Senator Carter Glass, Former Sec. of the Treasury, moving in the US Senate, Feb 17, 1932, the Glass-Steagall bill, an emergency act to protect the American gold reserve said, and I quote: The Federal Reserve System has been threatened with raids upon its gold supply by foreign nations, notably by France. There has been that threatening situation, the conjecture being...that THAT country wanted to affect our situation with respect to reparations and to her indebtedness to the US... The officials of the Bank of France have simply outwitted the officials of the Federal Reserve System of this county.CLOSE QUOTE
What with the:
A)American moratorium for a yr on war debt payments owing to US Treasury,
B)Relending of $700-800 millions of SHORT-term American credit in Germany to save her from wretched default,
C)A cash loan at the same time to the Reichsbank,
D)a CASH loan to the Bank of England to save the gold honor of the pound sterling
E)IMMEDIATELY another to the British TREASURY for the same purpose--
with all of this, we put no less than a billion and a half of American gold credit into Europe during the summer of '31, thinking, thereby (our actions) to avert the disaster of a total financial collapse.
The specific intent of our loans to the BoE and to the British Treas. was to keep the mighty pound sterling on a gold basis...If the BoE should be unable to pay its notes in gold ON DEMAND, that would mean repudiation, inflation, a depreciate Brit currency no longer worth its face in gold....Thre was no stopping the run on the BoE. Its borrowing in New York was too desperate and only increased the alarm.
This American gold credit was like bundles of currency piled in the window of a doomed bank, to (visually) put the depositors off when it had the exact opposite effect--nobody believed it would be enough.
After the BoE had borrowed all the American gold credit it could get on its own signature, and 2 weeks after the Brit Treas. had itself borrowed $200 mil more in NY to save the pound, the BoE suspended gold payments. The gold value of the pound immediately declined one quarter and Gr. Brit. was on a paper money basis.
So now, with GBrit off the gold basis, German financially frozen (events adequately described by both Alex and Becker heretofore), Austria and Hungary bankrupt, and all war debt payments owing by Europe to the United States Treasury suspended for a year the situation simply (boiled down)to this:
<What Europe owed us she could either pay in depreciated fiat or need not pay at all. WHEREAS, ANYTHING we owed or might owe to Europe was payable in gold on demand, because we were still on a gold basis.
Here's an allegory to help clear all this up:
Suppose you have at your bank, 2 separate accounts.
One account, you owe the bank $1 Mil on a long-term promissory note, which you have undertaken to pay off gradually, with interest.
The second account is current. You have there, a credit, say of $50,000 dollars. This is your daily transaction/business account.
Now, supposing you go to your banker and say:
"I cannot pay the interest on that $1 MIL note. I am bankrupt if you make me pay." You throw yourself on the mercy of the bank. The bank can A) demand payment and sell you out, B)foreclose on your business, & take all your property. But the banker, being kindly and wise says:
"All right. These are hard times and you're not the only one having trouble. Let the interest payments go for one year, and let the note run."
Relieved, you say, "Wow, thanks, Mr. Banker." And then you have a sickening realization. You quickly add: But how about my current account in which I have $50K credit? What are you going to do with that?"
The kindly banker replies, "But of course!!! You MUST go on doing business. We will continue to treat THAT account as if you were solvent. Go on drawing your checks against it as before, and by all means, please keep your business going. All of this will work out in time. Don't you worry." Relieved, you leave and go home.
Tomorrow morning, upon arising and thinking about this all night, you march into your bank and say: "Mr. Banker, I'm afraid of your institution! I've been thinking about this all last night and this banks, it's just too loose with its credit. I'm afraid my current account is NOT safe here. Therefore, I am closing it out. Here is my check for $50,000 and I want it in gold, please."
As strange as the above set of facts is, having made this arrangement with you, the bank is obliged to pay you your credit balance of $50K, and pay it in gold, or end up confessing itself insolvent.
Between Europe and the US, this same preposterous situation exists (remember this article was written in '32). The facts however maybe somewhat obscured by its own magnitude (billions instead of thousands) and by the high language (spin) surrounding it.
Owing this country more than $10 Bil, less than half of it war debts,
the rest of it representing private and public borrowing from Am. investors and Am. banks--Europe nevertheless had very large credit balances here, payable on demand.
These balances had originated in various ways, most notably, the American banks had been putting deposits in Euro banks, especially Germany b/c the rate of interest was high. At the same time, Euro banks had been putting deposits in Am. banks for another, opposite reason. They wanted safety.
Euro exporters had been in the habit of leaving their profits on deposit in Am. banks, thinking the money was safer here than in Euro, esp the German exporters, who were quite right. Private Euro capitalists had been sending money to New York to be employed in short-term paper which they could sell at a moment's notice.
Some of the Euro cr. balances were simply the "untouched proceeds" of recent American loans.
(Continued next note:) |
