One Summer: America, 1927

products and its roads with cars. It made America the consumer paradise it has remained ever since.
     
    All this left America in a peculiar position. It was by far the most economically dynamic of the four nations at the summer conference on Long Island, but also the least experienced. Its own central bank, the Federal Reserve, was just thirteen years old, and so cumbersome in structure as to be almost incapable of decisive action anyway. A portion of the responsibility for the Fed’s odd and hobbled nature lay, interestingly, with the father of America’s most celebrated young aviator. As a member of the House of Representatives Committee on Banking and Industry, C. A. Lindbergh had helped to design the Fed. Like many rural Midwesterners, the senior Lindbergh felt a bitter antipathy towards eastern bankers – he would have been appalled to know that his son would marry the daughter of a Morgan partner – and wanted the new Federal Reserve Bank’s powers diffused widely rather than invested in a single east coast establishment. For that reason, he and his congressional colleagues decided not to have a single central bank, as in other countries, but to create a network of twelve independent regional banks, to be loosely overseen by a Federal Reserve Board in Washington.
    It was – and remains still – a strange concoction. Although the twelve regional banks collectively form a single central bank and act on behalf of the government, they are at the same time private, individual, profit-making concerns owned by shareholders. Their principal function, from the government’s point of view, is to control the money supply, which they do by adjusting the discountrate – the rate of interest at which reserve banks lend to commercial banks. The discount rate is the foundation rate against which all other bank rates are calibrated.
    The twelve scattered outposts of the Federal Reserve were in principle each of equal importance, but in practice the New York Fed under Benjamin Strong was by far the dominant player. As Allan H. Meltzer said of Strong in his history of the Federal Reserve: ‘He regarded the twelve reserve banks as eleven too many.’ Under Strong, the New York Fed exploited its many advantages, notably that it was larger than any of the other reserve banks and conveniently located in America’s financial capital. The Federal Reserve Board in Washington was still largely in the hands of fiscal incompetents thanks to the inept and careless appointments of President Harding. Crucially, Strong won for the New York Fed the right to be the exclusive agent for the United States in dealings with other countries. It became, in short, the de facto central bank – more or less exactly what Congressman C. A. Lindbergh had been determined to avoid.
     
    For five days, the four bankers met under a cloak of secrecy. They issued no public comments. Indeed, they wouldn’t even confirm that they were meeting – rather extraordinary, considering that they were making decisions that would determine the direction of world finances for years to come. What exactly they discussed isn’t known because no minutes were kept, but the problems that lay before them largely came down to a single issue: gold.
    The international banking system remained almost obsessively devoted to the venerable but rather creaky mechanism known as the gold standard. A gold standard is an appealingly simple concept. Under it, any paper money in circulation is supported by gold reserves. When America was on the gold standard, a $10 bill could be exchanged for $10 of gold, and vice versa. It was gold, in other words, that gave value to the otherwise worthless slips of paper known as money. A gold standard had certain limitations – mostobviously, the amount of money in circulation was limited by the amount of gold that had been discovered – but it had many compensating attractions that endeared it to bankers. It made inflation almost impossible since governments couldn’t just print money. It kept the management of exchange rates out of the hands of politicians with their narrow, short-term interests. It promoted price stability and, by and large, kept the heavy wheels of international trade turning. Above all, a gold standard had a huge psychological importance. It worked. It had worked for a long time. It was what was known.
    The problem was it wasn’t working very well now. Half of all the gold in the world was in the United States, mostly