Super Imperialism. Michael Hudson
had reached. The problem of low silver prices would be solved “not by a rise in the price of silver as such,” but through “a rise in the general level of commodity prices, which would bring up the value of silver at the same time.”
Finally, the British listed their most important objective: U.S. assurance that the debt issue would soon be settled at an international conference. “The existence of these debts constitutes, as the Preparatory Commission have said, an insuperable barrier to economic and financial reconstruction, and there is no prospect of the World Economic Conference making progress if this barrier cannot be removed.”
This British agenda was about to be countered by Roosevelt’s New Deal. His program did indeed endorse higher price levels and lower interest rates. But as far as currency stabilization was concerned, Roosevelt was about to take America off gold, while his agricultural program and related policies would require protectionist trade quotas. As to settlement of the war debts, Roosevelt wasn’t prepared even to begin discussing a resolution of this problem.
MacDonald and Herriot visit Washington
After taking office on March 4, 1933, just five weeks after Hitler became Chancellor of Germany, President Roosevelt declared a bank holiday, repealed prohibition, provided unemployment relief and endorsed agricultural price supports. The last presupposed import quotas for the crops whose prices were being supported. On April 17, Senator Elmer Thomas of Oklahoma added an amendment authorizing the President to issue greenbacks, fix the ratio of the value of silver to gold and provide for free silver coinage, and fix the weight of the gold dollar by proclamation. Three days later, on April 20, Roosevelt cut the dollar loose from gold to find its own level. His objective was to reflate prices according to the theory of Cornell economics professor George F. Warren that domestic prices would rise in proportion to the dollar’s depreciation against gold. Rising prices would alleviate the depression by making it easier for farmers, workers and businesses to pay their debts. Both the House of Representatives and Senate backed the inflationary policies deemed necessary to reduce the debt burden and speed economic recovery.
Dollar depreciation had the incidental effect of increasing U.S. export competitiveness vis-à-vis Europe, wiping out much of the trade advantage that Britain had gained by going off gold the previous year and generally aggravating Europe’s already debt-ridden balance-of-payments position. But for the United States, Walter Lippman wrote, “national policies were bound to prevail. In such a conflict they always do prevail in any powerful nation.” The basic problem with such a policy was that “In spite of the underlying conception of the AAA [Agricultural Adjustment Act] and of NRA [National Recovery Act], that competition in the domestic market must be limited and controlled, the Administration continued to advocate freer trade in the world.”24 The erroneous assumption was that foreign countries could open their markets in the face of increasing U.S. payments surpluses and still pay their dollar-denominated war debts.
Britain began to prepare for the worst. In May it negotiated trade preferences with Argentina, extending the Imperial Preference system whose foundation had been laid at Ottawa a year earlier. Roosevelt approved an increase in U.S. cotton tariffs, and the trade wars of the 1930s began to gain momentum.
Hoping that the conflict could be resolved without a break, the British Prime Minister, Ramsay MacDonald, planned to visit Washington to seek U.S. commitment for the London Economic Conference. His Cabinet warned him not to make the trip “without advance assurance from us that the June 15th debt payment could be postponed.” Otherwise, it was feared, he would be embarrassed by a failure in what had become Britain’s major economic concern. The United States refused to provide any such advance commitment, but MacDonald came anyway, accompanied by Sir Frederick Leith-Ross, Chief Economic Advisor to His Majesty’s Government, and Sir Robert Vansittart, Permanent Under-Secretary of State for Foreign Affairs.25
Roosevelt invited former Prime Minister Herriot to the meeting in recognition of his having risked his political career attempting to get France to pay its December debt installment. Herriot was flanked by the economic advisor Charles Rist and Jean J. Bizot, Advisor to the French Treasury, as well as Robert Coulondre of the French Foreign Office and Paul Elbel of the Ministry of Commerce. Italy sent Guido Jung and a staff. Germany sent Hjalmar Schacht.
With the London Conference less than three months away, the world’s financial system was thrown into turmoil as Roosevelt cut the dollar free of gold while these visitors were crossing the Atlantic. Meanwhile, the State Department drafted a reply to the British proposals for a joint statement of principles that would guide the London negotiations. The task initially fell to Norman Davis, the suspect internationalist, but Moley quickly eliminated him from further involvement in the negotiations and set about preparing a reply himself, rejecting the idea “that the maintenance of the debts, whether the installments were paid or not paid, would in any way hinder recovery here or abroad.”26
James Warburg, an official formerly with the Bank of New York, worked out a formula to settle the debt issue. Nicknamed “the Bunny,” it proposed to cancel all interest charges and substantially reduce the remaining principal “in the light of the depressed conditions that had arisen since the last agreements had been made in the 1920s. The debtors would reaffirm their obligations by depositing a note for the new amounts with the Bank for International Settlements. These notes were to be secured by a deposit of 25 per cent of the principal amount in gold bullion plus another 5 per cent in gold or silver. The remainder of the debts would be dealt with by a sinking-fund agreement under which each debtor would make certain annual payments to the Bank for International Settlements,” which would use the payments to buy U.S. Government debt. This proposal would have turned the Bank for International Settlements from an instrument designed to collect German reparations into one in charge of transferring European payments to the United States. European tribute would finance America’s budget deficit, leaving its revenue to be spent on goods and services to help pull the country out of depression.27
Upon their arrival Roosevelt informed the European leaders that this was as far as the United States would go toward resolving the debt issue. As for the dollar’s falling value, he assured them that he did not want speculation to push it down “unnaturally,” but wanted it to find a “natural” level, defined as one that would restore prosperity for America. This certainly meant a much lower exchange rate against gold, as there is little point to devaluation unless one devalues to excess, that is, by enough to change existing trade patterns in one’s favor. This meant that the dollar’s fall would win export trade from countries that sought to keep their currencies on the gold standard at the existing gold price.28
Roosevelt left the Europeans with the impression that he was eager to resolve the problem, however, and they left Washington in the belief that a final solution would be reached at the London Economic Conference. To a large extent they were merely reading in their hopes, for the joint statement Roosevelt issued with MacDonald was carefully written to be noncommittal, providing the United States with the escape clause that an improved gold standard should operate “without depressing prices,” “when circumstances permit,” and containing the qualification that its policy commitments would aim at “ultimate reestablishment of equilibrium in the international exchanges.”29 Just what did all this mean about stabilizing exchange rates and opening markets in the near future was not clear.
Wheeler-Bennett noted how urgent this had become in January: “The flagging hopes and expectations of the world are centered on the Economic Conference . . . It may be the last upward effort that brings the world from the brink of disaster on to firm ground; it may be the last despairing struggle before the final plunge. By the date of the opening of the Conference, President Roosevelt will have been inaugurated, and the world will know whether or not he will use the reduction of war debts to bargain for the reduction of tariffs.”30
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