Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World (36 page)

In November, Caillaux was ousted, one more victim of the vendettas and personal intrigue that pervaded French political life. As he left, the franc touched 25 to the dollar. In his seven months in office, the cost of living had risen by 10 percent. During the following eight months, France
had five different finance ministers, each with his own pet solution—a wealth tax, a moratorium on certain maturing debts, more vigorous collection of taxes, an increase in the turnover tax. Each failed to stem the collapse in confidence. French investors continued to pull their money out of the country.

In April 1926, France and the United States finally negotiated a war-debt settlement at 40 cents on the dollar. The budget was at last fully balanced. Still the franc kept falling. By May, the exchange rate stood at over 30 to the dollar.

With a currency in free fall, prices now rising at 2 percent a month, over 25 percent a year, and the government apparently impotent, everyone made the obvious comparison with the situation in Germany four years earlier. In fact, there was no real parallel. Germany in 1922 had lost all control of its budget deficit and in that single year expanded the money supply tenfold. By contrast, the French had largely solved their fiscal problems and its money supply was under control.

The main trouble was the fear that the deep divisions between the right and the left had made France ungovernable. The specter of chronic political chaos associated with revolving-door governments and finance ministers was exacerbated by the uncertainty over the government’s ability to fund itself, given the overhang of more than $10 billion in short-term debt.

It was this psychology of fear—a generalized loss of nerve—that seemed to have gripped French investors and was driving the downward spiral of the franc. The risk was that international speculators, those traditional bugaboos of the left, would create a self-fulfilling meltdown as they shorted the currency in the hope of repurchasing it later at a lower price, thereby compounding the very downward trend that they were trying to exploit. It was the obverse of a bubble, where excessive optimism translates into rising prices, which then induces even more buying. Now excessive pessimism was translating into falling prices, which were inducing even more selling.

In the face of this all-embracing miasma of gloom, neither the
politicians nor the financial establishment seemed to have any clue what to do. In early 1926, the budget minister, Georges Bonnet, invited the regents of the Banque de France to his office to seek their advice. He was struck by how extremely old they seemed to be—one of them could only walk leaning on two canes; another entered on the arm of his valet, who had to assist him into his chair. During the meeting, the panel, which represented the collective financial wisdom of France, seemed only to be able to offer one platitude after another about the need to restore confidence. When asked how to achieve this, they fell back on the usual military metaphors that were de rigueur at times of French financial crisis. One of the regents proclaimed vehemently that “we are the soldiers
³⁷³
of the franc and we will die in the trenches for the franc.” That winter and spring, there was much in the press about the “battle of the franc
³⁷⁴
,” “monetary Marnes,” and the “Verdun of the currency.”

At one point, the government decided it had to do more than just rely on a lot of military-sounding talk. Marshal Joffre, the “Hero of the Marne,” was summoned out of retirement and placed in charge of the “Save the Franc Fund.” It managed to raise
³⁷⁵
all of 19 million francs, rather less than $1 million, including 1 million francs from Sir Basil Zaharoff, the noted European arms merchant, and 100,000 francs from the
New York Herald
, the precursor of today’s
International Herald Tribune
.

The authorities still had one weapon in reserve to break the downward spiral—the more than $1 billion in gold holdings of the Banque de France, some $700 million parked in its vaults on the Rue de la Vrillière, and a further $300 million held abroad with the Bank of England.

For much of modern history, including well into the latter half of the twentieth century, gold has occupied a hallowed place in the French psyche. So revered was it that during these years of financial turmoil, the regents could never quite bring themselves to actually draw upon their reserves. At one point during the war, the British had tried to persuade the Banque de France to utilize some of its gold for the war effort. What was the point, they asked, of building up a reserve if not to use at times of crisis? But the Banque had insisted that its reserves had to be preserved so that when the
troubles were all over, and France was in a position to resume its rightful place in the economic order, the gold would be there to back its currency. The French gold reserves were like family heirlooms or jewels, “which must never be brought out
³⁷⁶
and never be touched; to lie idle, as it were, under a glass case.”

In early 1926, the government, its finances now restored but its currency still inexorably and inexplicably falling, tried to persuade the Banque that now was the time to redeem its pledge by supporting the franc with foreign currencies borrowed against the security of the gold. The Banque refused. Its behavior during the whole crisis—its reluctance to help and its lack of cooperation with the government—would later give rise to the accusation that the plutocrats at the apex of the French banking system had been determined from the very start to bring the left-wing coalition to its knees.
Le mur d’argent
—the wall of money—it was called, joining
les deux cents familles
as the twin rallying cries of the left in France.

In May 1926, the government, spurned by its own central bank, sought frantically to obtain credit abroad. But the scandal of
les faux bilans
had confirmed the universal prejudice among British and American bankers that French institutions—government, politicians, press, and now even the central bank—were decadent, corrupt, and dysfunctional. A French delegation came to see Benjamin Strong, then in London, to beg for a $100 million loan from the New York Fed and was firmly turned down—he could not lend to the French government by statute and would not lend to the Banque de France until all the groups involved—government, opposition, the Banque itself, and the most important French bankers—“[laid] down their squabbles
³⁷⁷
” and agreed to cooperate. At a further meeting in Paris later in May, when French officials again pressed for a loan, Strong told them that when, as he quite expected, they would be unable to pay, the Americans would have to physically take the pledged gold reserves from the vaults of the Banque, for which they would be “excoriated from one end
³⁷⁸
of France to another.” Rejected by the Federal Reserve, the French approached every investment house they could—Morgans, Kuhn Loeb, and Dillon Read. Every house demurred.

On June 15, the “Ballet of Ministries” came around full circle, and Joseph Caillaux returned as minister of finance, his fifth time in that position. This time he finally succeeded in firing Robineau, and Émile Moreau was invited to take over from him. Caillaux was set on making a clean sweep of the Banque’s entire upper management, replacing it with men who were more pragmatic and less ideologically opposed to the government. The deputy governor, Ernest Picard, was packed off to the Banque d’Algérie, a convenient and proven place of exile for unwanted civil servants, and replaced by Charles Rist, a professor of law at the Sorbonne, a well-known specialist in monetary economics. Albert Aupetit, as secretary general of the Banque the primary architect of
les faux bilans
, was also shunted aside. When a group of regents threatened to resign en masse in outrage at the government interference in their internal affairs, Caillaux and Moreau called their bluff. All of them stayed.

On June 24, Moreau, fifty-eight years old, vindicated at last, assumed the governorship. That day, the currency stood at 35 francs to the dollar, having bounced modestly from its low of 37 to the dollar. A friend to whom he confided of his elevation to the new position told him that he pitied him. In his diary that evening, Moreau wrote, “Am I to become the liquidator
³⁷⁹
of the national bankruptcy? This has to be feared or at least expected. . . . My wife is very unhappy.”

COINCIDENTALLY
,
AS THE
financial crisis in France was reaching a sort of crescendo, Norman and Strong were enjoying their annual vacation together, this year on the French Riviera. They had developed the practice of meeting twice a year, combining business and pleasure—in New York during the winter and in Europe during the summer.

The previous summer, Strong had spent a full three months in Europe. After going to London, Strong, who was accompanied by his eldest daughter, Katherine, had gone on to Berlin with Norman to meet with Schacht, then to Paris and then for a month to the Palace Hotel at Biarritz.

Come 1926, Strong proposed that they go to the south of France. The
Côte d’Azur was one of Norman’s favorite vacation spots—he had been a regular visitor since 1902, when he had spent several months in Hyères recuperating after the Boer War. But like most of the other English people who frequented the Riviera in those years, he preferred to be there in the winter and the early spring. “My doubt is only about
³⁸⁰
the heat: I like to be warm but not grilled,” he groused when Strong first came up with the idea. But the inducement of being able to sit down with his friend and “ooze out whatever questions are in my head” persuaded him to go along.

They chose to stay at the Hôtel du Cap Eden-Roc. Before the war, the Hôtel du Cap, secluded in twenty-five acres of ornamental gardens at the tip of Cap d’Antibes, had been a favorite watering hole of European royalty. Like most resort hotels on the Riviera, it used to shut between May and September. However, in 1923, a rich young American couple, the Murphys,
^fn2
persuaded the owner to keep it open and took over the whole hotel for the summer. Thus was born the summer season in the south of France. In the three years since the Murphys had first commandeered the Hôtel du Cap, it had become the most fashionable summer resort hotel on the Côte d’Azur.

In the last week of June, Strong and Norman and the other guests found themselves besieged by newspapermen. It seemed too much of a coincidence that the world’s two most important central bankers should happen to be in France at the very moment its currency crisis was reaching some sort of denouement. Rumors were rife that a meeting of the world’s great financiers, to be held in Antibes, of all places, was in the offing; that Schacht was on his way; that Andrew Mellon, the U.S. secretary of the treasury, would soon arrive; that Moreau was already in daily contact.

The two bankers did manage to elude the escort of reporters one evening, but were soon discovered dining at the Colombe d’Or, a small restaurant at St. Paul-de-Vence, twenty miles away. Another intrepid
³⁸¹
journalist managed to talk his way into the hotel grounds and reported encountering Norman perched acrobatically on a sort of surfboard being dragged through the waves by a small motor dinghy. The hotel management became so irritated with the inconvenience to its other guests caused by the press barrage that its employees were given strict instructions not to deliver messages to the two men. In fact, while Norman and Strong followed the events in Paris avidly, they knew that at this stage it was premature to enter into any sort of discussions with the French authorities.

At the end of July, Norman returned to England. Strong went to Paris, arriving on July 20. Three days before, the latest French government, having lasted all of four weeks, collapsed. It was followed by another left-wing coalition that survived only seventy-two hours. There was talk of revolution or a coup d’état. The streets outside the National Assembly were daily thronged with protesters.
³⁸¹
Strong found his French banking
³⁸²
correspondents so fearful that they had begun sending their families to safety in the provinces, while the American officials he knew were preparing for violent anti-American demonstrations.

Since the founding of their republic, Americans had had a love affair with France and especially with Paris. In the early twenties, with the franc at a quarter of its prewar level, that romance had suddenly become accessible to any American with a couple of hundred dollars to spare. A tourist-class passage across the Atlantic could be had for as little as $80 and the cost of living in France was astoundingly cheap for anyone with dollars. By 1926, an estimated forty-five thousand
³⁸³
Americans were living in Paris and every summer another two hundred thousand tourists arrived to enjoy the combination of culture, gracious living, and a risqué nightlife that made Paris, even then, the most visited city in the world.

Unfortunately, the affection of Americans for all things French was increasingly unrequited. The French press had
³⁸⁴
for a while expressed its indignation at the spectacle of rich Americans taking advantage of the low franc to buy up the choicest French property on the Côte d’Azur and Côte Basque, along the Loire valley, and on the Champs de Mars in Paris. The
newspaper
Le Midi
had taken to referring to Americans as “destructive grasshoppers
³⁸⁵
.”

One incident in particular had been a lightning rod for bad feeling. In March 1924, at the height of the currency crisis, the U.S. ambassador, Myron Herrick, bought out of his own pocket a grand mansion at Two Avenue d’Iéna to house the embassy. Built in the late nineteenth century at a cost of 5 million francs, equivalent at the time to about $1 million, the mansion was now selling for 5,400,000 francs.
^fn3
Herrick astutely chose to exchange his dollars for francs on March 11, 1924, the very day that panic selling on the Bourse drove the exchange rate down to 27 francs to the dollar, which gave him the house for only $200,000. As ambassador from 1912 to 1914 Herrick had won the affection of the French for his decision to stay in the city when it seemed about to fall to the Germans. The affection was great enough that he had been asked to return as ambassador in 1921. But when the newspapers discovered that the American ambassador himself had cut a sweet deal from the franc’s collapse, there was outrage.