Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World (31 page)

Finally, on August 14, the definitive terms were submitted to the German delegation, who were granted the night to accept or reject them. The Germans gathered in one of the rooms at the Ritz for an all-night session. Each of them spoke his mind. As dawn arrived, the chancellor went around the room with a last poll. All voted for acceptance, except for Schacht, who said, in his harsh Frisian accent, “We cannot accept
³⁰⁹
the terms—we can never fulfill them.” He insisted that the Dawes Plan’s failure to reduce the total level of reparations was its fatal flaw. But it was Stresemann who had the final word. “We must get the French out of the Ruhr. We must free the Rhineland. We must accept.”

ON THE SURFACE
, the Dawes Plan appeared to be the turning point for Europe. The wrangling over reparations, which had consumed the energy of officials for the last five years, seemed to be over. In September, the loan that formed the basis of the plan was successfully floated in New York and London. It started a boom in lending to Germany by American banks that was to fuel a recovery in its economy for the next several years and bring stability to the new currency.

Young, the true architect of the plan, had believed that in the climate of bitterness and recrimination prevailing in 1924, Europe would be able to improvise its way toward an eventual solution only by avoiding confronting its problems head-on. The plan had therefore very deliberately swept a whole series of issues under the carpet. The total bill for reparations remained unspecified. As a result, resentment within Germany continued to fester just below the surface. Moreover, the new German prosperity depended on what Keynes described as “a great circular flow of
paper” across the Atlantic: “The United States lends money
³¹⁰
to Germany, Germany transfers its equivalent to the Allies, the Allies pay it back to the United States government. Nothing real passes—no one is a penny the worse. The engravers’ dies, the printers’ forms are busier. But no one eats less, no one works more.” No one was willing to predict what would happen once the music stopped.

Nevertheless, the initial fanfare associated with the plan did catapult Charles Dawes, hitherto a relatively obscure financier, to fame and fortune. In the summer of 1924, Coolidge selected him to be his running mate; Dawes was elected vice president of the United States that autumn. For having bought time for Europe and at least created the illusion that the Continent’s battles over money were finally over, he was awarded the 1925 Nobel Prize for peace.

^fn1
He was also a self-taught composer. In 1911, he composed a piece entitled “Melody in A Major,” which, set to words in the 1950s, became the popular hit song “It’s All in the Game.”

^fn2
In 1940, during the German occupation of Paris, the Astoria would be commandeered by the occupation forces. Subsequently, when the city was liberated in 1944 by the Allies, it would be taken over as General Eisenhower’s Paris headquarters. Torn down in the 1950s, its successor building became famous to visitors to Paris in the 1960s as Le Drugstore.

^fn3
Between 1894 and 1914, six heads of state were assassinated by terrorists. See Barbara Tuchman,
The Proud Tower
(New York: Bantam Books, 1966), p. 72.

“I never knew a man
³¹¹
who had better motives for all the trouble he caused.”

—G
RAHAM
G
REENE,
The Quiet American

BY
1924,
LONDON
had shaken off the grim austerity of the war years and was basking happily and prosperously, as Robert Graves put it, “in the full sunshine
³¹²
of Peace.” The shops were crowded, the theaters and cinemas filled to capacity, the streets jammed with traffic. Regent Street had been made over
³¹³
and transformed into a broad thoroughfare, its refurbished buildings gleaming.

Whereas in Germany, a demobilized army officer might find his calling in a right-wing death squad, his counterpart in Britain had plunged into commercial life—it was said that most of the fleets of motor buses that jammed the streets of London were owned and operated by syndicates of former army officers. There was a new freedom
³¹⁴
in the air. At night, in the West End, the bright young things who set the pace for London society had discovered dancing: the jog-trot, the vampire, the camel-walk, the shimmy, and most infamous of all, the Charleston. That, and a modest relaxation in the wartime liquor-licensing laws, had fueled an explosion in the number of nightclubs. On Bond Street was the Embassy Club, a
favorite haunt of the Prince of Wales and the smart set. In the Haymarket was the fashionable Kit-Kat Club, which boasted a dance floor for four hundred and was where Edwina and Dickie Mountbatten could be found most evenings. At 43 Gerard Street was the more raffish and bohemian “43” Club, frequented by, among others, the crown prince of Sweden, Prince Nicholas of Romania, Tallulah Bankhead, Augustus John, and Joseph Conrad. In April 1924, in a scandal that shook all London society, it was raided by the police and one of its members, the well-known London restaurateur “Brilliant” Chang, was arrested for running a cocaine ring.

But while London and the Southeast were celebrating the return of peace and prosperity, not more than a hundred miles north of the capital was another country. The industrial heartland of Britain—the Midlands and the North—was struggling while London danced. The great traditional industries—the cotton mills of Lancashire, the coal mines of Nottinghamshire and South Wales, and the shipbuilding yards along the Tyne—once the engines of the Victorian boom, but now priced out of world markets, had fallen into a severe slump. Textile exports were half of what they had been in 1913, and it was the same with coal. Over a million and a quarter men were unemployed and another million were on part-time work. In some places—the dreary colliery districts of Yorkshire or the blighted ship-building town of Jarrow—one man out of every two was on the dole.

The irony was that Britain’s economic troubles were not the result of ineptitude or the wages of financial sin but the unfortunate side effect of a high degree of financial piety and rectitude. The decision to deflate the economy in 1920 and 1921 to reverse wartime inflation had partially succeeded. Prices came down by 50 percent from their postwar peak and the weakness in the currency was reversed—the pound, which had touched $3.20, had rebounded fitfully and erratically to $4.30. But the price of financial orthodoxy had been stiff. While Britain had recovered from the recession of 1921, the rebound had been muted. The City of London, finding it difficult to compete with New York for funds, had been forced to
impose a regime of high interest rates, and unemployment remained stubbornly stuck above 10 percent.

The comparison between Britain and France was striking. Solid conservative Britain had pursued the most orthodox and prudent financial policies of any European power, refusing to inflate its way out of debt or to allow its currency to collapse, and had been rewarded with the highest unemployment rate in Europe and a limping economy. By contrast, France had been invaded during the war, suffered the highest ratio of casualties of any country other than Serbia, and seen large tracts of its most productive land leveled and destroyed. After the war, the French had resorted to inflation to lighten the burden of debt and to a weak franc to steal a march on the British by cheapening their goods. Though the government had continuously staggered on the edge of insolvency since the war, the overall economy had done well; exports had boomed. The number of unemployed in France was a fraction of that in Britain. As one contemporary journalist summarized it, “While England is financially sound
³¹⁵
and economically sick, France is economically sound and financially sick.”

All of this self-inflicted pain might have been worthwhile if in the process Britain had been able to achieve its overriding postwar economic objective: the restoration of the pound to its prewar pedestal. But even here the rewards of virtue proved to be elusive

By the fall of 1924, the pound was stuck. Having floated at around $4.35 for two years, it seemed unable to rise any further. Despite mass unemployment and high interest rates, prices in Britain still remained stubbornly elevated compared to the United States. Even if by most calculations the discrepancy was only 10 percent, that last 10 percent was proving to be the hardest.

Facing an economy in poor shape, prices that were too high, and a currency apparently stuck some 15 percent below its prewar parity, one school of economists argued that the authorities should abandon their dogged attempt to depress prices further and with it the goal of restoring the prewar exchange rate. Any attempt in the current circumstances to return to gold at the old parity would just throw hundreds of thousands more people out of work. They argued that a new level for the pound should be selected that reflected the realities of postwar Britain: the changed international environment, the new competition, Britain’s higher cost structure, and the transformation in its international balance sheet brought about by war.

To Norman and the purists within the Bank of England, this was unacceptable. They continued to press for a return to the old gold rate of $4.86, seeing it as a moral commitment on the part of the British nation to those around the world who had placed their assets, their confidence, and their trust in Britain and its currency.

Even the most orthodox among them—like Norman, who in 1918 had wanted to return to gold the moment the guns stopped firing—conceded that the time was not right. The Cunliffe committee of 1918 had originally estimated that it might take as much as a decade for Britain to return to the gold standard. In 1924, another committee, under the chairmanship of Austen Chamberlain, also recommended a delay of some years. Britain’s
economy was still not in shape to withstand the harsh medicine of a rise in its currency and the strictures of the gold standard.

The success of the Dawes Plan had been seen as a giant step in restoring financial order to continental Europe. The spotlight now shifted to Britain and the pound. With the mark stabilized and now fixed against gold, the universal question was: When would sterling follow? It was an uncomfortable position for Norman. He hated the prospect of having to operate under the white light of publicity. As he complained to Strong, “You know how controversial
³¹⁶
a subject it is—and how it is everybody’s business.”

He did worry that Britain was being left behind. Germany, Sweden, Poland, Austria, and Hungary had already returned to gold, while the Netherlands, Canada, Australia, New Zealand, and South Africa were all making plans to do so in the near future. Once all these currencies were stabilized, it would be hard to retain the pound’s financial and trading preeminence. Merchants and investors would soon begin looking for an alternative. His fears that the newly stabilized mark might become the strongest on the Continent and supplant the pound were echoed by others in the City who warned that further delay would “hand over to Germany
³¹⁷
the financial scepter in Europe.” Even Strong began kidding him that sterling was “rather far behind
³¹⁸
in the procession.”

In November 1924, the political situation changed suddenly and dramatically. Since the war, Britain had faced an unusual series of fragile coalition and minority governments. The immediate postwar coalition of Conservatives and Lloyd George Liberals was followed in 1922 by a Conservative government, initially led by the dying Bonar Law, and six months later by Stanley Baldwin. In January 1924, a minority Labor government under Ramsay MacDonald took over, but that November, a wave of anticommunist sentiment, fueled by the publication of a fraudulent letter linking the Labor Party to the Soviet Union, led to a Conservative landslide. Norman’s close friend Stanley Baldwin resumed the reins of power.

To everyone’s surprise, Winston Churchill was appointed chancellor of the exchequer, the second most powerful position in government.

NO ONE WAS
more taken aback by the appointment than Churchill himself. He was then a few days shy of fifty. After a spectacular early career—home secretary at the age of thirty-five and first lord of the admiralty in 1911—he had fallen on hard times. The debacle at Gallipoli in 1915 had been a turning point. Politically damaged, he had gone off to fight on the Western Front, continued to deliver his brilliant speeches, and had become a follower of Lloyd George; when the “Welsh Wizard” was ousted in 1922, Churchill had lost his seat in Parliament and spent the next two years trying to rehabilitate himself.

It was a daunting task. Within political circles, he was almost universally distrusted as a man who had changed parties not just once, but twice. In 1903, after the Tories had split over free trade and their political fortunes seemed bleak, he had crossed the floor to join the Liberals, becoming a junior minister in barely two years. Now again, in 1924, as the Liberals were being shunted into the political wilderness, he had abandoned them—although for the sake of form he did not formally join the Conservatives for several more years. Many people thought that vaulting ambition and poor judgment were hereditary traits of the Churchills, echoing Gladstone’s verdict, “There never was a Churchill
³¹⁹
, from John Marlborough down, that had either morals or principles.”