Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World (35 page)

But French finances balanced on a knife-edge. A large part of the public debt was short-term in nature, which made its refinancing an annual ordeal for the franc as French savers underwent an agonizing reappraisal of their government’s solvency. The fact that the Banque de France,
of all institutions, should now have fallen from grace and was implicated in this sordid scandal, albeit one in which no individual seemed to have profited financially, provoked a minor crisis of confidence among French investors.

FOR MUCH OF
the nineteenth century, the Banque de France had been by far the most conservative financial institution in all Europe, far more cautious, for example, than its cousin the Bank of England. Although it was not legally bound, as was the English central bank, to hold a minimum amount of gold, it had adopted the practice of retaining an unusually large gold reserve to back its currency notes—in 1914, the largest in Europe, totaling over $1 billion. On a number of occasions it had even been asked to come to the aid of the Bank of England—for example, during the crises of 1825 and 1837; in 1890, when Barings Brothers faced bankruptcy over its ill-considered loans in South America, and finally, during the panic of 1907. In effect, the Banque played the role of backstop to the Bank of England.

While the Bank of England was a solidly bourgeois institution, egalitarian in the way that an exclusive men’s club is democratic among its members, the Banque de France was from its birth an aristocratic place, even if the aristocracy was only a few years old. Among its first few governors were the comte Jaubert, the comte de Gaudin, the duc de Gaete, the comte Apollinaire d’Argout, and the baron Davillier. Even after 1875, when the republic was brought into being for the third and final time and the French aristocracy abandoned political life, the Banque de France continued to be a haven for the nobility.

The Banque itself remained a private institution owned by shareholders. Though the governor and deputy governors by this time tended to be drawn from the ranks of the higher civil service, they were still ultimately responsible to the twelve-man Council of Regents. In addition, the governor, though appointed by the government, was also required to own one hundred shares, which in the 1920s cost the franc equivalent of $100,000.
Since few government officials, even the very highest, had that much free capital, the purchase money was lent by the regents, making the average governor very much their agent.

In 1811, the Banque moved into the magnificently flamboyant Hôtel de la Vrillière, just north of the Louvre near the Palais Royal. It had once been the town palace of the comte de Toulouse, bastard son of Louis XIV and Madame de Maintenon. Every year at 12:30 in the afternoon, on the last Thursday of January, the pinnacle of French society would gather there for the Banque’s Annual General Assembly. Though it had more than forty thousand shareholders, only the top two hundred were eligible to attend the meeting and choose the regents. The conclave was held in the Galerie Dorée, the long rococo hall running down the center of the hotel. There, beneath the gorgeous paintings on the vaulted ceiling, the carved and sumptuously gilded woodwork, the opulent wall mirrors, seated in alphabetical order would be some of the oldest and most aristocratic families in France: Clérel de Tocqueville, La Rochefoucauld, Noailles, Talleyrand-Périgord.

To be invited to this gathering was one of the most highly coveted emblems of social standing in France. Noblemen, who might otherwise
³⁶⁵
care nothing about banking, treasured their family holdings in the Banque, valued typically at several hundred thousand francs, equivalent then to about a hundred thousand dollars, and held for generations as a prized part of their patrimony.

With an electorate of two hundred of the richest and grandest families in France, it was not surprising that seats on the Council of Regents came to be almost hereditary. Five out of the twelve elected regents were descendants of the original founders and a disproportionately large number were Protestants of Swiss extraction. In 1926, the twelve included Baron Ernest Mallet, Baron Édouard de Rothschild, Baron Jean de Neuflize, Baron Maurice Davillier, M. Felix Vernes, and M. François de Wendel. The Mallet family, Protestant bankers originally from Geneva, proprietors of a concern bearing their name, had the distinction of having sat on the council continuously for four generations, since it was first convened in 1800. The
Rothschilds, the only Jewish family on the council, had sat there since 1855, when Baron Alphonse de Rothschild, managing partner of Rothschild Frères, the French arm of the banking empire, had been chosen. On his death in 1905, his seat had been passed to his son Baron Édouard.

The Davilliers, like so many other regent families elevated to the baronage under Napoléon, were primarily industrialists, although they also operated an eponymous private bank. Baron Maurice Davillier was the fourth member of his family to serve on the council. Although Baron Jean de Neuflize was the first member of his clan to be elected, the Neuflizes, who owned one more eponymous bank, had been ennobled by Louis XV. Baron Jean, an avid sportsman who had represented France as an equestrian at the 1900 Olympics, was president of the Society of Steeplechasers and the even more exclusive Casting Club of France; his daughter was married to the wonderfully named English grandee Vere Brabazon Ponsonby, ninth Earl of Bessborough.

Over the 120 years
³⁶⁶
since the Banque’s foundation, France itself had experienced no fewer than three revolutions; transformed its political system five times; had had seventeen different heads of state, including one emperor, three kings, twelve presidents, and a president who then made himself emperor; and had changed governments on the average of at least once a year. Meanwhile, the Banque and the same few families that wielded power within its council had remained unmolested. So great was the institution’s authority that it had continued to function unhindered during the Paris Commune and had met the currency needs of both sides—not only of the legitimate government at Versailles but of the Commune itself. “The hardest thing to understand
³⁶⁷
,” wrote Friedrich Engels, amazed at the deference of those first Communists, “is the holy awe with which they remained standing outside the gates of the Banque de France.” The mystique attached to the regents and the top two hundred shareholders would give rise in the 1930s to the legend that France was controlled by a financial oligarchy of
les deux cents familles
, a potent myth that would become a rallying cry for the left.

When war broke out in 1914 and the very survival of the nation was
threatened, the Banque, like all the other European central banks, voluntarily subordinated itself to its government, and obligingly printed whatever money was needed to finance the colossal effort. But unlike the Reichsbank, within a few months of the end of the war, it reasserted its independence and refused to go on filling the gap between government spending and tax revenues. In April 1919, the National Assembly fixed a limit on its advances to the state and in September 1920, imposed a ceiling of 41 billion francs on the Banque’s note circulation. There things stood until the crisis of 1925.

IN
1925,
ÉMILE
Moreau, now fifty-seven, was in his twentieth year at the Banque d’Algérie and his fourteenth as its director general. He was proud of his achievements: his role in providing credit to the Moroccan economy, in stimulating the development of industry in Algeria after the war, and in launching a campaign against usury in Tunisia. For his services, he had accumulated a large array of decorations, including the czarist Russian Order of Saint Anne, the Spanish Order of Isabella the Catholic, and the Belgian Order of Leopold II, in addition to being a Commandeur de la Légion d’Honneur. But for all of these accolades, he had never been able to shake off the conviction that his assignment remained a form of professional banishment.

For many years, he had harbored the faint hope of one day returning to the mainstream of the civil service, maintaining, for example, his status as a member on leave of absence of the elite Inspectorat des Finances. But as the years had gone by and no new assignment had come his way, he had finally reconciled himself to his lot. In 1922, he had resigned from the higher civil service, though he continued to hold his position as the head of the Banque d’Algérie.

He and his wife had no children, and he was at an age when he could begin to look forward to more time for his other interests—he had assembled an extensive collection of Islamic coins, was an avid bibliophile, and also an active member of the Touring Club France, periodically taking
off on long automobile trips through the countryside. And after twenty-two years, he was still a very dedicated mayor of his tiny home commune of Saint Léomer, only two hundred miles from Paris, which allowed him to get back to the old village as often as he wished.

Then suddenly in April 1925, when the Herriot government fell over the scandal at the Banque de France, it seemed that Moreau’s star was about to turn. Paul Painlevé
^fn1
formed a new left-wing coalition government and named as his finance minister a man whose four previous tours in the office had gained him a legendary reputation in the field of public finance: Moreau’s old mentor, Joseph Caillaux.

In a country infamous for political instability, few men had had as stormy a career as Caillaux. In 1920, he had been sentenced to three years imprisonment for damaging the security of the state. But having already spent two years at La Santé prison awaiting trial, he had the remainder of his sentence commuted. Legally banished from Paris, Caillaux and his wife, Henriette, retired to the little town of Mamers in the Loire valley. For the next four years they lived quietly. Though he wrote an account of his years in prison that became a best seller, with the shadows of her trial for murder and his conviction for treason hanging over them, they found themselves outcasts, not only shunned in society, but dogged by petty humiliations—turned out of hotels, refused service in restaurants, insulted in cafés and on the streets. Caillaux was even once attacked by a gang armed with clubs and bricks.

But as France headed toward bankruptcy, more and more people could not help remembering Caillaux’s warnings at the height of the war that both victors and vanquished would be ruined and increasingly he came to be seen as a victim of wartime hysteria. What had then been looked down upon as defeatism on his part now began to be viewed as prescience. In December 1924, his supporters in the National Assembly voted to abrogate
his sentence. His return to the Ministry of Finance with a reputation, according to one French senator, as “a kind of Treasury magician
³⁶⁸
, capable of turning dry leaves into bank notes,” was the final vindication for this remarkable man.

Not everyone had forgiven or forgotten, however. As he strode into the Chamber
³⁶⁹
of Deputies on April 21, 1925, to take his place on the government bench, his domed bald head gleaming, a monocle fixed firmly in his right eye, there was hissing and booing and shouts of “traitor” and “deserter.” One ardent Nationalist got up and cried, “Have we reached the point where we must chose between bankruptcy and M. Caillaux? Bankruptcy would be better.” An American newsmagazine reported that it was as if Benedict Arnold, instead of being condemned to death, had been barred from Philadelphia, exiled to the country, then pardoned, and appointed secretary of war.

Over the years, even during Caillaux’s long banishment into the political wilderness, Moreau had assiduously maintained his friendship with the brilliant and erratic politician. For all of Caillaux’s many faults—the indiscretions, the abysmal judgment, the disreputable friends with whom he surrounded himself, the terrible thirst for power, his essential “frivolity
³⁷⁰
”—Moreau had never wavered in his belief that Caillaux was one of the best financial brains France had produced and that had he been minister of finance during the war, France would not have been in its present shape.

The situation confronting the new minister was grave. The franc was the only major currency still “off gold” and fluctuating on the exchanges, its ups and downs serving as a barometer of confidence in French financial management. In the spring of 1924, during the Dawes negotiations, it had briefly sunk to 25 to the dollar. Thereafter it had recovered somewhat, remaining reasonably stable for a year at about 18 to 19 to the dollar, 25 percent of its prewar level. But the affair of the
faux bilans
damaged that fragile equilibrium, and by the end of June, it was wavering at around 22 to the dollar.

Caillaux threw himself into the task of saving France from insolvency with characteristic energy. Immediately upon assuming office, he tried to
fire Governor Robineau from the Banque de France and replace him with his old friend Émile Moreau. A housecleaning at the Banque would have helped to reestablish its credibility abroad. But fearing such a move would irretrievably compromise the Banque’s reputation, the president of the republic killed the idea. Moreau saw his hopes of redemption dashed yet again.

Caillaux succeeded on some fronts. He managed to negotiate a budget deal that, for the first time since 1913, promised to balance the government’s accounts. At the same time, he squashed the proposal for a capital levy, a form of wealth tax much enamored by the Socialists, the threat of which was provoking a flight of capital. In July, he went to London and struck a bargain with Winston Churchill to restructure the French war debt to the British at 40 cents on the dollar, effectively cutting it from $3 billion to $1.2 billion.

But the combination of France’s financial problems and its political logjam were too great even for a man of Caillaux’s abilities as financier and politician. He traveled to Washington to negotiate a similar write-down of the $4 billion debt owed to America but came back empty-handed. And while his appointment may have inspired confidence “in elegant social circles
³⁷¹
and the higher reaches of the Ministry of Finance,” he was less successful in generating the same enthusiasm among those average French investors who held short-term government bonds. He became embroiled in a confrontation with the regents of the Banque de France, who, finding the government unable to meet all of its short-term obligations, tried to push Caillaux to impose some sort of debt moratorium—in effect for the government to admit that it was insolvent. So frustrated was Caillaux by the Banque’s attitude that at one point he burst out how much he “regretted not having thrown
³⁷²
the management of the Banque out of the window the minute he had assumed power.”