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J. Burke Knapp Oral History Interviews

Oral History Interview with
J. Burke Knapp

Economist, Federal Reserve Board, 1940-44; adviser on German economic affairs, U.S. Department of State and German Military Government, 1944-45; special assistant to the chairman, Federal Reserve Board, 1945-48; director, Office of Financial and Development Policy, Department of State, 1948-49; economic adviser U.S. delegation to NATO, 1950-51; U.S. president of the Joint Brazil-U.S. Economic Development Commission, 1951-52; and assistant director, economics department, International Bank for Reconstruction and Development, 1950-52, director, Western Hemisphere department, 1952-56, vice president, IBRD, 1956.

Bethesda, Maryland
July 24 and 30, 1975
by Richard D. McKinzie

[Notices and Restrictions | Interview Transcript | List of Subjects Discussed]


Notice
This is a transcript of a tape-recorded interview conducted for the Harry S. Truman Library. A draft of this transcript was edited by the interviewee but only minor emendations were made; therefore, the reader should remember that this is essentially a transcript of the spoken, rather than the written word.

Numbers appearing in square brackets (ex. [45]) within the transcript indicate the pagination in the original, hardcopy version of the Knapp oral history interview.

RESTRICTIONS
This oral history transcript may be read, quoted from, cited, and reproduced for purposes of research. It may not be published in full except by permission of the Harry S. Truman Library.

Opened March, 1980
Harry S. Truman Library
Independence, Missouri

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Oral History Interview with
J. Burke Knapp

Bethesda, Maryland
July 24, 1975
by Richard D. McKinzie

[1]

MCKINZIE:  Mr. Knapp, would you be good enough to talk about your early ideas about Government --your attitude, rationale, and your assignments?

KNAPP:  Well, I'd have to start back a little earlier than that.  Life in the international field really began for me when I went to Oxford as a Rhodes scholar in 1933.  I spent three years at Oxford studying politics, economics, and philosophy.  When I was ready to leave in 1936 I had the idea that I would probably go into Foreign Service, although I knew that in those years the opportunities for getting into the

[2]

Foreign Service were very restricted.  As it happened, in the summer of 1936 I went to Berlin to the Olympic Games, which I thought I'd take in before I came home.  In Berlin, actually through the intervention of some German and American Rhodes scholars that lived in Berlin at the time, I was recommended for a job with an American banking firm that had a branch in Berlin.  I decided to take a fling at that before I came home; it would give me an opportunity to learn German and some practical financial aspects.  So, I took this job thinking of it as a pretty short term arrangement before coming home and pursuing my career.

This turned out to be a very interesting job, and I decided to stay with it.  I spent just six months in Berlin, then moved to London and went into the City (where I carried an umbrella like everybody else, although I never got around to wearing a bowler hat).  I spent a further

[3]

three years in the City of London, which was sort of my indoctrination in international finance, which I have pursued as a career ever since then.

I was with an Anglo-American firm called Brown, Harriman & Co., Ltd.  The managing director of the firm, as he was called, was a fellow by the name of Henry Mann, who was of German origin and had a lot of German connections.  He'd gotten out of Germany very early in the game and set up his headquarters in London.  I owe a great deal to him, as a man of immense integrity, experience, and a real aptitude for the banking business.  I always think of him as my first mentor.

The business that I was in was concentrating on international banking and the underwriting of international bond issues, which was at that time pretty primitive, although it's grown to be a huge business in international

[4]

finance now.  This was really a pioneer effort in trying to build up international bond issues.  The conditions were very difficult in Britain in the thirties; there wasn't that much capital and there began to be restrictions on the British capital market for foreign issues.  This made our business somewhat difficult, although we also placed bonds in continental European markets as well as in the British market.

I remember particularly an operation in which we placed bonds of the River Plate Telephone Company, which was a subsidiary of ITT, and sold these bonds all over Europe.  At the time the London market itself was closed to us.  This operation happened to have been quite historic in the history of ITT, because ITT at that time had very large short term debts outstanding in the United States and they were on the point of collapse.  Through our efforts, and on the credit of their Argentine subsidiary, which was one of

[5]

the most profitable of their operations, enough money was raised to tide them over the short term cash flow problem that they had at home and keep the ITT empire intact.

MCKINZZE:  Were you aware of Lord Keynes?

KNAPP:  Oh, yes.  My Oxford education in economics was almost pre-Keynesian, Keynes was writing at the time and things were coming out, but of course, he was at Cambridge and not at Oxford.  At Oxford they don't pay much attention to Cambridge economists, so I only really later came to appreciate the values of the Keynesian doctrine.

The war broke up the business that I was in.  When the war broke out in September '39, the British market closed down completely, continental Europe was soon in turmoil, and my job went out from under me.  I came back to the States in January 1940, looking for work.  I talked a little at that time to the State Department, thinking of

[6]

the old idea that I might like to go into the Foreign Service.  But with my experience in economics and finance, I thought that I might have a better opportunity in one of the financial agencies.  I shopped around among the Treasury and the Federal Reserve Board in Washington and in the Federal Reserve Bank in New York, and, to make a long story short, I ended up by taking a job with the Federal Reserve Board.

As a matter of fact, I got two offers at the time which were both very interesting.  One was from the Federal Reserve Board, which I accepted, and the other was from the Treasury, where I had a long interview at the time with Mr. Harry White, who came later to be known as the real intellectual author of the Bretton Woods institutions.  Harry White was very anxious for me to come to the Treasury, but I finally decided on the Federal Reserve, not really because of any considerations about money or career, but

[7]

just because of the people over there.  The people in the Federal Reserve at that time were the chairman, Mr. Marriner Eccles; the head of the research department, as they called it, Dr. [E.A.,] Goldenweiser; the assistant head, Woodlief Thomas; and then the head of the international work, Walter Gardner.  All these men were very outstanding and interesting people, and I'll have a little more to say about some of them later.

So, I ended up taking this job in the Federal Reserve.  They had a personnel form that asked you to specify the lowest salary you'd accept, which I always felt was a kind of a dirty trick.  So, I decided finally that I really wanted this job, and put down $2,500; and that was my starting salary at the Federal Reserve.  Of course, I probably couldn't have gotten more than $3,000 anyway, given the salaries of those days, but I think I probably understated a little my

[8]

experience as a graduate in economics from Stanford University, a graduate from Oxford, and four years of practical experience in international finance.

I hadn't been there more than about two or three months when another very interesting proposition came along, which I think is worth mentioning.  This was with the Bank for International Settlements, in Basle, Switzerland.  Its director, Per Jacobsson, later became the head of the Monetary Fund, and he was really an outstanding economist; he had great size, both physically and intellectually.  He came to Washington on a recruitment expedition, wanting to get a young American economist to come and work for the BIS in Basle.  The Federal Reserve in principle was prepared to release me on a sort of loan basis.

I talked to Jacobsson very seriously about it, along in February 1940.  I knew some languages,

[9]

had had this European experience, and he thought it would be a very good fit.  They wanted to add some Americans, at least one, to their staff.  I told Per that I was interested in principle, but that I was concerned about what was going to happen to this job in neutral Switzerland if the war heated up and Switzerland became virtually isolated in a belligerent Europe.

This was in February or March.  He said, "Well, we'll fix it for the first of July.  You come to work on the first of July, if we're still in business, so to speak."

Well, then came the events of April and May 1940, the invasion of Belgium, the Netherlands, and then of France; the BIS really went into mothballs for the rest of the war period.  They did a lot of useful research work there, but it wasn't the kind of active life that I had expected and looked for, and so I respectfully declined.

I came to know Per Jacobsson very well

[10]

later, when he was the head of the Monetary Fund.  We used to reminisce and talk about what might have been if the BIS had been able to continue its work, or if I'd come there to spend a while in the isolation of Switzerland.

But that didn't work out. Of course, the war clouds began to gather pretty fast over the United States, and my work at the Federal Reserve came to be dominated more and more by wartime considerations.  I really think of my years there as being concerned with wartime finance and postwar planning.

On the subject of wartime finance -- that is to say, the financing of the United States war effort -- I didn't personally have anything to do with it; I was strictly on the international side.  But I learned a lot about it by contact with my colleagues.  The Federal Reserve essentially was called upon to underwrite the war effort, and the budget immediately began to run into huge

[11]

deficits as war expenditures began, even as the preparations for war began.  Certainly after Pearl Harbor there were huge deficits in the Federal budget, and they had to be financed in large part by the banking system.  There were the savings bond drives, taxes were increased, and all that, but the huge requirements of the Federal budget required the banking system to move in, to buy war bonds on a vast scale, expand the money supply, and engage in what Marriner Eccles liked to call the "monetization of the public debt."  What this meant was that large public expenditures were financed by the creation of money through the banking system.  The Federal Reserve, which in normal times would be exercising restraints on the supply of money because of the fear of inflation, was turned into a veritable engine of inflation.  It tried to organize this through the banking system, but it had no autonomous power to control events;

[12]

it was simply the victim of events, and the money supply was vastly expanded.  The inflationary impact of that expanded money supply was held in check by price controls and wage controls, but when that backed up money supply was let loose, it led to the very serious inflation that followed immediately after the end of the war.

There were two notable personalities that came down to serve as advisers to the Federal Reserve in those days.  One was Alvin Hansen, who was a professor of economics at Harvard University and a great exponent of Keynes.  He was the first Keynesian disciple in the United States, and he wrote and talked a great deal.  He exercised a very powerful influence in Washington, not only in the Federal Reserve but in the Treasury and the White House, in arguing the Keynesian case and how Keynes would have handled a situation such as was confronted during

[13]

the war.  Keynes had, indeed, in his writings contemplated exactly the case of war finance.  Then in London he was the principal author of the British system for financing the war effort, which again ran on very