America's Money Machine

Wading in the Big Pond 131
1923, when delivery schedules were not met, sent troops into the Ruhr
to enforce its claims. The results were as expected: a sullen resentment
paralyzed activity and the German economy stagnated and collapsed.
The final debacle was the German inflation which reduced the value of
money to practically zero.
It was at this juncture that the United States quietly abandoned its
post-war mood and policy of isolation and undertook again to intervene
in European affairs. President Coolidge announced on December 15 his
agreement to a commission to examine German finances and to propose
a solution to the reparations impasse, and the appointment ofCharles G.
Dawes as the principal U. S. member. From this investigation came the
Dawes Plan to stabilize the German currency and to revisedownward the
reparations payments. The Plan was to be financed initially by an international
loan of which the principal amount ($110 million out of $200
million) would be subscribed in the U. S.*
In this fragile condition of the European economy, the British government,
under the influence of Winston Churchill, then Chancellor of the
Exchequer, concluded to restore the pound sterling to its former parity
-as a necessity for British prestige and British international finance.
U. S. cooperation would be needed, and this was forthcoming. The Federal
Reserve System was the agency. In favor ofthe action was the relative
strength of the pound in the international exchanges. Since 1921 it had
held at no greater than 15 per cent discount from parity. It was reasoned
by British monetary authorities that with some assistance from the U. S.
the restoration could be managed. Not everyone was of this opinion,
however; indeed, some able economists argued for a devaluatioN of the
pound, and others frankly proposed the abandonment ofa metallic standard
altogether and the establishment of a managed currency.
The proponents of restoration were aided by prevalent speculation
which anticipated the result, and began to bid the pound up, a process
which, of course, also promoted their own ends. By the end of 1924
sterling was selling at $4.70 in terms of dollars, and to within 1 1/2 per
cent of par early in 1925. This was decisive. On April 28, Winston
Churchill announced a return to the gold standard, and authorized the
*This, strictly, was not the first post-war resumption of international activity. In 1921
Harding had convened an international conference on naval disarmament, by which substantial
reduction ofthe world's principal navies was achieved, and about the same time the
U. S., as its contribution to the economic rehabilitation of Europe, agreed to a major
revision of the war loan repayments.