Generous Machiavelli

Just before President Wilson led the U. S. into war, the British Government sold in Manhattan an attractive issue of 51% "gold dollar" bonds, never dreaming that under the next Democratic President of the U. S., all "gold clauses" in U. S. securities would be invalidated. Last week $136,333,500 of this British issue was still outstanding and stooped, hawk-nosed Chancellor of the British Exchequer Neville Chamberlain had a smart idea.

Not a few U. S. capitalists, he knew, had reached a state of mind in which they preferred francs or pounds to dollars. They would therefore prefer, he reasoned, sterling bonds paying a low rate of interest to dollar bonds with a higher rate. Abruptly Chancellor Chamberlain offered holders of British 5 1/2% "gold dollar" bonds the option to convert them into sterling bonds paying only 2 1/2%.

On the day of Mr. Chamberlain's proposal it took more than $4.85 in depreciated dollars to buy an English pound. He offered to convert at a rate of $3.85--thus giving a premium of one dollar in every pound to bondholders willing to convert. This premium, Mr. Chamberlain told the House of Commons, would be paid because of His Majesty's Government's "moral obligation" to compensate holders of the bonds injured by the U. S. Congress' cancellation of their "gold clause." Up from a Labor bench popped Sir Stafford Cripps. "This is the first time," he shouted, "that the Government have sought to convince themselves by ingenious arguments that we ought to pay more than we owe! If the Exchequer is going to be generous, I suggest that there are many worthier recipients of charity--such as the unemployed--than wealthy bondholders!"

Only the National Government's huge following enabled Chancellor Chamberlain to push his measure through the House of Commons. Meanwhile, however, the New York fiscal community began to call Mr. Chamberlain not generous but Machiavellian.

The instant effect of his offer of a $3.85 bond conversion rate when the monetary exchange was above $4.85 was to stop the decline of the dollar and give it an upward fillip. Simultaneously the recent Wall Street boom, partly induced by a falling dollar, collapsed (see p. 45). On the theory that Chancellor Chamberlain's fiscal acumen is very great indeed, he was credited with a deliberate and successful move to start sterling downhill.

French editors promptly revived their theory of a "war" between the dollar and the pound, with both President Roosevelt and His Majesty's Government trying to raise home prices by forcing their own money lower. Technically the rise of the dollar and the fall of sterling was supposed to have resulted from the fact that U. S. holders of the 5 1/2% British bonds sold sterling short last week at the current market rate of $4.85, knowing that through Mr. Chamberlain's bond conversion they would be able to cover at $3.85. Short sales of course depressed the pound, buoyed the dollar.

In London the fact was noted that J. Pierpont Morgan landed in England the day Mr. Chamberlain made his conversion offer. That morning the London Times, usually close to the Exchequer, urged further depreciation of sterling, questioned the wisdom of recent British policy in keeping the pound pegged at around 86 gold francs. This policy, English financiers presume, has been maintained by Chancellor Chamberlain in close agreement with Governor of the Bank of England Montagu Norman, a rock-ribbed stabilizationist. Rumors flew last week that Mr. Norman's influence must be waning, that he and Mr. Chamberlain may have begun to disagree.

On London's fiscal Olympus such secrets are well kept. Tantalizing to correspondents was the statement of Banker Morgan: "One of the first men I am going to see is the Governor of the Bank of England. He is a great personal friend. I am hoping to have several long conversations with him. I would not be surprised if stabilization were discussed. Somewhere there is a diseased spot in the world of international finance, but the ways to it are tangled and complicated. Yet I do not think it will be impossible to trace this spot or to deal with it when it is found."

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