Edwin W. Kemmerer, the “Money Doctor” of the 1920s, Imposed Central Banks and Gold-Exchange Standards on 3rd World Countries

The War Department was beside itself: How could it drive Mexican silver coinage out of the Philippines? In desperation, it turned to the indefatigable Conant, but Conant couldn’t join the colonial government in the Philippines because he had just been appointed to a more far-flung presidential commission on international exchange for pressuring Mexico and China to go on a similar gold-exchange standard. Hollander, fresh from his Puerto Rican triumph, was ill. Who else? Conant, Hollander, and several leading bankers told the War Department they could recommend no one for the job, so new then was the profession of technical expertise in monetary imperialism. But there was one more hope, the other pro-cartelist and financial imperialist, Cornell’s Jeremiah W. Jenks, a fellow member with Conant of President Roosevelt’s new Commission on International Exchange (CIE). Jenks had already paved the way for Conant by visiting English and Dutch colonies in the Far East in 1901 to gain information about running the Philippines. Jenks finally came up with a name, his former graduate student at Cornell, Edwin W. Kemmerer.

Young Kemmerer went to the Philippines from 1903 to 1906 to implement the Conant plan. Based on the theories of Jenks and Conant, and on his own experience in the Philippines, Kemmerer went on to teach at Cornell and then at Princeton, and gained fame throughout the 1920s as the “money doctor,” busily imposing the gold-exchange standard on country after country abroad.

Relying on Conant’s behind-the-scenes advice, Kemmerer and his associates finally came out with a successful scheme to drive out the Mexican silver coins. It was a plan that relied heavily on government coercion.

——————————

But the true successor of Conant was Edwin W. Kemmerer, the “money doctor.” After his Philippine experience, Kemmerer joined his old Professor Jenks at Cornell, and then moved to Princeton in 1912, publishing his book Modern Currency Reforms in 1916. As the leading foreign financial adviser of the 1920s, Kemmerer not only imposed central banks and a gold-exchange standard on Third World countries, but he also got them to levy higher taxes. Kemmerer, too, combined his public employment with service to leading international bankers. During the 1920s, Kemmerer worked as banking expert for the U.S. government’s Dawes Commission, headed special financial advisory missions to more than a dozen countries, and was kept on a handsome retainer by the distinguished investment banking firm of Dillon, Read from 1922 to 1929. In that era, Kemmerer and his mentor Jenks were the only foreign currency reform experts available for advising. In the late 1920s, Kemmerer helped establish a chair of international economics at Princeton, which he occupied, and from which he could train students like Arthur N. Young and William W. Cumberland. In the mid 1920s, the money doctor served as president of the American Economic Association.

—Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2002), 223-224, 233-234.

September 20, 1931 Was the Last Day of the Age of Economic Liberalism in which Great Britain Had Been Leader of the World

England betrayed not only the countries that aided the pound, but also the countries it had cajoled into adopting the gold-exchange standard in the 1920s. It also specifically betrayed those banks it had persuaded to keep huge sterling balances in London: specifically, the Netherlands Bank and the Bank of France. Indeed, on Friday, September 18, Dr. G. Vissering, head of the Netherlands Bank, phoned Monty Norman and asked him about the crisis of sterling. Vissering, who was poised to withdraw massive sterling balances from London, was assured without qualification by his old friend Norman that, England would, at all costs, remain on the gold standard. Two days later, England betrayed its word. The Netherlands Bank suffered severe losses. The Netherlands Bank was strongly criticized by the Dutch government for keeping its balances in sterling until it was too late. In its own defense, the bank quoted repeated assurances from the Bank of England about the safety of foreign funds in London. The bank made it clear that it was betrayed and deceived by the Bank of England.

The Bank of France also suffered severely from the British betrayal, losing about $95 million. Despite its misgivings, it had loyally supported the English gold-standard system by allowing sterling balances to pile up. The Bank of France sold no sterling until after England went off gold; by September 1931, it had amassed a sterling portfolio of $300 million, one-fifth of France’s monetary reserves. In fact, during the period of 1928–31, the sterling portfolio of the Bank of France was at times equal to two-thirds of the entire gold reserve of the Bank of England.

Despite Montagu Norman, who began to blame the French government for his own egregious failure, it was not the French authorities who put pressure on sterling in 1931. On the contrary, it was the shrewd private French investors and commercial banks, who, correctly sensing the weakness of sterling and the British refusal to employ orthodox measures in its support, decided to make a run on the pound in exchange for gold. The run was aggravated by the glaring fact that Britain had a chronic import deficit, and also was scarcely in a position to save the gold standard through tight money when the British government, at the end of July, projected a massive fiscal 1932–33 deficit of £120 million, the largest since 1920. Attempts in September to cut the budget were overridden by union strikes, and even by a short-lived sit-down strike by British naval personnel, which convinced foreigners that Britain would not take sufficient measures to defend the pound.

In his memoirs, the economist Moritz J. Bonn neatly summed up the significance of England’s action in September 1931:

September 20, 1931, was the end of an age. It was the last day of the age of economic liberalism in which Great Britain had been the leader of the world. . . . Now the whole edifice had crashed. The slogan “safe as the Bank of England” no longer had any meaning. The Bank of England had gone into default. For the first time in history a great creditor country had devalued its currency, and by so doing had inflicted heavy losses on all those who had trusted it.

As soon as England went off the gold standard, the pound fell by 30 percent. It is ironic that, after all the travail Britain had put the world through, the pound fell to a level, $3.40, that might have been viable if she had originally returned to gold at that rate. Twenty-five countries followed Britain off gold and onto floating, and devaluating, exchange rates. The era of the gold-exchange standard was over.

—Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2002), 429-431.

What the Bank of England Did VERSUS the Correct Way of Solving a Gold Standard Crisis

With the successful runs on Austria and Germany, it was clear that England would be the next to suffer a worldwide lack of confidence in its currency, including runs on gold. Sure enough, in mid-July, sterling redemption in gold became severe, and the Bank of England lost $125 million in gold in nine days in late July.

The remedy to such a situation under the classical gold standard was very clear: a sharp rise in bank rate to tighten English money and to attract gold and foreign capital to stay or flow back into England. In classical gold standard crises, the bank had raised its bank rate to 9 or 10 percent until the crises passed. And yet, so wedded was England to cheap money, that it entered the crisis in mid-July at the absurdly low bank rate of 2.5 percent, and grudgingly raised the rate only to 4.5 percent by the end of July, keeping the rate at this low level until it finally threw in the towel and, on the black Sunday of September 20, went off the very gold-exchange standard that it recently had foisted upon the rest of the world. Indeed, instead of tightening money, the Bank of England made the pound shakier still by inflating credit further. Thus, in the last two weeks of July, the Bank of England purchased nearly $115 million in government securities.

England disgracefully threw in the towel even as foreign central banks tried to prop the Bank of England up and save the gold-exchange standard. Answering Norman’s pleas, the Bank of France and the New York Fed each loaned the Bank of England $125 million on August 1, and then, later in August, another $400 million provided by a consortium of French and American bankers. All this aid was allowed to go down the drain on the altar of inflationism and a 4.5-percent bank rate.

—Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2002), 428-429.

In 1930 BoE Governor Montagu Norman Got His “Central Bankers’ Bank,” the Bank for International Settlements

In 1930, Montagu Norman got part of his wish to achieve a formal intercentral bank collaboration. Norman was able to push through a new “central bankers’ bank,” the Bank for International Settlements (BIS), to meet regularly at Basle, to provide clearing facilities for German reparations payments, and to provide regular facilities for meeting and cooperation. While Congress forbade the Fed from formally joining the BIS, the New York Fed and the Morgan interests worked closely with the new bank. The BIS, indeed, treated the New York Fed as if it were the central bank of the United States. Gates W. McGarrah resigned his post as chairman of the board of the New York Fed in February 1930 to assume the position of president of the BIS, and Jackson E. Reynolds, a director of the New York Fed, was chairman of the BIS’s first organizing committee. J.P. Morgan and Company unsurprisingly supplied much of the capital for the BIS. And even though there was no legislative sanction for U.S. participation in the bank, New York Fed Governor George Harrison made a “regular business trip” abroad in the fall to confer with the other central bankers, and the New York Fed extended loans to the BIS during 1931.

During 1931, many of the European banks, swollen by unsound credit expansion, met their comeuppance. In October 1929, the important Austrian bank, the Boden-Kredit-Anstalt, was headed for liquidation. Instead of allowing the bank to fold and liquidate, international finance, headed by the Rothschilds and the Morgans, bailed the bank out. The Boden bank was merged into the older and stronger Österreichische-Kredit- Anstalt, now by far the largest commercial bank in Austria, capital being provided by an international financial syndicate including J.P. Morgan and Rothschild of Vienna. Moreover, the Austrian government guaranteed some of the Boden bank’s assets.

But the now-huge Kredit-Anstalt was weakened by the merger, and, in May 1931, a run developed on the bank, led by French bankers angered by the announced customs union between Germany and Austria. Despite aid to the Kredit-Anstalt by the Bank of England, Rothschild of Vienna, and the BIS (aided by the New York Fed and other central banks), to a total of over $31 million, and the Austrian government’s guarantee of Kredit-Anstalt liabilities up to $150 million, bank runs, once launched, are irresistible, and so Austria went off the gold standard, in effect, declaring national bankruptcy in June 1931. At that point, a fierce run began on the German banks, the Bank for International Settlements again trying to shore up Germany by arranging a $100 million loan to the Reichsbank, a credit joined in by the Bank of England, the Bank of France, the New York Fed, and several other central banks. But the run on the German banks, both from the German people as well as from foreign creditors, proved devastating. By mid-July, the German banking system collapsed from internal runs, and Germany went off the gold standard.

—Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2002), 426-428.

The Indian “Gold-Exchange Standard” Received Great Praise from Keynes for Its Inflationary Potential

The gold-exchange standard was not created de novo by Great Britain in the interwar period. It is true that a number of European central banks before 1914 had held foreign exchange reserves in addition to gold, but these were strictly limited, and they were held as earning assets—these after all were privately owned central banks in need of earnings—not as instruments of monetary manipulation. But in a few cases, particularly where the pyramiding countries were from the Third World, they did function as a gold-exchange standard: that is, the Third World currency pyramided its currency on top of a key country’s reserves (pounds or dollars) instead of on gold. This system began in India, after the late 1870s, as a historical accident. The plan of the British imperial center was to shift India which, like many Third World countries, had been on a silver standard, onto a seemingly sounder gold, following the imperial nations. India’s reserves in pound sterling balances in London were supposed to be only a temporary transition to gold. But, as in so many cases of seeming transition, the Indian gold-exchange standard lingered on, and received great praise for its modern inflationary potential from John Maynard Keynes, then in his first economic post at the India Office. It was Keynes, after leaving the India Office and going to Cambridge, who trumpeted the new form of monetary system as a “limping” or imperfect gold standard but as a “more scientific and economic system,” which he dubbed the gold-exchange standard. As Keynes wrote in February 1910, “it is cheaper to maintain a credit at one of the great financial centres of the world, which can be converted with great readiness to gold when it is required.“ In a paper delivered the following year to the Royal Economic Society, Keynes proclaimed that out of this new system would evolve “the ideal currency of the future.”

Elaborating his views into his first book, Indian Currency and Finance (London, 1913), Keynes emphasized that the gold-exchange standard was a notable advance because it “economized” on gold internally and internationally, thus allowing greater “elasticity” of money (a longtime code word for ability to inflate credit) in response to business needs. Looking beyond India, Keynes prophetically foresaw the traditional gold standard as giving way to a more “scientific” system based on one or two key reserve centers. “A preference for a tangible reserve currency,” Keynes declared blithely, “is . . . a relic of a time when governments were less trustworthy in these matters than they are now.” He also believed that Britain was the natural center of the new reformed monetary order. While his book was still in proofs, Keynes was appointed a member of the Royal Commission on Indian Finance and Currency, to study and make recommendations for the basic institutions of the Indian monetary system. Keynes dominated the commission proceedings, and while he got his way on maintaining the gold-exchange standard, he was not able to convince the commission to adopt a central bank. However, he managed to bully it into including his annex favoring the state bank in its report, completed in early 1914. In addition, in his work on the commission, Keynes managed to enchant his doting mentor, Alfred Marshall, the unquestioned ruler of academic economists in Britain.

—Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2002), 387-389.

Under the 1920s Gold-Exchange Standard, Britain “Exported” Her Inflation to Other Nations Without Paying a Price

The major twist, the major deformation of a genuine gold standard perpetrated by the British in the 1920s, was not the gold bullion standard, unfortunate though that was. The major inflationary camouflage was to return, not to a gold standard at all, but to a “gold-exchange” standard. In a gold-exchange standard, only one country, in this case Great Britain, is on a gold standard in the sense that its currency is actually redeemable in gold, albeit only gold bullion for foreigners. All other European countries, even though nominally on a gold standard, were actually on a pound-sterling standard. In short, a typical European country, say, “Ruritania,” would hold as reserves for its currency, not gold but British pounds sterling, in practice, bills or deposits payable in sterling at London. Anyone who demanded redemption for Ruritanian “rurs,” then, would receive British pounds rather than gold.

The gold-exchange standard, then, cunningly broke the classical gold standard’s stringent limits on monetary and credit expansion, not only for the other European countries, but also for the base or key currency country, Great Britain itself. Under the genuine gold standard, inflating the number of pounds in circulation would cause pounds to flow into the hands of other countries, which would demand gold in redemption. Thereby gold would move out of British bank and currency reserves, and pressure would be put on Britain to end its inflation and to contract credit. But, under the gold-exchange standard, the process was very different. If Britain inflated the number of pounds in circulation, the result, again, was a deficit in the balance of trade and sterling balances piling up in the accounts of other nations. But now that these nations have been induced to use pounds as their reserves rather than gold, these nations, instead of redeeming the pounds in gold, would inflate, and pyramid a multiple of their currency on top of their increased stock of pounds. Thus, instead of checking inflation, a gold-exchange standard encourages all countries to inflate on top of their increased supply of pounds. Britain, too, is now able to “export” her inflation to other nations without paying a price. Thus, in the name of sound money and a check against inflation, a pseudo gold standard was instituted, designed to induce a double-inverted pyramid of inflation, all on top of British pounds, the whole process supported by a gold stock that does not dwindle.

Since all other countries were sucked into the inflationary gold-exchange trap, it seemed that the only nation Britain had to worry about was the United States, the only country to continue on a genuine gold standard. That was the reason it became so vitally important for Britain to get the United States, through the Morgan connection, to go along with this system and to inflate, so that Britain would not lose gold to the United States.

—Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2002), 384-386.

Like Keynesian Pyramid-Building and Hole Digging Schemes, Greenbackers Wanted a Canal from New York to San Francisco

Also sympathetic to greenbacks were many manufacturers who desired cheap credit, gold speculators who were betting on higher gold prices, and railroads, which as heavy debtors to their bondholders, realized that inflation benefits debtors by cheapening the dollar whereas it also tends to expropriate creditors by the same token. One of the influential Carey disciples, for example, was the leading railroad promoter, the Pennsylvanian Thomas A. Scott, leading entrepreneur of the Pennsylvania and the Texas and Pacific Railroads.

One of the most flamboyant advocates of greenback inflation in the postwar era was the Wall Street stock speculator Richard Schell. In 1874, Schell became a member of Congress, where he proposed an outrageous pre-Keynesian scheme in the spirit of Keynes’s later dictum that so long as money is spent, it doesn’t matter what the money is spent on, be it pyramid-building or digging holes in the ground.¹³⁵ Schell seriously urged the federal government to dig a canal from New York to San Francisco, financed wholly by the issue of greenbacks. Schell’s enthusiasm was perhaps matched only by that of the notorious railroad speculator and economic adventurer George Francis Train, who called repeatedly for immense issues of greenbacks. Train thundered in 1867:

Give us greenbacks we say, and build cities, plant corn, open coal mines, control railways, launch ships, grow cotton, establish factories, open gold and silver mines, erect rolling mills. . . . Carry my resolution and there is sunshine in the sky.

¹³⁵Thus, Keynes wrote: “‘To dig holes in the ground,’ paid for out of savings will increase, not only employment, but the real national dividend of useful goods and services.”

—Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2002), 148-150.