2THINGS FALL APARTThe Collapse of Cooperation and the Great Depression

The Crisis and Depression after 1928

In the United States, the 1920s were a period of unprecedented economic prosperity. From late 1928 to 1929, the New York stock market “seemed spectacular.” The market was described as “an orgy of speculation, a mania, a bubble,” but, as Kindleberger also points out, it denoted “a loss of contact with reality.”² The New York Stock Exchange was at the center. The Dow Jones Industrial Average increased almost sixfold from 1921 to 1929. Irving Fischer, one of the most well-known economists of the time, was quoted in the New York Times on October 16, 1929, saying that “stock prices have reached ‘what looks like a permanently high plateau.’”

Not ten days later, on October 24, the roaring twenties came to a crashing halt. On October 28, dubbed Black Monday, the Dow Jones Industrial Average declined nearly 13 percent; and then another 12 percent the next day. By mid-November, the Dow had lost nearly half its precrash value and continued to slide in the years that followed.

The crash itself did not halt economic growth—economic output was already in decline. In light of this emerging recession in the summer of 1929, the Federal Reserve was already assessing how to respond in the months leading up to the crash. When the recession began, and as it turned into a depression, it was neither immediately obvious nor inevitable that the crisis would be so severe or last as long as it did.

Because of the exceptional nature of the crisis, finding an explanation for it has been described as the “search for the Holy Grail.”³ In the context of the United States, there is consensus within the scholarly community searching for this explanation that the Fed failed to act appropriately during the crisis. There is less of a consensus as to why it did. Milton Friedman and Anna Schwartz blame the Fed's failure to stem the banking panics that began in 1929 on the structure of the institution—disagreement over what policy action to take and the power struggle between the New York Fed and the Board. The Fed's actions at the start of the recession-depression were distinct from those of the 1920s, and Strong's death also played an important role in determining Fed policies. As they argue, Harrison did not have “the confidence and backing of other financial leaders inside and outside the [Federal Reserve] System, the personal force to make his own views prevail, and also the courage to act upon them.”⁴

David Wheelock suggests that Strong's death in 1928 led “to a redistribution of authority within the [Federal Reserve] System that caused a distinct deterioration in Fed performance.” Authority was transferred to other Reserve Banks that were less knowledgeable and failed to recognize the need for aggressive policies.⁵ But Wheelock disagrees on Strong's influence over Fed policies, suggesting that they represent a continuation of the Fed's 1920s policies, focused on defending the gold standard and maintaining dollar parity; they did not focus on domestic economic activity.

Allan Meltzer highlights the Fed's flawed policies, focusing on its actions and inactions. Fed leaders had no coherent policy strategy in place, and the lack of agreement among the governors of regional Feds exacerbated the recession then turned it into a Depression. Several Board leaders believed that speculation misdirected resources away from more productive activities such as commercial, agricultural, or industrial activity. Many authors of the 1913 Federal Reserve Act, and leaders within the Federal Reserve System, prescribed to the theory of real bills, which essentially called for procyclical policy: “The central bank should issue money when production and commerce expanded, and contract the supply of currency and credit when economic activity contracted.” The Fed's adherence to the real bills doctrine contradicted the prescriptions of the gold standard mechanism, and so policy was deflationary. Per Meltzer, because Strong also adhered to the real bills doctrine, had he been alive, he would similarly have failed to take the necessary aggressive action.⁶

The Federal Reserve Board in Washington opted for a policy of more direct action to reduce the surge in call loans by asking reserve banks to deny credit to any bank that used these funds for loans to stock market speculators. As early as February 1929, the Board was worried about Federal Reserve credit seeping into security markets and warned against speculation.

Harrison sought a different approach to raise the discount lending rate to 6 percent when he made his first appeal to the Board for this change.⁷ His applications for this move were repeatedly shot down. While Harrison believed that higher discount rates would bring about lower call loan rates, the Board believed the opposite effect to be more likely.

Between February and May 1929, the Board shot down ten appeals by Harrison to increase discount rates. In this time, conditions in New York changed drastically. The Board was being asked to raise rates amid falling Federal Reserve credit and increasing reserve ratios, which “according to the canons of banking practice called for lower rather than higher rates!” Even more, Harrison's plea was for an increase to 6 percent to start, with the possibility of further increases should it not “correct the situation.” The Board, however, believed that the “present fever of speculation could not be curbed through the discount rate by any increase short of such extremes as would produce a cataclysm in the market, which, as stated above, would injure business as much as or even more than it would injure the stock market.”⁸

Perhaps they were right. But the Board finally acquiesced to Harrison's appeals in August 1929, raising the discount rate in New York to 6 percent. This step pushed foreign central banks to increase their own interest rates, and tightening monetary policy tipped European economies into a recession. While international commercial and economic activity contracted, the financial stock market boom continued, and commercial banks continued lending money to speculators. By that September, stock prices began to fluctuate increasingly in the United States and collapsed in October.

While commercial banks were protected by the New York Fed's intervention, the stock market dashed investor and consumer confidence, hurt commerce and industrial activity, and reduced consumer demand, especially for higher-priced goods usually purchased using credit. Large manufacturers saw their demand decline, leading to lower production and furloughs. As unemployment increased, the economic contraction that had begun in the summer of 1929 was accelerated by the stock market collapse, turning a recession into the Depression.

The Depression in the United States was marked by regional banking panics that spread nationwide by 1931, with the collapse of the commercial banking system in the United States that March. The United States saw a series of regional banking crises and failures, starting in the south, in Tennessee, and moving north to the Midwest that December.

These crises reached the heart of American finance. On December 11, the Bank of the United States in New York City failed, then the largest commercial bank to have ever failed in US history. The New York Fed's intervention failed, depositors panicked, and the bank was closed. This panic created fears of a repeat of the 1907 crisis, the first worldwide financial crisis of the twentieth century that led to the creation of the Federal Reserve System in 1914.

Between 1929 and 1933, the US economy experienced the most severe business cycle contraction of the century. The money stock fell by over 30 percent. Firms faced higher prices to access working capital, and others found it hard to get credit at any rate.⁹ This created further deflationary pressures, reducing the overall monetary base deposited in banks, and pushed many banks and firms into bankruptcy, reducing consumption, and generating high unemployment. The long bout of bank runs was capped by President Franklin D. Roosevelt's bank holiday across the United States from March 6 to March 13, 1933. The deflationary spiral only ended with the bank holiday, the suspension of the gold standard, the reflation of prices, and a slew of domestic financial reforms, including the creation of deposit insurance and recapitalizing commercial banks.

But this was by no means the end of the crisis. Even more, these efforts came too late to prevent the Depression from being exported to other industrial economies. Beginning in 1929, Britain began to bleed gold, losing a significant portion of its reserves. Banks in Germany and Central Europe were also especially vulnerable to stock market pressures from New York. In response, central banks across Europe lowered discount rates in 1929 to provide some relief from the crash.

Soon, Europe met with its own slate of banking crises, starting with the collapse of Credit-Anstalt in Austria and Danatbank in Germany. In the summer of 1931 the German mark collapsed, followed by similar currency crises of the pound and the dollar. The Bank of England alone did not have adequate reserves to help the failing Austrian bank. Politics closed another solution to the problem, making international rescues seemingly impossible: the French refused to do so without the promise of specific political concessions by Austria. Central banks were constrained by the fetters of the gold standard system in their abilities to address their own troubles, let alone those overseas, ultimately causing several states to abandon it. In September 1931, Britain left the gold standard, triggering fears in international markets that other nations would follow suit. Some did.

To explain why the Depression went on so long, Charles Kindleberger points to the absence of a hegemonic leader to stabilize the global economy: “No longer London. Not yet New York.”¹⁰ Britain's inability and American unwillingness to lead meant that there was no stabilizer to manage the international gold standard system—to provide liquidity and stability through international cooperation.

Eichengreen identifies the breakdown of credibility and cooperation, both inextricably linked and sourced in the rise of mass politics and labor unions, as impeding central bank policy during the crisis. Emerging domestic political pressures and an unstable international economic climate—generated by the fetters of the gold standard mechanism—constrained governments in their ability to commit credibly to adhering to the international monetary practices that kept the system going. This resulted in a collapse of monetary cooperation in the interwar period, leading to a series of banking and currency crises, the Great Depression, and ultimately a world war. Central bank internationalism that kept the gold standard system going was on the ebb.

Central banks’ inability to credibly commit to upholding the gold standard system was in part rooted in the rise of labor unions, in the latter half of the interwar 1920s, in Britain, and Germany, and elsewhere in Europe that put upward pressure on wages. In the United States, wages rose to fend off the threat of unionization. High wages and downward inflexibility were a problem within the gold standard system. Attempts to end the Depression by cutting wages ended in disaster. Domestic priorities led policymakers to lose sight of international monetary stability as a collective good, rendering the gold standard system incapable of working.

A unifying aspect of these accounts of the depression is, as Eichengreen and Peter Temin highlight, “the ideology, mentalité and rhetoric of the gold standard led policymakers to take actions that only accentuated economic distress in the 1930s. Central bankers continued to kick the world economy while it was down until it lost consciousness.”¹¹ The doctrine of the gold standard and the “masochistic strand of the gold standard mentalité” hamstrung policymakers throughout the Depression in a manner that allowed the crisis to worsen, even in their efforts at rescuing domestic and international economic activity from collapsing.¹²

These seminal studies together provide key insights into what caused the Great Depression, and why it went on as long as it did, pointing to a failure of central bank policies and an inability to collectively manage crises during this period as they unfolded. However, they underplay the impact of key leadership changes within central banks that altered and inhibited their room to maneuver their way through their troubles. In this chapter, I tell the story of how central bankers tried and failed to mobilize resources to rescue the global economy from its worst collapse. I bring the role of central bankers to the forefront of the discussion and debate around why attempts to arrest the Depression failed. I show how relationships of trust, or their absence, fed into the policymaking process of arresting the Depression and illustrate the interpersonal nature of the mission.

I pick up the line of inquiry set up by Friedman and Schwartz, of the impact of Strong's death on Fed policy on the eve of, and during the Great Depression. While their analysis focuses on Fed policy specifically, I point to another set of changes in the Fed's ability to act in Strong's absence: the weakening of cross-border relationships between New York and Europe, when Strong was replaced by Harrison following his untimely death. The greatest effect of this change in leadership in the central bank community was in the detrimental impact it had on the Anglo-American partnership, which hindered attempts at bilateral central bank assistance and crisis management.

I also provide a more general story of how interpersonal relations among central bankers during this time were too weak to overcome political and economic obstacles to rescue attempts, unlike in the 1920s. Not only was Norman dealing with a new counterpart in New York, he was also dealing with Hans Luther in Germany, who had taken over the Reichsbank presidency from Schacht. While Norman's relations with Clement Moret at the Bank of France were an improvement to those with Moreau before him, they were not strong enough to manage or overcome disagreements between Luther and Moret and his associates in France. In a sense, this chapter illustrates the microfoundations of why system leadership, as had been provided primarily by Norman and Strong in the 1920s, was nowhere to be found because leaders changed. The package of players tasked with dealing with the Great Depression did not possess the right types of personal ties necessary to collectively provide this public good.

The 1929–1933 years mark a period of key turning points, opportunity, and crucially, missed opportunity, that allowed the crisis to escalate and explain, to use Charles Kindleberger's words, “why the Depression went so deep, and lasted so long.”¹³ In this chapter, I evaluate some of the many efforts made domestically and internationally to arrest the Depression. I start with the attempted rescues of Credit-Anstalt and Danatbank in Germany and Austria. I then consider the crisis in Britain that prompted sterling's departure from gold. Finally, I look at the failed tripartite meetings during the WEC held in 1933 to revitalize international trade, stabilize currencies, and fight the Great Depression, which were “torpedoed” by Roosevelt.

While the chapter ends with WEC tripartite meetings in 1933, this was not the end of the Depression. The Tripartite Agreement was signed in September 1936 by Britain, France, and the United States to facilitate currency stabilization following the collapse of the gold standard during the crisis. But the recovery of output and employment only occurred during the Second World War; the Dow Jones only returned to its precrash levels in 1954.

I do not address the post-1933 efforts as they present a distinct context to the pre-1933 years and are outside the scope of this book. Germany left the League of Nations in 1933; Italy was denounced by it. The remilitarization of the Rhineland in March 1936 broke the Versailles and Locarno Treaties, and Europe was now more decidedly on the road to war. The long recovery was then interrupted in 1937 by a double dip recession. By then, military tensions were the main focus: Hitler's expansionist aims had turned violent, and the United States had abandoned neutrality against aggressor states. The Anschluss, the annexation of Austria by the German Reich, took place in March 1938. Diplomatic appeasement efforts such as the Munich Agreement, or Roosevelt's letter to Hitler seeking peace, were underway. The Second World War was around the corner, and the Depression was no longer the focal crisis, as states began to build up military and war efforts.

A Changing of the Guard

The turn of the 1920s to the 1930s was marked by more continuity than change. The most significant changes related to international monetary affairs were not structural but personnel changes in major central banks, yielding consequent changes in the internal institutional apparatuses of these banks, and the creation of the Bank for International Settlements (BIS).

Strong's international influence, especially in Europe, started with Norman. The two relied on one another to exercise their influence and undertake their operations as they wished; both were keenly aware of the prospects for their joint efforts if one of them were to leave their post. Early in their tenures, Norman wrote to Strong, “You are an international asset + almost unique in your own country: with you we hope to gain the whole world: without you we should not know where to turn for instructed support: do not jeopardize that support, especially at this stage, by endangering the powers or the health of yourself as its channel.”¹⁴ Indeed, both expressed their discomfort at the prospect of a change of guards at one another's banks, as Strong wrote to Norman:

It has long been the cause of some uneasiness to me that when the time comes for you to retire as Governor of the Bank, your successor may not feel the same interest and be inspired by the same purposes that have characterized your attitude from the start in building up an understanding between your institution and ours. There is so much to be done from now on that is important to both of us, and our success in accomplishing anything depends so much on these personal relations that I look forward with dread to the day when you will be succeeded by some unknown person with whom I may not have the same intimate and affectionate relations that I have enjoyed so greatly with you.¹⁵

Although seven years later it was Norman who faced this change of guards, the implications of these concerns were apparent. With Strong's departure, “the intimacy of the transatlantic relationship evaporated.”¹⁶ Norman was “desolate and lonesome at Ben's sudden death.” While it was unclear whether he realized “how mountainous were the odds stacked against him,” his circle of friends in the financial world was dwindling.¹⁷

Harrison, a lawyer by training, replaced Strong as governor of the New York Fed, having served as deputy governor from 1920. His appointment was welcomed by the private banking industry in the United States; J. P. Morgan saw it as “most natural” and “had the advantage of continuing unchanged the friendly and important relations the Federal Reserve has had so many years with the central banks of issue abroad.”¹⁸

But Harrison was markedly distinct from his predecessor. Under his “less forceful” governance, the Fed's power shifted from New York to the Federal Reserve Board and the US Treasury headquartered in Washington, DC.¹⁹ DC's influence and opposition to the BIS was so strong that Harrison actively avoided Basel when visiting Europe.²⁰ He enjoyed friendly relations with his European opposites and maintained Strong's tradition of consulting with Norman. But the nature and the intimacy of his relationships were not as deep and personal as were Strong's, and he did not share Strong's “readiness to go more than half-way to meet the wishes of Norman.”²¹

In Germany, in 1930, Schacht was replaced by Luther as Reichsbank president. He was trained as a civil servant and was a nationalist who “had faith in the government and the army,” a “politician without a party.”²² He had previously served as chancellor, and before that as the Reich finance minister, was involved in fighting inflation in the early 1920s, negotiated the Dawes Loan, and was known to be a skilled diplomat. Luther shared credit with Schacht for Deutschmark stabilization following hyperinflation in the early 1920s. But when he took over the Reichsbank in 1930, he was viewed by his counterparts in Britain as a politician.²³

Moret took over from Moreau at the Bank of France in 1930. For most of his tenure, Moreau had “leaned to passivity in relation to international gold movements.” Moret's governorship improved relations with Norman and his Bank, even if old political loyalties and governmental influence remained. Moret, along with his assistants, had learned how to interact and cooperate over gold movements. Under Moret, Norman's cooperation with the French now “had a highly practical slant.”²⁴ Moret “did not inherit the aggressive distrust Moreau had shown toward the British”; he was more cooperative from the outset, indicating his inclination toward reciprocity by saying that the Bank of England “will find here all the support it might require.”²⁵ Unlike the poor relations between Norman and Moreau, Norman, Moret, and Harrison enjoyed mutual respect; their assistants were closer than any of their predecessors.

Strong's death brought on significant system-level changes: the first was a change in the relationship between the New York Fed, the Board, and the US government, restricting the New York Fed's freedom. Moreover, with Strong gone, Norman could no longer rely on the trust and good faith of his overseas counterparts. Leadership changes on the continent similarly reduced central bank autonomy and their willingness to prioritize international issues. Two institutions most keenly affected by these personnel changes were the New York Fed and the BIS.

In many ways, Harrison's policy preferences represented continuity from Strong's tenure, especially on domestic policy, or his position on the League of Nations.²⁶ Still, Strong's death made way for increased intervention by the Board and US Treasury in Washington. This changed the New York Fed's capacity as an international leader in the absence of what Lester Chandler prescribes as “some powerful man, with sufficient understanding, imagination, and personal force to weld the Board members into an efficient unit capable of vigorous and timely action.”²⁷ Harrison did not share Strong's international influence or his internationalism to the same extent.²⁸ According to the economist Lester Chandler, Strong's death left the Federal Reserve System “with no [center] of enterprising and acceptable leadership” to consolidate the position of the FRBNY vis-à-vis Board and other Reserve Banks.²⁹ No clear policies could be agreed to within the institution in 1929. Harrison's replacement of Strong changed the position and interactions of the New York Fed in the United States and overseas.

Norman had a good relationship with Harrison, and they maintained regular contact.³⁰ However, Harrison did not share Strong's interest in Europe and was more tied to Washington's position in international monetary affairs, leaving Norman “baffled to know how to proceed in the situation.”³¹ The influence of the New York Bank with the Board shifted and constrained Harrison's ability to sidestep institutional and domestic political influence to cooperate with Norman and his other foreign counterparts. Harrison was wary of overstepping his position or engaging in conversations that were governmental concerns.

A second change was the establishment of the BIS. In the early 1920s, Norman and Schacht had drawn up a framework for the functions and policy of what became the Bank for International Settlements.³² In 1929, Owen Young, an American diplomat, chaired a committee revisiting the issue of German reparations. The BIS was established under the Young Plan, in 1930, as a central bank for central banks, to formalize Norman's agenda of central bank cooperation and autonomy. This realized Norman's dream of creating an international central bankers’ club, to “provide the machinery for bringing together and offsetting the demands on the gold reserves of Central Banks, which as things were, tended all to be converted into claims upon London.”³³

The first role of the BIS was to arrange the Young Loan, which reduced the German reparations payments agreed to in the Dawes Plan and abolished the control over German economic life that Dawes had imposed. But its combined functions, of managing German reparations and coordinating central bank cooperation, “proved fatal.” The Fed's absence in the BIS, due to constraints on Harrison's participation, meant that cooperative arrangements had to continue on an ad hoc basis.³⁴ Moreover, as Henry Clay observes, the Young Plan “came at a time when the financial sky was overcast, economic depression was deepening, and the flow of international loans drying up.”³⁵ The BIS was unequal to the task of preserving the gold standard and stemming the Great Depression. In its early years, the Bank has been described by Eichengreen as proving “singularly ineffectual” in managing the Great Depression.³⁶

Banking Crises in Austria and Germany

The new cohort of central bank leaders did not have the tools or experience to manage it. Given the unprecedented gravity of the Great Depression, their experimentation was neither quick nor adequate to stem the crisis as it emerged. The BIS had hardly begun its operations when the world was in the throes of the Great Depression. An unfavorable economic environment, combined with weak personal ties and political pressures upon BIS members further inhibited international cooperative solutions to arrest the Depression.

The crisis in the United States triggered a collapse of banking systems all over the world. President Hoover passed the Smoot-Hawley Tariff in June 1930, and trading partners soon retaliated by imposing protectionist measures at home, leading to a collapse in international trade. Heavily indebted economies were most affected by the global economic collapse at first. For them, default and devaluation seemed to be the only ways to get their domestic finances under control.

These troubles were not limited to debtor states. The banking crises in the United States quickly engulfed creditor countries, including Britain, leading to losses in interest earnings and mounting balance-of-payments pressures. The most significant consequence of this development was the collapse in international lending, which consumed central European banking systems, leading to a financial collapse that began in Austria and spread to Germany.³⁷ I look at two failed efforts at resolving the banking crises in Austria and Germany: first, Norman's International Committee in London and Basel, and second, Germany's fraught attempts to secure French credits. I show that central bank leaders were now free to float interbank assistance but did not make extensive efforts to circumvent intergovernmental constraints to coordinate central bank credits to Austria and Germany, as they had done following the Genoa Conference and in the Dawes arrangement in the 1920s.

“The Old Lady Goes Off”

The British banking system was better insulated against the crisis than most other countries. But its fiscal situation was poor. Due to mounting deficits, its balance of payments position was in disarray. The collapse in international trade and the protectionist spiral in the United States and Europe meant that the earnings Britain relied on to finance its trade deficit—from financial services, interest earnings, and shipping—had declined so significantly that they could not cover the cost of its imports. Austria and Germany's decisions to freeze foreign deposits meant British deposits there were illiquid. As Britain's external position worsened, pressure grew on its reserves, leaving the Bank of England with little policy flexibility to manage payments and reserve pressures. Even painful policies and spending cuts by the new Labor government could not correct it.

Investors lost confidence in sterling's stability and Britain started to see capital leave its financial system. Firms and depositors held onto their cash, exacerbating declining demand and consumption and the shrinking monetary base. Sterling fell sharply after the DanatBank collapse. Within days, the Bank of England had lost $10 million in reserves. By the end of July, it had lost $56 million in gold. Britain seemed to be next in line to suspend gold standard operations.

To some, Britain's inability to recover from balance of payments pressures was because it could no longer credibly maintain parity due to the collapse of central bank cooperation. The domestic political climate hindered the government's ability to reduce deficits and made partner banks wary of assisting the Bank of England via credits. Norman's hesitation to increase interest rates to curb gold outflows had put the Bank's credibility, and therefore sterling, into question.⁷⁶

This assessment underplays Norman's influence in Britain's monetary affairs. In 1925, Britain's return to prewar parity was engineered in a large way by Norman with the help of Strong in New York. The British government had been eager to meet this goal without relying on any foreign support. Nevertheless, Strong secured the support of the US Treasury and J. P. Morgan bank associates to float a large loan to Britain. Strong and Norman together circumvented political priorities and preferences. What changed in 1931?

Between June and September 1931, Norman's behavior and choices exacerbated the Bank's inability to credibly commit to gold and its willingness to participate in any credit arrangement. Norman became increasingly uncooperative with his own associates and his counterparts whose help was initially forthcoming. In a sense, during the second half of 1931, Norman's influence was as significant through his absence as it was through his outsized presence the decade prior.

In August 1931, Norman had a nervous breakdown and left Britain as the Bank continued to bleed reserves. In his absence, Ernest Harvey, the Bank's deputy governor, could not fend off government pressure to leave gold. Eventually, central bankers, including Norman, reluctantly accepted the inevitability that Britain would leave gold. But this did not arrest the crisis. Given that sterling and the Bank had been the linchpins of the gold standard system, Britain's departure from gold devasted confidence and stability not only in Britain but across Europe.

In June 1931, Norman's hesitation to raise interest rates challenged the bank's credibility to manage pressures and allowed the crisis to accelerate. It soon became clear that international help would be necessary to assist the Bank of England maintain parity. Richard Sayers, a historian of the Bank of England, notes that in early July, Moret was willing to extend credits to the Bank of England. Some of Norman's associates at the Bank of England, including Harvey, believed this show of cooperation might calm markets and render these credits unnecessary. Norman, in contrast, was stubborn about his views regarding sterling's troubles. He believed that sterling was not in trouble and sought to assure foreign partners the same.⁷⁷ So, he opted for a less cooperative route, and Norman chose not to take the French up on their offer.

Norman's belief in sterling's stability was quickly proven incorrect. In response to growing pressures on the Bank's reserves, Harrison and Moret were able to float a small loan, to the tune of $25 million, by the end of July, much like the modest forms of bilateral assistance that emerged early in the Austrian and German crisis. Both central banks were constrained by their governments in their abilities to extend more than these small amounts. It was far less than the reserve losses that the Bank of England faced, and not nearly enough to prevent the Bank from depleting its reserves in the following months. It failed to arrest Britain's crisis.

Even more, the use of these loans was not in accordance with what Harrison and Moret had agreed to with Norman. The Bank of England breached a spoken agreement with its creditors, perhaps a move he may not have made with Strong. In August 1931, the Bank suddenly suspended sterling support, to Moret and Harrison's dismay. Moret expressed his frustration as to why the credit had “so little psychological effect. He was even more puzzled to know why [Britain] had withdrawn exchange support.”

There was much misunderstanding as to how the arrangement would be settled between Harrison, Moret, and the Bank of England. British officials believed settling the credit in gold would allow the line to remain intact, while Moret noted that he had not anticipated the agreement to be settled if that meant Britain would ship more gold to France.⁷⁸

Difficulties in cooperation between the central banks of England and France were partly sourced in distant personal relations, which led to poor communication with Britain in discussing problems and coming to cooperative solutions together. Lacour-Gayet recognized the importance of personal relations, but had not established these ties with his British counterparts, Harvey and Harry Siepmann, to communicate on the terms agreed in the French credit to Britain.⁷⁹ This misunderstanding was exacerbated by Norman's poor communication with his domestic associates, many of whom he frequently, and famously, did not get on with.⁸⁰ Ernest Skinner, Norman's private secretary, was used to recurring “tense ‘situations’” in Norman's personal relations with his deputies; “there were estrangements with them all from time to time.” They wanted to be more than the deputy he felt he needed.⁸¹ Norman's poor personal relations with his own Bank of England associates had severe consequences for the Bank and for Britain during the Depression, as he failed to fully convey his understanding with the French on the use of their credit to his Bank.⁸²

Under pressure from the looming prospect of having to leave gold, Norman collapsed one day after leaving work early as he was “feeling queer.” He had a nervous breakdown and left to convalesce in Canada on August 15, temporarily abandoning his duties.⁸³ His absence turned the Bank's functioning to Harvey and empowered the new MacDonald government.

The issue of how to support sterling had not gone away. However, given the misunderstandings that had previously risen between Moret and the Bank of England, the Bank of France was concerned about Britain's use of its previous credit. Now, it maintained that any additional support ought to be a longer-term line of credit. Even more, Lacour-Gayet had intimated to Harrison that such assistance could only be done together with the support of New York.⁸⁴

Harrison told Lacour-Gayet that he received a loan inquiry from the British government (not the central bank), which he assumed Lacour-Gayet also received. Harvey believed that the French were not eager to assist the Bank of England. But from their communications with Harrison, it seemed they believed that Moret would be more forthcoming with assistance, if an invite was made to New York to simultaneously cooperate pari passu, that is, if credits would be floated on equal footing in Paris and New York. In London, they also believed that Morgan bankers in the United States would be called on to extend a credit of up to $300 million if the matter was settled with Paris.⁸⁵

Correspondence between Lacour-Gayet and Harrison suggests a different story. Lacour-Gayet and Moret agreed in principle about the need for this loan, but now found it impossible, after their previous misunderstanding and sterling's growing troubles. Privately, Harrison and Lacour-Gayet believed that, while necessary, neither bank should participate in such a credit; sterling's troubles ought to be dealt with by private banks and not central banks. While Harrison saw this as urgent, Lacour-Gayet “figuratively, threw up his hands and said it was not possible” as they were not authorized by the French government to approach private banks and could not immediately do so.⁸⁶ This marked a break from the 1920s when Norman and Strong regularly went directly to private banks, and Strong could persuade Moreau to cooperate. This time, no adequate American or French assistance was forthcoming beyond a $20 million “transitional loan” with Morgan bank support. Norman's involvement was necessary to bring the Morgan bankers together.⁸⁷

Norman's departure was followed by daily gold losses that continued to escalate, peaking at over $20 million in a day by mid-September. Harvey talked to Harrison about Britain's declining exchange position, noting that Britain had already used up most of its transitional credits. Both Harvey and Harrison agreed it was wiser to no longer peg sterling but “let it go its own way,” at which point the Bank might regain some of its monetary policy discretion.⁸⁸ Harvey hoped that Harrison could hint at Washington's inclination toward taking an affirmative position on inter-Allied debts, which Harrison saw as unlikely. In Norman's absence, a special committee of directors was created to manage sterling, which opened weaker every day through August and September. The directors overseeing the situation were of Norman's bent and sought to keep the rate at $4.86 or higher.

Communication between Norman, Harvey, and Harrison remained patchy. Harvey and Harrison did not keep one another apprised on their banks’ activities as Norman had done with Strong. Norman and Harvey also had little communication within the bank, which had bearing on how Britain's position was dealt with among international partners. While Norman was in Canada, he met Harrison, who informed Norman of the British government's budgetary program to reduce its deficits, which neither believed to be adequate.

Harvey and Harrison were less candid in sharing their assessments with one another. Harrison was more in the know about Norman's views and plans than Harvey, who was running the Bank's business. It was Harrison who informed Harvey of his communication with Norman, but not until weeks later. Given what Harrison had learned regarding Norman's view, when asked by Harrison whether he thought the government's program was satisfactory, Harrison found Harvey's answers to be unclear and unsatisfactory. This lack of open communication, as the Bank exhausted its transition credits, made Harrison wary of taking any chances on acting even “halfway,” given the uncertainty over whether these actions would suffice.⁸⁹

Sterling's position continued to deteriorate, and the Bank of England was unsure about its ability to manage their exchange situation. This raised a worrying prospect of a snap election. The Bank had exhausted almost all of its external credit as pressure increased on sterling. But the committee handling the situation remained fettered to the $4.86 value, provoking withdrawals from Europe and causing growing concern in New York. Washington would do little to help the situation. Harrison alone was incapable of steering the Board toward any sort of support to Britain. He also learned that Norman had now also changed his mind about Britain's commitment to stay on gold: it was “most important not to peg [sterling], that every peg in the past history had proved disastrous.” Norman was to hurry back to Britain sooner than he was ready to see if he could handle the exchange situation more satisfactorily.⁹⁰

On September 19, Harvey informed Harrison and his French counterparts that the government had come to the “definite conclusion, for which they saw no option, to suspend gold payments Monday morning,” without explicitly stating that this would be temporary. He told Harrison that “it was only fair that [the Fed] should support sterling in order, if possible, to keep it over the gold point if we can do so with say one million pounds,” as “they had reached the end of their tether and that so far as he could see there was nothing left to do.”⁹¹

As Norman began his return to England, Prime Minister Ramsay MacDonald decided to suspend gold payments and go off gold on September 21, 1931. On his journey, Norman received a cryptic cable that “the Old Lady goes off on Monday,” which he pretended to not understand as he returned to the Bank.⁹² Until he arrived in Liverpool on September 23, some misguidedly believed he thought that his mother was going on holiday.⁹³

In principle, Britain's departure from gold should have been an opportunity, opening new types of policy options when countries had devalued their currencies.⁹⁴ Instead, it ended in disaster in Europe, with Britain's neverending collapse. Neither the Bank nor the government had clear plans for their future, and much would depend on the next general election. Norman now wanted no external interference until sterling was returned to gold.⁹⁵

Britain's crisis was met with inadequate and delayed assistance from its creditors and exacerbated by the government and central bank's inability to get its house in order. Credibility and cooperation collapsed. One key source of this collapse was Norman, who had chosen to take an uncooperative stance, within his bank and overseas, to exacerbate the political and economic impediments to cooperation and crisis management in 1931.

Tripartite Discussions, 1933

Schacht described the pound's fall in September 1931 as “a deathblow to trust and good faith in all international money and credit dealings.”⁹⁶ Losses devasted the British Empire, its colonies and most of Europe, and exacerbated political disputes—Britain's leaders blamed the United States and France for Britain's crisis. Given Britain's central position in the financial system, many neighboring states lost millions in reserves and soon abandoned gold. Britain's neighbors and trading partners were severely affected by its abandonment of gold, creating pressures on the US dollar and capital flight from the United States and France to countries that had already abandoned the gold parity and devalued it. Britain's crisis had now been exported to its key creditors.

By 1932, the Depression showed no signs of ending—unemployment soared, and far-right politics were gaining ground in Germany and France. Clarke suggests that the devaluation of the dollar and of sterling “placed the gold-exchange standard under a cloud.”⁹⁷ The BIS failed in its main goal of facilitating a resolution of the postwar reparations, and the Fed chose to make unilateral adjustments instead of participating in the BIS.⁹⁸ When Sayers asked what was discussed in Basel, Schacht replied, “Not very much—what you think about at a hen party—the only thing we ought to have talked about we never did—development help; the French were against that.”⁹⁹

In turn, the WEC was announced to be held in 1933, to manage “beggar thy neighbor” and isolationist policies and pursue currency stabilization in the post–gold standard 1930s, as one last gasp of international, multilateral cooperation to arrest the Depression. The conference was primarily an intergovernmental conference, with sixty-four nations attending.

By this time, important political changes were taking place, generating a new strong nationalist bent in state preferences. Hitler became the chancellor of Germany in January 1933. In France and Britain, economic despair from the Depression generated a push toward more nationalist politics. In 1932, Franklin D. Roosevelt's election added a new dose of ambiguity about US national preferences in international monetary affairs. In April 1933, Roosevelt announced that the United States would suspend gold convertibility while WEC delegates met in Washington, DC, to prepare for the conference in June. Roosevelt was focused on reflating prices to their pre-Depression levels and on dollar devaluation, which alarmed Britain and France.¹⁰⁰

Because the WEC was a political conference, I do not go into the details of the meeting itself, which was ultimately derailed by incompatible national interests.¹⁰¹ Reparations, debt, and currency stabilization were once again the key agenda items. Addressing these issues remained fraught as states continued to squabble over German debts, as well as their divergent monetary goals of reflation and currency stabilization. Any hope of success was dashed when Prime Minister MacDonald delved into the issue of debts in his opening remarks, as a breach of faith, considering he had told Roosevelt's government he would not bring it up.

During preparations for the WEC, Moret urged that the central banks ought to be dealing with the stabilization question. He proposed joint meetings between central banks and treasuries at the WEC, but initially was met with little support for this plan from Norman and Harrison, in another break from the past. Recall that following the Genoa Conference and during the Dawes negotiations, Norman seized the chance to hold private central bank meetings with Strong and Schacht. Expecting that little would be achieved at the WEC, Norman, Harrison, and Moret ultimately agreed to private central bank talks. Tripartite monetary talks began on June 9, right before the WEC, and ran parallel with the conference through June and July, aiming to reach some agreement over gold and currency stabilization.¹⁰²

Unlike in the 1920s, central bankers this time were less able to circumvent, or influence, political obstacles and less willing to cooperatively resolve their diverging interests and economic constraints. Harrison could not overcome the hold of his government. Moret was similarly constrained in France. They now met an increasingly uninterested and uncooperative Norman, who had little hope of achieving anything at the Conference. It had become increasingly clear at the Bank of England that as long as monetary policy in the United States was determined by Washington, cooperation with the Americans was impossible.¹⁰³ And Britain's departure from gold gave the Treasury increased monetary authority vis-à-vis the Bank of England. Notably, Norman had faced a similar constraint before 1925, when Britain had not yet returned to prewar parity. However, that had not impinged on his willingness to circumvent governmental preferences. In 1931, Norman was unwilling to cooperate with his counterparts. By 1933, he was also unable to do so.

In preparing for the Conference, central bankers hesitated to discuss issues that were under the purview of governments, and vice versa. Harrison held that “it was of the utmost importance for the World Conference to avoid invading the central bank field and making any suggestions or instructions to central banks which might prove embarrassing.” While they agreed in principle about the need for central bank cooperation, “it had not been settled what they were to cooperate about.”¹⁰⁴ Their loss of autonomy stifled their efforts. As WEC proceedings and preparations began earlier in 1933, central bankers, it seemed, were largely kept in the dark. In May 1933, Norman “professed [to Harrison] to know little or nothing about the proposed procedure. He admitted many questions of central bank policy are on the agenda, but he had no way of knowing how they are proposed to be handled. He seemed disturbed at the whole setup and quite in the dark.”¹⁰⁵

They arrived in London not very hopeful, which made them not only unable but increasingly unwilling to push their boundaries as they had done in the past. When asked what the WEC could achieve, Norman's response was “not a thing.” The French felt similarly skeptical.¹⁰⁶ Norman's distrust of politicians clouded his hope of any progress. He believed that the French and British governments had already approached the United States about exchange stabilization through “devious channels” and was convinced that “there was little we [central bankers] could do” until it was clear what governments sought to achieve. In the run-up to the conference, Norman “didn’t believe in any more conferences; especially hot air conferences of which there had been too many” when the meeting was first proposed and was largely disengaged from the effort.¹⁰⁷

The tripartite talks began at the Bank of England on June 9, three days before the WEC. Very soon into the Conference proceedings, all eyes were more focused on the tripartite endeavors than the political meeting itself. During the WEC, in mid-June, the dollar also began to strengthen. To manage emerging fluctuations, monetary authorities quickly agreed in the parallel monetary talks to a limited six-week temporary stabilization period, pegging the dollar, sterling, and franc at their present values. Roosevelt, who had been supportive of currency stabilization, vetoed this proposal. Harrison was disappointed and sailed back to New York, unwilling to continue any efforts.

Harrison was replaced at the WEC by Raymond Moley, “the Man who controlled Presidents,” known in US circles for his isolationist stance.¹⁰⁸ He was one of Roosevelt's closest advisers and assistant secretary of state to Cordell Hull. Moley made “every effort to appear as a loyal subordinate” to Hull, but no one trusted him.¹⁰⁹ The French believed he had the power to stabilize the US dollar if he chose to, issuing him an ultimatum: “Stabilize or we quit.”¹¹⁰

Moley's delegation decided that the only way to resolve the situation was to issue a tripartite communiqué that some short-term agreement had been made. It was clear that the French were not going to get any commitment from the United States regarding “stabilization” per se, only a far more diluted wording that efforts would be made by non–gold bloc countries—Britain and the United States—to minimize currency fluctuations.¹¹¹ This communiqué would be shared with WEC delegations instructing them to work with their central banks over currency stabilization. He was so sanguine that Roosevelt would accept his proposal. But to Moley's dismay, Roosevelt rejected this plan, after which Hull told him “You had better go back home. You had no business here in the first place.”

It was then that Roosevelt, on holiday on his sailboat, upended the entire Conference effort in his famous “bombshell” cable sent from his yacht on July 3. Roosevelt wrote that the failure of the WEC to address long-term economic problems was a “catastrophe amounting to a world tragedy.” He opposed the “artificial and temporary” stabilization “on the part of a few countries only,” which represented “old fetishes of so-called international bankers.”¹¹² Roosevelt's words rendered any continued efforts at the WEC useless and threw the conference into an uproar.¹¹³

To save face, political and monetary leaders continued to find a way around ongoing currency wars for a few more weeks. In the end, all that they could agree to were rather empty statements affirming the “superiority of the gold standard over alternative monetary arrangements” but little as way of concrete steps on how to reestablish the system. Roosevelt's words had “consigned the World Economic Conference to failure.”¹¹⁴ The Conference was adjourned by the end of July, with no real accomplishments to show for it. Hull said, “Human ingenuity could scarcely have devised a more complete jumble and chaos of business and general economic conditions than those facing the nations and the conference when it convened.”

“There are after all, only two ways of reaching international agreement” Hull said in his closing remarks at the WEC. “One is by imposing one's will by force—by war. The other is by persuasion—by conference.”¹¹⁵ But the most catastrophic impact of the WEC failure was that it made governments avoid further attempts at cooperation to facilitate an economic recovery. Instead, it reinforced nationalist and isolationist recourse, exacerbating debt disputes and currency wars, closing any opportunities to find a path off the road to war.

Although the 1933 meetings were a lost opportunity for strengthening Anglo-American monetary relations, bilateral Anglo-German cooperation was revived, in no small part, by Schacht's return to the Reichsbank that year. Even while Norman was unwilling to sway his government or the Bank's cooperation with Harrison and Moret during the Conference, he had returned to his ways of ad hoc, bilateral, and secretive interbank assistance with Schacht.

Schacht took over Germany's WEC preparations, and blamed American protectionism for Germany's debt distress. In May, Schacht threatened to default on American commercial debts that had been frozen in the Standstill agreement, but assured Hull and Roosevelt that he opposed moratoriums. Patricia Clavin shows that when Schacht returned to Germany, he announced that as of “July 1, 1933, the Reichsbank will discontinue making foreign exchange available for those obligations that existed at the time of the banking crisis on 15 July 1931,” effectively denouncing Germany's Dawes and Young obligations.¹¹⁶

When the parallel central bank meetings began, Schacht used his influence with Norman to strengthen Germany's position. He took up talks with Norman and other British bankers in London. Roosevelt then learned that “British banking authorities [were] working closely with German authorities to develop further plans satisfactory to themselves” regarding German debts. It seemed to them that Schacht, a close friend of Norman, was favoring British bondholders over American bondholders. American authorities felt that Schacht “was being governed inordinately by considerations of the Bank of England.”¹¹⁷ Norman and Schacht arranged to renew the Anglo-German Standstill agreement, and had settled on their plans for Germany's debt payments to Britain and its suspension of US debts.¹¹⁸

Certainly, the crisis was not resolved at the Conference, and economic turmoil was increasingly heightened by growing political turmoil. But Norman and Schacht's arrangement had long-lasting effects for cementing Anglo-German monetary ties, encouraging Germany to continue favoring British over American financial interests, and strengthening British banks’ support for Germany's commercial debt policy, which fortified the Nazi regime. As political and economic disputes heightened, Schacht wrote to Norman about their efforts through the troubled year:

It seems to be that the world will still have to go through some more dark waters until we reach the shore and all that I hope and trust is that our mutual friendship will last during and after that time. I feel most strongly that, after the death of our New York friend, you and I have been the only two men who understood what had to be achieved. Let us not be discouraged by a passing setback and believe whatever may happen in the sincerity and friendship of Yours, thankfully and truly, Hjalmar Schacht.¹¹⁹

Death of a Banker

The years between 1928 and 1933 were some of trial, and mostly error, by politicians and central bankers. Friedman and Schwartz pin the responsibility for the Great Depression on central bankers, namely, the failure of the Federal Reserve after Strong's death.¹²⁰ Central bankers’ inability to cooperate to arrest the 1931 crisis and during the WEC plagued international monetary affairs from 1929 to 1933 was “in no small measure a result of the internal struggle for power within the [Federal Reserve] System which followed the death of Benjamin Strong.”¹²¹ But it was not just Strong's death or Harrison that ought to bear the responsibility for the Depression. It was an entire cohort of central bankers that were at times unable, and often unwilling, to overcome structural, political, and economic obstacles to cooperation, bilaterally and through interpersonal channels, as they had done in the decade before.

Central bankers were now far more constrained by their governments, and no longer lived in a time “when each of the great central banks seemed to be personified by a single outstanding individual.”¹²² They also shared very different personal relations with their counterparts than their predecessors in the 1920s. This made it increasingly difficult for each of them to cooperate with their banking partners, and to act quickly and adequately in the face of rapidly growing crises.

With Strong gone, the US government and the Federal Reserve Board in Washington increasingly interfered in Harrison's New York Fed. Under Harrison, international considerations gave way to political involvement. Strong's death also dealt a blow to Anglo-American relations. Harrison was even limited in his ability to engage in international efforts, as an outsider to the BIS, and faced more restrictions on the New York Fed's international lending. While Norman's relations with Moret were not distrustful as they had been with Moreau, they were not adequate to pursue cooperative arrangements on the basis of personal trust and good will. However, Norman, despite added constraints on his own independence, was both willing and able to work with Schacht to renew the Reichsbank's Standstill agreement on its British debts.

A period of trade tensions and economic despair was followed by a modest and short-lived recovery from 1934 to 1937, with domestic policy tools. But each year after 1933 was marked by major diplomatic hiccups that escalated into war by 1939. The remilitarization of the Rhineland in 1936 by Germany violated the Versailles and Locarno Treaties (which were signed willingly by Germany), taking a sharp turn on the road to war. The only real recovery from the Depression came from the war effort, and more decidedly, at Bretton Woods in 1944, which also put in place institutions and resources for longer-term stability.

A few central bankers in the interwar years undoubtedly had a unique and outsized influence on their own banks and on international affairs. Others were less able to sway their banks and their governments as per their will. Central bankers’ personal relations with their foreign opposites could also serve to bolster or constrain their individual power and their influence in monetary affairs. Interpersonal ties between central bankers in the 1920s and the 1930s could both help or hinder cooperation and crisis management.

Bankers’ Trust is not a story of only Strong and Norman, or Schacht or Moreau. It is a story of the Normans and Strongs, the Schachts, and the Moreaus of the last century. Through their powerful personalities and unique interpersonal relations of trust, reciprocity, and goodwill, central bankers can determine the fate of the global economy in times of grave economic uncertainty. Next, I turn to the midcentury era to evaluate the creation of the central bank swap network in 1962, used to patch up the flailing Bretton Woods system.