CENTRAL BANK COOPERATION 1924-31 STEPHEN V. O. CLARKE FEDERAL RESERVE BANK OF NEW YORK Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis CENTRAL BANK COOPERATION: 1924-31 STEPHEN V. O. CLARKE FEDERAL RESERVE BANK OF NEW YORK Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis To John Henry Williams Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Foreword HIS monograph is another in the series published by the Federal Reserve TBank of New York on monetary policy, institutions, and techniques. It deals with a segment of history that has special fascination for students of mone- tary affairs: the efforts of American, British, French, and German central bankers to reestablish and maintain international financial stability in 1924-31 and the frustration of those efforts during the financial crisis at the end of that period. This is a story whose broad outlines are familiar, but the author has used the historical records of this Bank and unpublished papers of various prominent Americans to bring new insight to his description of the dramatic events of those years. Mr. Clarke's monograph surveys central bank cooperation as it was practiced in an era when the international economy differed in many respects from that of today. In the twenties and early thirties, the world was still feeling the reper- cussions of the political and economic upheaval generated by World War I. Reparations and war debts were souring relations among the great powers. The United States, having rejected membership in the League of Nations, had retired by and large into isolation. At the same time, the Western democracies were experiencing a reaction against government management of their economies—of which they had had their fill during the war—and a renewal of confidence in the functioning of free market forces. As governments withdrew from economic management, central banks were left to carry virtually the whole responsibility of maintaining economic stability. Although the contrasts are many, striking parallels with today are also to be found. Mr. Clarke's account of the efforts of the authorities in the United States and abroad to reconcile domestic and international policy objectives has a familiar ring, as does his discussion of the complications that arose from con- flicts in the foreign policy objectives of the great powers. This book also focuses on the perennial problem of the policy maker who must be on the alert to adjust economic policies and techniques to changing circumstances. In fact, the study suggests that the failures of 1929-31 can be traced basically to the slowness of the Western democracies to realize that the problems at hand were radically (Please turn page.) Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis different and more complicated than those of the midtwenties and that their handling thus demanded major new departures in economic policy and technique. The problem of benefiting from the lessons of the past, while at the same time discerning where previous events are no longer relevant, is as old as the study of history. How far the experience of 1924-31 can be of help in dealing with present-day international financial problems, and how far it is only a reminder of turbulent days gone by—these are intriguing questions posed by Mr. Clarke's study. At the very least, however, a review of the period provides a vivid reminder of the pitfalls into which an earlier generation fell, and a warning to governments and central banks today. ALFRED HAYES President New York City January 1967 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Acknowledgments Many persons have given invaluable assistance to the author in the preparation of this monograph. Associates in this Bank, especially Francis H. Schott, have supplied unfailing encouragement and constructive criticism throughout the various stages of the study. The author has benefited from the comments of staff members of the Board of Governors of the Federal Reserve System as well as from the scholarly suggestions of Benjamin H. Beckhart of Columbia University, Arthur I. Bloomfield of the University of Pennsylvania, Lester V. Chandler of Princeton University, and Herman E. Kroos of New York University. Sir Theo- dore Gregory and Sir Otto Niemeyer made numerous valuable suggestions based on their intimate knowledge of the events of 1924-31. The author is indebted to those who arranged for him to use several important collections of private papers: Dr. Everett Case who arranged for the use of the Owen D. Young Papers, located in Young's former office in Van Hornesville, New York; Thomas S. Lamont for the use of his father's papers, deposited in the Baker Library of the Graduate School of Business Administration of Harvard University; and Richard H. Logsdon, Director of Libraries of Columbia University for the Papers of George L. Harrison. He owes an especially large debt to Mrs. Evelyn Knowlton, who searched through not only these private collections but also this Bank's records and the Library of Congress for the key historical materials on which this study is so heavily based. Mrs. Knowlton also prepared the Dramatis Personae, the Chronology of Important Events, 1919-31, and the index. The author wishes to thank Mrs. Ann A. Goldenweiser for permission to quote from her late hus- band's papers, deposited in the Library of Congress, and the Macmillan Company of London for permission to quote from Sir Henry Clay's Lord Norman. Valuable assistance in the collection and checking of statistical materials was provided by Miss Vincenzina Santoro and Mrs. Rona Lupkin. Many thanks are also due to Miss Gloria Topper who designed the cover of the book, Miss Abigail M. Cantwell and Miss Stella E. Walsh for their painstaking efforts in the final editing and preparation of the manuscript for publication, to Mr. John H. Hendrickson and Mr. Sigurds Vidzirkste for the preparation of the charts, and to Mrs. Marilyn Daniels and Miss Geraldine Barry for patiently providing indispensable secre- tarial assistance. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Contents: Page Page Dramatis Personae 10 5. Britain's Return to Gold 71 Introduction 71 1- Introduction 15 The Objectives of Anglo-American Cooperation 72 The Strategy of Cooperation 75 2. The Problems of 1924-31 18 Timing 78 Economic Difficulties 18 Implementing the Strategy 81 Political Tensions 21 The Federal Reserve and Temporary Solutions 22 Trouble Spots 23 Morgan credits 81 The Economic Breakdown 24 Coordination of monetary policy .. 85 Consolidating Sterling's Position 96 The Unfinished Task of Inter- 3. The Role of Central Bank national Economic Cooperation 105 Cooperation 27 Introduction 27 The Gold Standard Conception of 6. The Defense of a Key Currency: Central Bank Cooperation 27 1926-28 108 Central Banks as Instruments of Introduction 108 National Policy 29 Payments Surpluses Complicate The Debate on Central Bank Monetary Policy 109 Cooperation 33 Germany 109 The Genoa proposals 34 France 110 Strong's critique of the Genoa proposals 36 The Shift toward Gold 112 A Pragmatic Approach to Central Germany 112 Bank Cooperation 40 France 115 British-French Accommodation 119 4. The Bankers' Role in the Stabiliza- The Central Bankers' Meeting of tion of the German Mark: 1924 45 July 1927 123 Introduction 45 The Easing of Federal Reserve Cooperative Aspects 48 Policy 124 Political and economic conditions The Payments Balance Shifts in for the Dawes Loan 50 Favor of Europe 127 The transfer committee and The Liquidation of the Federal Re- the agent general 56 serve's Sterling Balance and the Shift- Competitive Aspects: ing of the Demand for Gold to New York 130 Dollars or Sterling? 58 The Gold Discount Bank 58 The International Financial System The Reichsbank's international Becomes More Rigid 134 reserves 60 Inadequate Efforts to Buttress Final Negotiations for the Sterling 139 Dawes Loan 67 Conclusion 141 Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Page Page 7. Mounting Strains Appendix 222 Declining Cooperation 144 The Reparation Settlement 145 Index 228 Strains During the Boom: July 1928-October 1929 147 CHARTS AND TABLE International imbalance 147 Difficulties of cooperation 150 Chart 1: Foreign Exchange Rates in The role of the Bank of France ... 164 New York, June 1914 and 1920-31... 19 False Hopes: November 1929- Table: The Dawes Loan 70 June 1930 168 Strains During the Depression: Chart 2: Short-term Interest Rates: July 1930-May 1931 , 171 New York and London, 1924-26 .... 87 Deterioration 171 Chart 3: Wholesale Price Indexes: Central bank cooperation: much United States and United Kingdom, activity; little accomplished 173 1924-26 91 8. The 1931 Crisis 182 Chart 4: Arbitrage Opportunities between New York and London, Introduction 182 1924-26 94 Germany at Loggerheads with France 183 Chart 5: Arbitrage Opportunities be- Central Bank Cooperation: Half tween Paris and London, April 1927- Measures to Support Austria and June 1928 122 Germany 185 Chart 6: Arbitrage Opportunities Supporting the Austrian schilling.. 186 between New York and London, The failure of efforts to support January 1927-June 1928 129 the reichsmark 189 The Attack on Sterling 201 Chart 7: Central Bank Discount Rates: The first attack 202 United States, United Kingdom, Ger- many, and France, December 1927- Britain's response 203 April 1931 149 Central bank credits to the Bank of England 204 Chart 8: Central Bank Discount Rates: The bankers' loan to the United States, United Kingdom, Ger- British government 209 many, and France, May-December The final onslaught 213 1931 190 Epilogue 218 Chart 9: Supporting Sterling in Crisis: A Partial View, July 13- September 21, 9.