Gentlemen's Agreement

In Paris one midnight last week a weary little Frenchman, Vincent Auriol, Minister of Finance to Premier Blum, dropped his telephone in its cradle and brought to an end a day-long marathon of transoceanic negotiation. At that moment it was just after 7 p. m. in Washington, D. C. In the U. S. Treasury Department Secretary Henry Morgenthau and a group of weary but pleased advisers also stood around a newly silenced telephone. At 7:30, after he had remained for hours strictly incommunicado, Secretary Morgenthau called for the press.

In marched 40 newshawks who had been waiting in an adjoining room. By cable from London and Paris they had heard minutes before that the U. S. Secretary of the Treasury had an important announcement to make in Washington. Mr. Morgenthau began to read from a paper: "By authority of the President . . ."

After considerable diplomatic verbiage, he came to the news that France was devaluing her franc. That was French news, however. The U. S. news was that: 1) the U. S. joined with Britain in welcoming France to devalue her franc to approximately the same level to which the dollar has been fixed, the pound maneuvered; 2) the U. S. made a purely gentlemen's agreement with Britain and France to try to stabilize their respective currencies at this level (30% to 40% below pre-Depression value), provided other nations do not start another currency war by cutting deeper.*

Jubilant was Mr. Morgenthau as he explained this to newshawks. The announcement fulfilled his oft-repeated promise that "when [the world] is ready to seek foreign exchange stabilization, Washington will not be an obstacle." It also brought nearer that goal sought by the U. S. Treasury since 1933 when Dr. George F. ("Rubber Dollar") Warren enunciated the theory that the whole world would start toward recovery when all nations devalued their currency.

On the day the agreement was made gold exports hit an all-time high when $43,532,000 of gold was engaged in Paris for shipment to the U. S. Since Aug. 7 such shipments to the U. S. have totaled $197,700,000. Since early December 1932 France has lost over $2,000,000,000 in gold, much of which has come to the U. S. to build up one huge $10,786,000,000 gold reserve. Ever since Depression hit, such vast sums of migratory capital have charged about the world like tons of drifting cannon balls rolling loose in the hold of a storm-tossed economic ship. Last summer the Department of Commerce estimated that foreigners had $1,200,000,000 deposited in U. S. banks and invested in short term securities, had $2,951,000,000 in U. S. stocks and bonds. Economists have long been alive to the danger to U. S. securities markets if the tempestuous lashings of unruly European currencies should send these cannon balls crashing back to Europe.

Day before announcement of the franc's devaluation, attention was called to this danger when Secretary Morgenthau made public a political letter he had received from Senator Arthur Vandenberg who wrote: "If we have anything like $4.000,000,000 on instant foreign call, our financial structure and our price structure rest to a considerable extent on foreign judgment or caprice.

"With the best answer of all--the incipient stabilization plan--burning under his hat for the past three months, Secretary Morgenthau obligingly vamped up several other good reasons why the foreign capital now visiting in the U. S. is not likely to depart with a dangerous rush: 1) world trade is growing and some of the footloose foreign capital will have to stay in the U. S. to finance that trade; 2) much of the foreign capital in the U. S. is in long-term investments unlikely to be in an undue hurry to go home; 3) the $2,000,000,000 U. S. stabilization fund can take up a lot of slack if a flight of capital begins; 4) the Federal Reserve Board in July by boosting the legal reserve requirements effectively boxed up $3,000,000,000. When foreign capital starts home this boxed-up capital can be released to replace it.

* Next day Secretary Morgenthau announced that the U. S. had promptly lived up to this pledge by buying -L-1,000,000 sterling dumped in Manhattan by the Soviet State Bank. This was news, not only because it showed the U. S. in a new co-operative monetary role, but also because, two years ago when the stabilization fund was put in his hands, Secretary Morgenthau had pledged: "I will never answer any questions about that fund."

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