Carroll Quigley - Tragedy and Hope - A History of the World in Our Time

The improvement in Britain was not shared by the countries still on gold. As a result of the competition of depreciated sterling, they found their balances of trade pushed toward the unfavorable side and their deflation in prices increased. Tariffs had to be raised, quotas and exchange controls set up. The United States could hardly do the first of these (her tariff of 1930 was already the highest in history), and rejected the others in principle.

THE CRISIS IN THE UNITED STATES, 1933

As a result of the British crisis, the gold countries of Europe sought to modify their financial basis from the gold exchange standard to the gold bullion standard. When Britain abandoned gold in September 1931, France was caught with over £ 60 million in sterling exchange. This was equal to about 30 percent of her foreign-exchange holdings (7,775 million francs out of 25,194 million). The loss exceeded the total capital and surplus of the Bank of France. To avoid any similar experience in the future, France began to transfer her holdings of exchange into gold, much of it called from the United States. As confidence in the pound rose, that in the dollar fell. It became necessary to raise the New York discount rate from 1 1/2 percent to 3 1/2 percent (October 1932) and to engage in extensive open-market buying of securities to counteract the deflationary effects of this. However, the gold exports and gold hoarding continued, made worse by the fact that the United States was the only gold standard country with gold coins still circulating.

As a result of the decline of confidence and the demand for liquidity, the American banking system began to collapse. The Reconstruction Finance Corporation was set up early in 1932 with $3/2 billion in government money to advance to banks and other large corporations. By the end of the year, it had lent over 1 1/2 billion. When the details of these loans were published (in January 1933), runs on the banks were intensified. A bank holiday was declared in Nevada in October 1932, in Iowa in January 1933, in six states during February, and in sixteen states in the first three days of March. From February 1st to March 4th the Federal Reserve Bank in New York lost $756 million in gold; it called in $709 million from the other Federal Reserve Banks, which were also subject to runs.

The banks of the whole United States were closed by executive order on March 4 to be reopened after March 12th if their condition was satisfactory. Export of gold was subjected to license, convertibility of notes into gold was ended, and private holding of gold was made illegal. These orders, completed on April 20, 1933, took the United States off the gold standard. This was done in order that the government could pursue a policy of price inflation in its domestic program. It was not made necessary by the American international financial position, as this continued very favorable. This was quite different from the situation in Britain in 1931. London had left gold unwillingly and had followed an orthodox financial program afterward; Washington left gold in 1933 voluntarily in order to follow an unorthodox financial program of inflation.

As a result of the abandonment of the gold standard by the United States, the central-exchange triangle between London, Paris, and New York was further disrupted. All three exchange rates were able to fluctuate, although the Exchange Equalization Account kept two of them relatively steady. To the worldwide problem of economic distress was now added the problem of exchange stabilization. A dispute ensued among Britain, France, and the United States over which of these two problems should be given priority. France insisted that no economic recovery was possible until exchanges were stabilized. It surely was true that as long as the franc remained on gold at the same valuation, France would suffer from the depreciation of the pound and the dollar. The United States insisted that economic recovery must have priority over stabilization, since the latter would hamper the process of price reflation which the administration considered essential to recovery. Britain, which had supported the priority of recovery over stabilization as long as the pound was the only one of the three currencies which was depreciated, insisted on the importance of stabilization as soon as the advantages of depreciation began to be shared by the dollar. This depreciation of both the dollar and the pound put great strain on the franc. To keep France from being forced off the gold standard, Britain, on April 28, 1933, lent her ^30 million to be repaid out of the sterling exchange with which France had been caught in September 1931. Until the middle of 1933, the Exchange Equalization Account was used by Britain to prevent any appreciation of the pound. This was countered in the United States by the inflationary Thomas Amendment to the Agricultural Adjustment Act (May 12, 1933). This Amendment gave the president the power to devaluate the dollar up to 50 percent, to issue up to $3 billion in fiat money, and to engage on an extensive program of public spending.

THE WORLD ECONOMIC CONFERENCE, 1933

This dispute over the priority of stabilization or recovery reached its peak in the World Monetary and Economic Conference held in London from June 12 to July 27, 1933. A Preparatory Commission of Experts drew up a series of preliminary agreements for countries on gold or off, with exchange controls or without, but no agreement could be obtained at the conference itself. Britain and France tried to get the dollar to join them in a temporary de facto stabilization in preparation for a real agreement. The franc and pound had already been pegged to each other at 84 francs per pound, which gave a London gold price of 122 shillings. The United States refused to join in any temporary stabilization because of the success of the administration’s domestic recovery program. The general price index in the United States rose by 8.7 percent from February to June 1933, and farm products rose by 30.1 percent. The mere hint of a stabilization agreement was sufficient to cause a sharp break in the rise of security and commodity prices (June 14, 1933), so Roosevelt broke off all negotiations toward stabilization (July 3, 1933).

The World Economic Conference, as Professor William Adams Brown wrote, broke up on four great negatives: the countries which had adopted trade restrictions refused to abandon them without currency stabilization; the countries on the gold standard refused to accept price increases as a road to recovery because of fear of inflation; Great Britain wanted price increases but refused to permit an unbalanced budget or a public works program; and the United States, which was seeking recovery through inflation and public works, refused to hamper the program by currency stabilization.

As a result of the failure of the Economic Conference, the countries of the world tended to divide into three groups: a sterling bloc, a gold bloc, and a dollar bloc. The gold and sterling blocs were formally organized, the former on July 3rd and the later on July 8th. A struggle ensued among these three in an effort to shift the economic burdens of past mistakes from one to another.

A great deal has been written since 1933 in an effort to apportion the blame for the failure of the World Economic Conference. It is a futile task. From the point of view of narrow self-interest in the short run, all countries were correct in their actions. From the wider point of view of the world as a whole or of the long-run results, all countries were worthy of blame. By 1933, the day in which any country could follow a policy of short-run self-interest and remain under liberal capitalism was past. For technological and institutional reasons, the economies of the different countries were so intertwined with one another that any policy of self-interest on the part of one would be sure to injure others in the short run and the country itself in the long run. Briefly, the international and the domestic economic systems had developed to a point where the customary methods of thought and procedure in regard to them were obsolete.