,
Harper, 1965).

Rolf E. Lueke, Von der Stabilisierung zur Krise (Zuerich: Polygraphischer
Verlag, 1958).

Broadus Mitchell, Depression Decade (White Plains, New York: 1947).

Alexander Dana Noyes, The Market Place: Reminiscences of a Financial Editor
(Boston: Little, Brown, 1938)

Melchior Palyi, The Twilight of Gold, 1914-1936: Myths and Realities
(Chicago: Regnery, 1972)

Sidney Pollard (ed), The Gold Standard and Employment Between the Wars
(London: Methuen, 1970).

Lionel Robbins, The Great Depression (London, 1934)

Jacques Rueff, De L'Aube au Crepuscule (Paris: Plon, 1967).

R.S. Sayers, "The Return to Gold, 1925" in Sidney Pollard (ed), The Gold
Standard and Employment Between the Wars (London: Methuen, 1970).

Max Shapiro, The Penniless Billionaires (New York: Truman Talley, 1980)

Steven Solomon, The Confidence Game: How Unelected Central Bankers Are
Governing the Changed World Economy (New York: Simon and Shuster, 1995).

Gordon Thomas and Max Morgan-Witts, The Day the Bubble Burst (Garden City:
Doubleday, 1979)

Stefan Zweig, Die Welt von Gestern (Frankfurt: Fischer, 1993)

END

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