Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World (28 page)

After spending much of the morning discussing the German situation, Schacht finally got to his main object in coming to London. Though the Rentenmark was for the moment stable, it was not yet acceptable to foreigners, and hence could not provide the basis for loans to import goods from abroad. True recovery depended on getting international commerce moving again. Schacht proposed that the Bank of England lend a certain amount of capital to a new subsidiary of the Reichsbank to build up its sterling reserves and funds. He was asking for a mere $25 million, which, supplemented by a further $25 million that he hoped to raise from capital held abroad by German banks, would be enough to give the new subsidiary access to the London market and provide the nucleus for as much as $200 million in loans.

This was a typically bold Schacht proposal—given the circumstances, almost outrageous. Germany was essentially bankrupt. It had destroyed its own currency, owed the Allies over $12 billion in reparations—and had defaulted on these—was partially occupied by French and Belgian troops and now on the verge of disintegration. Schacht himself had barely been in office for two weeks; had been appointed in the teeth of fierce opposition, especially from within his own institution; and had yet to put his stamp on the place. For the Bank to lend money to Germany and a deeply divided Reichsbank in the current circumstances would be almost foolhardy. Norman could not help being impressed with the audacity of his new acquaintance.

Both men knew that a loan at this moment from an institution with the authority and prestige of the Bank of England would represent a dramatic gesture of support for Germany, and for Schacht personally. There could be no better seal of approval anywhere in the banking world, one that might in itself set in train a self-reinforcing migration of money back into the country.

Norman had been trying over the years to find a way to help Germany.
He had been shocked by the extent of the collapse of the German currency. In 1922, Von Havenstein had come to see him for help. Though he had found his visitor to be “quiet, modest
²⁸³
, convincing, and [a] very attractive man: but so sad. . . (with) an attitude of almost hopelessness,” he had declined to get involved, believing that the old president was not up to the task.

One element in Schacht’s plan was specifically designed to appeal to Norman: the proposal to base the new bank on the pound sterling. Not only was its capital to be denominated in sterling, it would make loans in sterling, and perhaps issue bank notes in pounds to circulate in Germany. Norman had been working to strengthen the pound by having other European central banks hold some of their reserves in sterling rather than gold. He had so far had some modest success with the idea. Austria and Hungary, like Germany ravaged by postwar inflation, had both pegged their currencies to the pound. But they were small nations of little economic significance. To bring a country such as Germany, despite its troubles still the largest economy within Europe, into the ambit of the pound would enormously bolster sterling’s faltering position.

Schacht’s grasp of the multiple dimensions of the situation, his virtuosity in matters of finances, and his determination clearly impressed Norman, who agreed to the German plan after a single night’s reflection. During the next few days he shepherded Schacht around the City to introduce him to the directors of the Bank. Few took to Schacht, finding him to be a pompous blowhard. But for these two polar opposites—the German parvenu, with a direct and aggressive style, and his English guide, with his old-fashioned manners and elliptical ways of thinking and talking—it was the beginning of a genuine and enduring friendship.

For four years, Norman had stood on the sidelines and watched powerlessly as the situation in Germany had progressively deteriorated. With Schacht’s arrival on the scene, however, he had found reason for hope. On January 7, three days after Schacht left London, he wrote to Strong, “You know, of course
²⁸⁴
, how precarious the position of Germany has been. . . . None the less we are disposed to believe that there is now a chance, and
probably the last chance, of preventing a complete collapse. The new President of the Reichsbank has been here for several days. He seems to know the situation from A to Z and to have, temporarily, more control of it than I should have believed possible: he is acting more resolutely than his predecessor, Havenstein.”

WHILE SCHACHT AND
Norman were concocting their scheme, a team of American “experts,” with even greater ambitions to resolve the problems of German finances, was in mid-Atlantic steaming toward Europe on board a liner. Over the years, Germany had had no shortage of foreign “experts” willing to tell it how to stabilize its currency. The British ambassador, Viscount d’Abernon, himself a currency expert, remarked that on arriving in Berlin, these advisers would be invited to “entertainments
²⁸⁵
after dinner—like actresses with doubtful pasts,” thereafter generally to meet a “sad fate. During life, they empty every room in which they hold forth, and death finds them in madhouses.” The monetary technicians had universally failed because it was not intellectual but financial help that Germany needed. This time, however, the “experts” were Americans, coming with the blessing of the U.S. government and the promise, so everyone hoped, of American money.

Though the United States, frustrated by Europe and its quarrels, had withdrawn from active involvement in world affairs, there remained a faction within the administration, led by Herbert Hoover, the secretary of commerce, and Charles Evans Hughes, the secretary of state, who had continued to push for some degree of engagement in the belief that European recovery was essential to American prosperity. In October 1923, Hughes took advantage of a Europe-wide mood of exhaustion with the issue of reparations to propose the creation of a new committee of experts. It was to include some prominent Americans, although in deference to the country’s isolationist state of mind, they were not to have any official standing but were to act as concerned private citizens.

Even Raymond Poincaré, the French prime minister, recognized that
by invading the Ruhr, he had overplayed his hand and that France was for the present a spent force within Europe. He consented to the proposal subject to one firm condition: under no circumstances was the committee to reconsider the total amount of reparations agreed to by all parties. The word
reparations
was not even to appear in the committee’s remit. It was only to be asked to consider “the means of balancing the budget and the measures to be taken to stabilize the currency,” though no one could quite fathom how it was to accomplish these tasks without addressing the unmentionable issue.

On November 30, 1923, the Reparations Commission announced the appointment of two international committees of experts—the first to consider how to balance the German budget and stabilize the currency, the second to investigate how much German capital had been exported. The first and more important was to be composed of ten men, two each from the United States, Britain, France, Belgium, and Italy. All Europe now awaited the arrival of the Americans.

The leader of that delegation was Charles Gates Dawes, a Chicago banker, who had risen to the rank of brigadier general while serving in France with the American Expeditionary Force and had gone on to become the director of the budget in the Harding administration. He was a straight-talking midwesterner with a long basset hound face who smoked an underslung Sherlock Holmes–style pipe and peppered his conversation with picturesque swearwords.
^fn1
Asked by reporters, as he was preparing to embark, whether he was hopeful that reparations would ever be paid, he replied, “None of your damned business. It’s no use you fellows getting brain fag by thinking up conundrums to put to me before the ship sails, because I do not intend to answer them. I can tell you that I am paying my own fare to France, and am not receiving any pay for my services on the committee.” When the reporters kept pressing him, he roared back, “Hell and Maria
²⁸⁶
, go away from me, I am about to lose my temper.”

His fellow expert was Owen D. Young, a farm boy from upstate New York who at the age of forty had become president and chairman of the board of the General Electric Company, the tenth largest company in America, and was now also the president of the Radio Corporation of America, the darling of Wall Street. Young, tall, and lanky, with thinning black hair and the “hollow deep-set eyes
²⁸⁷
of an ascetic,” was a contrast to the garrulous Dawes, a man of few but well-chosen words. Both he and Dawes were wealthy men who not only refused to accept any compensation for the assignment but also insisted on paying their own expenses.

Though the American party was eagerly awaited in Europe, few people gave the committees much chance of success. The gap between the Germans and the French seemed unbridgeable. The Germans argued that the collapse of the mark was proof enough of their bankruptcy and that for them to pay reparations was impossible. The French, by contrast, saw the collapse of the mark as evidence of capital flight from Germany. How could it claim to be bankrupt when so many rich Germans seemed to be wandering around Europe? Every newspaper was filled with stories of German nouveaux riches flaunting their newly acquired wealth in foreign watering holes, calling attention to themselves by their bad manners and flagrantly conspicuous consumption. The British were caught in the middle. Since the occupation of the Ruhr, public opinion had shifted decisively in favor of Germany, which the French were seen to be trying to dismember, using reparations as an excuse. The British government argued that reparations had to be scaled back.

It was hard to see how a committee of technical experts, even if it did include some prominent Americans, could get the various parties to agree. After all, the premiers of Germany, France, Britain, Belgium, and Italy had met at least a dozen times—at Spa, at San Remo, at Cannes, and several times at conferences in Paris and London—without being able to find common ground, leaving a trail of failed negotiations, torn-up agreements, and bitter ill feeling.

Moreover, with the passage of time, the issue had become hopelessly entangled and complicated. The commission itself had held some four
hundred sessions since its creation in 1919. The two Americans were amateurs who knew very little about the technical details, but each represented that new and distinctively American breed, the businessman-turned-political-troubleshooter who was much like his cousin, the Wall Street–lawyer-turned-diplomat. They were down-to-earth practical men who, though they might know little about the precise problem at hand, prided themselves on their ability to cut through rhetoric and obfuscation, and come up with a solution by applying simple old-fashioned American common sense.

On the transatlantic voyage, the American team—General Dawes; his brother Rufus, who was to be the committee’s chief of staff; Owen Young; and various aides seconded from government departments in Washington—debated their strategy. Some argued that the committee should cut through the confusion and go directly to the heart of the matter—explicitly recognize that Germany simply could not pay what was demanded of it, estimate what it could come up with, and recommend that figure as what it should pay.

Young took the position that the simple and direct approach would not work. The total figure for reparations, $12.5 billion, was too politically charged a number, particularly in France. Tampering with it would inevitably lead to confrontation. To challenge the French at this stage of the negotiations would bog them down in the sort of wrangling that had produced no results for the last three years. Instead, Young proposed that the committee focus on the very limited but achievable goal of reducing the amount Germany would have to pay in the immediate future to a more manageable level.

The committee should jettison the whole concept of “capacity to pay,” he argued. It was impossible to know what this number was. Too many imponderables entered into the calculation, involving such questions as: How much could taxes be raised without triggering mass protest? How tightly could imports be squeezed without precipitating a collapse in production? How far could wages be reduced without provoking labor unrest?
No one could agree on the answers to such cosmic questions. What was needed was a completely new approach to the problem.

In its place, he proposed an alternative criterion: the German public should be required to shoulder the same tax burden as British and French taxpayers. Britain and France had to tap their tax revenues to pay interest on their own internal debts. Germany had inflated away its internal public debt—the Germans, therefore, had a natural surplus from which they could afford to pay reparations. Here was a principle that was easily quantifiable, would be viewed as fair in the court of world public opinion, and would be hard for Germany to argue against. It injected “both the element of novelty
²⁸⁸
and a defensible moral principle” into the whole discussion.

Landing at Le Havre on January 7, the Americans traveled by train to Paris, where they checked into the Ritz. On January 14, the ten-man expert committee held its first meeting at the offices of the Reparations Commission, housed in the Hotel Astoria, a Belle Époque
hotel de luxe
situated at the top of the Champs-Élysées by the Arc de Triomphe. Before the war, the hotel had been popular with rich visiting shoppers. But its conveniently central location and wonderful view of the Arc doomed it to spend the next thirty years under constant requisition by whichever government happened to be in power. The German invasion plans of 1914 had it earmarked for the kaiser’s Paris headquarters. In August 1914, it had been shut down by the French authorities because the owner was suspected of being a German spy. In 1919, it had provided one of the homes of the two-hundred-strong British delegation to the Peace Conference. In 1921, while all the other great hotels were profiting from the enormous influx of tourists drawn to Paris by the cheap franc, the Astoria was taken over by the reparations commission.
^fn2