6. Internationalizing the Cartel

The fortunes of the House of Morgan had been declining since the turn of the century, and so the Morgans saw a glorious opportunity open to them upon the outbreak of the war in Europe. The Morgans had close and long-time financial connections with England. In particular, Edward Grenfell (later Lord St. Just), senior partner of Morgan, Grenfell & Co., the London branch of J.P. Morgan & Co., was also a long-time director of the Bank of England. Grenfell had long been the main informal link between the Bank of England and the New York financial community, and the relationship was formalized when the Morgan Bank became the fiscal agent of the Bank of England.[45] Led by partner Henry P. Davison at the end of 1914, the Morgans got themselves named virtually sole purchasing agent in the United States for British and French war goods. To pay for this immense export of arms and other materiel, the British and French were obliged to float immense loans in the United States, and the House of Morgan became the sole underwriter for these Allied bonds in the United States. Not only did Morgan find these monopolies highly profitable, but it prospered relative to its great rival Kuhn, Loeb & Co.—which, being German and connected with German banking and finance, was excluded from Allied war operations. As the Morgans and the bond market geared up to finance massive munitions and other exports to the Allies, Davison’s old friend and colleague Benjamin Strong stood ready to inflate money and credit to finance these foreign loans.[46] The Wilson administration and the Federal Reserve Board were prepared to do likewise.[47]

Benjamin Strong had scarcely been appointed when he began planning for an international cartel, a regime of “international cooperation” between the leading central banks of the world. In practice, such high-sounding terms could mean only cooperation for world monetary expansion. The classical gold standard, which basically prevailed before World War I, placed a firm restraint on the propensity of national central banks to inflate: The expansion of one country’s currency would raise nominal income and prices in that country, cause a deficit in its balance of payments and an outflow of gold, thereby causing a check on inflation and perhaps a compulsion on the central bank to deflate back to its previous position. International central bank “cooperation” (or cartelization) then and now means the establishment of formal and informal mechanisms to prevent pressures for redemption and contraction on an inflating nation’s currency. If this were not the meaning, there would be no need for international cooperation or indeed for central banking at all, since all any individual bank need do to keep itself afloat is to keep its rate of inflating to a minimum.

In the latter part of 1915, Benjamin Strong worked on international central bank collaboration, and in February 1916, he sailed to Europe to launch the first step: the establishment of the banks of England and France as foreign agents or correspondents for the New York Fed. Strong had long admired the central banking record of the Bank of England, and close collaboration with that leading central bank was to be the keystone of the new regime of inter-central bank cartelization. In England in March, Strong worked out an agreement of close collaboration between the New York Fed and the Bank of England, with both banks maintaining an account with each other and the Bank of England purchasing sterling bills on account for the New York Bank. In his usual high-handed manner, Strong expressed his determination to go ahead with the agreement even if the other Reserve Banks objected or failed to go along. Finally, after some backing and filling, the Federal Reserve Board endorsed the scheme as well as the initiating of a similar agreement with the Bank of France.[48]

Strong made his agreement with the governor of the Bank of England, Lord Cunliffe, but his most fateful meeting in England was with the then assistant to the deputy governor, Montagu Norman. This meeting proved the beginning of the momentous Strong-Norman collaboration that highlighted the international financial world of the 1920s.[49]

Montagu Collet Norman was born to banking on both sides of his family. His father was a partner in the British banking house of Martin & Co. and was related to the great banking family of Barings. His uncle was indeed a partner of Baring Bros. Norman’s mother was the daughter of Mark W. Collet, a partner in the international banking firm of Brown Shipley & Co. Brown Shipley was the London branch of the great Wall Street banking firm of Brown Brothers. Grandfather Mark Collet, furthermore, had been governor of the Bank of England in the 1880s.

At the age of twenty-one, young Norman began his working life at the family bank of Martin & Co., and then at Brown Shipley. In 1895, he went to work at the New York office of Brown Brothers, where he stayed for three years, returning to London to become a partner of Brown Shipley in 1900.

Strong and Norman became close friends as well as collaborators almost immediately, writing a steady stream of correspondence, personal and financial, and visiting each other at length every year from 1919 until Strong’s death in 1928. They spent long vacations together, sometimes at Bar Harbor or Saratoga but more often in southern France.