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G-20: Ghosts Of Conferences Past

Author: Amity Shlaes, Former Hayek Senior Fellow for Political Economy
March 23, 2009
Forbes Online

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The upcoming G-20 meeting is not the first conference held in London several months into a new U.S. administration in the midst of an international economic crisis. International powers also met there in the summer of 1933, not long after Franklin Roosevelt's inauguration. To review that London meeting reminds us just how badly an international conference can flop.

But to the story: The planning for that London conference was in motion well before Roosevelt was inaugurated, just as the current London Conference antedates the Obama presidency. In those days, presidents took office in March, and even in January interregnum days, diplomats were already laying out agendas.

Then as now, repairing a broken world was the overall goal. There was a sense that the economic troubles of industrial nations could only be resolved by building new architecture--and that, too, only by delicate, self-sacrificing cooperation. In Britain, after all, the depression had started earlier; Ramsay MacDonald was presiding over a national government of the two big parties. The German central banker, Hjalmar Schacht, was to come to London representing another new leader--Adolf Hitler--who had seized power at the end of January.

The proximate American goal was for intelligent, subtle, precise minds to reestablish a new monetary arrangement between Britain, France and the U.S. Britain's decision to go off the gold standard had deepened the recession at home: Depositors figured the U.S. would be the next to do so and pulled gold out of American banks. Trade was also on the agenda. In those days, Democrats were the free traders, and the new administration wanted to end a cycle of retaliation that had taken over since Hoover had signed the punitive Smoot-Hawley Tariff. The urgency dominated: "Get fast action and cut the speeches short," the president told his team on the eve of their departure.

The trouble started with the very makeup of that team: Each representative seemed to have a slightly different mission. For Secretary of State Cordell Hull, the delegation head, this was a trade pilgrimage. Smoot-Hawley was taking an especial toll on the U.K.-U.S. relationship. Hull believed that the best chance of avoiding a repeat of the carnage of World War I was to win back Britain and to soothe allies and potential allies with international agreements that would cut tariffs and yield comity. With freer trade, he believed, "one country would not be deadly jealous of another, and the living standards of all countries might rise, thereby eliminating the economic dissatisfaction that breeds war." Hull boarded his ocean liner safe in the conviction that the president was shepherding free-trade legislation through Congress even as he sailed.

James Couzens, a Republican senator from Michigan, often disagreed with Hull. Nevada Senator Key Pittman was traveling to London on behalf of silver, in the hope that a new international silver agreement would push up the price of the metal mined in his state.

In addition, there was Raymond Moley, an expert in criminal justice from Roosevelt's New York crowd--he was, or believed himself to be, the new president's point man. James Warburg, the son of Wall Street's Paul Warburg, was there to work on the financial side of things and get the U.S. back on something like the gold standard, which the U.S. had left in spring. The representatives were all a bit perplexed at their own variety--Warburg wondered why Rep. Sam McReynolds of Tennessee was there, and wrote that the latter "took no interest in the conference and rarely attended meetings of the delegation. His chief concern was to get his daughter presented at court." The Anglophiles in the group betrayed their narrowness by mocking Pittman as a hick. Warburg noted that it rained on the day of a garden party with King George and Queen Mary, but an equerry advised the Americans that it was etiquette to greet royalty without raincoats. Pittman refused, saying, "I ain't going to get soaked for no king and queen."

Still, as another official, Herbert Feis of the State Department, noted, it could have been worse. Upon pressure from lawmakers, Roosevelt had considered sending Father Coughlin, the bigoted radio show host, as well. This would have been something like inviting Ann Coulter or Mike Moore to join Secretary Geithner in his London work.

What ensued was a comedy of errors so outstanding as to be chronicled by various authors from Feis to The New Yorker's John Brooks to, most recently, Liaquat Ahamed in Lords of Finance. The best of them is Feis' tell-all, 1933: Characters in Crisis. The short version is that the emissaries began to recognize their challenges were serious while they were still aboard the S.S. Roosevelt. Hull received news that Roosevelt had not pushed his free-trade legislation through Congress, and knew, therefore, that he now lacked the means to convince Britain to agree to strong free-trade provisions. "I left for London with the highest hopes but arrived with empty hands." Once in London, Warburg labored assiduously for an agreement on finance only to find himself sabotaged by other delegates. The leader of the French delegation, Georges Bonnet, was, as Feis put it, "as cooperative as a rattlesnake."

The Europeans, overall, seemed driven by vanity to an appalling extent--"I cannot offend Havas [the French news agency]," Bonnet said, "because if I do they will not print my speeches." Schacht of Germany seemed the most addled of all, for he was nursing the illusion that he could steer Hitler, and not the other way around. The United States sensed, perhaps accurately, that the Europeans might not accept any compromise.

It all led to deep quarrels within the U.S. delegation. Hull showed the parvenu Moley his place by squelching his efforts to take the lead on policy. Roosevelt kept his distance, yachting about the Atlantic and firing off, from time to time, contradictory messages. Moley frantically wired the president: "Success or even continuance of the conference depends on U.S. agreement." But Roosevelt responded instead with what became known as his "bombshell," a message that seemed to contradict what Hull had been saying and doing, as well as the old original plan for order. The Roosevelt message dissed what it called the "old fetishes of international bankers"--read, the crowd in London--with the argument that it was time for individual nations to "plan national currencies." The U.S. was going to manage its money alone, hour by hour--at least for the moment--to suit its own economy.

As the appalled editors of Le Temps wrote: "One has the feeling that the threat of distress has caused the people of the United States to lose self-control." What the bombshell can have meant to German citizens, who that spring had watched their new government burn books and construct a camp at Dachau, is hard to know. Warburg, whose philosophic compass was the gold standard, handed in his resignation to Hull, writing, "We are entering upon waters for which I have no charts and in which I therefore feel myself an utterly incompetent pilot." In any case, Roosevelt's bombshell meant that, in terms of content at least, the conference was over.

As has sometimes been the case with certain Doha sessions, the actual death took much longer. The humiliation was total. At a garden party, the king told one diplomat that "Ramsay MacDonald had been made a fool of." Though it wasn't the end of MacDonald's national government, he warned that it was. Before they headed home at the end of July, the once lofty participants were driven by the sheer pressure of it all to alcohol, bad jokes and scatology. The representative of the Argentine Republic told Warburg: "Ze conference is a failure, but I have learned English. I now know ze difference between a piss of paper and a shit of paper." (This is in Warburg's book.) Yet worse, however, at least in terms of literary product, was a quatrain about the gold standard produced by the Times of London.

The dollar swan has sat upon her gold

When death approached unlocked her hoard and gold

Raising her price to meet her need full sore

But sank the exchange 'til it could sink no more.

Even at the time, there were some international observers who saw some method in Roosevelt's madness. The Keynesian of the day was John Maynard Keynes himself, who deemed FDR's work "Magnificently Right." The equivalent to today's housing lobby was farming. Today, the sight of Americans losing their homes shifts the plans of presidents; then, it was the reality of citizens losing both homes and farms. Confronted with the choice of angering marching farmers or angering histrionic diplomats, Roosevelt was opting for the latter. With his traditional advisers out of sight--Hull in London and William Woodin, the Treasury secretary, deeply ill--the president had begun paying more attention in any case to inflationists, especially George Warren, a Cornell professor who Roosevelt's friend Henry Morgenthau Jr. had come to know through his work on farm prices.

Warren had a plan for reflating that suited the political moment: The U.S. might drive up the prices of agricultural commodities by buying gold. This was right in theory, but only in theory--something like saying you can raise the sea level by pouring liquid into the ocean by the thimble. Roosevelt's own entourage recognized the challenges of FDR's plan. "How different life would have been had Franklin and Henry not met those arboreal experts," Mrs. Morgenthau would later comment.

There are those who argue that Roosevelt's bombshell did little destruction at all--the Princeton scholar Harold James has posited that London 1933 was a series of catch-22s, rigged to fail from the beginning. By 1934 Roosevelt was in any case abandoning Warren and discretionary gold purchases, going back on the gold standard and even signing Hull's historic trade agreement into law. I would argue that the real loss of the conference didn't come, in the end, in the monetary or trade areas. The damage was in the area of diplomacy and democracy. "The only beneficiaries were Germany and Japan," wrote Feis, later, of London 1933. Today, Latin America watches as the U.S. turns inward and draws the consequences. That is what happened in Europe after London. The message for dictators on the continent was that the U.S. would, in the future, be absent from the scene and was leaving them alone to pursue their agendas. The next time Schacht stood before so many international cameras would be at Nuremberg during his trial as a war criminal.

Our own G-20 conference, with its agenda of banking, stimuli and monetary policy, is not the same. But there is a parallel tension between budgetary responsibility--Angela Merkel's mutterings about a "solid, sustainable fiscal policy"--and the perceived need to dump out yet further trillions in stimuli into the U.S. economy. And, more importantly, there is the same problem of war lurking on the horizon of what currently looks to be an all economic landscape. The Germany of 2009 is Russia. What 1933 says about 2009 is that diplomacy may actually matter more than any specific monetary or banking agreement. Counterintuitive, but that's the London takeaway.

Amity Shlaes, a Forbes columnist, is a senior fellow in economic history at the Council on Foreign Relations and the author of The Forgotten Man.

This article appears in full on CFR.org by permission of its original publisher. It was originally available here.

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