The Mystery of Banking

Central Banking in the United States IV
245
rather than gold coin standard, so that only large traders could
actually redeem paper money or deposits in gold. In addition,
Britain induced other European countries to go back to gold
themselves at overvalued pars, thereby discouraging their own
exports and stimulating imports from Britain. 
After a few years, however, sterling balances piled up so high
in the accounts of other countries that the entire jerry-built inter-
national monetary structure of the 1920s had to come tumbling
down. Britain had some success with the European countries,
which it could pressure or even coerce into going along with the
Genoa system. But what of the United States? That country was too
powerful to coerce, and the danger to Britain’s inflationary policy
of the 1920s was that it would lose gold to the U.S. and thereby be
forced to contract and explode the bubble it had created. 
It seemed that the only hope was to persuade the United
States to inflate as well so that Britain would no longer lose much
gold to the U.S. That task of persuasion was performed brilliantly
by the head of the Bank of England, Montagu Norman, the archi-
tect of the Genoa system. Norman developed a close friendship
with Strong and would sail periodically to the United States
incognito
and engage in secret conferences with Strong, where
unbeknown to anyone else, Strong would agree to another jolt of
inflation in the United States in order to “help England.” None of
these consultations was reported to the Federal Reserve Board in
Washington. In addition, Strong and Norman kept in close touch
by a weekly exchange of foreign cables. Strong admitted to his
assistant in 1928 that “very few people indeed realized that we
were now paying the penalty for the decision which was reached
early in 1924 to help the rest of the world back to a sound finan-
cial and monetary basis”—that is, to help Britain maintain a
phony and inflationary form of gold standard.
8
8
O. Ernest Moore to Sir Arthur Salter, May 25, 1928. Quoted in Roth-
bard, 
America’s Great Depression
, p. 143. In the fall of 1926, a leading
banker admitted that bad consequences would follow the Strong cheap
money policy, but asserted “that cannot be helped. It is the price we must
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Why did Strong do it? Why did he allow Montagu Norman
to lead him around by the nose and to follow an unsound policy
in order to shore up Britain’s unsound monetary structure? Some
historians have speculated that Norman exerted a Svengali-like
personal influence over the New Yorker. It is more plausible,
however, to look at the common Morgan connection between the
two central bankers. J.P. Morgan & Co., as we have seen, was the
fiscal agent for the Bank of England and for the British govern-
ment. Norman himself had longtime personal and family ties with
New York international bankers. He had worked for several years
as a young man in the New York office of Brown Brothers & Co.,
and he was a former partner in the associated London investment
banking firm of Brown, Shipley & Co. Norman’s grandfather, in
fact, had been a partner in Brown, Shipley, and in Brown Broth-
ers. In this case, as in many others, it is likely that the ties that
bound the two men were mainly financial. 
246
The Mystery of Banking
pay for helping Europe.” H. Parker Willis, “The Failure of the Federal
Reserve,” 
North American Review
(1929): 553.
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XVII. 
C
ONCLUSION
: T
HE
P
RESENT
B
ANKING
S
ITUATION AND
W
HAT TO
D
O
A
BOUT
I
T
1. T
HE
R
OAD TO THE
P
RESENT
W
ith the Federal Reserve System established and in place
after 1913, the remainder of the road to the present
may be quickly sketched. After Fed inflation led to the
boom of the 1920s and the bust of 1929, well-founded public dis-
trust of all the banks, including the Fed, led to widespread
demands for redemption of bank deposits in cash, and even of
Federal Reserve notes in gold. The Fed tried frantically to inflate
after the 1929 crash, including massive open market purchases
and heavy loans to banks. These attempts succeeded in driving
interest rates down, but they foundered on the rock of massive
distrust of the banks. Furthermore, bank fears of runs as well as
bankruptcies by their borrowers led them to pile up excess
reserves in a manner not seen before or since the 1930s. 
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Finally, the Roosevelt administration in 1933 took America
off the gold standard domestically, so that within the United
States the dollar was now fiat paper printed by the Federal
Reserve. The dollar was debased, its definition in terms of gold
being changed from 1/20 to 1/35 gold ounce. The dollar
remained on the gold standard internationally, with dollars
redeemable to foreign governments and central banks at the
newly debased weight. American citizens were forbidden to own
gold, and private citizens’ stocks of gold were confiscated by the
U.S. government under cover of the depression emergency. That
gold continues to lie buried at Fort Knox and in other deposito-
ries provided by the U.S. Treasury. 
Another fateful Roosevelt act of 1933 was to provide federal
guarantee of bank deposits through the Federal Deposit Insurance
Corporation. From that point on, bank runs, and bank fears
thereof, have virtually disappeared. Only a dubious hope of Fed
restraint now remains to check bank credit inflation. 
The Fed’s continuing inflation of the money supply in the
1930s only succeeded in inflating prices without getting the
United States out of the Great Depression. The reason for the
chronic depression was that, for the first time in American his-
tory, President Herbert Hoover, followed closely and on a larger
scale by Franklin Roosevelt, intervened massively in the depres-
sion process. Before 1929, every administration had allowed the
recession process to do its constructive and corrective work as
quickly as possible, so that recovery generally arrived in a year or
less. But now, Hoover and Roosevelt intervened heavily: to force
businesses to keep up wage rates; to lend enormous amounts of
federal money to try to keep unsound businesses afloat; to pro-
vide unemployment relief; to expand public works; to inflate
money and credit; to support farm prices; and to engage in fed-
eral deficits. This massive government intervention prolonged the
recession indefinitely, changing what would have been a short,
swift recession into a chronic debilitating depression. 
Franklin Roosevelt not only brought us a chronic and massive
depression; he also managed to usher in the inflationary boom of
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1933–37 
within
a depression. This first inflationary depression in
history was the forerunner of the inflationary recessions (or
“stagflations”) endemic to the post-World War II period. Worried
about excess reserves piling up in the banks, the Fed suddenly
doubled reserve requirements in 1937, precipitating the reces-
sion-within-a-depression of 1937–38. 
Meanwhile, since only the United States remained on even a