Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World (47 page)

Apart from his power to determine transfer payments, Gilbert’s most potent weapon was his annual report. Generally viewed as the best independent assessment of Germany’s economic policy and overall situation, it was always eagerly awaited by Germany’s creditors. Though successive ministers of finance may have resented being lectured for overspending by this absurdly young whippersnapper of an American, no German politician dared challenge him because of the influence he carried abroad.

In his 1927 report released in December, Gilbert declared that the time had come for Germany to take control over her own economic destiny “on her own responsibility without foreign supervision and without transfer protection.” Germany should be told once and for all exactly how much she owed and for how long. Moreover, the transfer protection clause embodied in the Dawes Plan, while useful in 1924 for restarting foreign lending, was now creating its own perverse incentives—what we now refer to as moral hazard. By providing an escape clause in the event of a payments crunch, the plan encouraged foreign bankers to be too cavalier in their lending and allowed Germany to be too lax about the consequences of accumulating so much debt “without the normal incentive
⁵¹¹
to do things
and carry through reforms that would clearly be in the country’s own interests.” Though Gilbert thus announced his intention of working himself out of one of the most powerful economic positions in the world, it did help that he had just received the highly lucrative offer to join J. P. Morgan & Co. as a partner.

There were many on the British side, and even among the Germans, who thought that it was still premature for a final reckoning. The bitterness between France and Germany had yet to subside; more time was needed until the German economy had truly revived before the amount of foreign payments it could sustain could definitively be settled.

By late 1928, however, Gilbert had been successful in persuading the Allies to convene a conference in Paris in February 1929 to do just that. He had even convinced the powers in Berlin that though the current situation—no new foreign loans coming in, large debts to nervous French depositors in German banks, and rising domestic unemployment—did not provide the ideal backdrop against which to reopen negotiations, it was best to try to strike a deal now while at least the rest of the world was booming.

Gilbert and the German leadership, Schacht included, were operating, however, from two completely different assumptions about what such a deal might look like. During his campaign to get a new round of negotiations started, the Allies had very explicitly told Gilbert that any further concessions would have to be small. Receipts from Germany had to cover payments on war debts to the United States and provide France and Belgium something beyond this to cover some of the costs of reconstruction. The lowest figure that the Allies could concede was an aggregate payment of $500 million a year. In his enthusiasm to get the parties to the table, Gilbert convinced himself and told everyone on the Allied side that the Germans would be willing to accept such a settlement as the price for getting France out of the Rhineland and regaining economic sovereignty.

Meanwhile, Schacht believed that American bankers had now committed so much money to Germany—they had provided some $1.5 billion of the $3 billion it had borrowed—that they represented an effective lobby
for reduction and would bring enough political pressure on the creditor governments for Germany to swing a settlement of $250 million a year. Schacht, having by now broken with the German Democratic Party (DDP), which he had helped found, was beginning to flirt with the right-wing reactionaries of the DNVP, the German Nationalist People Party. At one point, he even bragged to his new friends that he could get reparations below $200 million a year. Gilbert tried his best to disabuse the Germans of such excessive optimism and they in turn tried to convince him that Germany “was dancing on a volcano
⁵¹²
” and could not afford $500 million a year. But the two parties ended up talking past each other.

Thus as the delegations began to descend on Paris in February 1929 for yet one more summit devoted to reparations, none of the participants realized how wide the chasm of disagreement between the various sides remained. It came as an ill omen
⁵¹³
when, just as the conference convened, a massive cold front descended across Europe, bringing with it the coldest temperatures for almost a century. Temperatures in Berlin fell to their lowest level in two hundred years; in Silesia it was 49 degrees below zero, the coldest day since records had begun in 1690. Europe was icebound. Across the continent, trains were immobilized, ships lay frozen in the Baltic and on the Danube, and many rural communities, particularly in Eastern Europe, faced actual famine. The newspapers carried chilling reports evoking the Dark Ages, of packs of starving wolves attacking isolated villages in Albania and Romania and of a whole band of gypsies found frozen to death in Poland.

The German delegation, weighed down with twenty-seven boxes of files, arrived by train from Berlin on February 8. Paris had escaped the worst of the cold—the temperature was only 10 degrees below zero. Nevertheless, the city authorities had lined the streets with braziers. But for all the chill, in contrast to Central and Eastern Europe, the French capital was visibly booming. The local economy, fueled by soaring exports, high savings, and large capital inflows, was expanding at 9 percent a year, making it the fastest growing major country. In the last two years, the French stock market had enjoyed the best performance in the world, beating even
Wall Street’s—having gone up 150 percent since the end of 1926, while the Dow had risen 100 percent. With the good times had come a renewed self-confidence, even arrogance, and this being Paris, scandals. As the delegates arrived, the city was still abuzz with L’Affaire Hanau.

Marthe Hanau was a forty-two-year-old
⁵¹⁴
divorcée who in 1925 had started a stock tip sheet,
La Gazette du Franc
. By 1928, she had a following of hundreds of thousands of investors. Taking advantage of the gullibility and cupidity of the small-town savers who were her clients—local priests, retired soldiers, schoolteachers, and shopkeepers—she promoted stocks that were often little more than paper companies. When her success brought her to the attention of the authorities, Hanau, nicknamed by the press “La Grande Catherine de Finance,” kept investigators at bay by bribing politicians. The archbishop of Paris was one of her clients. But eventually her extravagance—she always traveled in a convoy of two limousines, in case one of them broke down; regularly splurged $100,000 on diamonds; and periodically spent the weekend at the Monte Carlo gaming tables—caught up with her. In December 1928, she was arrested and forced into bankruptcy, owing $25 million. Now in prison, she was awaiting trial threatening to name names.
^fn2

The Germans were put up at the Royal Monceau, a new luxury hotel near the Arc de Triomphe, and furnished with four new limousines by Mercedes-Benz for the duration. This was the first conference at which they felt themselves treated as equals rather than as the enemy. They were even invited to the opening lunch at the Banque de France on Saturday, February 9, hosted by the head of the French delegation, Émile Moreau. Representing the United States were Owen Young and Jack Morgan, with Thomas Lamont as Morgan’s alternate; from Britain came Sir Josiah Stamp, one of the original members of the Reparations Commission of
1921, and Lord Revelstoke, one of the five peers in the Barings family and chairman of the bank; the industrialist Alberto Pirelli, one of the richest men in Italy, and the banker Émile Francqui, the richest man in Belgium, represented their countries. Also attending was a delegation from Japan. It was a reunion for many of the men, who like Young and Stamp, had been on the Dawes negotiating teams.

Over a six-course lunch—Huîtres d’Ostend washed down with a 1921 Chablis, Homard à l’Américain with a 1919 Pouilly, Rôti de Venaison accompanied by an 1881 Château Lafite-Rothschild, Faisans Lucullus with a 1921 Clos de Vougeot, Salade d’Asperge with a 1910 Château d’Yquem, a 1910 Grand Fine Champagne with desserts, and finally a bottle of the 1820 Cognac Napoléon over coffee—the delegates selected Owen Young, with his perfect diplomatic skills, as their chairman.

On February 11, the Young Conference—as it would come to be called but was for the moment referred to as the Second Dawes Conference—opened in the Blue Room at the Hotel George V. During the previous decade Paris had been the scene of so many international gatherings that every other grand hotel—the Crillon on the Place de la Concorde, the Bristol on the Rue Saint Honoré, the Majestic on the Avenue Kléber, and the Astoria on the Champs-Élysées—carried in its faded corridors and meeting rooms the echoes of some gathering of statesmen that had ended in acrimony. It seemed only fitting, a sort of rite of passage, for the George V only recently opened for business to host this new meeting before it could claim its place in the ranks as a true Parisian
hôtel-de-luxe
.

On the second day, seated around the horseshoe table, Schacht made his opening offer—$250 million a year for the next thirty-seven years. Moreau conveyed to Young that France would accept nothing less than $600 million a year for the full sixty-two years and might even demand as much as $1 billion. Young was shocked at the huge gap between the main protagonists. Being the consummate financial diplomat, and recognizing that a premature discussion of numbers on reparations would merely lead to an early breakdown in negotiations, he arranged for all the delegates to
be tied up in subcommittees for the next six weeks talking around the subject, while he used the time in back-channel shuttle diplomacy between the Germans and the French.

As the conference stretched into its sixth week, a sour and cynical mood began to pervade its halls. Lord Revelstoke complained in his diary that the sessions were “lengthy, tiresome
⁵¹⁵
and far from satisfactory. Schacht resumes his most negative attitude, is unhelpful to the last degree.” One of the journalists present described Schacht, storming out of meetings with threats to abort the talks, as “a vehement, intolerant man
⁵¹⁶
; excitable and dogmatic; . . . the most tactless, the most aggressive and the most irascible person I ever have seen in public life.” He alienated all the other delegates with his “tantrums and exhibitionism
⁵¹⁷
.” Revelstoke thought that with his “hatchet, Teuton face
⁵¹⁸
and burly neck and badly fitting collar” he looked like a “sea lion at the Zoo.”

Moreau by contrast sat there obstinate and ill-tempered, his mouth shut, Revelstoke observed, “like a steel trap when Schacht pleads poverty and inability to pay.” As Moreau watched the Germans become more isolated, he tried to keep quiet and let them dig their own graves. But eventually, unable to restrain himself, he exploded and publicly accused Schacht of negotiating in bad faith. Jack Morgan, bored with the sort of details he generally left to underlings and shaken by his one attempt to try to reason with Schacht, left for a cruise on his yacht around the Adriatic and the Aegean with the archbishop of Canterbury, complaining that, “If Hell is anything like Paris
⁵¹⁹
and an International Conference combined, it has many terrors and I shall try to avoid them.”

The German delegates
⁵²⁰
found the atmosphere in Paris menacing. They were not being paranoid. The French secret police were tapping their phones. All communications with their government had to be conducted by courier or by cipher telegrams, with each of the twenty-eight participants assigned a code name. The three senior representatives, Schacht included, took turns traveling back to Berlin by train every two weeks in order to brief the cabinet.

Finally, in early April, Young felt ready to allow the Allies to unveil
their proposal. Germany would have to make annual payments of $525 million for the first thirty-seven years and, in order to match exactly the Allied war debts to the United States, $400 million a year for the subsequent twenty-one years. The Allies made it clear that the only reason they were saddling two generations of Germans with reparations was that they themselves were in debt to the Americans for the same length of time. On hearing the Allied proposal, Schacht turned pale and, in a voice trembling in anger, declared the session terminated.

By now he realized how totally he had miscalculated. The American bankers’ power to pressure the Allies had foundered on the U.S. government’s unwillingness to contemplate any further reduction in war debts. Without such an easing, the Allies would not reduce their claims on Germany. Schacht was now caught between letting the conference collapse thus very likely provoking a financial crisis in Germany for which he would be blamed, or settling for the terms on offer, for which he feared he would be equally vilified.

Schacht had always been a gambler. In a desperate effort to win more options, he decided to change the German offer radically. He had always believed that one of the greatest injustices of Versailles had been the seizure of Germany’s colonies—an odd collection of territories that Germany, late to the scramble for empire, had accumulated, including most of Samoa, part of New Guinea, Togoland, German South-West Africa, the Cameroons, and Tanganyika—which Schacht implausibly claimed had been worth $20 billion to Germany, an amount that overshadowed even the bill for reparations. He now argued that Germany would be unable to meet the victors’ demands unless its former colonies were restored. Even more provocatively, he demanded that the Danzig corridor, the most contentious strip of land in all Europe, taken from Germany to give Poland access to the sea, should also be returned.

In seeking to tack what amounted to a territorial revision of Versailles upon what was supposed to have been a purely financial negotiation, Schacht had gone out on a limb, and without the permission, or even the knowledge, of his own government. The détente between Germany and
the Allies, so painstakingly achieved since the withdrawal from the Ruhr five years before, had rested on the principle that Germany would not seek to overturn the political or territorial clauses of the 1919 settlement. Here was Schacht in one stroke trying to undermine the whole fragile basis of European peace.