Chapter CLV: The St Leger's Day Massacre
Lord of Slower-than-real-time
- Dec 13, 2005
Chapter CLV: The St Leger's Day Massacre.
The end of summer and the start of autumn often brings with it financial problems and crises, indeed there is a traditional City saying to that effect; "Sell in May and go away, come back after St Leger's Day". While the origins of the saying may well have been a recognition of the de facto long summer break that most financial markets enjoyed it had survived so long because there was more than a grain of truth in it, following this advice would have yielded an investor good returns for much of the 20th century. There are doubtless many reasons for the poor average returns over the summer, but a key one is surely the break itself and the subsequent return. If a problem remains unsolved at the start of summer it will generally get worse over the following weeks, thus when investors and bankers return from their summer break they will find the situation considerably worse than when they left it and be prompted to hasty action, this action rarely being good for the short term value of the asset in question. For the more serious events there has likely been a degree of 'frog boiling', that is to say a chronic problem getting constantly worse but so slowly that the true scale of the predicament is not apparent, for these cases the return from summer with fresh eyes can prompt a realisation of how bad things actually are and so initiate the crisis. Appropriately enough in the autumn of 1937 the focus of the returning financial world was on the Gold Bloc and in particular France. While Paris publicly declared the sacred and eternal nature of the link between the franc and gold, in private it was recognised the cost of supporting the franc at it's current value was increasingly untenable. The Bank of France had been very active in the foreign exchange markets in the previous months however the end of summer prompted an exponential increase in the scale of the required interventions. In the first week of September the Bank of France was spending £3 million in gold a day on defending the franc, in other terms this meant just over 13 tons of bullion leaving the vaults every day, most of which was making it's way to the London gold market. In theory France could keep up such spending for many months, there had been almost 2,500 tons of bullion in the Bank of France vaults in the spring, but in reality much of that gold was needed to back the Franc. The Gold Conference in Geneva only a few months earlier had declared that 40% currency backing was the absolute minimum required to be in the Gold Bloc, on that basis France needed at least 1,500 tons and realistically nearer 1,800 tons in reserve when all liabilities were considered just to meet the bare minimum. If this had been merely another short term speculative attack then the French would doubtless have gritted their teeth and continued the spending, to a certain extent that was the point of having reserves in excess of the bare minimum. However the devaluation fears were starting to infect the wider economy, bank deposits both at the Bank of France and at the commercial banks were declining rapidly as the public sought to exchange francs for gold, sterling, or any other hard asset they could. Given the chronic weaknesses of the post-Depression French banking sector this was not something that could endured for long before serious structural damage started being done. The traditional counter was raising interest rate and this had been done several times, while this had had precious little effect on the exchange markets it had been a further blow to the economy, to the point the finance ministry was warning about a serious risk of recession, or worse, unless the currency stabilised and interest rates lowered to more appropriate levels. Taking the wider view of the whole economy the answer was as obvious as it was unpalatable; France would have to devalue.
Sir Sultan Mahomed Shah, Aga Khan III, on his way to Doncaster Racecourse for the last classic of the British flat racing season. The choice of St Leger's Day in the quoted saying was not an un-characteristic outbreak of piety from the City but a reference to this race, the St Leger's Stakes, which was named for it's military founder Major-General Anthony St Leger and not the medieval Burgundian martyr. The Aga Khan himself would end up peripherally involved in the devaluation crisis, while his experience with gold was limited to being gifted his weight in bullion for his golden jubilee the previous year, as President of the Assembly League of Nations for the 1937 session he would oversee the General Assembly that coincided with the international response to the affair.
While the Bank of France and the civil servants in the finance ministry began very quietly working on the mechanics of the devaluation, the new laws, emergency bank holiday regulations and so on, the politicians and diplomats turned to the wider implications. There were two pressing concerns about the devaluation and the first was France's continued membership of the Gold Bloc, the increasingly formal group of nations still on the gold standard. Technically France did not have to leave the gold standard in order to devalue the franc, it was theoretically possible to just revalue it in gold terms and carry on as before. In practice a devaluation would prove the speculators correct and there would be doubts that the new level of the franc was credible, consequently there would be a massive demand for gold as banks and the population scrabbled to avoid holding francs in case of a second devaluation. Of course the Bank of France could take the Italian or German route and notionally remain on the gold standard but end the right to exchange francs for gold. Unfortunately for this scheme the same Gold Bloc conference that had set the minimum backing ratio had also declared that being able to freely exchange currency for gold was a requirement for being on the gold standard, or at least a requirement for being a member of the Gold Bloc, as Italy had found out to it's disappointment. One obvious question is why Paris was so keen on remaining in the Gold Bloc and there were a range of reasons, none of which actually involved gold. As we have discussed the Gold Bloc members had lowered tariffs between themselves, not by a large amount and nothing on the scale of Empire Free Trade, but enough to be worth trying to keep and on a more practical level the clear support of the US government and Federal Reserve would make the new level of the franc easier to maintain. These were the official reasons and they were valid enough, but very unofficially Paris wanted to stay in the Bloc for strategic reasons. The Bloc was one of the few international forums that the US seriously engaged with and was the only one where Britain was not also present, it was therefore seen as a key route to engagement with the US and keeping them involved in world affairs. Given these world affairs, as defined by Paris at least, ranged from continued support for the Republican side in Spain through to security co-operation in the Pacific it is hardly surprising that this agenda could not be spoken of openly; the Landon administration was already burning political capital with it's support for Spain, so there was no appetite for another bruising fight with the isolationists over foreign affairs. The issue therefore was how to keep France de jure on the gold standard that they could stay in the Bloc, but de facto off it so they could reap the benefits of devaluation. The solution was typically French, use regulation and heavy taxes to encourage all gold holders to sell their gold to the Bank and then require all transaction in gold to be approved by the Bank of France. Paris could therefore state that the franc was still theoretically convertible with gold and thus conformed to the letter of the gold standard, if the Bank never actually gave permission for any gold transactions that was a mere irrelevant detail. Leaving aside any moral objection to this approach the challenge was to getting the rest of the Bloc to accept it. This ties in neatly with the other pressing concern, getting international agreement and support on defending the new value of the franc and not setting off a round of currency wars and competitive devaluations.
The central corbeille (basket) at the Paris Bourse with the official agents clustered around it, all trading on the exchange was via open outcry between this strictly limited group and those on the outer ring were there to support, instruct or just observe those traders. As part of the Monetary Law that changed the gold value of the franc the French government also imposed a retrospective 50% tax on any forward operations on the stock market and forced the declaration of all foreign currency operations even when not made at the exchange. Separately all gold holders in France had to either sell their gold to the Bank or pay a 'special levy' equal to the increase in the franc value of their gold after the devaluation. While such measures were doubtless satisfying to the government and parliament as a way to punish those seen to profit from France's misfortune, it also prompted another exodus of traders and business to New York, Amsterdam and above all London. As with the failure of Paris' previous attempts to be a financial centre the French were unwilling, or perhaps psychologically unable, to pay the price required to be a serious financial centre.
The United States may have been in a period of semi-isolation and disengaged from most international forums, but that did not mean they had lost all their diplomatic skills or their ability to spot a hustle. The French attempts at subtlety failed miserably, both the sleight of hand on the gold standard and the strategic reasoning for wanting to keep the Gold Bloc intact were soon spotted. Fortunately for Paris the US had it's own reasons for wanting to keep the Bloc intact, not least the lack of a plausible alternative. After the initial hurried and domestically focused reactions to the Depression US policy had been to try an rebuild international trade, as a considerable net exporter prior to the crash the collapse in trade had hit the US economy particularly hard. Unfortunately these efforts had failed and so in parallel a determined attempt had been made to build a Dollar Bloc, a economic area of preferential trade to rival the Sterling Area and the Exchange Control group forming around Germany. After many years of effort by the State Department and US Treasury the Dollar Bloc consisted of the US, the Philippines, and a smattering of smaller Central American states that had been on the receiving end of a US Marine intervention during the Banana Wars. Both policies had failed for the same reason, bipartisan political pressure that international trade be "fair" and not offer any competition to domestic industry. In practice this meant that while the US trade negotiators had no end of ideas about which tariffs and quotas other people should cut they had precious little to offer in terms of access to US markets to those negotiating a trade treaty or considering entry to the Dollar Bloc. As a result the Gold Bloc represented pretty much all of the progress the US had made towards trade liberalisation and tariff reduction, letting it fall apart risked undoing that progress and causing a further drop in trade, which would damage the still weak US domestic economy. In comparison to that possibility continuing to stay in an international talking shop seemed a small price to pay, particularly as the State Department was confident any French strategic overtures could easily be dismissed or at least politely watered down to nothing. It should also be noted there was another important reason the US response was far more enthusiastic than the French had dared hoped; the Federal Reserve was concerned that after the franc devalued it would be the dollar next to come under pressure. Devaluations must be relative to something and though both Paris and Washington were loath to admit it the reference currency of the time was, as it is today, sterling. Thus it had been the franc-sterling exchange rate that had been attacked by speculators and once the franc devalued it would be 'cable' (city slang for the dollar-sterling rate) that would be their next target. This would require the US to intervene to support the currency and as in France lead to increased public demand for 'safer' assets instead of an under-pressure dollar. In absolute terms the US Federal Reserve held far more gold bullion than the Bank of France, but as a proportion of the economy or the amount of currency in circulation, the psychologically important percentage backing of the currency, the figures were far lower. To be blunt the US would struggle to fend off gold flight of the scale France had faced for more than a couple of weeks and while the US domestic banking system was slightly stronger than in France that did not mean it could withstand extended capital flight. Recognising the inevitability of the situation the US government decided to minimise the economic costs and carry out a pre-emptive devaluation on their own terms; better to be seen as strong while making a controversial move than weak by being forced into it. To that end it was the US Treasury that came up with the final scheme adopted by the Gold Bloc, the plan should not be to devalue the franc or any other currency, instead the Bloc should say they were revaluing gold. If the entire Bloc all changed the exchange rate of their currencies to gold at the same time they could maintain it was the value of gold itself that had changed not their currencies. While this would be a devaluation relative to sterling and the rest of the world the rates between members would not change, hence the French decision to value the franc within a range not an absolute value, allowing them to conform to the letter of the devaluation while keeping flexibility to trade lower as required.
A Soviet gold mine in the mid 1930s, the crude approximations of a uniform and the pit pony indicate this is one of the more modern mines in the country at that time. The vast majority of Soviet gold production came from the mines around Kolyma in the Far East, these mines were operated by prison labour under the Gulag system and so lacked such luxuries. Global gold production increased almost 70% between 1929 and 1937 due to massive increases in US, Canadian, Australian but above all Soviet output. This should have led to a slump in the gold price as extra production flooded the market, yet the London gold fix had jumped from around £4/oz to over £7/oz in the same period. It was this disparity between the price of gold and both production and the size of the global economy that was the justification for the revaluation. Such talk was heresy to the high priests of the Gold Bloc, the League of Nation's Economic and Finance Organisation, who's economists and theorist were appalled at the very idea of devaluation and the cynical schemes being prposed to avoid keeping the 'golden promise'. However they were ultimately responsible to the League secretary-general, Joseph Avenol, a man who believed his highest concern was not the League's charter but French foreign policy. Consequently after a somewhat hustled vote of the General Assembly the plan received the League's seal of approval.
It must be noted at this point that these discussion and agreements were not taking place in a calm and considered atmosphere but in the midst of market turmoil. In financial circles it is still referred to as the Saint Leger's Day massacre, while no blood was spilled there were oceans of red ink across the stock, bond, exchange and even commodity markets on both sides of the Atlantic. As is often the case the rumours circulating were worse than the secret discussions and the speculation fuelled the volatility in the markets, particularly when it became clear the central banks were reluctant to intervene to defend rates that would soon change. It is in this context that the British cabinet and the Bank of England were presented with a tough choice around how, if at all, to react to the overtures from the Gold Bloc on co-operation around exchange rates, gold and related issues. Unusually it was genuinely a difficult decision and not the more common political version where 'tough choice' was code for 'There is an obviously correct solution to this, but it is electorally unfavourable'. There already was a degree of communication between the Bank of France and the Bank of England, as both were regularly intervening in the exchange and gold markets some unofficial co-ordination prevented their agents ending up on opposite sides of the same trade and helped solve the logistical challenges of regularly moving large quantities of bullion from Paris to London. What the French proposed was an extension of the existing Gold Bloc agreement on maintaining stability between currencies to include sterling and the Bank of England. The Bank was modestly in favour of the proposal as was the Treasury in the form of Frederick Leith-Ross, the chief economic advisor recently returned from his triumphant mission to China, who was a strong advocate for it. While far from enthused about the gold standard itself, he had after all just overseen China abandoning the silver standard and reaping the rewards, he was attracted by the stability offered and the promise to prevent another round of currency wars. To this formidable grouping could be added the Foreign Office who could still be relied upon to look favourably on almost any international agreement, particularly if it involved the prospect of improved relationships with France; one consequence of Eden selecting a passive Foreign Secretary was the lack of effort being applied to remove the lingering Francophilia in the department. In opposition the arguments were mainly revenge based, not just because of France's inaction during the Abyssinian War or it's self serving deal making at the Amsterdam Conference, but something older and more relevant. In early 1931 the UK had been struggling with a currency crisis that eventually ended in devaluation and French support had been minimal and grudging, worse that little help had been more than offset by the Bank of France systematically dumping it's own sterling reserves and hurriedly purchasing gold, a very clear sign to all involved that Paris had zero faith in sterling and a move which rapidly became a self fulfilling prophecy. In fairness while those opposed may have been in part motivated by thoughts of retribution there were other more cool headed reasons to reject the offer. Top of the list was the Gold Bloc itself, should France fail to stabilise the franc then the Bloc could well collapse and there was a strong argument this could be good for the UK. While it was very unlikely France or the US would join the Sterling Area the other Bloc countries may well do so and as we have seen this was of benefit not just to the new members but all the existing ones as well. In particular the prospect of tempting the Netherlands across and into the Sterling Area was seen as having a strategic value in addition to any economic advantages that would accrue. There was also the question of credibility, under the proposal the Bank of England and Treasury would to an extent be standing behind the new devalued level of the franc, so should the Bank of Franc fail to stabilise the franc then in part the Bank of England would also have failed. While the Bank had plenty of reserves in the Exchange Fund, and at the time was mostly fighting to restrain the pound from rising too far, the French experience was proof that if the people lost confidence in a currency then all the reserves did was delay the inevitable.
The imposing Palazzo Mezzanotte, home of the Borsa Italiana (Italian Exchange) in Milan. While Rome remained the administrative and political capital, Milan was the financial hub of Italy and so her exchange was the most prestigious and her traders the best connected, thus when rumours of the devaluation spread it was attentive ears in Milan and not Rome that heard them first. The resulting stock and currency crash was stopped before it became a widespread panic as the government agents shut the exchange, but the end result would be the same; Mussolini had lost 'The Battle of the Lira' and Italy would devalue mere hours after the official Gold Bloc announcement. Il Duce and his propagandists blamed the French and US decisions for forcing his hand, which was in part true, but there were plenty of Italian economists relieved that a long overdue devaluation of the lira was finally happening, whatever the cause.
In the end the cabinet came to a mature and considered compromise, mostly by convincing the more retribution minded members not to cut off their nose to spite their face. That said the final deal was not the 'deep co-operation' that Paris had originally proposed, in the grandest French tradition the first draft had a system whereby the Bank of France decided what interventions should be carried out to support the franc and the Bank of England would then unquestioningly implement their part. The cabinet also demurred at the proposed 'currency swaps', exactly as suggested this would involve an exchange of currencies between the two central banks, a boon to the Bank of France which would have a large amount of Sterling to spend on interventions but just a liability for the Bank of England which would receive a matching pile of francs that it didn't want and couldn't do anything with. Instead the existing unofficial co-operation between the central banks was put on a firmer footing and the three main players agreed what currency rates would be defended by the various exchange intervention and stabilisation funds. In addition the Bank of England agreed to have the necessary chats with the main British commercial banks to ensure the large sterling loan being floated in London by the Bank of France would be strongly supported and get away at an 'appropriate rate' for a government security. Said chats mostly consisted of reassurance that while the Bank of France was technically a private company, the British government considered that the French state was backing it and so would treat a failure to repay in full as a major diplomatic incident with all that entailed. To provide cover for these moves there was also a very grand sounding announcement of an international currency control agreement between London, Washington and Paris to maintain the post-devaluation currency levels and to forswear any competitive depreciations or devaluations. Grand sounding because the actual text of the agreement mostly consisted of loopholes and exceptions, nobody involved wanting to actually commit to anything beyond the very short term measures previously discussed. That said with the support of London secured Paris and Washington could finally explain the plan to the rest of the Gold Bloc and then make the announcement and devalue at the end of September. The market turmoil extended on well into October, though at a markedly lower level and well within the capacity of the intervention funds to control, making the transition a success for a suitably relaxed and expansive value of success.
The Treasury and Bank of England kept a careful eye on things and checked for domestic or Imperial consequences, but these mostly failed to emerge. There were a number of excitable stories about firms or individuals who had made fortunes by speculating on the crisis or lost them by believing French government statements, but nothing significant or out of the ordinary. The rest of the government were relieved to consider the matter closed and moved onto the other challenges facing the country. Indeed the Foreign Office and those of a Francophile disposition were optimistic that Anglo-French relations had finally hit rock bottom and this economic co-operation would lead to a warming of relations as Paris became more appreciative of the value of strong links with London. As their more realistic colleagues tried to warn them such a rose tinted view would only lead to disappointment, as it duly did later in the autumn during the Straits Crisis. There are however a number of other events that occurred that autumn that we need to consider first.
Look, plot! That's a good thing I'm told.
This is the much delayed US and France falling off gold update, which has been causing them a degree of problems. But it is important not to over-state that, France also had a number of domestic... challenges shall we say while the US problem was more the collapse in global trade and their idiosyncratic approach to trying to re-start it and that hasn't changed. If anything the US has been chucked a bone here and there is no gold confiscation, an OTL FDR measure which yielded very little actual bullion but did a great deal to undermine confidence and the economy (after the silver confiscation and the gold confiscation it was not unreasonable to ask what would be seized next). France has avoided the disasters of the Popular Front, but not addressed the problems the Popular Front were trying to solve so things remain troubled, but that is for later.
The Aga Khan is an interesting figure who we may yet see again in a future sub-continent related update, certainly he was a unique figure who was indeed president of the League General Assembly at this point. And in his religious leader role did indeed get gifted his weight in precious materials at the relevant jubilee, alas the available photos are not the highest quality or I would have gone with the one of him being weighed against gold. While he did love horse racing, Rolls Royces and the finer things in life all the money from the jubilee was apparently spent on various charitable endeavours to benefit the community and outside of that he was a renowned philanthropist.
Gold output did jump massively and by the mid-1930s most of it ended up in London or New York, the exact flows depending on how badly the US economy was doing vs how likely war in Europe looked at that moment. In Butterfly that means its all flowing to London to the extent the Bank of England is starting to get concerned about the stability of the wider global financial system and so are keen to get things stabilised, unlike Paris they are aware that after a certain point vast gold reserves become a problem and not a sign of strength. I think the rest is fairly self explanatory, a factor no doubt of it's length, so I will curtail the excessive notes. I feel confident if I am not correct on that then someone will soon say, hopefully sparking some lively debate.