Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World (57 page)

Moreover, as the German unemployment rolls kept rising, the cost of unemployment benefits mounted with them and the budget deficit kept increasing. The government, a grand coalition of all democratic parties led by the Socialist Hermann Müller, proposed to finance itself by more borrowing abroad. For Schacht, who had been on a campaign against excessive foreign debt since 1927, this was one more sign that a coalition that included the Socialists was incapable of governing Germany. Having failed to control either its spending or borrowing abroad during the good times, it was now repeating the mistake as times turned bad. He feared that Germany was heading for national bankruptcy.

On December 5, he dropped his bombshell on Berlin
⁶³⁸
. Without warning he issued a public statement in which he accused the government in inflammatory language of “twisting” the Young Plan and failing to take the necessary steps to control its own finances. Declaring that it would be
“self-deception” for the German people to believe that the nation could pay a pfennig more than it had agreed to in Paris, he publicly repudiated the plan’s latest revisions. A few weeks later, he sabotaged the government’s attempt to raise a loan in New York through the American investment house of Dillon Read.

Such an open declaration of war on the government by the head of the central bank in the middle of an economic crisis threatened to plunge the country into chaos. The government was barely able to survive financially and then only by tapping the loan from the munificent Ivar Kreuger.

The following weeks were a time of terrible stress for Schacht. While the ultimate severity of the coming Depression could not yet be foreseen, he could tell that after the Wall Street crash Germany was headed for a catastrophe and wished to avoid being buried by the coming disaster. And yet, if he resigned now, he would be giving up the most powerful economic position in Germany and stalking off into the political wilderness with no apparent way back. Having already alienated the right wing by signing the Young Plan, he was now falling out with the left and center by challenging the coalition’s financial policy.

The tension of having to juggle all these competing considerations, some opportunistic, others heartfelt, began to tell. He seemed at times to be close to a breakdown. One foreign banker, meeting him in January 1930, described his paranoia as he ranted about how “he was about to be crucified
⁶³⁹
by a gang of corrupt politicians.” His old friend Parker Gilbert, increasingly baffled at such erratic behavior, could only say that he thought Schacht had gone “crazy
⁶⁴⁰
.”

The final and dramatic denouement occurred at an intergovernmental conference on the Young Plan that opened at The Hague in early January. Shaken by the demagoguery of the German Nationalist right and by Schacht’s repudiation of the plan, the French revived the issue of what to do should Germany cease payment by introducing a new clause that in the event that Germany was held by the International Court at The Hague to have willfully defaulted on its obligations, the creditor powers would
“recover full liberty of action” as envisaged by the Treaty of Versailles, a proposal that evoked memories of the occupation of the Ruhr in 1923, of French soldiers marching back into Germany.

Schacht had promised the government that though he had broken with it, he would do nothing to embarrass Germany in an international forum. Once more his impulsiveness got the better of him. The new sanctions clause was a slap in Germany’s face, representing a radical change in the “spirit” of the Young Plan. Though the Reichsbank was powerless to prevent the revised plan from going into effect, in order to register his protest “on the highest moral grounds
⁶⁴¹
,” Schacht announced that it would refuse to subscribe a pfennig to the new Bank for International Settlements, declaring melodramatically that he “would stick to his position until he died.”

The German delegation, led by the new foreign minister Julius Curtius, was furious. At a stormy closed-door meeting, Schacht was accused of fomenting “mutiny before the enemy,” of grandstanding on an issue of no material importance, of using the issue as a political gambit aimed at rebuilding his credibility with the right—a rumor was circulating in Berlin that Schacht was contemplating a run for the presidency when Von Hindenburg, who was pushing eighty-five, retired in early 1932. It was, said the
Times
of London, an example of the sort of “flamboyant political moves
⁶⁴²
which are expected of him.” The left-leaning
Die Welt
accused him of being “the head not only of a state within the State, but of a state above the State.”

The next day, however, he found himself outmaneuvered when the German delegation kept its nerve and proposed that if the Reichsbank refused to sign, the government would find a consortium of other German banks to subscribe the capital. Schacht’s tendency to overplay his hand now undid him. He negotiated a face-saving formula under which the government would pass a law requiring the Reichsbank to subscribe, thus allowing him to declare that while he still thought the Young Plan an “immoral agreement
⁶⁴³
,” he was obliged as a good citizen to obey the “German law or else emigrate.” Nevertheless, his histrionics at The Hague had put
him in an untenable position. Back in Berlin, on March 7, he announced his resignation. “I will now become a country squire and raise pigs,” he declared at a turbulent press conference where he lost his temper more than once at the journalists who questioned his motives for resigning a little too closely. One correspondent asked bewilderedly, “Dr. Schacht, is there any particular point to your resignation?” “My act has nothing to do with politics,” replied an agitated Schacht. “It is merely the moral act of a self-respecting man.”

The
Vossische Zeitung
, the German national paper of record, equivalent to the
Times
or
Le Monde
, expressed the general sense of puzzlement in Berlin when it asked, “What is the actual reason
⁶⁴⁴
for his resignation? Nobody knows.” Nevertheless, alert as ever to his own self-interest, Schacht did negotiate an attractive severance arrangement, waiving his annual pension for a lump sum of $250,000.

SCHACHT LEFT OFFICE
believing that the Socialist-dominated coalition would lead Germany to financial disaster, precipitated by what he judged to be an inescapable foreign debt crisis. At this stage he still viewed Germany’s problems through the prism of the 1920s; for him the central issue was that the country had profligately saddled itself with far too much foreign debt. The solution, he thought, was to curb government expenditure and avoid borrowing abroad. His recommendations were still very orthodox, designed to prevent an exchange crisis rather than to address the growing problem of unemployment.

Three weeks later, the government with which he had broken split over the unemployment question and fell, the Socialists wanting to finance an expansion in unemployment benefits by more foreign borrowing, the center parties to cut the budget deficit. A new center-right coalition, excluding the Socialists, took office and was led by a new chancellor, Heinrich Brüning, a dour Catholic, former army officer, and staunch monarchist.

Unable to get anything through a divided parliament, Brüning was forced to rule by decree, moving Germany in a more authoritarian
direction by his reliance on the constitution’s provisions for emergency powers. Defeated in the Reichstag, he had Von Hindenburg dissolve it and hold new elections in September 1930, two years early. The results came as an ugly shock. In a campaign dominated by the deteriorating economy, Hitler appealed across class lines, promising to reunite the nation, rebuild its prosperity, restore its position in the world, and purge the country of profiteers. He put a lid on some of his more extreme anti-Jewish rhetoric. Speaking at giant open-air rallies, many in sports stadiums lit by arrays of blazing torches, he mesmerized the tens of thousands who attended these events with his oratory. Meanwhile in the streets, his jack-booted paramilitary thugs, armed with truncheons and knuckledusters, clashed violently with Communists and Socialists. The Nazis won 6.4 million votes, and vaulted into second place in the Reichstag with 107 seats.

The election panicked the financial markets; an estimated $380 million, about half of Germany’s reserves, bolted. To halt the flight, the Reichsbank was forced to raise its rates, so that while in New York and Paris these stood at 2 percent, and in London at 3 percent, in Germany they went up to 5 percent. With prices falling at a rate of 7 percent per year, it meant that the effective cost of money had risen to 12 percent, gravely exacerbating the economic weakness.

As the economy lost ground, unemployment climbed, and the budget deficit widened, Brüning focused on balancing the budget. Unemployment benefits were restricted; salaries of all high federal and state officials, including the president’s, were slashed by 20 percent. Wages of lower-level officials were cut 6 percent; income taxes were raised, taxes on beer and tobacco increased, and new levies imposed on warehouses and mineral water. All of these measures made the Depression worse.

Germany was unusual in the degree of deflation that the government imposed on the economy. In the United States, the Hoover administration had cut taxes and allowed the budget to go from a surplus of $1 billion in 1929 to a deficit of $2 billion in 1931, 4 percent of GDP. Britain ran a deficit of $600 million in 1931, 2.5 percent of GDP. By contrast in Germany, even though revenues fell as activity faltered, expenditures were cut even
more, and the deficit was actually reduced from an already modest $200 million to $100 million, less than 1 percent of GDP.

Brüning, who was now being called the “Hunger Chancellor,” would later claim that his austerity measures had been designed to prove to foreigners that Germany could no longer pay reparations, a reprise of the old perverse “hair-shirt” policy attempted in the early 1920s: to inflict so much damage on Germany’s economy that her creditors would be forced to reduce their demands.

Historians have debated
⁶⁴⁵
whether the government had any alternative. Borrowing abroad was not an option. By the middle of 1930, foreign lending throughout the world had collapsed. Moreover, Germany had borrowed so much during the boom years, living by the standards of the time so high on the hog that when bad times finally arrived and it really needed the money, it had exhausted its credit lines and loans were no longer available.

The problem was made much worse by one of the unintended consequences of the Young Plan
⁶⁴⁶
. Under the Dawes Plan before it, private commercial lenders had priority over reparations at a time of crisis. In effect, Germany’s public creditors, principally the governments of France, Belgium, and Britain, had to stand last in line. The Young Plan’s elimination of this “transfer protection,” which incidentally Schacht had tried to resist, put an end to the guarantee. In the event of a payments crisis, private lenders did not automatically move to the front of the line but had to wait their turn with the big governments. Not surprisingly, private foreign lending to Germany collapsed.

No longer able to borrow abroad, Germany could only have avoided the Brüning austerity package if the government had borrowed from the Reichsbank—in other words, financed its budget deficit by printing money. But memories of the hyperinflation of the early 1920s were too fresh. Moreover, the Dawes and Young plans severely limited the Reichsbank’s ability to buy government debt. The only way Germany could have followed such a policy was to cut loose from gold; and almost no one was ready for so drastic a move.

Out of office, Schacht was careful not to criticize Brüning’s domestic
policies, perhaps in the hope that he might return to power as part of a conservative Nationalist government. At the time, he did not realize how lucky he was. The new government adopted many of the austerity policies that he himself was advocating, with catastrophic results. But he was able to watch from the sidelines while the German economy fell apart, remaining free from any blame.

He could not, however, keep silent about reparations. The idea that the way to escape them was to inflict a terrible recession on Germany was to him completely absurd. Though he spent the first few months of his retirement at his estate at Gühlen, he quickly became frustrated at his confinement. In the summer of 1930, he embarked on a worldwide speaking tour, beginning in Bucharest, and thence to Berne, Copenhagen, and Stockholm. In September, he departed for two months to the United States.

He made something of a splash in America. With his pince-nez and his distinctive hair
en brosse,
the “Iron Man” of Germany, as
Time
magazine labeled him, was immediately identifiable. He was certainly more familiar to the average reader of the London
Times
or the
New York Times
than any of the last few German chancellors. He traveled to over twenty cities, giving almost fifty talks to audiences of college students and professors, bankers and business associations, at private clubs and in public meetings.

Mostly he spoke about reparations, seeking to make his audiences understand German bitterness over the issue: “You must not think
⁶⁴⁷
that if you treat people for ten years as the German people have been treated they will continue to smile.” Germany, with its GDP of $16 billion, exports of $3 billion, and an overhang of private foreign debt now amounting to $6 billion, simply could not afford to pay $500 million a year to France and Britain. In Cincinnati, he declared, “Reparations are the real cause of the world-wide economic depression.” Everywhere he went he was asked about the recent elections and Hitler. “If the German people are going to starve
⁶⁴⁸
, there are going to be many more Hitlers,” he would reply. Back in Europe, when a Swedish journalist asked him, “What would you do if you were to become Chancellor tomorrow?” Schacht replied with no hesitation, “I would stop making payments
⁶⁴⁹
of reparations that very day.”