A deeply inflationary structure understandably sets the stage for inflationary policies. Policies are enacted and carried forward by particular people, and so we must examine the controlling groups, and the motivations and procedures for carrying out monetary expansion after the launching of the Federal Reserve.We know in general that the bankers, especially the large ones, were using the federal government as a cartelizing and inflationaryd evice. But what of the specifics? Which bankers?
With the passage of the Federal Reserve Act, President Wilson in 1914 appointed one Benjam in Strong to what was then the most powerful post in the Federal Reserve System. Strong was made Governor of the Federal Reserve Bank of New York, and he quickly made this position dominant in the System, auto cratically deciding on Fed policy without consulting or even against the wishes of the Federal Reserve Board in Washington. Strong continued to be the dominant leader of the Fed from 1914 until his death in 1928.
Strong pursued an inflationary policy throughout his reign, first during World War I, and then in spurts of expansion of bank reserves in the early 1920s, 1924, and 1927. While it is true that wholesale prices did not rise, they were prevented from falling from increases of capital investment, productivity, and the supply of goods during the 1920s. The expansion of money and credit generated by the Fed during the 1920s kept prices artificially high, and created an unhealthy boom and investments in capital goods and construction, and in such capital title markets as stocks and real estate. It was only the end of the monetary expansion after Strong’s death that brought an end to the boom and us hered in a recession—a recession that was made into chronic depression by massive interference by Presidents Hoover and Roosevelt. But who was Strong and why did he pursue these inflationary and eventually disastrous policies? In the first place, it must be understood that, like other bureaucrats and political leaders, he did not emerge full-blown out of the thin air in 1914. At the timeof his appointment, Strong was head of the Morgan-created Bankers’ Trust Company in New York—a bank set up by the Morgans to concentrate on the new field of the trusts. Tempted at first to refuse this high office, Strong was persuaded to take the job by his two closest friends: Henry P. Davison, partner at J.P. Morgan& Co., and Dwight Morrow, another Morgan partner. Yet a third Morgan partner, and another close friend, Thomas W. Lamont, also helped persuade Strong to take up this task. Strong was also an old friend of Elihu Root, states man and Wall Street corporate lawyer, who had long been in the Morgan ambit, serving as personal attorney for J.P. Morgan himself.
It is not too much to say, therefore, that Strong was a Morgan man, and that his inflationary actions in office accorded with the Morgan outlook. Without the inflationary activity of the Federal Reserve, for example, the United States could not have entered and fought in World War I. The House of Morgan was hip-deep in the Allied cause from 1914 on. Morgan was the fiscal agent for the Bank of England, and enjoyed the monopoly under writing of all British and French bonds in the United States during World War I. Not only that: J.P. Morgan & Co. was the financier for much of the munitions factories that exported weapons and war materiel to the Allied nations.
Morgan’s rail roads were in increasingly grave financial trouble, and 1914 saw the collapse of Morgan’s $400 million New Haven Rail road. Concentrating on rail roads and a bit laggard in moving into industrial finance, Morgan had seen its dominance in investment banking slip since the turn of the century. Now, World War I had come as a god send to Morgan’s fortunes, and Morgan prosperity was intimately wrapped up in the Allied cause.
It is no wonder that Morgan partners took the lead in whipping up pro-British and French propaganda in the United States; and to clam or for the U.S. to enter the war on the Allied side.Henry E. Davison set up the Aerial Coast Patrol in 1915, and Willard Straight and Robert Bacon, both Morgan partners, took the lead in organizing the Businessman’s Training Camp at Plattsburgh, New York, to urge universal conscription. Elihu Root and Morgan himself were particularly active in pressing for entering the war on the Allied side. Further more, President Wilson was surrounded by Morgan people. His son-in-law, Secretary of the Treasury, William G. McAdoo, had been rescued from financial bankruptcy by Morgan. Colonel Edward M. House, Wilson’s mysterious and powerful foreign policy adviser, was connected with Morgan rail roads in Texas. McAdoo wrote to Wilson that war exports to the Allies would bring “great prosperity” to the United States, so that loans to the Allies to finance such exports had become necessary.
Strong pursued his inflationary policies during the 1920s, largely to help Great Britain escape the consequences of its own disastrous inflationary program. During World War I, all the European countries had inflated greatly to pay for the war, and so were forced to go off the gold standard. Even the United States, in the war for only half the duration of the other warring powers, in effect suspended the gold standard during the war. After the war, Great Britain, the major world power and in control of the League of Nations’s financial and economic policies, made the fateful decision to go back to the gold standard at a highly over valued par for the pound. Britain wished to regain the prestige it had earned under the gold standard but without paying the price of maintaining a non inflationary sound money policy. It stub bornly insisted on going back to gold at the old pre war par of approximately $4.86, a rate far too high for the post war pound depreciated by inflation. At one point after the war, the pound had sunk to $3.40 on the foreign exchange market. But, determined to return to gold at $4.86, Great Britain persuaded the other European countries at the Genoa Conference of 1922 to go back, not to a genuine gold standard, but to a phony gold exchange standard. Instead of each nation issuing currency directly redeemable in gold, it was to keep its reserves in the form of sterling balances in London, which in turn would under take to redeem sterling in gold. In that way, other countries would pyramid their currencies on top of pounds, and pounds themselves were being inflated throughout the 1920s. Britain could then print pounds without worrying about the accumulated sterling balances being redeemed in gold.
The over valued pound meant that Britain was chronically depressed during the 1920s, since its crucial export markets suffered permanently from artificially high prices in terms of the pound. Britain might have overcome this problem by massive monetary deflation, there by lowering its prices and making its exports more competitive. But Britain wanted to inflate not deflate, and so it tried to shore up its structure by concocting a gold exchange standard, and by going back to a gold bullion rather than gold coin standard, so that only large traders could actually redeem paper money or deposits in gold. In addition, Britain induced other European countries to go back to gold themselves at over valued pars, there by discouraging their own exports and stimulating imports from Britain.
After a few years, however, sterling balances piled up so high in the accounts of other countries that the entire jerry-built international monetary structure of the 1920s had to come tumbling down. Britain had some success with the European countries, which it could pressure or even coerce into going along with the Genoa system. But what of the United States? That country was too powerful to coerce, and the danger to Britain’s inflationary policy of the 1920s was that it would lose gold to the U.S. and there by be forced to contract and explode the bubble it had created.
It seemed that the only hope was to persuade the United States to inflate as well so that Britain would no longer lose much gold to the U.S. That task of persuasion was performed brilliantly by the head of the Bank of England, Montagu Norman, the architect of the Genoa system. Norman developed a close friendship with Strong and would sail periodically to the United State sincognito and engage in secret conferences with Strong, where unbeknown to anyone else, Strong would agree to another jolt of inflation in the United States in order to “help England.” None of these consultations was reported to the Federal Reserve Board inWashington. In addition, Strong and Norman kept in close touch by a weekly exchange of foreign cables. Strong admitted to his assistant in 1928 that “very few people indeed realized that we were now paying the penalty for the decision which was reached early in 1924 to help the rest of the world back to a sound financial and monetary basis”—that is, to help Britain maintain a phony and inflationary form of gold standard.
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