The Mystery of Banking

Central Banking in the United States IV
243
7
On the role of the Morgans in pushing the Wilson administration into
war, see Charles Callan Tansill, 
America Goes to War 
(Boston: Little, Brown
and Co., 1938), chaps. II–IV.
and fought in World War I. The House of Morgan was hip-deep
in the Allied cause from 1914 on. Morgan was the fiscal agent for
the Bank of England, and enjoyed the monopoly underwriting of
all British and French bonds in the United States during World
War I. Not only that: J.P. Morgan & Co. was the financier for
much of the munitions factories that exported weapons and war
materiel to the Allied nations. 
Morgan’s railroads were in increasingly grave financial trou-
ble, and 1914 saw the collapse of Morgan’s $400 million New
Haven Railroad. Concentrating on railroads and a bit laggard in
moving into industrial finance, Morgan had seen its dominance in
investment banking slip since the turn of the century. Now, World
War I had come as a godsend to Morgan’s fortunes, and Morgan
prosperity was intimately wrapped up in the Allied cause. 
It is no wonder that Morgan partners took the lead in whip-
ping up pro-British and French propaganda in the United States;
and to clamor for the U.S. to enter the war on the Allied side.
Henry E. Davison set up the Aerial Coast Patrol in 1915, and
Willard Straight and Robert Bacon, both Morgan partners, took
the lead in organizing the Businessman’s Training Camp at Platts-
burgh, New York, to urge universal conscription. Elihu Root and
Morgan himself were particularly active in pressing for entering
the war on the Allied side. Furthermore, President Wilson was
surrounded by Morgan people. His son-in-law, Secretary of the
Treasury, William G. McAdoo, had been rescued from financial
bankruptcy by Morgan. Colonel Edward M. House, Wilson’s
mysterious and powerful foreign policy adviser, was connected
with Morgan railroads in Texas. McAdoo wrote to Wilson that
war exports to the Allies would bring “great prosperity” to the
United States, so that loans to the Allies to finance such exports
had become necessary.
7
Chapter Sixteen.qxp 8/4/2008 11:38 AM Page 243

---

244
The Mystery of Banking
Strong pursued his inflationary policies during the 1920s,
largely to help Great Britain escape the consequences of its own
disastrous inflationary program. During World War I, all the
European countries had inflated greatly to pay for the war, and so
were forced to go off the gold standard. Even the United States,
in the war for only half the duration of the other warring powers,
in effect suspended the gold standard during the war. 
After the war, Great Britain, the major world power and in
control of the League of Nations’s financial and economic poli-
cies, made the fateful decision to go back to the gold standard at
a highly overvalued par for the pound. Britain wished to regain
the prestige it had earned under the gold standard but without
paying the price of maintaining a noninflationary sound money
policy. It stubbornly insisted on going back to gold at the old pre-
war par of approximately $4.86, a rate far too high for the post-
war pound depreciated by inflation. At one point after the war,
the pound had sunk to $3.40 on the foreign exchange market.
But, determined to return to gold at $4.86, Great Britain per-
suaded the other European countries at the Genoa Conference of
1922 to go back, not to a genuine gold standard, but to a phony
gold exchange
standard. Instead of each nation issuing currency
directly redeemable in gold, it was to keep its reserves in the form
of sterling balances in London, which in turn would undertake to
redeem sterling in gold. In that way, other countries would pyra-
mid their currencies on top of pounds, and pounds themselves
were being inflated throughout the 1920s. Britain could then
print pounds without worrying about the accumulated sterling
balances being redeemed in gold. 
The overvalued pound meant that Britain was chronically
depressed during the 1920s, since its crucial export markets suf-
fered permanently from artificially high prices in terms of the
pound. Britain might have overcome this problem by massive
monetary deflation, thereby lowering its prices and making its
exports more competitive. But Britain wanted to inflate not
deflate, and so it tried to shore up its structure by concocting a
gold exchange standard, and by going back to a gold 
bullion
Chapter Sixteen.qxp 8/4/2008 11:38 AM Page 244

---