Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World (38 page)

Every country in Europe to emerge from the war had faced the same set of issues. Britain had chosen one extreme: to impose most of the burden on its taxpayers and to protect its savers. Germany had chosen the opposite extreme: the way of pathological inflation, which had wiped away
its internal debts at the price of annihilating the savings of its middle classes. Moreau was set on finding a middle way.

Poincaré’s natural inclination was to savor the benefits to his reputation of the strengthening currency and let the franc keep rising. He was understandably reluctant to go down in history as the man who had formally acceded to an 80 percent reduction in the value of his nation’s money. But he also recognized that by allowing it to rise too far, he risked driving the economy into recession. Like many with a genius for detail, Poincaré was by nature indecisive and vacillating, one day in favor of capping the rise, the next day against.

The principle of opposition to capping the franc’s recovery did not come from the prime minister but from within Moreau’s very own institution. A faction within the Banque’s directorate, led by the two most powerful regents, Baron Édouard de Rothschild and François de Wendel, saw in the decline of the franc the decline of France. True diehards, they considered it their moral obligation to defend the interests of all those who had invested in French bonds during the war.

No one better symbolized the power of
les deux cents familles
and
le mur d’argent
than these two men. Rothschild was the epitome of the French aristocrat. Tall and slender, always fastidiously dressed in his old-fashioned banker’s uniform of frock coat and top hat, he had become the senior partner at Rothschild Frères at the age of thirty-seven. Beneath his haughty demeanor, he was shy, almost withdrawn; cautious and old-fashioned, he was a true conservative. The family bank matched his character, a place where, according to his son Guy, “The past clung to everything
³⁹⁹
and everyone” and whose main purpose was in “gently prolonging the nineteenth century.”

A familiar figure
⁴⁰⁰
in the best Parisian clubs, Rothschild had been an intimate friend of Edward VII’s, and was known as a great philanthropist, being especially generous to Jewish charities. To the public he was above all famous for his racehorses; during the season he was a fixture at Longchamps. More than just another wealthy breeder and owner of
thoroughbreds, he was a skilled equestrian in his own right who had even represented France at polo at the 1900 Olympics.

In the world of banking the Rothschild name and the family’s great wealth evoked both awe and resentment. There was much anti-Semitic innuendo about their political influence. One exaggerated account has it that between 1920 and 1940, “No cabinet was formed
⁴⁰¹
without Édouard de Rothschild being consulted.” Édouard had been a young man of twenty-five when the Dreyfus affair broke in 1894. As Dreyfus was being publicly degraded from his rank, an enraged mob had howled
⁴⁰²
, “
A Mort les Juifs!
”—“Death to the Jews!” He was determined thereafter that the Rothschilds should keep a low profile, keep out of the papers, and guard their privacy—though justly enraged by an anti-Semitic slur, he did once challenge a man to a duel.
^fn7

If Édouard de Rothschild was the glamorous face on the “wall of money,” Francois de Wendel was, in the public mind, its more sinister visage. The Wendels were one of the great arms manufacturers of Europe, armorers from Lorraine for more than 250 years, who had supplied weapons to, among others, Napoléon Bonaparte. Under the Second Empire, they had diversified, building one of the largest steel empires in Europe so that by 1914 the Wendel name in France had become as synonymous with steel as that of Carnegie was in the United States.

In the French edition of
Who’s Who,
François de Wendel listed his profession simply as “Maître de Forges
⁴⁰³
”—ironmaster. He did not look the part. His receding chin gave him the appearance of “a tall friendly duck.” He lived discreetly in a mansion at 10 Rue de Clichy, not the most elegant or fashionable quartier of the capital, and liked to spend his weekends at
his private game reserve just outside Paris, where he was said to be an enthusiastic but not very talented shot.

Unusually for a regent of the Banque de France, Wendel was an elected member of the National Assembly, leaving his two brothers to run the vast steel empire. In 1918, he became president of the Comité des Forges, the very powerful industry association of iron, steel, and armament manufacturers.

It required a certain obstinacy and tenacity of purpose for Moreau to take on the most powerful of his own regents. But over a thirty-year career in the higher civil service, he had acquired the remarkable skill in operating within the machinery of government. He certainly did not rely on diplomatic skills or charm—he had neither. Furthermore, after years on the periphery of power and of avoiding the salons of Paris, he had a limited network of political allies. His one great mentor, Caillaux, who might have helped him through the labyrinth of the French power structure, was gone within a few weeks of his appointment. It did not help that Poincaré was a long-standing enemy of Caillaux’s, and from the very start viewed Moreau with some hostility and suspicion as a holdover.

But Moreau proved to be unusually adept at bureaucratic infighting. In his diaries, he displays a natural talent for the give-and-take of policy formulation, knowing when to concede and when to push, when to bluff, when to threaten and when to fold, and considerable insight into the motivations and character of those he was up against.

On December 21, the Banque began to purchase foreign exchange and sell its own currency to prevent the franc from rising above 25 to the dollar. For the next two years, with Poincaré’s blessing, Moreau pursued a policy of intervening in the currency market to keep it pegged there.

Meanwhile, Rothschild and Wendel waged a guerrilla campaign against Moreau within the halls of the Banque and the corridors of power of the finance ministry on the Rue de Rivoli. Few institutions were more riddled with byzantine intrigue than the Banque. Moreau had had his first taste
⁴⁰⁴
of it soon after joining—in August 1926, to his great surprise, he discovered
that all incoming and outgoing calls including those from the governor’s office were being wiretapped. He had the taps dismantled.

Unable to secure a majority within the Council of Regents, Rothschild and Wendel employed every
⁴⁰⁵
possible tactic to undermine Moreau. They lobbied the prime minister. They breached a long-standing tradition of discretion among the regents by making public pronouncements on currency policy, hoping thereby to lure such a flood of money into the country that Moreau would be forced to remove the cap. At one point, Rothschild ordered the Chemin de Fer du Nord, the largest railway company in France—of which he was president—to buy francs in order to push the exchange rate higher, risking the accusation that a regent of the Banque de France was engaged in inside trading in the currency market.

By the middle of 1927, it was clear that Moreau had won. Waves of French capital that had fled to London or New York had washed back home, allowing the Banque to accumulate a foreign exchange war chest of $500 million, most of it in pounds. Despite the pressure from the diehards among the Regents, Poincaré had been won over. Moreau kept urging him not to look to France’s past but to its future. At 25 francs to the dollar, French goods were among the most competitive in the world; exports were booming, while prices were stable. It seemed as if, thanks to Moreau, France, of all the European countries, had finally hit upon the right recipe for dealing with the financial legacy of the war, avoiding the two extremes of German-style inflation and British-style deflation.

Moreau’s mistake was to assume that the value of the currency of a major economic power such as France, the fourth largest industrial economy, was a matter for that country alone. Exchange rates, by their very nature, involve more than one side and are therefore a reflection of a multilateral system. Though it may have been very difficult in 1926 to know the exact ramifications of the franc’s exchange rate on surrounding countries, Moreau seems to have deliberately closed his eyes to the impact of his decision on the wider system. Perhaps he was irritated at an international regime that he felt had done so little to support France in its time
of trouble. Perhaps he resented that the structure was dominated by an Anglo-American combine led by Norman—or so he believed. Whatever the reason, his decision to fix the franc at an undervalued rate would eventually help to undermine the stability of the very standard to which he had now hitched his currency.

^fn1
Like so many politicians from the left, Painlevé was an intellectual, a brilliant mathematician from the Sorbonne with a particular expertise in nonlinear second-order differential equations.

^fn2
Gerald and Sara Murphy were the models for Dick and Nicole Diver in F. Scott Fitzgerald’s book
Tender Is the Night
. They were introduced to the south of France in 1922 by their friends Cole and Linda Porter.

^fn3
The mansion belonged to the family of the French politician Daniel Wilson, the son-in-law of President Grévy, who had been accused in 1887 of selling decorations, including nominations to the Légion d’Honneur, from his office in the Elysée Palace.

^fn4
When the royal family was imprisoned at the Temple, the princess de Lamballe had accompanied them. She met a gruesome end in September 1791, when she was handed over to a lynch mob, who stripped her naked, gang-raped her in the streets, then mutilated her body before finally impaling her head upon a pike and parading it in front of Marie Antoinette’s prison window.

^fn5
He made up for his apparent coldness by an obsessive love of animals. He and his wife, Henriette, had no children and lavished their affection on their pet cats and dogs. Poincaré is supposed to have been heartbroken both when his sheepdog Nino died in 1926 and when his favorite Siamese cat, Gris-gris, passed away in 1929.

^fn6
Pierre Quesnay became a close friend of Moreau’s. He drowned in 1937 in a swimming accident in a lake on the grounds of La Frissonaire while staying with Moreau.

^fn7
Édouard’s efforts to keep his family firmly out of the papers except for the society columns were not helped when his cousin Maurice, a flamboyant womanizer and the black sheep of the family, took it into his head to enter politics, ran for the National Assembly, and in early 1926, was found guilty of having bought his seat by offering his constituents cash handouts, ranging from twenty to a thousand francs. Expelled from parliament, he insisted on running again and won.

Circumstances rule men
⁴⁰⁶
; men do not rule circumstances.

—H
ERODOTUS
,
Histories

No other issue would create more debate, disagreement, feuds, and confusion within the Federal Reserve System than what to do about the stock market. Wall Street had always loomed large in the American national psyche. Charles Dickens, visiting the United States in 1842, had been struck by the local taste for speculation and the desire “to make a fortune
⁴⁰⁷
out of nothing.” After the 1884 panic on the New York Stock Exchange, the London magazine
The Spectator
commented, “The English, however speculative
⁴⁰⁸
, fear poverty. The Frenchman shoots himself to avoid it. The American with a million speculates to win ten, and if he takes losses takes a clerkship with equanimity. This freedom from sordidness is commendable, but it makes a nation of the most degenerate gamesters in the world.”

Surprisingly, despite this national proclivity for betting on stocks, the U.S. market had never been especially large. In 1913, the total value
⁴⁰⁹
of common stocks was some $15 billion, roughly the same size as the British stock market, which rested upon an economy about a third the size of that of
the United States. From the beginning of the century until the outbreak of war, the stock market had essentially gone nowhere. The “merger” bull market
⁴¹⁰
from 1900 to 1902 had been cut short by the “rich man’s panic” of 1903, which was followed by the “Roosevelt” bull market, then the “1907 panic,” and finally the “recovery” bull market. As a consequence, the Dow had fluctuated for a decade and a half in an irregular wavelike movement between 50 and 100 without breaking in either direction.
^fn1

When war came, the U.S. economy experienced a boom and profits shot up dramatically for a couple of years as America became the arms supplier and financier to the Allies. But few investors were convinced that European Armageddon could be good for stocks in the long run, and so despite the profit surge, the market remained firmly range bound. Wisely so, for once the United States did enter the fray, labor shortages emerged, the war effort consumed great chunks of the national product, and profits suffered. By the end of 1920, the Dow stood at 72, almost at the midpoint of its range for the last twenty years—though after taking wartime inflation into account, this represented half the 1913 level in real terms.

But once the initial postwar adjustment pains had died away, the market began to take off. From 1922 onward, the Fed, under the leadership of Benjamin Strong, did a remarkable job in stabilizing prices. With inflation thus effectively at zero, it was able to keep interest rates low. This allowed the economy, boosted by the dynamic new industries of automobiles and radios, to surge ahead. While overall economic growth was exceptionally strong, even stronger and more exceptional was the rise in profits. Powered by new forms of organization and by a surge in factory mechanization, productivity accelerated in the 1920s while hourly wages grew only modestly. Most of the benefits, therefore, of the “new era” flowed to the
corporate bottom line—by 1925, earnings were double their level in 1913.As a result, the Dow, after hitting a low of 67 in the summer of 1921, more than doubled to above 150 during the subsequent four years. By 1925, after the reelection of Calvin Coolidge as president, this last upward ride even acquired its own moniker: the Coolidge bull market.