The Great Contraction, 1929-1933 by Milton Friedman & Anna Jacobson Schwartz

The Great Contraction, 1929-1933 by Milton Friedman & Anna Jacobson Schwartz

Author:Milton Friedman & Anna Jacobson Schwartz [Friedman, Milton & Schwartz, Anna Jacobson]
Language: eng
Format: epub
ISBN: 9780691137940
Google: -lCArZfazBkC
Published: 2008-08-31T05:26:56+00:00


Britain’s Departure from Gold, September 1931

Britain’s departure from gold and the resulting gold outflow from the United States changed the focus of policy-making from the Open Market Policy Conference back to the New York Bank. New York had always had, and continued to have, primary responsibility for international monetary relations. The Bank of England, the Bank of France, and other central banks had always treated the New York Bank as their counterpart and had conducted negotiations and consultations with it. The Board had been kept informed, consulted in the process, and its approval obtained before final action, but it had never had a major voice in forming policy. The other Reserve Banks had for the most part simply been kept informed. That had been the practice while Strong was alive and had remained the practice. The most recent instance during the contraction had been the negotiations in the summer of 1931 in connection with loans to foreign banks.

New York had little doubt about what action to take. At its October 8 meeting, the board of directors voted to raise the discount rate from 1½ to 2 ½ per cent. The arguments given at the meeting were, first, the gold outflow itself, and second, “advices from France, where foreign fears concerning the dollar appear to have concentrated, which indicated that an increase in the rate would be interpreted there more favorably than otherwise.” Some fear was expressed that the rise in rates might have adverse domestic effects, particularly by interfering with Hoover’s efforts to organize a National Credit Corporation, but that fear was belittled. Harrison noted that any unfavorable effect on the bond market could be offset by security purchases, since the executive committee of the Open Market Policy Conference still had authority, under the recommendation of the August 11 meeting, to buy up to $120 million of government securities.115 The only discordant note was a cablegram from Burgess, who was in Europe on a mission for the Bank, recommending no action that would bring about higher money rates in the United States.116 The cablegram was read at the meeting, then disregarded. The Reserve Board promptly approved the rise in discount rates, several of its members having been strongly in favor of a rise ever since the beginning of the gold drain.117

A week later, Eugene Meyer attended the directors’ meeting at the New York Bank. Harrison proposed a further increase in the discount rate to 3½ per cent, giving as the technical reason the continued gold outflow. One director, Charles E. Mitchell, expressed serious doubts about the domestic effects. Meyer replied that “an advance in the rate was called for by every known rule, and that … foreigners would regard it as a lack of courage if the rate were not advanced.” He expressed the opinion that “the bond market was already adjusted to a higher level of interest rates, and therefore it would be but little affected.”118 A month later, Owen D. Young pressed the desirability of purchasing government securities to offset unfavorable domestic effects.



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