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The Buck Starts Here: the Federal Reserve and Monetary Politics from World War to Cold War, 1941-1951

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The Buck Starts Here: the Federal Reserve and Monetary Politics from World War to Cold War, 1941-1951 THE BUCK STARTS HERE: THE FEDERAL RESERVE AND MONETARY POLITICS FROM WORLD WAR TO COLD WAR, 1941-1951 A dissertation submitted to Kent State University in partial fulfillment of the requirements for the degree of Doctorate of Philosophy by Timothy W. Wintour December, 2013 Dissertation written by Timothy W. Wintour B.A., Canisius College, 2002 M.A., John Carroll University, 2006 Ph.D., Kent State University, 2013 Approved by __________________________________, Chair, Doctoral Dissertation Committee Mary Ann Heiss __________________________________, Members, Doctoral Dissertation Committee Walter L. Hixson __________________________________, Steven W. Hook __________________________________, Clarence Wunderlin, Jr. __________________________________, Michael Ellis Accepted by __________________________________, Chair, Department of History Kenneth Bindas __________________________________, Associate Dean, College of Arts and Sciences Raymond Craig ii Table of Contents List of Figures…………………………………………………………………………….iv List of Tables……………………………………………………………………………...v Acknowledgments………………..……………………………………………………....vi Introduction……………………………………………………..…..……………………..1 Chapter One: “If We Lose the War We Cannot Save Freedom”: The Federal Reserve and War Finance, 1941-1945.……………………………..……………..………24 Chapter Two: “For a Peaceful and Prosperous World”: The Federal Reserve and the Political Economy of the World Bank, 1942-1945………………………..……..67 Chapter Three: “New Lanes in Uncharted Seas”: The Federal Reserve and International Exchange Stabilization, 1941-1945……………………………..……………...113 Chapter Four: “Messenger Boys” or “Men of Ability”: The Federal Reserve, Foreign Financial Policymaking, and the NAC…………………………………………174 Chapter Five: “No Particular Fear of Russia, Just of Chaos”: The Federal Reserve, Postwar Reconversion, and the British Loan, 1945-1947……...……………….231 Chapter Six: “On the Horns of a Dilemma”: European Reconstruction, the Postwar Economy, and the Federal Reserve, 1946-1950……...……..……………….....305 Chapter Seven: “The Shadow of the Soviets”: Federal Reserve Policy, Korea, and Perpetual Cold War, 1947-1951…………………………………………….....386 Conclusion……………………………………………………………………………...463 Bibliography……………………………………………………………………………469 iii List of Figures 1. Consumer Price Index, 1942-1947…………………………………………………..286 2. Federal Cash Surplus or Deficit for the United States, 1945-1951…………….……372 3. Consumer Price Index for All Urban Consumers, 1946-1948………………………405 4. Average Open-Market Money Rates in New York City & Bond Yields, 1946- 1951…………………………………………………………………………….410 iv List of Tables 1. External Liabilities of Great Britain…………………………………………………263 2. Proposed Sterling Balance Reductions……………………………………………....264 3. Postwar Pattern of Interest Rates…………………………………………………….393 v Acknowledgments There are innumerable individuals who deserve thanks and a substantial amount of credit for the final completion of this dissertation. I owe an immense debt of gratitude to the members of my dissertation committee. First and foremost, my advisor, Ann Heiss. Her insight, feedback, and patience are present in every facet of the dissertation. Additionally, her keen editing surely saved me from doing irreparable damage to the English language. Clarence Wunderlin provided critical understanding of political ideology, and his willingness to indulge my fascination with political economy offered my important opportunities to broaden my exposure and knowledge. Steven Hook helped me to develop an appreciation for the role of social and ideational forces in the process of foreign policy making. His insights helped me to bridge the gap between the worlds of domestic and foreign policy. From the University of Akron, Walter Hixson’s comments on the nature of the military-industrial complex helped push my thinking in enlightening directions. Each and every one of them deserves far more credit and thanks than I can ever express. There are a number of individuals at Kent State University, the University of Akron, and at various professional organizations who did not serve on my committee but that nevertheless played an important part in my intellectual development. Either in class or in conversation they helped me to broaden my intellectual horizons in new and sometimes unexpected ways. In this way they played an integral role in this dissertation. These people include Rebecca Pulju, Kevin Adams, Stephen Harp, Leonne Hudson, and vi Mark Cassell. I am also grateful to John McNay and Alonzo Hamby. Their thoughtful comments and those of the other conference goers and panelists from the Ohio Academy of History helped clarify and strengthen my thinking at critical points. I also owe a deep debt of gratitude to professors and teachers who helped shape my academic career before I even arrived at Kent State University. Even before my days as an undergraduate at Canisius College in Buffalo, New York through my early graduate work at John Carroll University, I had the privilege of encountering fine scholars and teachers who encouraged my academic aspirations. These include the late Edwin L. Neville and the late J. David Valaik, as well as René de la Pedraja, Maria Marsilli, Robert Kolesar, Daniel Kilbride, and Fr. Lawrence Ober, S.J. As with every other historical inquiry, unnamed and innumerable archivists, librarians, and clerks, through their diligence and dedication deserve great credit. The employees of the National Archives in College Park, Maryland enabled me to tap into a wealth of documentation. I am also immensely indebted to the Federal Reserve System and its dedication to the preservation of historical materials. The Federal Reserve Archival System for Economic Research (FRASER) places a tremendous amount of material right at the fingertips of researchers, and to those unnamed souls who scanned, uploaded, and catalogued vast quantities of material that founds its way into this dissertation you have my everlasting thanks. Friends and family absolutely deserve credit here. My sister, Elizabeth, and my parents, Marcia and William Wintour, encouraged throughout my studies. While my vii mother did not live to see the completion of this work, I know it would not have been possible without her support first in body and then in spirit. The person, however, who deserve the most credit is my wife, Christa Adams. Without her constant and unwavering support this dissertation would never have been completed. She kept me sane in periods of stress and anxiety and supported me in bouts of research and writing. A last word. While many people contributed to and strengthened this dissertation any errors are mine alone. viii Introduction In the aftermath of the First World War, American, British, and French policymakers attempted to create a stable international economic and political order. Unfortunately, that order failed to satisfactorily address a number of potentially destabilizing issues, including harmonizing the restoration of an inherently powerful Germany with French security concerns; establishing a flexible international monetary system to provide the economic stability of the prewar gold standard without the associated rigidity; ensuring American participation in and commitment to the international political and economic order; and resolving postwar German reparations and Allied war debts with the restoration of economic prosperity. The result was an ad hoc political and economic system that survived thanks to the superficial prosperity of the 1920s but ultimately collapsed during the 1930s, leading to the Great Depression. Rejecting the apparent failure of the capitalist democratic model supported by the Western allies, the Axis sought national economic self-sufficiency through the creation of closed economic blocs controlled by totalitarian and autocratic states and secured by powerful military establishments. The failure to conclude the First World War in a manner that secured universal economic prosperity and political peace set the stage for the conflict of the 1940s. The United States entered the Second World War still mired in the economic problems of the Great Depression but emerged from the conflict as the world’s premier 1 2 military and economic power. During the war average weekly wages increased 65-70 percent while corporate profits doubled. The nation controlled half the world’s manufacturing capacity and electrical generation and fully two-thirds of the global gold stock, and it dominated industries from international shipping to the production of petroleum. At the same time, inflation remained relatively in check, with prices rising by roughly 28 percent, compared to the First World War experience of 100 percent.1 Militarily, the nation maintained a monopoly control over the newly developed atomic bomb. This vast national wealth and strength positioned the United States to bear the costs of simultaneously reconstructing the economies of Europe and Asia, restoring a system of relatively free international trade, creating an international monetary system essentially based upon the dollar, and building a defense establishment capable of countering Soviet expansion. Reflecting on the strengths of the United States during the 1940s, the nation’s economic and physical security seems almost inevitable. Such a perspective, however, fails to appreciate the great uncertainty policymakers felt during and after the war. Fear that the United States might sink back into recession or slump under the weight of spiraling price inflation plagued policymakers, including the central
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