Facing an economy in poor shape, prices that were too high, and a currency apparently stuck some 15 percent below its prewar parity, one school of economists argued that the authorities should abandon their dogged attempt to depress prices further and with it the goal of restoring the prewar exchange rate. Any attempt in the current circumstances to return to gold at the old parity would just throw hundreds of thousands more people out of work. They argued that a new level for the pound should be selected that reflected the realities of postwar Britain: the changed international environment, the new competition, Britain’s higher cost structure, and the transformation in its international balance sheet brought about by war.
FIGURE 3
To Norman and the purists within the Bank of England, this was unacceptable. They continued to press for a return to the old gold rate of $4.86, seeing it as a moral commitment on the part of the British nation to those around the world who had placed their assets, their confidence, and their trust in Britain and its currency.
Even the most orthodox among them—like Norman, who in 1918 had wanted to return to gold the moment the guns stopped firing—conceded that the time was not right. The Cunliffe committee of 1918 had originally estimated that it might take as much as a decade for Britain to return to the gold standard. In 1924, another committee, under the chairmanship of Austen Chamberlain, also recommended a delay of some years. Britain’s economy was still not in shape to withstand the harsh medicine of a rise in its currency and the strictures of the gold standard.
The success of the Dawes Plan had been seen as a giant step in restoring financial order to continental Europe. The spotlight now shifted to Britain and the pound. With the mark stabilized and now fixed against gold, the universal question was: When would sterling follow? It was an uncomfortable position for Norman. He hated the prospect of having to operate under the white light of publicity. As he complained to Strong, “You know how controversial a subject it is—and how it is everybody’s business.”
He did worry that Britain was being left behind. Germany, Sweden, Poland, Austria, and Hungary had already returned to gold, while the Netherlands, Canada, Australia, New Zealand, and South Africa were all making plans to do so in the near future. Once all these currencies were stabilized, it would be hard to retain the pound’s financial and trading preeminence. Merchants and investors would soon begin looking for an alternative. His fears that the newly stabilized mark might become the strongest on the Continent and supplant the pound were echoed by others in the City who warned that further delay would “hand over to Germany the financial scepter in Europe.” Even Strong began kidding him that sterling was “rather far behind in the procession.”
In November 1924, the political situation changed suddenly and dramatically. Since the war, Britain had faced an unusual series of fragile coalition and minority governments. The immediate postwar coalition of Conservatives and Lloyd George Liberals was followed in 1922 by a Conservative government, initially led by the dying Bonar Law, and six months later by Stanley Baldwin. In January 1924, a minority Labor government under Ramsay MacDonald took over, but that November, a wave of anti-communist sentiment, fueled by the publication of a fraudulent letter linking the Labor Party to the Soviet Union, led to a Conservative landslide. Norman’s close friend Stanley Baldwin resumed the reins of power.
To everyone’s surprise, Winston Churchill was appointed chancellor of the exchequer, the second most powerful position in government.
No ONE WAS more taken aback by the appointment than Churchill himself. He was then a few days shy of fifty. After a spectacular early career—home secretary at the age of thirty-five and first lord
of the admiralty in 1911—he had fallen on hard times. The debacle at Gallipoli in 1915 had been a turning point. Politically damaged, he had gone off to fight on the Western Front, continued to deliver his brilliant speeches, and had become a follower of Lloyd George; when the “Welsh Wizard” was ousted in 1922, Churchill had lost his seat in Parliament and spent the next two years trying to rehabilitate himself.
It was a daunting task. Within political circles, he was almost universally distrusted as a man who had changed parties not just once, but twice. In 1903, after the Tories had split over free trade and their political fortunes seemed bleak, he had crossed the floor to join the Liberals, becoming a junior minister in barely two years. Now again, in 1924, as the Liberals were being shunted into the political wilderness, he had abandoned them—although for the sake of form he did not formally join the Conservatives for several more years. Many people thought that vaulting ambition and poor judgment were hereditary traits of the Churchills, echoing Gladstone’s verdict, “There never was a Churchill, from John Marlborough down, that had either morals or principles.”
When Baldwin first offered him the chancellorship, Churchill himself was caught so much by surprise that, for a moment, he thought he was being offered the position of chancellor of the Duchy of Lancaster, a sinecure office that served (and still serves) as a general utility post for junior ministers. So keen was he to return to power that he even toyed with the idea of accepting this position, which he had held a decade earlier in the aftermath of the Gallipoli disaster and had resigned in despair. When his appointment as chancellor was finally announced, there was outrage in the Conservative ranks, one minister complaining that he could not understand “how anybody can put their faith in a man who changes sides, just when he thinks it is to his own personal advantage to do so,” and lamenting that the “turbulent pushing busybody Winston will split the party.” But Baldwin was willing to weather the reaction of his many diehards, because, it was said, he wanted Churchill inside the government where he could keep an eye on him rather than outside, where he could only cause mischief.
Though everyone acknowledged his talents—formidable energy, exuberance, and restless imagination—many, particularly the more reactionary Tories, viewed Churchill as a pushy, self-promoting, ambitious political adventurer. The louche circle of friends with which he surrounded himself during those years only intensified doubts about his judgment. His three great cronies were Max Aitken, Lord Beaverbrook, the charming and manipulative press lord and a master of political intrigue; F. E. Smith, Lord Birkenhead, a dazzlingly clever lawyer, witty and articulate, who might have become the leader of the Conservative Party had he not been an alcoholic with a proclivity for seducing teenage girls; and Brendan Bracken, MP, an Australian-Irish rogue who fed the rumor that he was Churchill’s illegitimate son.
Despite Norman’s natural conservatism and his friendship with Baldwin, he did not particularly welcome the new Conservative government, fearing that it would allow its economic policies to fall into the hands of “traders and manufacturers, who, while they profess a remote affection for gold and a real affection for stability, always want a tot of brandy (in the shape of inflation).” And he naturally distrusted flamboyant characters like Churchill. The previous chancellor in the minority Labor government had been Philip Snowden, an intensely moralistic teetotaler, crippled by tuberculosis of the spine, who could only get around supported by two walking sticks. With his thin lips, icy eyes and bloodless skeletal face, his black suit and black Turkish cigarettes, he looked like an undertaker in a horror movie. But despite Snowden’s fervent belief that capitalism was doomed and his suspicion of bankers, he had espoused the cause of orthodox finance and the gold standard with all the fervor of the old puritan radical stock from which he sprang and had developed an exceptionally close relationship with Norman.
Churchill and Norman could not have been more different. Churchill avidly sought publicity and had a terrible reputation for grandstanding. Norman chose to wrap himself in enigma, and shunned the limelight. Churchill courted the press lords. Norman considered them part of the vanguard of a new barbarism that preyed on the emotions of the expanded electorate. Churchill was naturally gregarious, loved company, and hated to be alone. Norman rarely socialized, buried himself in his work, and claimed that the Bank of England was “his only mistress.” Churchill liked to argue and debate. Norman was reserved and uncommunicative, oddly inarticulate in public, and when confronted by opposition, he retreated into a shell of sullenness.
Their personal habits were also poles apart. Churchill was addicted to high living. He had a Rolls-Royce and a chauffeur and by his own admission had never been on a bus or on the Underground.26 He kept an enormous retinue of twenty-four servants, and pampered himself with the finer things of life—silk underwear, champagne at every meal, Havana cigars, strings of polo ponies, and bouts at the gaming tables of Monte Carlo and Biarritz—and was predictably in perpetual debt. Norman, despite his inherited wealth and his grand house in Holland Park, lived an existence of almost monkish simplicity, sleeping on a plain iron bed in a bare room with paintings propped up against the wall and taking the Underground to work every day, with the ticket jauntily protruding from his hatband.
About the only things the two men shared was a common disdain for the parochial “Little Englanders,” who would see Britain retreat from its role in the world, and a particular sympathy for the United States, an unusual trait among upper-class Englishmen who had reached maturity in the high noon of Edwardian England.
IN THE LAST few months of 1924, the pound began to rise, buoyed by speculators betting that the new Conservative government would return to gold. But the fundamental discrepancy between British prices and American prices remained, and Norman was still unsure whether to press for an early return to gold. Nothing was more symbolic of the change in Britain’s financial position than that before he could even think about doing so, he first had to go to New York to consult with Strong.
He arrived in New York aboard the S.S. Carania on December 28, having managed to slip out of Britain “undetected, like a shadow in the dead of night,” as one magazine put it. But he was quickly unmasked by reporters, provoking the usual speculation. One story had it that he was there to renegotiate the war debt; another hinted that he was on a secret but unspecified mission for the British government. One rumor even had him preparing U.S. bankers for the imminent return of sterling to gold. When pushed by the press for a statement, the bank’s official spokesman expressed complete astonishment at his chief’s appearance in New York, but glossed over it with the observation that because Norman was in the habit of taking a vacation at this time of year, his absence had gone “unremarked.”
The embassy in Washington was more inventive. Two months earlier, the New York Fed had moved into new headquarters on Liberty Street, which boasted not only a giant vault for the bank’s very considerable gold reserves, carved out of the solid bedrock of Manhattan and protected by doors ten feet thick and weighing 230 tons each, but also new mechanized coin-handling machines that sorted the twenty tons of nickels, dimes, quarters, and half dollars that clinked in every day. Because the Bank of England was itself about to embark on a construction project to expand its venerable London headquarters, Norman had obviously come to the United States to pick up points.
Norman had not been in the United States for two years. Buoyed by new industries such as automobiles, radios, household appliances, electrical machinery, and plastics, the U.S. economy was just embarking on the spectacular boom of the 1920s. The physical transformation of the city was remarkable. Most noticeable was the number of cars on the road, which had doubled since he was last there—there were now as many on the streets of New York City alone as there were in the whole German republic. Despite the introduction of traffic signals in Manhattan earlier that year, there were still constant jams and everyone complained about the congestion. It was not only the automobile. There had been a dizzying revolution in
the types of goods available—household appliances such as washing machines and vacuum cleaners, new materials such as rayon and cellophane, radios and talking movies—that were changing the whole texture of life. The contrast between the gaudy prosperity of the United States, where a typical worker was earning close to $6 a day, with the dingy poverty of postwar Europe, where workers earned less than $2 a day, was another reminder of the terrible price exacted by the war.
Strong was waiting enthusiastically at the pier. He was the U.S. official with the deepest understanding of international financial issues, the widest network of friends and contacts in European banking circles, and the strongest commitment to European reconstruction. Nevertheless, a combination of his ill health and the administration’s official hands-off toward European financial affairs had left him relegated to the sidelines. In 1922, he had tried to involve himself in crafting a solution to German hyperinflation but had been expressly warned off by the secretary of state. For much of 1923 he had been ill. Then, earlier in 1924, he had again been excluded from the Dawes Plan negotiations by administration officials, except for a few informal discussions on a brief spring visit to London and Paris. He had fallen ill again on his return and had to spend part of the fall once more recuperating in Colorado.
But he remained convinced that given the importance of the pound to world trade, a global return to the gold standard would only be possible if Britain took the lead: “The great problem is sterling, the others will come along easily if sterling could be dealt with,” he kept telling his colleagues.
Strong, who had just moved into a more spacious residence in the Maguery, an elegant apartment hotel located at Forty-eighth and Park Avenue, insisted that Norman stay with him. Over the next two weeks, during the day and in the evenings, Norman was subjected to an intense campaign by the Americans, especially by Strong and the Morgan bankers, to get the pound back on gold as soon as possible.
Strong did not have to persuade Norman of the consequences should Britain not return to gold. They agreed that this could only lead to “a long period of unsettled conditions too serious to contemplate. It would mean violent fluctuations in the exchanges, with probably progressive deterioration in the values of foreign currencies vis-a vis-the dollar; it would prove an incentive to all those who were advancing novel ideas for nostrums and expedients other than the gold standard to sell their wares; and incentives to governments at times to undertake various types of paper money expedients and inflation; it might indeed result in the United States draining the world of gold.” It could but end, they believed, “with a terrible period of “hardship, and suffering, and . . . social and political disorder,” culminating in some kind of “monetary crisis.”
Strong stressed that the British had only a few weeks, at best months, to act. The pound was for the moment supported by the positive political developments at home; American capital was currently very optimistic about Europe in the wake of the Dawes Plan, and the Fed had been able to help Britain out by easing U.S. credit conditions in mid-1924. He warned that this narrow window would soon close, as Britain commenced war-debt payments, an outflow that was certain to weaken sterling. The Fed’s easing of credit during 1924 had suited America’s own domestic needs—the U.S. economy having suffered a mild and short-lived recession in the summer. But the time was fast approaching when the Fed would be forced to tighten credit for domestic reasons, making it difficult and more expensive for Britain to attract capital to support its currency. There were already murmurs within the corridors of the Fed that Strong was too greatly influenced by his friends in London.
He was acutely aware that British prices were still 10 percent too high, and that further deflation to cut them would bring further hardship. But he had become increasingly convinced that the British needed to be pushed into making the big decision—force majeur, he called it. The shock therapy of forcing Britain to compete in world markets, while painful, would bring about the necessary realignment in prices more efficiently than a long drawn-out policy of protracted tight credit.
The Americans recognized that if Britain did go back to gold, it was imperative that the link not snap at the first signs of trouble. Otherwise, the credibility of the whole system might be called into question, throwing all the world’s currencies into turmoil. The government of the United States was in no position to lend money to any country—it had had enough of government-to-government lending during the war and was now saddled with renegotiating the terms of those loans. To ensure that Britain had adequate reserves to draw upon, Strong promised $200 million from the New York Fed. From the partners of J. P. Morgan came a further tentative commitment of $300 million.
Strong did impose one important condition: not, as might be supposed, a restriction on the economic policy of the Bank of England—how much credit it could provide or the level of interest rates it could set. The sole condition was that this loan would be available only while Norman remained governor.