Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World (4 page)

What an extraordinary episode
¹⁷
in the economic progress of man that age was which came to an end in August 1914!

—J
OHN
M
AYNARD
K
EYNES
,
The Economic Consequences of the Peace

IN
1914,
LONDON
stood at the center of an elaborate network of international credit, built upon the foundations of the gold standard. The system had brought with it a remarkable expansion of trade and prosperity across the globe. The previous forty years had seen no big wars or great revolutions. The technological advances of the mid-nineteenth century—railways, steamships, and the telegraph—had spread across the world, opening up vast territories to settlement and trade. International commerce boomed as European capital flowed freely around the globe, financing ports in India, rubber plantations in Malaya, cotton in Egypt, factories in Russia, wheat fields in Canada, gold and diamond mines in South Africa, cattle ranches in Argentina, the Berlin-to-Baghdad Railway, and both the Suez and the Panama canals. Although every so often the system was shaken by financial crises and banking panics, depressions in trade were short-lived and the world economy had always bounced back.

More than anything else, more even than the belief in free trade, or the ideology of low taxation and small government, the gold standard was the economic totem of the age. Gold was the lifeblood of the financial system.
It was the anchor for most currencies, it provided the foundation for banks, and in a time of war or panic, it served as a store of safety. For the growing middle classes of the world, who provided so much of the savings, the gold standard was more than simply an ingenious system for regulating the issue of currency. It served to reinforce all those Victorian virtues of economy and prudence in public policy. It had, in the words of H. G. Wells, “a magnificent stupid honesty
¹⁸
” about it. Among bankers, whether in London or New York, Paris or Berlin, it was revered with an almost religious fervor, as a gift of providence, a code of behavior transcending time and place.

In 1909, the British journalist Norman Angell, then Paris editor of the French edition of the
Daily Mail,
published a pamphlet entitled
Europe’s Optical Illusion.
The thesis of his slim volume was that the economic benefits of war were so illusory—hence the title—and the commercial and financial linkages between countries now so extensive that no rational country should contemplate starting a war. The economic chaos, especially the disruptions to international credit, that would ensue from a war among the Great Powers would harm all sides and the victor would lose as much as the vanquished. Even if war were to break out in Europe by accident, it would speedily be brought to an end.

Angell was well placed to write about global interdependence. All his life he had been something of a nomad. Born into a middle-class Lincoln-shire family, he had been sent at an early age to a French lycée in St. Omer. At seventeen he became the editor of an English-language newspaper in Geneva, attending the university there, and then, despairing of the future of Europe, emigrated to the United States. Though only five feet tall and of slight build, he plunged into a life of manual labor, working in California for seven years variously as a vine planter, irrigation-ditch digger, cowpuncher, mail carrier, and prospector, before eventually settling down as a reporter for the
St. Louis Globe-Democrat
and the
San Francisco Chronicle
. Returning to Europe in 1898, he moved to Paris, where he joined the
Daily Mail.

Angell’s pamphlet was issued in book form in 1910 under the title
The
Great Illusion.
The argument that it was not so much the cruelty of war as its economic futility that made it unacceptable as an instrument of state power struck a chord in that materialistic era. The work became a cult. By 1913, it had sold more than a million copies and been translated into twenty-two languages, including Chinese, Japanese, Arabic, and Persian. More than forty organizations were formed to spread its message. It was quoted by Sir Edward Grey, the British foreign secretary; by Count von Metternich; and by Jean Jaurès, the French Socialist leader. Even Kaiser Wilhelm
¹⁹
, better known for his bellicosity than his embrace of pacifism, was said to have expressed some interest in the theory.

Angell’s most prominent disciple was Reginald Brett, second Viscount Esher, a liberally minded establishment figure, and close confidant of King Edward VII. Though Lord Esher had been offered numerous high positions in government, he preferred to remain merely deputy constable and lieutenant governor of Windsor Castle while exerting his considerable influence behind the scenes. Most important, he was a founding member of the Committee of Imperial Defense, an informal but powerful organization formed after the debacles of the Boer War to reflect and advise on the military strategy of the British Empire.

In February 1912
²⁰
, the committee conducted hearings on issues related to trade in time of war. Much of the German merchant marine was then insured through Lloyds of London, and the committee was dumbfounded to hear the chairman of Lloyds testify that in the event of war, were German ships to be sunk by the Royal Navy, Lloyds would be both honor-bound and, according to its lawyers, legally obliged to cover the losses. The possibility that while Britain and Germany were at war, British insurance companies would be required to compensate the Kaiser for his sunken tonnage made it hard even to conceive of a European conflict.

It was no wonder that during a series of lectures on
The Great Illusion
delivered at Cambridge and the Sorbonne, Lord Esher would declare that “new economic factors
²¹
clearly prove the inanity of war,” and that the “commercial disaster, financial ruin and individual suffering” of a European war would be so great as to make it unthinkable. Lord Esher and Angell were right about the meager benefits and the high costs of war. But trusting too much in the rationality of nations and seduced by the extraordinary economic achievements of the era—a period the French would later so evocatively call La Belle Époque—they totally misjudged the likelihood that a war involving all the major European powers would break out.

Anybody who goes
²²
to see a psychiatrist ought to have his head examined.

—S
AMUEL
G
OLDWYN

ON TUESDAY
,
JULY
28, 1914, Montagu Norman, then one of the partners in the Anglo-American merchant banking firm of Brown Shipley, came up to London for the day. It was the height of the holiday season, and like almost everyone else of his class in Britain, he had spent much of the previous week in the country. He was in the process of dissolving his partnership and was required briefly in the City. That same afternoon it was reported that Austria had declared war on Serbia and was already bombarding Belgrade. Despite this news, Norman, “feeling far from well
²³
” under the strain of the painful negotiations, decided to return to the country.

Neither he nor almost anyone else in Britain imagined that over the next few days the country would face the most severe banking crisis in its history; that the international financial system, which had brought so much prosperity to the world, would completely unravel; and that, within less than a week, most of Europe, Britain included, would have stumbled blindly into war.

Norman, indeed most of his countrymen, had paid only cursory
attention to the brewing European crisis over the previous month. The assassination in Sarajevo of the archduke Franz Ferdinand, heir presumptive to the Austrian Empire, and his wife Sophie by a comic-opera band of bomb-throwing Serbian nationalists on June 28 had seemed at the time to be just another violent chapter in the disturbed history of the Balkans. It did finally capture the news headlines in Britain when Austria issued an ultimatum to Serbia on July 24, accusing it of being complicit in the assassination and threatening war. But even then, most people blithely continued with their relaxed summer schedule. It was hard to get too concerned about a crisis in Central Europe when the prime minister himself, H. H. Asquith, felt sufficiently at ease to insist upon his weekend of golfing in Berkshire, and the foreign secretary, Sir Edward Grey, had gone off, as he did every weekend in the summer, to his lodge in Hampshire for a spot of trout fishing.

It had been one of those glorious English summers, not a cloud in the sky for days on end, with temperatures in the 90s. Norman had taken an earlier extended two-month holiday in the United States, spending his time, as he usually did on his annual visits, in New York and Maine. He had sailed back to England at the end of June, to spend a leisurely July in London, enjoying the good weather, catching up with old friends from Eton, and passing the days at Lord’s watching cricket, a family obsession. He had also finally settled with his partners about withdrawing his capital, and going his own way. It had been a painful decision. His grandfather had been the senior partner at Brown Shipley, an affiliate of the U.S. investment house of Brown Brothers, for more than thirty-five years. Norman himself had worked there since 1894. But a combination of ill health and recurring conflicts with the other members of the firm had seemed to leave him with little choice but to sever his connections.

Norman returned to Gloucestershire on the morning of Wednesday, July 29, to find an urgent telegram recalling him to London. Taking a train the same day, he arrived in the evening, too late to attend a frantic meeting of the “Court”—the board of directors—of the Bank of England. Norman had been a member of this exclusive club since 1905.

Though forty-three years old, Norman was still not married and lived alone in a large two-story stucco house, Thorpe Lodge, just off Holland Park in West London. The house and his staff of seven servants were his two great luxuries. When he had bought it in 1905, it was a wreck; over the next seven years, he had devoted his energies to a complete reconstruction. He had designed much of the interior himself, including the furniture. Influenced by the ideals of William Morris and the Arts and Crafts movement, he had hired the best craftsmen and employed the most expensive materials, even occasionally stopping by the workshops on his way home from the City to help with the carpentry.

His taste in decoration was, it has to be said, a little idiosyncratic, even odd. The house was paneled in exotic woods imported from Africa and the Americas, giving it the austere and gloomy air of a sort of millionaire’s monastery. There was little ornamentation: an entrance hall of shimmering bricks, which looked like mother-of pearl but were in fact a type of industrial silicone; two giant embroidered Japanese panels depicting peacocks; and a gigantic seventeenth-century Italian fireplace. But it was his haven from the world. On one side, he had built a huge groin-vaulted music room, in which he held small concerts: string quartets playing chamber music by Brahms or Schubert, occasionally for Norman alone. And below the house, he had converted a small paddock into an exquisite little terraced garden shaded by fruit trees, overlooked by a pergola where he took his meals in summer.

Although he had some inherited wealth, the house aside, Norman lived quite simply. He had passed his father’s estate at Much Hadham, in Hertfordshire, on to his younger brother, who was married and had a family, while he contented himself with a little farmyard cottage on the grounds.

NORMAN NEITHER LOOKED
nor dressed like a banker. Tall, with a broad forehead and a pointed beard, already white, he had the long fine hands of an artist or a musician. He looked more like a grandee out of Velázquez or a courtier from the time of Charles II. But despite appearances, his
professional pedigree was impeccable: his father and mother had come from two of the most established and well-known English banking families.

Born in 1871, Montagu Norman, from his early childhood, had never quite seemed to fit in. He was sickly from birth and as a boy suffered from terrible migraines. His emotional and highly strung mother, herself subject to depressions and imaginary illnesses, fussed over him excessively. Like his grandfather and father before him, he went to Eton. But unlike his grandfather, father, uncle, and eventually his brother, who had all been captains of the cricket XI, Montagu did not excel in the atmosphere of competition and athleticism, and was a misfit—lonely, isolated, and generally moody. In 1889 he went up to King’s College, Cambridge, but again unhappy and out of place, he withdrew after a year.

Even as a young adult, he seemed to have a hard time finding himself. He spent a desultory couple of years traveling in Europe, living for a year in Dresden, where he picked up German and an interest in speculative philosophy, and a year in Switzerland. In 1892, he returned to England to join the family concern, Martins Bank, in which his father and an uncle were partners, as a trainee clerk in the Lombard Street branch. Unable to muster much enthusiasm or interest in the dull business of commercial banking, in 1894, he decided to try out his maternal grandfather’s bank, Brown Shipley. Its main activity was financing trade between the United States and Britain, which at least got him out of London and enabled him to spend almost two years working at the offices of Brown Brothers in New York City. He found life in America, with its fewer social restrictions, more liberating and less hidebound than the constricted world of London banking and even began to contemplate settling in the United States.

Instead, he found his deliverance in war. In October 1899, the Boer War broke out. Norman, who had joined the militia in 1894, spending several weeks in training every summer, and by now a captain, immediately volunteered for active service. He was not a particularly fervent imperialist. Rather he seems to have been motivated by a romantic quest for adventure and a desire to escape his mundane existence.