CHAPTER ELEVEN Lord Montagu Norman The collaboration between Benjamin Strong and Lord Montagu Norman is one of the greatest secrets of the twentieth century. Benjamin Strong married the daughter of the president of Bankers Trust in New York, and subsequently succeeded to its presidency. Carroll Quigley, in Tragedy and Hope says: "Strong became Governor of the Federal Reserve Bank of New York as the joint nominee of Morgan and of Kuhn, Loeb Company in 1914."87 Lord Montagu Norman is the only man in history who had both his maternal grandfather and his paternal grandfather serve as Governors of the Bank of England. His father was with Brown, Shipley Company, the London Branch of Brown Brothers (now Brown Brothers Harriman). Montagu Norman (1871-1950) came to New York to work for Brown Brothers in 1894, where he was befriended by the Delano family, and by James Markoe, of Brown Brothers. He returned to England, and in 1907 was named to the Court of the Bank of England. In 1912, he had a nervous breakdown, and went to Switzerland to be treated by Jung, as was fashionable among the powerful group which he represented.* Lord Montagu Norman was Governor of the Bank of England from 1916 to 1944. During this period, he participated in the central bank conferences which set up the Crash of 1929 and a worldwide depression. In The Politics of Money by Brian Johnson, he writes, "Strong and Norman, intimate friends, spent their holidays together at Bar Harbour and in the South of France." Johnson says, "Norman therefore became Strong's alter ego. . . . "Strong's easy money policies on the New York money market from 1925-28 were the fulfillment of his agreement with Norman to keep New York interest rates below those of London. For the sake of international cooperation, Strong withheld the steadying hand of high interest rates from New York until it was too late. Easy money in New 87 Carroll Quigley, Tragedy and Hope, Macmillan, New York, p. 326 * When people of this class are stricken by guilt feelings while plotting world wars and economic depressions which will bring misery, suffering and death to millions of the world's inhabitants, they sometimes have qualms. These qualms are jeered at by their peers as "a failure of nerve". After a bout with their psychiatrists, they return to their work with renewed gusto, with no further digressions of pity for "the little people" who are to be their victims. 145 York had encouraged the surging American boom of the late 1920s, with its fantastic heights of speculation."88 Benjamin Strong died suddenly in 1928. The New York Times obituary, Oct. 17, 1928, describes the conference between the directors of the three great central banks in Europe in July, 1927, "Mr. Norman, Bank of England, Strong of the New York Federal Reserve Bank, and Dr. Hjalmar Schacht of the Reichsbank, their meeting referred to at the time as a meeting of 'the world's most exclusive club'. No public reports were ever made of the foreign conferences, which were wholly informal, but which covered many important questions of gold movements, the stability of world trade, and world economy." The meetings at which the future of the world's economy are decided are always reported as being "wholly informal", off the record, no reports made to the public, and on the rare occasions when outraged Congressmen summon these mystery figures to testify about their activities they merely trace the outline of steps taken, and develop no information about what was really said or decided. At the Senate Hearings on the Federal Reserve System in 1931, H. Parker Willis, one of the authors and First Secretary of the Federal Reserve Board from 1914 until 1920, pointedly asked Governor George Harrison, Strong's successor as Governor of the Federal Reserve Bank of New York: "What is the relationship between the Federal Reserve Bank of New York and the money committee of the Stock Exchange?" "There is no relationship," Governor Harrison replied. "There is no assistance or cooperation in fixing the rate in any way?", asked Willis. "No," said Governor Harrison, "although on various occasions they advise us of the state of the money situation, and what they think the rate ought to be." This was an absolute contradiction of his statement that "There is no relationship". The Federal Reserve Bank of New York which set the discount rate for the other Reserve Banks, actually maintained a close liaison with the money committee of the Stock Exchange. 146 The House Stabilization Hearings of 1928 proved conclusively that the Governors of the Federal Reserve System had been holding conferences with heads of the big European central banks. Even had the Congressmen known the details of the plot which was to culminate in the Great Depression of 1929-31, there would have been nothing they could have done to stop it. The international bankers who controlled gold movements could inflict their will on any country, and the United States was as helpless as any other. Notes from these House Hearings follow: 88 Brian Johnson, The Politics of Money, McGraw Hill, New York, 1970, p. 63. MR. BEEDY: "I notice on your chart that the lines which produce the most violent fluctuations are found under 'Money Rates in New York.' As the rates of money rise and fall in the big cities the loans that are made on investments seem to take advantage of them, at present, a quite violent change, while industry in general does not seem to avail itself of these violent changes, and that line is fairly even, there being no great rises or declines. GOVERNOR ADOLPH MILLER: This was all more or less in the interests of the international situation. They sold gold credits in New York for sterling balances in London. REPRESENTATIVE STRONG: (No relation to Benjamin): Has the Federal Reserve Board the power to attract gold to this country? E.A. GOLDENWEISER, research director for the Board: The Federal Reserve Board could attract gold to this country by making money rates higher. GOVERNOR ADOLPH MILLER: I think we are very close to the point where any further solicitude on our part for the monetary concerns of Europe can be altered. The Federal Reserve Board last summer, 1927, set out by a policy of open market purchases, followed in course by reduction on the discount rate at the Reserve Banks, to ease the credit situation and to cheapen the cost of money. The official reasons for that departure in credit policy were that it would help to stabilize international exchange and stimulate the exportation of gold. CHAIRMAN MCFADDEN: Will you tell us briefly how that matter was brought to the Federal Reserve Board and what were the influences that went into the final determination? GOVERNOR ADOLPH MILLER: You are asking a question impossible for me to answer. 147 CHAIRMAN MCFADDEN: Perhaps I can clarify it-where did the suggestion come from that caused this decision of the change of rates last summer? GOVERNOR ADOLPH MILLER: The three largest central banks in Europe had sent representatives to this country. There were the Governor of the Bank of England, Mr. Hjalmar Schacht, and Professor Rist, Deputy Governor of the Bank of France. These gentlemen were in conference with officials of the Federal Reserve Bank of New York. After a week or two, they appeared in Washington for the better part of a day. They came down the evening of one day and were the guests of the Governors of the Federal Reserve Board the following day, and left that afternoon for New York. CHAIRMAN MCFADDEN: Were the members of the Board present at this luncheon? GOVERNOR ADOLPH MILLER: Oh, yes, it was given by the Governors of the Board for the purpose of bringing all of us together. CHAIRMAN MCFADDEN: Was it a social affair, or were matters of importance discussed? GOVERNOR MILLER: I would say it was mainly a social affair. Personally, I had a long conversation with Dr. Schacht alone before the luncheon, and also one of considerable length with Professor Rist. After the luncheon I began a conversation with Mr. Norman, which was joined in by Governor Strong of New York. CHAIRMAN MCFADDEN: Was that a formal meeting of the Board? GOVERNOR ADOLPH MILLER: No. CHAIRMAN MCFADDEN: It was just an informal discussion of the matters they had been discussing in New York? GOVERNOR MILLER: I assume so. It was mainly a social occasion. What I said was mainly in the nature of generalities. The heads of these central banks also spoke in generalities. MR. KING: What did they want? GOVERNOR MILLER: They were very candid in answers to questions. I wanted to have a talk with Mr. Norman, and we both stayed behind after luncheon, and were joined by the other foreign representatives and the officials of the New York Reserve Bank. These gentlemen were all pretty concerned with the way the gold standard was working. They were therefore desirous of seeing an easy money market in New York and lower rates, which would deter gold from moving from Europe to this country. That would be very much in the interest of the international money situation which then existed. 148 MR. BEEDY: Was there some understanding arrived at between the representatives of these foreign banks and the Federal Reserve Board or the New York Federal Reserve Bank? GOVERNOR MILLER: Yes. MR. BEEDY: It was not reported formally? GOVERNOR MILLER: No. Later, there came a meeting of the Open- Market Policy Committee, the investment policy committee of the Federal Reserve System, by which and to which certain recommendations were made. My recollection is that about eighty million dollars worth of securities were purchased in August consistent with this plan. CHAIRMAN MCFADDEN: Was there any conference between the members of the Open Market Committee and those bankers from abroad? GOVERNOR MILLER: They may have met them as individuals, but not as a committee. MR. KING: How does the Open-Market Committee get its ideas? GOVERNOR MILLER: They sit around and talk about it. I do not know whose idea this was. It was distinctly a time in which there was a cooperative spirit at work. CHAIRMAN MCFADDEN: You have outlined here negotiations of very great importance. GOVERNOR MILLER: I should rather say conversations. CHAIRMAN MCFADDEN: Something of a very definite character took place? GOVERNOR MILLER: Yes. CHAIRMAN MCFADDEN: A change of policy on the part of our whole financial system which has resulted in one of the most unusual situations that has ever confronted this country financially (the stock market speculation boom of 1927-1929). It seems to me that a matter of that importance should have been made a matter of record in Washington. GOVERNOR MILLER: I agree with you. REPRESENTATIVE STRONG: Would it not have been a good thing if there had been a direction that those powers given to the Federal Reserve System should be used for the continued stabilization of the purchasing power of the American dollar rather than be influenced by the interests of Europe? 149 GOVERNOR MILLER: I take exception to that term "influence". Besides, there is no such thing as stabilizing the American dollar without stabilizing every other gold currency. They are tied together by the gold standard. Other eminent men who come here are very adroit in knowing how to approach the folk who make up the personnel of the Federal Reserve Board. MR. STEAGALL: The visit of these foreign bankers resulted in money being cheaper in New York? GOVERNOR MILLER: Yes, exactly. CHAIRMAN MCFADDEN: I would like to put in the record all who attended that luncheon in Washington. GOVERNOR MILLER: In addition to the names I have given you, there was also present one of the younger men from the Bank of France. I think all members of the Federal Reserve Board were there. Under Secretary of the Treasury Ogden Mills was there, and the Assistant Secretary of the Treasury, Mr. Schuneman, also, two or three men from the State Department and Mr. Warren of the Foreign Department of the Federal Reserve Bank of New York. Oh yes, Governor Strong was present. CHAIRMAN MCFADDEN: This conference, of course, with all of these foreign bankers did not just happen. The prominent bankers from Germany, France, and England came here at whose suggestion? GOVERNOR MILLER: A situation had been created that was distinctly embarrassing to London by reason of the impending withdrawal of a certain amount of gold which had been recovered by France and that had originally been shipped and deposited in the Bank of England by the French Government as a war credit. There was getting to be some tension of mind in Europe because France was beginning to put her house in order for a return to the gold standard. This situation was one which called for some moderating influence. MR. KING: Who was the moving spirit who got those people together? GOVERNOR MILLER: That is a detail with which I am not familiar. REPRESENTATIVE STRONG: Would it not be fair to say that the fellows who wanted the gold were the ones who instigated the meeting? GOVERNOR MILLER: They came over here. REPRESENTATIVE STRONG: The fact is that they came over here, they had a meeting, they banqueted, they talked, they got the Federal Reserve Board to lower the discount rate, and to make the purchases in the open market, and they got the gold. 150 MR. STEAGALL: Is it true that action stabilized the European currencies and upset ours? GOVERNOR MILLER: Yes, that was what it was intended to do. CHAIRMAN MCFADDEN: Let me call your attention to the recent conference in Paris at which Mr. Goldenweiser, director of research for the Federal Reserve Board, and Dr. Burgess, assistant Federal Reserve Agent of the Federal Reserve Bank of New York, were in consultation with the representatives of the other central banks. Who called the conference? GOVERNOR MILLER: My recollection is that it was called by the Bank of France. GOVERNOR YOUNG: No, it was the League of Nations who called them together." The secret meeting between the Governors of the Federal Reserve Board and the heads of the European central banks was not called to stabilize anything. It was held to discuss the best way of getting the gold held in the United States by the System back to Europe to force the nations of that continent back on the gold standard. The League of Nations had not yet succeeded in doing that, the objective for which that body was set up in the first place, because the Senate of the United States had refused to let Woodrow Wilson betray us to an international monetary authority. It took the Second World War and Franklin D. Roosevelt to do that. Meanwhile, Europe had to have our gold and the Federal Reserve System gave it to them, five hundred million dollars worth. The movement of that gold out of the United States caused the deflation of the stock boom, the end of the business prosperity of the 1920s and the Great Depression of 1929- 31, the worst calamity which has ever befallen this nation. It is entirely logical to say that the American people suffered that depression as a punishment for not joining the League of Nations. The bankers knew what would happen when that five hundred million dollars worth of gold was sent to Europe. They wanted the Depression because it put the business and finance of the United States in their hands. The Hearings continue: MR. BEEDY: "Mr. Ebersole of the Treasury Department concluded his remarks at the dinner we attended last night by saying that the Federal Reserve System did not want stabilization and the American businessman did not want it. They want these fluctuations in prices, not only in securities but in commodities, in trade generally, because those who are now in control are making their profits out of that very instability. If control of these people does not come in a legitimate way, there may be an attempt to produce it by general upheavals such as have characterized society in days gone by. 151 Revolutions have been promoted by dissatisfaction with existing conditions, the control being in the hands of the few, and the many paying the bills. CHAIRMAN MCFADDEN: I have here a letter from a member of the Federal Reserve Board who was summoned to appear here. I would like to have it put in the record. It is from Governor Cunningham: Dear Mr. Chairman: For the past several weeks I have been confined to my home on account of illness and am now preparing to spend a few weeks away from Washington for the purpose of hastening convalescence. Edward H. Cunningham This is in answer to an invitation extended him to appear before our Committee. I also have a letter from George Harrison, Deputy Governor of the Federal Reserve Bank of New York My dear Mr. Congressman: Governor Strong sailed for Europe last week. He had not been at all well since the first of the year, and, while he did appear before your Committee last March, it was only shortly after that that he suffered a very severe attack of shingles, which has sorely racked his nerves. George L. Harrison, May 19, 1928 I also desire to place in the record a statement in the New York Journal of Commerce, dated May 22, 1928, from Washington: 'It is stated in well-informed circles here that the chief topic being taken up by Governor Strong of the Federal Reserve Bank of New York on his present visit to Paris is the arrangement of stabilization credits for France, Rumania, and Yugoslavia. A second vital question Mr. Strong will take up is the amount of gold France is to draw from this country.'" 152 Further questioning by Chairman McFadden about the strange illness of Benjamin Strong brought forth the following testimony from Governor Charles S. Hamlin of the Federal Reserve Board on May 23rd, 1928: "All I know is that Governor Strong has been very ill, and he has gone over to Europe primarily, I understand, as a matter of health. Of course, he knows well the various offices of the European central banks and undoubtedly will call on them." Governor Benjamin Strong died a few weeks after his return from Europe, without appearing before the Committee. The purpose of these hearings before the House Committee on Banking and Currency in 1928 was to investigate the necessity for passing the Strong bill, presented by Representative Strong (no relation to Benjamin, the international banker), which would have provided that the Federal Reserve System be empowered to act to stabilize the purchasing power of the dollar. This had been one of the promises made by Carter Glass and Woodrow Wilson when they presented the Federal Reserve Act before Congress in 1912, and such a provision had actually been put in the Act by Senator Robert L. Owen, but Carter Glass' House Committee on Banking and Currency had struck it out. The traders and speculators did not want the dollar to become stable, because they would no longer be able to make a profit. The citizens of this country had been led to gamble on the stock market in the 1920s because the traders had created a nationwide condition of instability. The Strong Bill of 1928 was defeated in Congress. The financial situation in the United States during the 1920s was characterized by an inflation of speculative values only. It was a trader-made situation. Prices of commodities remained low, despite the over-pricing of securities on the exchange. The purchasers did not expect their securities to pay dividends. The idea was to hold them awhile and sell them at a profit. It had to stop somewhere, as Paul Warburg remarked in March, 1929. Wall Street did not let it stop until the people had put their savings into these over-priced securities. We had the spectacle of the President of the United States, Calvin Coolidge, acting as a shill for the stock market operators when he recommended to the American people that they continue buying on the market, in 1927. There had been uneasiness about the inflated condition of the market, and the bankers showed their power by getting the President of the United States, the Secretary of the Treasury, and the Chairman of the 153 Board of Governors of the Federal Reserve System to issue statements that brokers' loans were not too high, and that the condition of the stock market was sound. Irving Fisher warned us in 1927 that the burden of stabilizing prices all over the world would soon fall on the United States. One of the results of the Second World War was the establishment of an International Monetary Fund to do just that. Professor Gustav Cassel remarked in the same year that: "The downward movement of prices has not been a spontaneous result of forces beyond our control. It is the result of a policy deliberately framed to bring down prices and give a higher value to the monetary unit." The Democratic Party, after passing the Federal Reserve Act and leading us into the First World War, assumed the role of an opposition party during the 1920s. They were on the outside of the political fence, and were supported during those lean years by liberal handouts from Bernard Baruch, according to his biography. How far outside of it they were and how little chance they had in 1928, is shown by a plank in the official Democratic Party platform adopted at Houston on June 28, 1928: "The administration of the Federal Reserve System for the advantage of the stock-market speculators should cease. It must be administered for the benefit of farmers, wage-earners, merchants, manufacturers, and others engaged in constructive business." This idealism insured defeat for its protagonist, Al Smith, who was nominated by Franklin D. Roosevelt. The campaign against Al Smith also was marked by appeals to religious intolerance, because he was a Catholic. The bankers stirred up anti-Catholic sentiment all over the country to achieve the election of their World War I protege, Herbert Hoover. Instead of being used to promote the financial stability of the country, as had been promised by Woodrow Wilson when the Act was passed, financial instability has been steadily promoted by the Federal Reserve Board. An official memorandum issued by the Board on March 13, 1939, stated that: "The Board of Governors of the Federal Reserve System opposes any bill which proposes a stable price level." 154 Politically, the Federal Reserve Board was used to advance the election of the bankers' candidates during the 1920s. The "Literary Digest" on August 4, 1928, said, on the occasion of the Federal Reserve Board raising the rate to five percent in a Presidential year: "This reverses the politically desirable cheap money policy of 1927, and gives smooth conditions on the stock market. It was attacked by the Peoples' Lobby of Washington, D.C. which said that 'This increase at a time when farmers needed cheap money to finance the harvesting of their crops was a direct blow at the farmers, who had begun to get back on their feet after the Agricultural Depression of 1920-21. "The New York World" said on that occasion: "Criticism of Federal Reserve Board policy by many investors is not based on its attempt to deflate the stock market, but on the charge that the Board itself, by last year's policy, is completely responsible for such stock market inflation as exists." A damning survey of the Federal Reserve System's first fifteen years appears in the "North American Review" of May, 1929, by H. Parker Willis, professional economist who was one of the authors of the Act and First Secretary of the Board from 1914 until 1920. He expresses complete disillusionment. "My first talk with President-elect Wilson was in 1912. Our conversation related entirely to banking reform. I asked whether he felt confident we could secure the administration of a suitable law and how we should get it applied and enforced. He answered: 'We must rely on American business idealism.' He sought for something which could be trusted to afford opportunity to American Idealism. It did serve to finance the World War and to revise American 155 banking practices. The element of idealism that the President prescribed and believed we could get on the principle of noblesse oblige from American bankers and businessmen was not there. Since the inauguration of the Federal Reserve Act we have suffered one of the most serious financial depressions and revolutions ever known in our history, that of 1920-21. We have seen our agriculture pass through a long period of suffering and even of revolution, during which one million farmers left their farms, due to difficulties with the price of land and the odd status of credit conditions. We have suffered the most extensive era of bank failures ever known in this country. Forty-five hundred banks have closed their doors since the Reserve System began functioning. In some Western towns there have been times when all banks in that community failed, and given banks have failed over and over again. There has been little difference in liability to failure between members and non-members of the Federal Reserve System. "Wilson's choice of the first members of the Federal Reserve Board was not especially happy. They represented a composite group chosen for the express purpose of placating this, that, or the other big interest. It was not strange that appointees used their places to pay debts. When the Board was considering a resolution to the effect that future members of the reserve system should be appointed solely on merit, because of the demonstrated incompetence of some of their number. Comptroller John Skelton Williams moved to strike out the word 'solely' and in this he was 156 sustained by the Board. The inclusion of certain elements (Warburg, Strauss, etc.) in the Board gave an opportunity for catering to special interests that was to prove disastrous later on. "President Wilson erred, as he often erred, in supposing that the holding of an important office would transform an incumbent and revivify his patriotism. The Reserve Board reached the low ebb of the Wilson period with the appointment of a member who was chosen for his ability to get delegates for a Democratic candidate for the Presidency. However, this level was not the dregs reached under President Harding. He appointed an old crony, D.R. Crissinger, as Governor of the Board, and named several other super-serviceable politicians to other places. Before his death he had done his utmost to debauch the whole undertaking. The System has gone steadily downhill ever since. "Reserve Banks had hardly assumed their first form when it became apparent that local bankers had sought to use them as a means of taking care of 'favorite sons', that is, persons who had by common consent become a kind of general charge upon the banking community, or inefficients of various kinds. When reserve directors were to be chosen, the country bankers often refused to vote, or, when they voted, cast their ballots as directed by city correspondents. In these circumstances popular or democratic control of reserve banks was out of the question. Reasonable efficiency might have been secured if honest men, recognizing their public duty, had assumed 157 power. If such men existed, they did not get on the Federal Reserve Board. In one reserve bank today the chief management is in the hands of a man who never did a day's actual banking in his life, while in another reserve institution both Governor and Chairman are the former heads of now defunct banks. They naturally have a high failure record in their district. In a majority of districts the standard of performance as judged by good banking standards is disgracefully low among reserve executive officials. The policy of the Federal Reserve Bank of Philadelphia is known in the System as the 'Friends and Relatives Banks.' "It was while making war profits in considerable amounts that someone conceived the idea of using the profits to provide themselves with phenomenally costly buildings. Today the Reserve Banks must keep a full billion dollars of their money constantly at work merely to pay their own expenses in normal times. "The best illustration of what the System has done and not done is offered by the experience which the country was having with speculation, in May, 1929. Three years prior to that, the present bull market was just getting under way. In the autumn of 1926 a group of bankers, among them one of world famous name, were sitting at a table in a Washington hotel. One of them raised the question whether the low discount rates of the System were not likely to encourage speculation. "'Yes', replied the famous banker, 'they will, but that cannot be helped. It is the price we must pay for helping Europe.' "It may well be questioned whether the encouragement of speculation by the Board has been the 158 price paid for helping Europe or whether it is the price paid to induce a certain class of financiers to help Europe, but in either case European conditions should not have had anything to do with the Board's discount policy. The fact of the matter is that the Federal Reserve Banks do not come into contact with the community. "The 'small man' from Maine to Texas has gradually been led to invest his savings in the stock market, with the result that the rising tide of speculation, transacted at a higher and higher rate of speed, has swept over the legitimate business of the country. "In March, 1928, Roy A. Young, Governor of the Board, was called before a Senate committee. 'Do you think the brokers' loans are too high?", he was asked. "'I am not prepared to say whether brokers' loans are too high or too low,' he replied, 'but I am sure they are safely and conservatively made.' "Secretary of the Treasury Mellon in a formal statement assured the country that they were not too high, and Coolidge, using material supplied him by the Federal Reserve Board, made a plain statement to the country that they were not too high. The Federal Reserve Board, charged with the duty of protecting the interests of the average man, thus did its utmost to assure the average man that he should feel no alarm about his savings. Yet the Federal Reserve Board issued on February 2, 1929, a letter addressed to the Reserve Bank Directors cautioning them against grave danger of further speculation. "What could be expected from a group of men such as composed the Board, a set of men who were solely interested in standing from under when there was any danger of friction, displaying a 159 bovine and canine appetite for credit and praise, while eager only to 'stand in' with the 'big men' whom they know as the masters of American finance and banking?" H. Parker Willis omitted any reference to Lord Montague Norman and the machinations of the Bank of England which were about to result in the Crash of 1929 and the Great Depression. 160 CHAPTER TWELVE The Great Depression
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