by Prins, Nomi
Presidents and Bankers and Foreign Loans
As Hoover put it later, Harding “was not a man with either the experience or the intellectual quality that the position needed. But he was neither a ‘reactionary’ nor a ‘radical.’” Though his style of governing vis-à-vis the bankers was primarily “hands off,” Harding did briefly stand up to them by demanding government supervision of their foreign loans. But this was mostly to assert the power of his office rather than to assert his jurisdiction over their practices.20
For the most part, it was Hoover who kept a sharp eye on lending and the general finances of Europe. In February 1922, Harding appointed Hoover to the new World War Foreign Debt Commission, designed to settle the Allies’ debts based on “their capacity to pay.” The total debt owed the US government was about $11 billion, 40 percent of which had been lent after the armistice. Debt payments totaled only $250 million annually, whereas the interest the United States owed on the bonds issued to finance the debt was $450 million.21 Harding was not at all impressed with that disparity. Nor was Mellon.
Unable or unwilling to define the amount of reparations Germany would pay going into the Treaty of Versailles, the Allies and the United States had instead established a reparation commission to consider the amount later. In May 1921, the commission set Germany’s payment amount at $31.5 billion, plus interest, starting with annual payments of $500 million. But within a year Germany was in default.22
Lamont began to think that neither the Germans nor the Allies could ever make good on their debts. The situation required a drastic remedy. A year later, at the annual meeting of the American Bankers Association on October 2, 1922, Lamont shocked the banking community and the president with his declaration that European debt should be canceled.
Echoing Wilson, he argued that America, the “greatest economic power in the world,” should assume a “more constructive and responsible role in world affairs.” The trouble, he claimed passionately, using but rejecting the words that ardent isolationist Borah had used on the Senate floor to help defeat the League of Nations, was that “we have been timid and fearful of petty entanglement.”23
Lamont did what he had urged Wilson to do in Paris in mid-1919. He strived to appeal to a latent sense of American altruism. He knew his speech would reach beyond the bankers and urged citizens to consider the Allies’ heavy burden of repaying war debt. Britain and France owed three-quarters of the debt. If France agreed to reduce its reparations demands on Germany, Lamont argued, it was only fair that the US government reduce its demands on France and other countries.
Though Congress had recently agreed to stretch loans up to twenty-five years and reduce interest rates, Lamont claimed the amount owed still greatly exceeded what Europe could pay. There was also the question of morality. Half the debt had been issued between April 4, 1917, when the United States declared war against Germany, and a year later, when large numbers of American soldiers first entered the French trenches. During that year, Britain and France gave up more blood and the United States more money. Lamont felt that this inequity deserved consideration relative to debt repayments. It was only just.
Lamont was the first prominent figure to stress debt forgiveness, even though when Harding asked him about the matter after the election, he had vigorously denied that he, the bankers, or Wilson had ever entertained debt cancellation. Now the three thousand bankers he spoke to in New York supported him on the notion, but for more selfish than altruistic reasons. (After all, if the US government forgave debts, the bankers could more easily extend credit to those same nations, a shift of the burden to the government and away from the bankers.) The press waxed skeptical. Some papers pointed out that the Morgan Bank would benefit financially from a public debt cancellation because it had arranged $2 billion in loans to begin with. Cancellation of debt owed to the US government would strengthen the ability of European nations to repay their private debt and to borrow more from Morgan.
Four days later, as a result of the fallout from Lamont’s speech and the public outcry it stirred on both sides of the issue, Secretary of State Hughes summoned Lamont to the State Department. He argued that while Lamont saw a direct link between the war debt and reparations issues (which there was), the administration preferred to consider the two as separate matters (which they weren’t). The World War Foreign Debt Commission was negotiating revised reparations agreements, but beyond that, congressional authority was needed to modify the war debt.24 He wanted Lamont to back off and let the US government deal with the debt its own way.
Breaking Point
American banks hadn’t improved the financial health of the European countries laboring under war debt repayments. Under the Treaty of Versailles, the idea was that Germany would pay reparations to the Allies, who would use that money to pay off their war debts to the United States and its bankers. The Morgan Bank and others kept lending to European countries through private bond issues on that basis.
The Allies were hard-pressed to make payments, though. Those difficulties were exacerbated when, in January 1923, Germany defaulted on its reparations payments to France.25 In response, France and Belgium moved to occupy the German industrial area of the Ruhr in an effort to collect their monies. These developments had the real possibility of escalating into renewed conflict.
True to his austere form and isolationist stance, Mellon resisted efforts to forgive European debt. Lamont retained his position on debt cancellation even while he was actively involved in raising more debt. By the summer of 1923 he completed work on a $25 million Austrian bond issue (a decade later, under those and other loans, Austrian banks would descend into widespread depression.) In mid-May, Lamont and his wife had traveled to Rome. There, he cautioned Prime Minister Benito Mussolini about hurrying to borrow abroad, urging the newly appointed National Fascist Party leader to support the League of Nations and participate in its councils first and then borrow. Lamont believed Mussolini would lead Italy from postwar economic chaos and had the potential to become a prime Morgan client.
Over the next decade Lamont solidified his ties with Mussolini and promoted the strength of Italy in his statements. On April 25, 1925, Lamont was the guest of honor at a Roman dinner with fifty of Italy’s most prominent banking and political officials, and he took two US senators with him on the trip (Mussolini had to cancel at the last minute but sent a warm letter in support of Lamont). The Italian government and the Morgan Bank had to reinforce each other; in the process, Italy felt well represented to America and the world, and Lamont felt he was securing a major client for the firm.26
The following year, Lamont found himself defending Mussolini against growing charges that fascism was a doctrine of “force and fear,” most publicly from Harvard professor William Elliott. In response, Lamont stated, “Since Minister of Finance Di Stefani, not himself a fascist,” was summoned by Mussolini to fix fiscal policy, the country had reduced labor disputes “and unemployment is at an end.” (Lamont didn’t consider how the smashing of Italian unions played a part in reducing those disputes.) He said that with respect to budget deficits, no European country has approached Italy’s financial record.27
No other bank established such strong ties to Italy in those years as the Morgan Bank did. Mussolini would continue to be available to Lamont for private meetings in Rome through the late 1930s. But as Italy moved toward an alliance with Nazi Germany, Lamont would find that the relationship he believed he had with Mussolini was not nearly as strong as he thought it was.
Shift of Power
On the domestic front, the postwar recession was turning around. US businesses and individuals weren’t hampered by war debt matters, even if the government was. From this perspective, isolationism was working. On August 2, 1923, Harding died suddenly of an alleged heart attack. The nation buzzed with conspiracy theories over the suspicious circumstances surrounding his death. Was it suicide? Murder?
The ever-placid Calvin Coolidge assumed the presidency. He was sworn in while
on vacation in his hometown of Plymouth Notch, Vermont, by his father, a local judge.28 Dubbed “Silent Cal” by the press, Coolidge had few close friends. The prevailing description of him when he served as Harding’s vice president was of a man who “packed his lunch in a tin box and ate alone.”29 A beacon of power he was not, yet he now occupied the most powerful political office in the world.
As vice president, Coolidge was so shunned by the power players of Washington that, according to Ferdinand Lundberg, when he was elected president “he made Senator Frank B. Kellogg, the only man in Washington who had spoken a kind word to him, his Secretary of State.”30 Records of his meetings while president indicate extreme brevity, though that might also have been indicative of his reserved Northeastern upbringing. Later, John F. Kennedy (JFK) kept many of his White House meetings succinct as well.31
Having entered politics in Massachusetts and given his introverted style, Coolidge was not very close to the New York bankers. His only major Wall Street relationship was with Morgan partner and Lamont protégé Dwight Morrow.32 Coolidge and Morrow had been Amherst classmates and friends for years.33
The rise of influential Amherst alumni in Washington and on Wall Street was extensive during the Coolidge period. The list also included top financiers such as National City Bank chairman Charles Mitchell and future Chase Bank chairman John McCloy, who would serve several presidents in a variety of capacities, including as assistant secretary of war during World War II and as president of the World Bank in the late 1940s. In minting the powerful, Amherst gave that “other” venerable Massachusetts institution, Harvard, a run for its money.
Lamont and the Morgan partners harbored high hopes that Coolidge would adopt a more liberal approach to government debt forgiveness. Yet Coolidge was bitterly opposed to forgiving the European debt. Domestically as well, he was upset that “the whole country from the national government down had been living on borrowed money.”34
His views on money developed early on. Of his homestead town in Plymouth Notch, Vermont, he later wrote reverently, “If any debts were contracted they were promptly paid.”35 Later, as governor of Massachusetts from 1919 to 1920, he oversaw appropriations and expenditures with great parsimony. His ideas of private and public business came from his father, who had the “strong New England trait of great repugnance at seeing anything wasted.”36
Though Coolidge was an isolationist at heart, he was aware of the need to maintain American power. He certainly didn’t want to preside over another world war. So in late 1923, at the suggestion of Secretary of State Hughes, he appointed a committee of experts headed by Harding’s old budget director, Charles Dawes, to propose a plan to settle reparations questions once and for all. Dawes had been instrumental in facilitating the $500 million Anglo-French loan that the Morgan Bank managed during World War I; he was a man the bankers cherished and Coolidge trusted.
By April 1924, with assistance from Lamont and other bankers, Dawes crafted a resolution: the Allies would restructure Germany’s debt to help reorganize the German central bank. Meanwhile, US banks would provide Germany the capital to repay its loans.37 The Dawes plan proposed internationally supervised controls over German government expenditures and allowed for the new central bank, the Reichsbank, to issue currency backed by gold reserves. Reparations payments would start at $250 million a year and rise to $600 million in five years.
A key ingredient was necessary to get the plan off the ground: a $200 million international loan to Germany to cover its initial payment. This extension of private debt was intended to give the appearance of paying off public debt; it was essentially a bait-and-switch strategy. There was no question that the Morgan Bank would head the American loan syndicate. Though Jack Morgan still didn’t want to help Germany, Lamont believed that the Dawes plan would open avenues of private lending everywhere.
All that remained were the details. Before Jack Morgan set sail to join the world’s political and financial leaders in London, where they were gathering to discuss the specifics of the Dawes plan and German loans, he described the bankers’ attitude as “very simple”: it “merely consisted of making sure that the bankers would get bonds which they could hope to sell.”38 This wasn’t an issue of diplomacy or benevolence; it was about finance and cultivating the appetite of international investors. President Coolidge didn’t journey to the conference, but Treasury Secretary Mellon did. The press ate it up: the Washington–Wall Street alliance would not just resolve an American market crisis, as it had during the Panic of 1907; now it would save the world. This loan took on a political and financial significance far beyond its size.
As the New York Times reported in late July 1924, the “three outstanding figures in the discussion of a German loan upon whom the American investing public will depend for reasonably safe security” were Mellon, Morgan, and Lamont. The paper praised Mellon’s mind as “razor-sharp,” able to cut “through the technicalities and complications of problems that ordinarily have average men floundering.” It was equally admiring of Lamont. For it was Lamont (and not Mellon or Federal Reserve chair Daniel Richard Crissinger, who has been forgotten by history) who worked on the crucial loan details with his British counterpart, Montagu Norman, governor of the Bank of England, because the United States and Britain would assume the largest portion of the German loans.
Over two weeks of arguments vaguely reminiscent of those preceding the Treaty of Versailles, the conference of delegates deliberated on the terms. There were problems. Notably, France wasn’t interested in helping its former foe in any financial way, and particularly not via a strategy that would entail devising one large international bond that American banks could sell a year later to avoid what they considered too heavy a burden on the US bond market.
Lamont was dispatched from the midst of meetings in Switzerland to attend the London negotiations, and from there, he traveled to discuss the matter in Paris with Étienne Clémentel, the French minister of finance. He managed to obtain agreement for France’s participation in the loan to Germany.39
The London Daily Telegraph reported that Lamont presented an ultimatum to the arguing Allies and that the bankers threatened to abort the $200 million loan if their conditions were not met. Lamont had saved Europe, according to the press. The byproduct was positioning the US government and its currency as savior, too. A New York Tribune story concluded that “in the final analysis the dollar really talks.”40 As it turned out, there was no need for the waiting period that so bothered France; it was a bankers’ ploy to drum up demand for the bond.
In August, Germany and the Allies agreed to back the Dawes plan and accepted the bankers’ terms for the German loan. Coolidge added his support. But there was another catch: though Lamont and Morgan supported the loan terms, Morrow had doubts about Germany’s intentions (as it would turn out, he had good reason to be concerned). Morrow sought a stronger expression of support from the State Department in case matters went awry, and the State Department complied.41 The loan was on.
The bond, offered in nine countries simultaneously, would be the most complex in history. Dollar bonds would be issued in the United States, sterling bonds would be issued in Britain and Continental Europe, and lira and krona bonds would be issued in Italy and Sweden. The Morgan name would appear on a line by itself above the names of other syndicate members. It was the precursor of huge global syndicates of issuers that would rise after the 1940s, and that would profit from a combination of debt issuance and currency fluctuations. It was genius for its time.
The offering, which took place in most countries on October 14, 1924, was an unmitigated success. In New York subscriptions of more than $500 million for the $110 million US allotment poured in: According to J. P. Morgan & Company, it was “the largest oversubscription” the bank had ever received.42 It was heavily oversubscribed in London, where it was managed by Morgan, Grenfell & Company.
As a result of the Dawes plan, an extra $2 billion of capital from the private bankers gushed into
Germany over the next five years. The German economy entered a boom period. European nations would use the German reparations payments—which were funded by private bank loans—to fund their debts (which had also been reduced by the Dawes plan) to the US government (and its banks). The result of this shell game, for which Dawes won a Nobel Prize, was that the actual total debt paid to the United States was a fraction of the original debt and interest owed.43
A Voice of Reason?
On October 20, 1923, Secretary of Commerce Herbert Hoover, already expressing concern about excessive private loans, had addressed a bankers’ convention about bankers’ risky behavior in extending more debt. “There are responsibilities which come to you . . . to develop an understanding of the difference between speculation and investment at home, but of even more importance, to safeguard our country in the investments abroad. In the case of loans . . . to foreign countries our people are even less able to judge of the security than they are in the case of domestic issues. Thus where foreign loans are involved even more depends upon the character of the bankers.”44
But by late 1924, the bankers didn’t care about a possible collapse of international loans. Such lending expanded their power to finance and thus to direct development of the world. The combination of isolationism at home and internationalism abroad had rendered bankers more reckless, competitive, and hungry. They embraced Coolidge’s leadership, unencumbered as it was by notions of regulation or oversight. Coolidge and Mellon were spectators, cheerleaders, and enablers, infatuated with what appeared to be substantial growth in the nation’s wealth—which is, of course, always good for politics.