Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World (14 page)

While the cause of the disease had been isolated in the late nineteenth century, there was still no effective therapy. Half of those who contracted it were dead within five years. At the time, it was thought that the thin dry air in high altitudes helped to contain the infection—with some grounds because its virulence declines in low-oxygen atmospheres. It was also believed—erroneously, it turned out—that total inactivity and complete rest allowed the lungs to rebuild themselves. Luxury sanatoria catering to the rich and the middle class, cut off from the rest of the world, had sprung up in mountain resorts across Europe and America.

Strong’s doctors insisted that he take an extended leave of absence from the Fed. In July 1916, he moved to Colorado, where almost a third of the population was then made up of “consumptives” seeking to be cured. He initially checked into a sanatorium in Estes Park, in the heart of the northern Colorado Rockies, but frustrated by this hermetically sealed world where patients spent hours doing nothing but sitting outdoors taking in the mountain air, he moved to Denver that October and set up a small office that allowed him to keep in touch with New York.

Strong was still convalescing in Colorado when the United States
entered the war in April 1917. Within six weeks, he was back in New York. For the next eighteen months he threw himself into the task of raising the money to pay for the war. Every other objective of the Fed was now subordinated to this goal. The United States spent in total some $30 billion on the war, a little over $20 billion on its own actual expenditures and another $10 billion in the form of loans to keep other countries going.
^fn4
Determined to avoid the mistakes that had been made in financing the Civil War, the secretary of the treasury, William McAdoo, who also happened to be the president’s son-in-law, launched an aggressive program to induce the American public to purchase war debt. The Fed, as banker to the government, was responsible for selling these so-called Liberty Bonds, which eventually brought in close to $20 billion, about half of this raised by the New York Fed.

Taking the lead in organizing the high-pressure campaigns in New York to stir public enthusiasm for the bonds, Strong suddenly found himself thrust into the limelight. Acting as the master of ceremonies for concerts at Carnegie Hall or at the Metropolitan Opera House, leading great patriotic marches down Fifth Avenue, speaking at rallies featuring such Hollywood celebrities as Mary Pickford and Douglas Fairbanks, he became something of a minor celebrity himself. Publicity stunts were a signature of these campaigns. On one occasion
¹¹⁷
Strong and the other organizers had trenches dug in the Sheep Meadow in Central Park—much to the outrage of conservationists—to show how soldiers were living on the Western Front. To kick off another campaign
¹¹⁸
, they arranged for every air-raid siren, police alarm, tugboat whistle, fire engine bell, and ship foghorn across the city to be turned on for five minutes.

By the time the war drew to a close, the Fed was a transformed institution. While it was not completely immune from the pressures of war finance, unlike so many European central banks, it had resisted purchasing government bonds directly and only indirectly helped to fuel the expansion
in money supply. It had therefore secured some credibility. More important, the war had irrevocably changed the economic and financial position of the United States in relation to the rest of the world. The Fed, which barely existed in 1914, now sat on the largest reservoir of gold bullion in the world, making it potentially the dominant player if and when the international gold standard was restored.

^fn1
The gold standard was officially suspended in Germany and France in August 1914. In Britain, the government maintained the legal fiction that the gold standard was still in operation. Theoretically, British citizens could demand gold for their Bank of England notes and were, until May 1917, free to export gold. In reality the threat posed by German submarines made insurance prohibitively high and gold exports were never feasible.

^fn2
That same ethos seems to have extended to the senior employees. Kenneth Grahame, the children’s author, joined the Bank of England in 1879 and rose through the ranks, eventually becoming secretary. In 1895, he published
The Golden Age,
a book not about bullion but childhood. In 1907 he retired, after having been shot during an unsuccessful robbery attempt at the Bank, and the following year published
The Wind in the Willows
.

^fn3
By comparison, the Bank of the United States, the primary bank of issue for a country with one-sixth of France’s population, was capitalized at $10 million.

^fn4
By comparison, Britain, with an economy about a third that of the United States, spent a total of $50 billion over a period of four years.

Lenin was certainly right
¹¹⁹
. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.

—J
OHN
M
AYNARD
K
EYNES
,
The Economic Consequences of the Peace

ON NOVEMBER
11, 1918, the Great War came to an end as it had begun, as a total surprise. In June 1918, the German army broke through the Allied lines, and came within fifty miles of Paris. The German public, given a distorted picture by its government, fully anticipated victory. A month later, the Allies counterattacked and suddenly the entire German war machine seemed to disintegrate. The German forces, exhausted by that last offensive, withered away; support for the war at home crumbled; civilian morale collapsed; soldiers deserted in droves; the navy, blockaded at Kiel, mutinied; and Germany’s allies began to sue secretly for peace. By October, the military, desperate to salvage what it could, turned over power to the civilians. On November 9, the kaiser was forced into exile by his generals, boarding a train for Holland. Early on November 11, in a railway carriage in the forest of Compiègne forty miles outside Paris, an armistice was signed.

Across Europe some 11 million men lay dead, including 2 million Germans, 1.4 million Frenchmen, and 900,000 British. Another 21 million had been wounded, very many maimed for life. Nine million civilians had perished, mostly of hunger, cold, or lowered resistance to the monstrous epidemics. But for all the horrendous human carnage, the actual material destruction of the war was limited to a long but narrow strip of northern France and Belgium. The costs of rebuilding the mines, farms, and factories destroyed on the Western Front amounted to only $7 billion.

Most European economies had contracted—Germany’s and France’s by 30 percent, Britain by less than 5 percent—as men and capital were siphoned off, as factories diverted to producing arms, and livestock slaughtered. The war had been a boon for the United States. Entering late, it had suffered fewer casualties, while the massive expansion in exports of foodstuffs, raw materials, and war supplies to its allies had provided a gigantic boost to its economy. Before the war, its GDP of $40 billion per annum was roughly the equivalent of that of Britain, France, and Germany combined. By 1919, it was more than 50 percent larger.

The most pernicious and insidious economic legacy of the war was the mountain of debt in Europe. In four years of constant and obsessive battle, the governments of Europe had spent some $200 billion, consuming almost half of their nations’ GDP in mutual destruction. To pay for this, they had raised taxes, borrowed gigantic amounts of money both from their own citizens and from the Americans, and simply printed more and more currency. By the end of the war
¹²⁰
, Europe was awash with the stuff—the money supply in Britain doubled, in France it tripled, and in Germany, the worst culprit, it quadrupled. Though the U.S. money supply also doubled, this was less because of inflationary war finance, which it relied upon to a much smaller extent than the Europeans, and more because of the massive influx of gold. This set the pattern of the next decade: Europe struggling with the legacies and burdens of the past, the United States wrestling with the excess bonuses of its good fortune.

ON THE DAY
the kaiser fled Germany, Schacht was in Berlin. That morning, although the kaiser had not actually abdicated—and would only formally do so two weeks later from his sanctuary in Holland—the chancellor, Prince Max of Baden, a distant cousin of the kaiser’s, announced preemptively that the emperor had gone. The city was like an armed camp, with barbed-wire entanglements and overturned vehicles blocking the streets. Revolution was in the air. A general strike had been declared, and thousands of workers and soldiers paraded through the center of town demanding a republic.

Coming out of the Hotel Esplanade near the Potsdammerplatz at about noon, Schacht was confronted by a convoy of Red soldiers packed in the back of trucks driving across the square. At the station, a machine-gun company was positioned for action. No one seemed to be in charge. To find out what was going on, and to avoid being caught in the mob, Schacht and his companion headed north toward the Reichstag, which they found deserted. A little while before, Philipp Scheidemann, a leader of the Social Democrats, had given history a push by coming out onto the balcony and proclaiming a republic to the crowds below, although no such measure had been passed by the Reichstag. Thus was born the new Republic of Germany. The mobs had then headed off to the emperor’s abandoned palace, the Berliner Schloss.

Schacht would remark later that there was a certain distinctively German order amid all the chaos of that dramatic day. The imperial dynasty might have fallen and the political system of Germany overturned, but ordinary people went about their everyday business, trying to ignore the demonstrations. The trams did not stop running; electricity, water, and gas supplies were not interrupted; and almost no one was killed—the casualties that day amounted to fewer than fifteen dead. Even when shots were randomly fired near the palace, the fleeing crowds remained so instinctively law abiding that they obeyed the signs to keep off the grass.

Across the country, workers’ and soldiers’ councils sprang up and took over the functions of the local authorities. On November 10, Schacht was elected, much to his amusement, to his local community council. After issuing a proclamation welcoming the revolution, it met precisely once more.

The next few weeks were a time of terrible turmoil. Although the November revolution was largely peaceful, by the first weeks of January, violence had broken out and Berlin was wracked by strikes, demonstrations, and fierce street fighting between the Spartacist revolutionaries and the army. It seemed to Schacht then, as to very many others, that Germany was the front line in a grand battle across Europe against the forces of Bolshevism. Going home through the darkened city, he could hear the rattle of machine guns. On one occasion, he was stuck in the Hotel Kaiserhof as a gang of Spartacist demonstrators clashed with a group of government supporters outside. A hand grenade burst among the crowd, scattering it in all directions and leaving one man dead in the street below. The “fate of Germany
¹²¹
hung by a thread,” he recalled many years later.

It was also, however, a time of opportunity for middle-class men of talent like Schacht. The collapse of empire and an army in defeat shattered the old order. Within forty-eight hours of the kaiser’s flight, twenty-five dynasties had abdicated within Germany. The Junkers who had dominated the country were discredited, their power swept away.

Initially Schacht thought he might find his opportunity in politics. Before the war, he had been a member of the Young Liberal Association, an arm of the National Liberals, a nationalistic though not very liberal party, which had enthusiastically supported the kaiser’s expansionist policies. In 1901, he had even declined an offer from the party to stand for election to the Reichstag, knowing that power in the Kaiserreich was reserved for the nobility, especially the Prussian nobility, and that a man of his background could not aspire to political office of any consequence. But with the new president of the republic himself a former saddler and the new chancellor a former journalist, it seemed that the old caste system had now disintegrated.