American people would be donated for a massive transfusion to Great Britain. Galbraith sets the scene:
On July 1, 1927, the
The names of neither of the great bankers appeared on the passenger list. Neither, on arriving, met with the press....
In New York the two men were joined by Charles Rist, the Deputy Governor of the Banque de France, and they went into conference with Benjamin Strong, the Governor of the Federal Reserve Bank of New York....
The principle, or in any case the ultimately important, subject of discussion was the persistently weak reserve position of the Bank of England. This, the bankers thought, could be helped if the Federal Reserve System would ease interest rates, encourage lending. Holders of gold would then seek the higher returns from keeping their metal in London. And, in time, higher prices in the United States would ease the competitive position of British industry and labor.1
Galbraith speaks with soft phrases to cushion a harsh reality.
What he is saying is that the purpose of the meeting was to finalize a plan whereby the Governor of the Federal Reserve System was to deliberately create inflation in the U.S. so that American prices would rise, making U.S. goods less competitive in world markets and causing American gold to move to the Bank of England. Governor Strong needed little convincing. That is precisely what he and Norman had planned to do all along and, in fact, he had already begun to implement the plan. The purpose of inviting the Germans and the French to the meeting was to enlist their agreement to create inflation in their countries as well. Schacht and Rist would have no part of it and left the meeting early, leaving Strong and Norman to work out the final details between them.
Strong was more concerned about British fortunes than
American. In a letter written in May of 1924 to Secretary of the Treasury Andrew Mellon, he discussed the necessity of lowering American interest rates as a step toward money expansion with the Galbraith, pp. 174-75.
426 THE CREATURE FROM JEKYLL ISLAND
objective of raising American prices relative to those in Great Britain. He acknowledged that the goal was to protect England trom having to cut back on wages, profits, and welfare. He said: At the present time it is probably true that British prices for goods internationally dealt in are as a whole, roughly, in the neighborhood of 10 percent above our prices, and one of the preliminaries to the re-establishment of gold payment by Great Britain will be to facilitate a gradual readjustment of these price levels
The burden of this readjustment must fall more largely upon us than upon them. It will be difficult politically and socially for the B r i t i s h G o v e r n m e n t a n d the B a n k of E n g l a n d to face a price liquidation in England ... in face of the fact that trade is poor and they have over a million unemployed people receiving government aid.
BRINGING DOWN THE DOLLAR
The Mandrake Mechanism of the Federal Reserve went into high gear on behalf of the Bank of England in 1924, several years before the historic meeting between Strong, Norman, and Rist.
There were two great surges of monetary expansion. The first came with the monetization of $492 million in bonds plus almost twice as much in banker's acceptances. The second burst of inflation came in the latter half of 1927, immediately following the secret meeting between Strong, Norman, Schacht, and Rist. It involved the funding of $225 million in government bonds plus $220 million in banker's acceptances, for a total increase in bank reserves of $445 million. At the same time, the rediscount rate to member banks (the interest rate they pay to borrow from the Fed) was lowered from 4 to 3.5 per cent, making it easier for those banks to acquire additional
'reserves' out of which they could create even more fiat dollars.
The amount created on top of that by the commercial banks is about five and a-half times the amount created by the Fed, which means a total money flood in excess of $10 billion in just six years.
1. Chandler, pp. 282-84. ,
2. Approximately $1,328,000,000 in the first burst, including ^h bonds anfl acceptances, plus' $445,000,000 in the second!burst equals amount multiplied by 5.5 equals $9,751,500,000. Add the original $1,773,000,OOU
used as a base, and the total is $11,524,500,000. This estimate is reasonably c l o s e to the figure of $10,661,000,000 published by the Fed itself, which represents the growth in total deposits and currency in circulation during that period. See Depos its and Currency,' p. 34.
THE LONDON CONNECTION
427
Throughout this period, the demand by the System for government bonds and acceptances pushed interest rates down.1 As anticipated, people with gold then preferred to send it to London where it could earn a higher yield, and America's gold supply began to move abroad. Furthermore, as inflation began to eat its way into the purchasing power of the dollar, the prices of American-made goods began to rise in world markets making them less competitive; U.S.
