Money in America, Part Five

 

Previously, we learned that the early 20th Century was a whole new ball game. A new and improved banking reform demanded by the people, with help, led to the Federal Reserve System. The “war to end war” commenced and ended, more or less …

 

Although peace broke out on November 11,1918 an Allied naval blockage hemmed in Germany for eight more months. Some 250,000 civilians, estimated, died in this period of disease and starvation. The necessity of importing food and the refusal of a loan from the United States meant Germany’s gold reserves diminished.

The signing of the Treaty of Versailles on June 28, 1919 ended the blockade. Germany had neither representation nor an invitation to the treaty completion. German reparations were specified at 132 billion marks (US$31.5 billion) and loss of territory, as well as limitations of their military. (The final reparation payment occurred in October, 2010.)

A few movers and shakers sat on the carpet playing their own version of ‘Risk’ and redrawing the world map to their liking. Meanwhile …

The Return of the Gold Standard

Great Britain was one of the victors of World War One – at a cost. They, and others, had monetized the debts for the war effort, double, triple or quadruple their money supply. Germany had extended to eight times pre-war! Only the United States had remained on the classic gold-coin standard, a dollar equal to one-twentieth of an ounce.

By February, 1920, the fiat pound sterling was worth one-third less than the pre-war value. Other countries were worse; the German mark had depreciated by 96 percent.

The British had a plan, floating exchange rates had to go: only a return to the pre-war value of the pound sterling would save the day.

Only one thing was wrong with this idea: an overvalued pound meant their mercantilist export market would suffer. A further complication to the alternate of a realistic value was the trade unionist movement – a deflationary policy was unthinkable. Britain would continue a monetary expansion – inflation – from the new standard and easy credit would solve all problems.

A policy was formulated, provisional on the U.S. maintaining an inflational policy to prevent adverse flow of British gold out of the country.

Britain hedged with the Gold and Silver Embargo Act of 1920, vowing to return to a gold standard by 1925. Both countries had seen an immediate post-war boom – and a ‘correction’ in 1920-21.

 

That Unknown ‘Correction’

Not many people apparently know of the U.S. Recession of 1920-21.

The Federal Reserve had been compliant in easing policy to support World War One. According to New York Federal Reserve Governor Benjamin Strong, the Fed was Treasury’s agent and servant. Independence … Anyway, by 1919, U.S. Inflation had risen over 27%. The Wilson administration slashed federal spending severely and by November, the federal budget was balanced. In concert, the Fed Reserve raised interest rates, sequentially to a final 7%.

This one-two punch to the economy resulted in employment and productivity declining and finally falling remarkably in June, 1920. Farmers, misled by high food prices in wartime had expanded land holdings based on cheap credit. The 7% final Fed’s rate was a killer. Wholesale prices overall declined by half. Bankruptcies on the land and general contagion bottomed the economy. Briefly – the economy immediately bounced upward (not a dead cat bounce) and the short-lived hardship was forgotten in the bling of the Roaring 20s.

Most everyone knew Great Britain intended to restore the gold standard. Speculators took advantage and a return to the prewar value of the pound stering was effectively priced in – objectively, it was overvalued.

Warren G. Harding had assumed the presidency in 1921 and further assisted the recovery by cutting government spending even more.

Incidentally, there was another Harding during this era: William P.G. Harding, second president of the Federal Reserve, 1916-1922. then president of the Federal Reserve Bank of Boston, 1923 to 1930, when he died. Connecting more dots … Carter Glass was Secretary of the Treasury from late 1918 to early 1920.

Great Britain’s post war recovery was not quite reflected in the unemployment rate, which varied between 9 and 15 percent even into 1924. The government countered this with a new unemployment program. Most of the problem involved the export industries. J.M. Keynes offered some opinions and criticism during the period. (By the way, he insisted his name was pronounced “Canes” or “Cains.” Or maybe it was “Cain’s descendant … )

“When stability of the internal price level and stability of the external exchanges are incompatible, the former is generally preferable.

There is no escape from a ‘managed’ currency, whether we wish it or not. In truth, the gold standard is already a barbaric relic.”

A Tract on Monetary Reform – 1924

Keynes advocated semi-monopolistic structures operating under government approval and with government supervision. He also favored eugenics. And he appeared to believe that individual or private business self-interest should be replaced by the “intelligent judgement” of government. For the common good.

Keynes surely appreciated the U.S. Federal Reserve System. Before 1914, government issued gold certificates were 100% redeemable. FRNs afterward were only 40% backed by gold. Aha, thus the money supply increased during the war years a great deal.

Benjamin Strong had gone to England in 1916 to set up monetary coordination between the two countries. He met Montague Norman, then deputy governor of the Bank of England and a personal and professional friendship began that ended only in 1928 when Strong died.

A dozen years working together can accomplish a lot. The goal was to return to a gold standard with the pound sterling at $4.86, its pre-war value. To accomplish this, the U.S. would maintain inflationary policy to keep gold from leaving England. Strong and his New York Fed purchased U.S. government securities from November 1921 to June 1922 and the money supply grew. To enhance this policy, Norman also advocated lowering Fed interest rates.

Strong was ill through much of 1923 and the Federal Reserve Board sold off much of the government securities. On his return, Strong intervened again and again the money supply increased.

Secretary of the Treasury Andrew Mellon received the rationale that keeping American prices higher than British would establish the pound around par and facilitate the return to the gold standard. By early 1925, a line of credit to Britain of $200 million in gold was necessary to keep the scheme alive. The House of Morgan assisted with a $100 million line of credit. No one in authority disagreed with these maneuvers, neither Mellon nor the Federal Reserve Board. Higher prices in America supported the pound sterling.

Even so, Norman came to America for a serious talk with Strong and “Jack” Morgan, seeking reassurance about returning to gold.

Harding had died in office in August, 1923 and Vice President “Silent Cal” Coolidge had become the new president. Business as usual. Except …

… there was this: Weimar Germany and war reparations. The German war machine was powered by the printing press – the national debt went from 5 billion marks to 156 billion. Their wartime government had imposed price controls but the flood of money printing overwhelmed such efforts.

The first reparations payment, at 2 billions of gold marks at the 1913 value came due in June, 1921. A combination of gold, currency, coal, iron and wood sufficed to keep the wolves from the door.

But prices had caught up well and truly with the supply of money and in 1922, it appeared a default on the next installment was inevitable.

“Jack” Morgan organized an international reparations conference; to no one’s surprise, no easy answer was available. The German cost of living index that June was 41 but had risen to 685 by December.

France had its fifty-year grudge for the defeat of 1871 and with Belgium, invaded the productive Ruhr industrial area in January, 1923.. The Weimar government ordered a general strike. To pay the idled workers and support families who’d lost their homes during the 18-month occupation, there was only one quick answer: print more money!

Imagine at a given moment that a person orders one cup of coffee at a cost of 5,000 marks – and minutes later, a second cup had risen to 9,000.

Overall the mark had gone from 4.20 to the U.S. Dollar in 1914 and by November, 1923, one dollar fetched 4.2 trillion with a T marks.

Klaus Mann, a writer of the day: “What breathtaking fun it is to watch the world coming off the rails … the complete depreciation of the only truly credible value in this godforsaken era: that of money.”

His brother, Golo Mann, a historian: “What was there to trust, who could you rely on if such were even possible?”

A critic of the government at the time was interviewed and asserted that the high cost of living was the biggest problem Germany faced. “We intend to make life cheaper,” he declared. His name was Adolf Hitler.

The Gold-Exchange Standard!

At last! Years in the making, the British Cabinet announced the return to gold on March 25, 1925, with conditions: a $300 million credit line from the U.S., no Bank of England change of the bank rate, and the new pretend standard would be based on gold bullion and not gold coin redemption. Also, the Chancellor of the Exchequer would discourage the domestic use of gold coin. If this didn’t work, there was always the legislative hammer.

By comparison, the classical gold standard empowering redemption in gold coin restrained issue of the currency and government excess. The bullion standard thus disempowered ordinary people but kept exchange for international trade.

The Gold Standard Act of 1925 specified a minimum bullion bar of 400 gold troy ounces. Montague Norman explained it this way:

“ … confidence in the value of money does not depend upon the existence of gold coin … in times of abundance hoarding [of gold coin] is bad because it weakens the command of the Central Bank over the monetary circulation and hence over the purchasing power of the monetary unit … the use of monetary gold can be limited, in case of need, to the settlement of international balances.”

In point of fact, however, Britain would be on gold and European countries effective went on a pound sterling basis. Effectively, European countries would redeem their masses of international trade currency for pounds as reserves.

The beauty of this was that Britain could issue more pounds for settlement which was a stealth opportunity for European economies to inflate their own money supply due to greater pound reserves. Such a deal!

America was the exception in this scheme but the Strong-Norman connection ensured U.S. Dollar inflation and no gold would flee jolly old England.

Some European countries fared better than others, initially. France, for example, had experienced significant inflation to the rate of 240 francs to the pound. Under the British plan, France returned to gold at 124 francs/pound. Germany, Austria, and other countries that experienced hyperinflation returned to the pretend gold standard at a more pragmatic rate.

Immediate post-war prices were high due to the armies of fiat dollars sloshing around the world. Those early masters of the universe feared ‘deflation’ so much that the falling prices of 1920-21 convinced them without much effort that an inflationary policy was the best response.

Some 39 countries were embroiled in the gold-exchange standard by 1926, and 43 by 1928.

Governor of the Bank of France, Emile Moreau had this to say at the time:

“England … putting Europe under a veritable financial domination … remedies prescribed always involve the installation in the central bank of a foreign supervisor who is British or designated by the Bank of England … guarantee against possible failure they are careful to secure the cooperation of the Federal Reserve Bank of New York. Moreover, they pass on to America the task of making some of the foreign loans if they seem too heavy, always retaining the political advantages of these operations.”

In the U.S., the money supply from 1921 to 1929 increased 61 percent. This certainly helped Great Britain but not enough. The self-serving policy of a strong pound sterling in reality shot themselves in the foot and fettered their export market. Also, militant trade unions maintaining a high wage rate also exacerbated high unemployment. During the whole of the Roaring Twenties, Britain’s unemployment rate remained around recession grade and was eleven percent by 1929.

Meanwhile, American prices had started to decline in the middle of the decade, and this threatened the balance again Britain. Not to be undone, the dynamic duo, Strong and Norman called a secret conference in 1927. Britain had already suggested to France that perhaps the pound sterling might have to be devalued. The duo met with counterparts from the French and German central banks. Even the Federal Reserve Board in Washington know nothing of this.

Strong promised more inflation, a boost to the stock market, and a further purchase of $60 million sterling to backstop that British pound. He also made significant purchases of U.S. Securities.

An article in The Banker, a London journal, praised Strong as “a friend of England in her greatest need.

Strong died in October, 1928, from a lengthy illness, and never saw the fruits of his labors.

The stock market certainly benefitted by Strong’s attentions, doubling in 1929. Before President Coolidge vacated the White House in March, 1929 he praised the American economy as “absolutely sound” and said stocks were cheap.

Black Thursday and Beyond

Belatedly, the Federal Reserve tried weakly to stuff the easy money genie back in the bottle. But the trends were already in place – July, 1927 unemployment, 3.3% and Dow Jones Industrial Average, 168. Early October, 1929, unemployment around 5%, DJIA, 343.

Coolidge had said back in 1927, “I do not choose to run for president in 1928.” He already had five years in and believed that too often, the man became the office. Harding, before him, had offered Herbert Hoover a cabinet post. Hoover chose Commerce, which was a minor position – and he aimed to change that. Harding died in office and VP Coolidge rose to the White House and though he kept Hoover in place, he privately referred to him as ‘Wonder Boy’.

The 1928 three-way early race for Republican nominee led to Hoover being nominated on the first ballot. The election went resoundingly to him with Democrat Al Smith winning but six states.

Hoover courted the press in his first seven months but after Black Thursday, his availability was diminished. Having already made a name for himself as a reformer and regulator of early radio, he made more plans for reform. He disliked laissez faire ideas and advocated public-private cooperation, expanded the civil service and unleashed the Justice Department and Internal Revenue Service on tax evaders like Al Capone.

Far from the “do-nothing presidency” faux reputation believed by some, he was a very busy administrator with hands in every pot, domestic and foreign.

Meanwhile in the last week of October, the Federal Reserve was still assisting Montague Norman; doubling the hoard of government securities and adding $300 million bank reserves increased liquidity, fuel to the fire on Wall St. Speculators on margin included more people than you can imagine: elevator operators, shoe shine boys, housewives, farmers, college students; it seemed every American was acting on the latest hot stock tip.

Volatility had increased with large swings both ways. DJIA peaked at 381.17 on September 3, the culmination of a six-year run.

On Thursday, October 24, the market fell by 11% after the opening bell.

Panic! The House of Morgan, Chase Bank, and the National Bank of New York met to agree on emergency funding. Richard Whitney, vice president of the New York Stock Exchange was chosen as their facilitator. He placed massive orders for blue chip stocks, U.S.Steel and others. By the day’s close, the DJIA was only down 6.38 and everyone breathed a sigh of relief until …

“Black Monday”, October 28, the market opened to massive selling and lost 13%. “Black Tuesday” followed with another drop of 12%. Sixteen million shares were traded that day, setting a record that lasted nearly 40 years.

One of the triggers for the instability was the anticipation, or dread, of the passage of Hoover’s Smoot-Hawley tariff.

Despite more interventions, the market continued to slide until November 13, 1929, with the Dow closing at 198.60. Then a bear market rally (dead cat bounce) took the peak to 294.07 on April 17, 1930. From there, the market declined to July 1932 when the Dow closed at 41.22. Only in November, 1954 did the Dow see a figure reminiscent of the 1929 peak.

The so-called ‘do nothing’ president got his tariff, part of an overall plan of price and wage manipulation, the Glass-Steagall Act, the National Credit Corporation, forced migration of Mexicans back to Mexico, the largest peacetime tax increase in history, the Federal Home Loan Bank Act, the Emergency Relief and Construction Act, the Reconstruction Finance Corporation – and more. Truly, these were the seeds of the New Deal.

Hoover’s policies claimed he did too little, too late, nothing worked – and then there was the debacle of the Bonus Army.

He accepted a nomination for re-election in 1932, likely because no other of the party wanted the job. Franklin Delano Roosevelt called Hoover “jelly” and people not only threw rotten eggs and fruit at his appearance but several assassination attempts were thwarted. By the election, Hoover won only as many states as Al Smith had in the previous election. Roosevelt captured the presidency, the house and the senate, and increased Democratic representation in many states as well.

 

Our next episode will begin with the real default of 1933, more interventions, the recession within the Depression, and the real end of the Great Depression.



Money in America, Part Four

 

Previously,we saw the holy Grail of banking reform was actually a hidden agenda of politics, banking, and big business.The seeds were planted in Indianapolis and now, the game is surely afoot.

 

The National Monetary Commission in 1908

Informing the public via a predetermined public relation campaign, with surveys and solutions of a predetermined outcome worked well. Keeping the scheme going for a decade took time, effort, and investment.

With the passage of the Aldrich-Vreeland Act in 1908 contained two important but little-known provisions: the emergency currency potential and the establishment of the NMC. The former provision would have expired in 1914 but curiously, was used for the one and only time that year.

However, Aldrich had packed his commission in June of 1908 with senators and representatives but, more significantly, powerful banking leaders.

This junket headed for Europe in the fall, studying and gather information with heads of private European banks and central banks. They concluded European banking was more efficient and the European currencies had more gravitas compared to the dollar. By December,, back in the U.S., Aldrich added Paul Warburg and others to the inner circle. Charles A. Conant was chosen for ‘research and public relations’. Warburg consulted with many academic economists at top-tier universities.

The American Bankers Association recommended a U.S. Central bank along the lines of the German Reichsbank. Hesitant heads of national banks were assured the business model would not be adversely affected by the origin of a U.S. Central bank.

Regional banking districts in the country, under control of a central board, was a recommentation in November, 1909. Throughout this whole era, the Morgan and Rockefeller banking interests had agreed to agree on a central bank. Yes.

Incidentally, William Howard Taft was elected president, a friend of Aldrich and others since 1900. On September 14, 1909, President Taft spoke in Boston and gave a big boost to the notion of a central bank. Wow. And a week later, The Wall Street Journal gave space to various op-eds, unsigned, praising that great idea of ‘elastic currency’ and other benefits. Actually, these letters were crafted by Charles Conant. He also recommended the regulation of interest rates by the central bank as a useful tool. The Washington Bureau of the Associate Press was also co-opted.

Another significant speech by Paul Warburg in New York on March 23, 1910 impressed the Merchants’ Association of New York. They had printed 30,000 copies of the transcript and distributed these far and wide.

For public consumption, a monetary conference in New York in November 1910 presented a specific recommendations for a central bank and an appeal for all part of the country to support the Bill that Alrich would soon craft.
The Private Railroad Car

G. Edward Griffin [1] sets the scene at a New Jersey railroad station like the opening of a thriller movie: it’s 10 p.m. on November 22, 1910 as a handful of important men board a private car. Unlike the numbered cars of the rest of this train, this one has no number, only a small plaque with the inscription “Aldrich”.

The senator greets his guests by first name only – and this rule is adhered throughout the trip and the week at Jekyll Island, Georgia. The private club on the island is part-owned by J.P. Morgan.

The personnel lineup:

  • Senator Nelson P.Aldrich
  • Paul Warburg, various banking connections
  • Abraham Andrew, Assistant Secretary of the U.S. Treasury
  • Henry P. Davison, senior partner, J.P. Morgan Co.
  • Frank A. Vanderlip, president, National City Bank of New York
  • Charles D. Norton, president, First National Bank of New York
  • Benjamin Strong, head of Bankers Trust Co.

(The last two are questionable due to differing accounts in the ‘historical record’ but both were in the Morgan camp. Aldrich, incidentally, was a financial partner of J.P. Morgan, and also father-in-law of John D. Rockefeller, Jr.)

If Strong wasn’t there, he surely knew about it – we will hear more of him.

The public did indeed hear something of this secret meeting, but it was in 1935. The Saturday Evening Post carried an article by Vanderlip and the key takeaway was:

If it were to be exposed publicly that our particular group had got together and written a banking bill, that bill would have had no chance whatever of passage by Congress.

Warburg led the argument for a regional structure, presumably cognizant of public mistrust of too much power located in one area. Aldrich wanted an overt central bank with no political meddling. The compromise that was reached became the Aldrich Plan, introduced in Congress in 1912 and 1913.

(On November 5–6, 2010, Ben Bernanke stayed on Jekyll Island to commemorate the 100-year anniversary of the original meeting.)

Alas, the Democrats won the 1912 elections resoundingly. The Republican Aldrich Plan seemed to fall by the wayside.

Shiny new President Woodrow summoned a special session of Congress in April 1913. To seal the importance, he appeared in person, the first president since John Adams to do so. Wilson’s address outlined various approaches to economic policies, banking and currency reform, tariffs, and the income tax.

The 16th Amendment had been ratified on February 3, 1913. Wilson needed that tax to support lower tariffs. A little bit of patronage pressure, and the Revenue Act of 1913 was passed by the House on May 8, 1913; finally it went through the Senate on September 9, 1913.

Meanwhile, the Aldrich Plan was not dead, though that hated Republican name vanished. Representative Carter Glass, chairman of the House Banking and Currency Committee, and Senator Robert Owen, chairman of the Senate’s did a little tinkering here and there. Wilson mandated a central Federal reserve board be appointed by the president – with the consent of the Senate.

There was one thorn in Wilson’s side, his Secretary of State, William Jennings Bryan. The “Cross of Gold” person was still a power in the Democratic Party. The sop to Bryan was that Federal Reserve currency would be a liability of the government – and also, provision for federal loans to farmers.

All this horse trading took time, though, and Wilson had other fish to fry during 1913.

The 17th Amendment (Direct Election of U.S. Senators), ratified and declared, became part of the Constitution on May 31, 1913..

Finally, months in the making, what started as the Glass-Owen bill became the Federal Reserve Act of 1913. It passed the House on December 13 and the Senate, after an all nighter, on December 23. Wilson signed it that morning.

A great year for the Populists, remember they wanted:

  • a graduated income tax, direct election of senators

and before long, they got women’s suffrage (19th Amendment), the eight-hour work day, and restricted immigration.
The Federal Reserve System, 1914 and Beyond

Aldrich had convened the Jekyll Island cabal but Warburg was the only expert on the European central bank model. Galbraith asserted that “Warburg has, with some justice, been called the father of the system.”

In the end, everybody won something. Aldrich’s ‘decentralization’ became the regional banks and avoidance of the term ‘bank’ itself inevitably led to the Federal Reserve System nomenclature. And having the Federal Reserve Board in Washington, D.C. implied ‘government’. Smoke & mirrors.

A decade later, the little Orphan Annie comic strip appeared. Did anyone recognize Daddy Warbucks, the self-made billionaire doing good works with his wealth as an avatar of Paul Warburg? Anyway …

Back in the day, the public story was that the Federal Reserve System would stabilize the economy. We’ll see how that worked out.

The real power of the System was – and is – the Federal Reserve Bank of New York. And who was offered the post of governor there? Benjamin Strong. Whether or not he was at Jekyll Island, there is no doubt he had influence, having been the personal auditor for J. P. Morgan, Sr. during the Panic of 1907, and also a long-time friend of Henry Davidson.

Paul Warburg became one of the seven members of the Federal Reserve Board in Washington.

History has a droll way of throwing some unexpected crises – who would have imagined the assassination of an obscure archduke would lead to a worldwide conflagration? Well, that’s the myth, anyhow. That the British mercantilist system might have been under threat from a foreign export power is unthinkiable as a cause for war. Isn’t it?

The outbreak of World War One had one immediate financial side effect: the New York Stock Market closed. Public anxiety was dispelled by the Secretary of the Treasury, using that dormant part of the Aldrich-Vreeland Act. Emergency currency was available, by October 23, 1914, $368,616,990.

In November, the 12 regional banks of the Federal Reserve System had opened and the emergency currency was withdrawn. The FRS was open for business!

England and various European countries had been preparing for war for years. Armies were trained, alliances arranged. But when war occurred, England found itself fiscally bereft. John Pierpoint “Jack” Morgan, Jr. ruled the House of Morgan, his father having died in March, 1913. Jack became the sales representative of British bonds and also the procurement officer for their needed war material. Nice profit on money going and coming!

In 1915, President Wilson removed the ban on private bank lending to foreign allies. The House of Morgan immediately loaned $12,000,000 to Russia and $50,000,000 to France. Meanwhile, the first $12,000,000 British contract arrived, the first of many. The final total would be $3,000,000,000.

Author John Moody, writing in 1919 summed it up:

Not only did Britain and France pay for their supplies with money furnished by Wall Street, but they made their purchases through the same medium … Inevitably the House of Morgan was selected for this important task. Thus the war had given Wall Street an entirely new role. Hitherto it had been exclusively the headquarters of finance; now it became the greatest industrial mart the world had ever known. In addition to selling stock and bonds, financing railroads, and performing other tasks of a great banking centre, Wall Street began to deal in shells, cannon, submarines, blankets, clothing, shoes, canned meats, wheat, and the thousands of other articles needed for the prosecution of a great war.

Large profits and small. A commission for selling $2 billion of Allied stock holdings to buy munitions. The sale of 4,400,000 rifles for $194,000,000. The House of Morgan was both buyer and seller, and no surprise that many of the purchase contracts went to businesses where Morgan was a shareholder.

A reputation as war profiteer does attract some resentment. On July 3, 1915 an intruder stole into Jack’s Long Island mansion and shot him twice in the groin. Jack, however, survived.

Great Britain, having burned through the Australian gold, from the 19th century gold rush there, found itself short of money to fund a war. It did the thing that is obvious to every politician: achieve fiat money by golng off the gold standard. Every other country in Europe did also. America maintained a gold standard but not redemption for foreign held dollars.

By the end of the war, every country had inflated its money supply; Germany went eight times the pre-war amount. This explains much of things to come.

 

The Cunard Lines had turned over their record-breaking Lusitania over to the Admiralty. The speedy ocean lined proved inadvisable to refit into an auxiliary cruiser due to operational expense (910 tons of coal a day!), so it was ordered to continue passenger (and mail) service. On April, 22 1915, the German embassy ordered advertisements in 50 U.S. newspapers, advising prospective passengers that an Atlantic crossing went through a war zone, the seas around the British Isles.. Many of these advertisements were never published …

On May 1, 1915, the Lusitania set out on its final voyage to Liverpool, England. Little did the passengers know there was a hidden cargo of munitions and other material for the British war effort.

At this point in time, the German navy followed the code of limited submarine warfare. Neutral vessels were off limits.

At 1420 hours on May 6, the commander of the U-20, Walther Schwieger, fires one torpedo at a target:

Torpedo hits starboard side right behind the bridge. An unusually heavy detonation takes place with a very strong explosive cloud. The explosion of the torpedo must have been followed by a second one [boiler or coal or powder?]… The ship stops immediately and heels over to starboard very quickly, immersing simultaneously at the bow… the name Lusitania becomes visible in golden letters.

U20 log

The Lusitania sank in only 18 minutes. Few lifeboats were properly launched due to the extreme starboard list.

Of 1,959 passengers and crew, 1,195 perish, including 128 Americans.

Several official inquiries were convened that created enough obfuscation to keep tinfoil hat manufacturers busy to this very day. Prevented testimony, state secrets, crew statements in identical handwriting with similar phrasing; definitely one, no, two, or was it three torpedos. Some closed hearings, other open with no access to some evidence. Two sets of Admiralty papers, depending on the type of hearing. Perjury.

At any rate, Wilson’s immediate response was three diplomatic notes to Germany: strong, stronger, ultimatum. After the second, Secretary of State William Jennings Bryan resigned in protest.

Nonetheless, the American public had been fired up, just not enough for war.

The British were already hinting that, should they lose the war, they would never be able to repay their debt to America. In early 1916, President Wilson sent his personal adviser, “Colonel” Edward Mandell House to London. And why not – House was the shadow power that had arranged Wilson’s nomination for president. House even had two rooms at the White House. And while Wilson sought re-election on the slogan “he kept American out of war”, his adviser consulted with British foreign office officials, notably Sir Edward Grey. Secretary of State William Jennings Bryan had not be told of this unofficial arrangement, nonetheless, he was not stupid.

Mary Baird Bryan, co-author, The Memoris of William Jennings Bryan:

While Secretary Bryan was bearing the heavy responsibility of the Department of State, there arose the curious conditions surrounding Mr. E.M.House’s unofficial connection with the President and his voyages abroad on affairs of State, which were not communicated to Secretary Bryan … The President was unofficially dealing with foreign powers.

U.S. Ambassador Walter Hines Page:

House arrived … [with] the idea of American intervention … a minimum programme of peace – the least the Allies would accept, which, he assumed, would be unacceptable to the Germans …we should plunge into the War, not on the merits of the cause, but by a carefully sprung trick.

(memorandum, February 9, 1916)

On March 9, 1916, President Wilson sanctioned the secret agreement with England and France for the United States of intervene on behalf of the Allies. It seems Wilson and House believed the worthy end, of world peace and a world government, lay through the means of war. They had help: Assistant Secretary of the Navy Roosevelt (the Franklin Delano) urged arming merchant ships in violation of neutrality.

And time passed with America on the sidelines and the Allies accusing Wilson of dragging his feet. Maybe they didn’t understand the U.S. election cycle. The attitude of the British public toward America was “too proud or too scared” and they termed unexploded shells on the front line as “wilsons”.

Both British and German propaganda served to inflame the American public over the next months.

Wilson was narrowly re-elected in 1916. A tipping point happened when Germany attempted to enlist Mexico as an ally, following their new policy. Of unrestricted submaine warfare. This threated American commercial shipping.

On April 2, 1917 in his message to Congress, Wilson spoke of armed neutrality no longer working, “enemies against us at our very doors … unsuspecting communities … and offices of government with spies … criminal intrigues” … and a warning: disloyalty “will be dealt with a firm hand of repression.” And finally, the world must again be safe for democracy.

With fifty representatives and six senators opposted, a declaration of war was passed by Congress on April 4, 1917 and signed by Wilson the April 6.

Behind the scenes during this period, the Federal Reserve went into full operation in 1915. They played a significant role in financial Allied and U.S. War efforts (with some help.)

Wilson furthered Democratic values with the agricultural Smith-Lever Act of 1914 and the Federal Farm Loan Act of 1916. He also thwarted a national transportation shutdown by guiding the Adamson Act through Congress which instituted the eight-hour day.

Then there was the Espionage Act of 1917 and the Sedition Act of 1918. A firm hand, yes. Anarchists, Wobblies, communists, anti-war activists, and even newspaper editors were grist for the DoJ mill. Deportation of recent immigrants who opposed the war came with the Immigration Act of 1918. Then there was Wilson’s Committee of Public information, the first official propaganda office.

Wilson’s League of Nations concept came via a speech on January 8, 1918, his Fourteen Points.

 

Liberty Bonds

We have a war! And on April 24, the 1917 Emergency Loan Act initiated the first of four bond issues. Buy Liberty Bonds! It’s a patriotic duty. A limit of $5 billion was set; $2 billion were sold.

The second, third and forth issues appeared in, respectively, October 1,1917, April 5, 1918, and September 28, 1918.

A poor response to the bonds was met by the Treasury with a sales campaign promoted by Hollywood stars, Boy Scouts, and even a special Army Air Corps elite group that travelled the country. Buy a bond and get to ride in a JN-4 airplane!

Incidentally, that 1917 act is the tool by which U.S. Treasury bonds are issued to this very day.

We will re-visit the fourth Liberty Bond issue in fifteen years.

The active “war to end war” ended on November 11, 1918 with a cease fire. The Treaty of Versailles was signed on June 28, 1919.

 

In our next exciting episode, we will see the Federal Reserve assistance to restoring the gold standard for the world. Only it wasn’t …