by Ron Chernow
The Austrian loan was worked out under the auspices of the League of Nations, which aided Monty Norman’s grand design of reconstruction. Impressively wrapped, it was payable in gold coin and backed by Austria’s customs and tobacco monopoly. It was issued simultaneously in several capitals. The $25-million New York portion was co-managed by J. P. Morgan and Company and Kuhn, Loeb. In retrospect, the League of Nations cachet perhaps gave a specious air of security to a risky venture.
Austria led to Germany. By early 1922, Germany was already pleading for relief from onerous reparations payments. The British sympathized, but France kept up its grudge, citing extensive war damage on its soil. (The extraordinary Anne Morgan was gathering hundreds of American women to rebuild French villages and raise money for schools, hospitals, and libraries. As a fund-raiser, her American Friends for Devastated France co-sponsored the July 1921 championship fight between Jack Dempsey and Georges Carpentier.) In the most potent form of default imaginable, the Germans expanded their money supply, ran large budget deficits, and depreciated the mark. This had the fatal side effect of unleashing hyperinflation. The Allies felt betrayed as German monetary policy undermined reparations payments. In January 1923, French and Belgian troops occupied the Ruhr. Irate troops ripped German bank notes from the hands of manufacturers and seized the customs machinery.
Monty Norman warned Ben Strong that occupied German soil was the “black spot” of the world and could ignite another war. Germany remained England’s main trading partner, and Norman saw its revival as the crux of his master scheme for European prosperity. He was also personally attached to Germany, where he had studied music. Washington similarly placed a high priority on German revival. America had ended the war with vastly expanded factory capacity and needed export markets to absorb its surplus. American corporations were also eager to acquire advanced German technology.
The result was a massive Anglo-American commitment to keeping Germany afloat, with the House of Morgan assigned a central role. As Lamont later wrote, “The British and ourselves regarded Germany as the economic hub of the European universe. We feared that unless Germany were rebuilt and prospered all the surrounding countries of the Continent would likewise languish.”29 Bankers of an earlier generation would probably never have fretted in this way about the fate of the Western world or thought in such explicitly political terms.
The new demands of the Diplomatic Age were graphically seen in Jack Morgan’s volte-face on Germany. In 1922, Secretary of State Hughes and Commerce Secretary Herbert Hoover asked Jack to participate—allegedly as a “private citizen”—in a global bankers’ committee in Paris, which was considering an international loan to Germany. Jack, implacable toward Germany, had sworn after the war that the United States should never trade with that country. He and Blumenthal were then winding up their spying forays against German-Jewish bankers on Wall Street. So Jack’s acceptance of Hughes’s suggestion must have been disorienting, especially given the outpouring of publicity he received in Paris. The New York Herald reported, “Paris dispatches tell us that J.P. Morgan’s presence at the international bankers’ conference is attracting more attention than has been devoted to any American since President Wilson arrived in the French capital for the Versailles conference. . . . He is a symbol of the tremendous American power that may be used for the rehabilitation of Europe.”30 Jack handled himself ably and raised valid reservations about a German loan but was obliged to suppress his more extreme private opinions of Germany.
From now on, Jack would be the sober financial statesman in public, the confirmed foe of Germany in private. After the Ruhr occupation, he fired off a letter to Hughes condemning it. In eloquent terms, he told Clarence Barron that the Allies shouldn’t strip Germany of hope by confiscating all its earnings through reparations. Yet his personal correspondence reveals the old demonology of the Hun. To Grenfell, he wrote, “I must say that it begins to look to me as though France is really talking to Germany in the only language that the Germans understand.” Of Germany’s state of mind, he added, “it calls for the whip and not for conversations.”31
Meanwhile, German inflation worsened. The government was printing so much money that newspaper presses were commandeered. Thirty paper mills worked around the clock to satisfy the need for bank notes. Prices soared so fast that wives would meet their husbands at factory gates, collect their wages, and then rush off to shop before the next round of price increases. In January 1922, about two hundred marks equaled one dollar. By November 1923, it took over four billion marks to buy a dollar. A stamp on a letter to America cost a billion marks. At the end, in a final absurdity, prices doubled hourly.
To restore Germany, a new conference was summoned in early 1924. Again the House of Morgan represented the Coolidge administration, which kept up a bogus air of indifference. In fact, Charles Evans Hughes was very disturbed by reports of starving children and mounting extremism in Germany. As the “private” American representatives to the conference, Hughes chose two people close to J. P. Morgan and Company—Owen Young, chairman of General Electric, and General Charles Gates Dawes, the lone Chicago banker to join the Anglo-French loan of 1915. The German problem was so fraught with risk that upon departing for Europe, Dawes joked, “Oh, well, somebody has to take the garbage or the garlands.”32 The fiction was maintained that these businessmen were just plain private citizens.
This conference generated the Dawes Plan to settle Germany’s problems. It was full of financial ingenuity and political hazard. It scaled back reparations and tied them to Germany’s capacity to pay. It also stipulated that the Allies would select an agent general to preside over Germany’s economy and reparations transfers. This effectively placed Germany in international receivership. (And many reparation payments were funneled through the Morgan bank.) Germany was mortgaged to the Allies, with its railways and central bank subjected to foreign control, a situation that would provide a propaganda bonanza for the Nazis.
Aside from a stipulation ensuring that it would get back the Ruhr, what reconciled Germany to the Dawes Plan was the prospect of a giant loan floated in New York and Europe. Reparations would largely be paid with borrowed money. With Germany now a financial outcast, bankers everywhere were dubious about the loan’s chances. Montagu Norman mused, “It can only be accomplished, if at all, through the Bank of England and in New York through J.P.M. &. Co.”33 Once again, the State Department was a guiding, if unseen, presence. Hughes told the House of Morgan that it would be a “disaster” and “most unfortunate” if the Dawes Plan miscarried for lack of American participation. Such official wishes were never lightly ignored.
To help along the prospective German loan, Monty Norman arranged a mid-1924 meeting at the Bank of England between Jack Morgan, Tom Lamont, and the new Reichsbank president, Dr. Hjalmar Horace Greeley Schacht (whose father had once worked in a New York brewery and been an admirer of publisher Horace Greeley). To stop the ruinous inflation, Dr. Schacht abolished the old mark and issued a new renten-mark, making him an instant hero in the banking world and winning him the Reichsbank post. On New Year’s Eve of 1924, he arrived in London for Bank of England talks. As he disembarked from the train at Liverpool Street Station, he later recalled, “I was not a little surprised to see . . . a tall man with a pointed grayish beard and shrewd, discerning eyes, who introduced himself as Montagu Norman, governor of the Bank of England.”34 This began another of Norman’s close, mysterious friendships.
In our narrative, we shall see Schacht playing many different roles-—evil genius of Nazi finance, daring plotter against Hitler, boisterously self-righteous defendant at Nuremberg—but we first encounter him at a moment of glory. Under Schacht, the Reichsbank was freed from government control, extending Norman’s dream of banker autonomy in Europe. A brilliant, narcissistic windbag prone to extravagant metaphors and bombast, Schacht assured Morgan and Lamont that the Dawes loan would be repaid. He obsequiously remarked that the American offering “would fail completely if it lacke
d the prestige and moral endorsement of the Morgan bank.”35 For J. P. Morgan and Company, it was critical that the loan take priority over other claims on Germany. The bank had no outstanding German loans and was only being drawn in under political pressure by Britain and France—a fact that would be loudly repeated when the loan defaulted in the 1930s. Then, in a very different political environment, Lamont would bitterly remind Schacht of his unctuous pledges.
To give the loan international seasoning, half the issue appeared in New York and the other half in London and other European capitals. The $110-million New York portion was enthusiastically received and oversubscribed. By seeming to settle the German question, the loan lifted a weight from financial markets. It electrified Wall Street and spurred foreign lending to Latin America and elsewhere. For Weimar Germany, it was a turning point. It became the decade’s largest sovereign borrower. American capital and companies poured in: Ford, General Motors, E. I. Du Pont, General Electric, Standard Oil of New Jersey, and Dow Chemical. Unemployment plunged and Germany’s economic slide was reversed into a five-year upturn. This revival would provide Adolf Hitler with a splendid industrial machine and the money to finance massive rearmament. In the meantime, the world was trapped in a circular charade in which American money paid to Germany was handed over as reparations payments to the Allies, who sent it back to the United States as war debt.
Most remarkable in Morgan archives is the partners’ skepticism of the Dawes Plan. Russell Leffingwell, now the resident economist, saw the scheme as riddled with dangerous contradictions. Why would investors have faith in a politically neutered Germany? And why did the Allies wish to resurrect their former foe? Prescient, he feared a political backlash, a day of reckoning: “My political doubt about Germany is how long her people will consent to be sweated for the benefit of her former enemies.”36 Montagu Norman and Philip Snowden, chancellor of the Exchequer, also feared Germany had submitted under duress and would later resent its position.
In August 1923, President Warren G. Harding had died of an embolism. His successor, Calvin Coolidge, wasn’t any more enlightened about the problem of world debt. He was adamant that the Allies should pay their war debts—“They hired the money, didn’t they?” he asked—and kept up the fiction that those debts had nothing to do with reparations.37 But so long as the United States demanded war-debt payments, the Allies couldn’t be flexible on German reparations.
A final aspect of the reparations problem was Morgan involvement in the contest for Germany’s new economic czar, the agent general. Amid much hoopla, the press labeled the job the world’s most important, since the occupant would supervise the German economy. He would have to extract the last penny from Germany while staving off renewed inflation. Hoping the United States would exert a moderating influence, Germany wanted an American for the post. On Wall Street, a powerful consensus formed behind Morgan partner Dwight Morrow.
An old friend of President Coolidge, Morrow had already been widely touted for numerous government posts. Short, bespectacled, and bookish, he was Morgan’s philosopher-king, a man marked for an elusive greatness. Now his moment arrived. He had formidable supporters—Jack Morgan, Charles Dawes, and Owen Young in the private sector; Hughes and Hoover in the cabinet. After a long White House meeting in July 1924, he seemed like a shoo-in. Among other things, the White House thought Morrow’s appointment would guarantee the success of the Dawes loan.
The next evening, however, at another White House meeting, the U.S. ambassador to Germany, Alanson Houghton, argued against Morrow’s appointment. He said the choice of a Morgan partner would be incendiary in German politics, even fatal to the Dawes Plan. The long, heated meeting ran till midnight. It was difficult for Coolidge to reverse the appointment of a close friend, but the Morrow nomination was nonetheless spiked. As Dawes afterward explained, “Houghton, with great earnestness, pointed out that the appointment of a member of the firm of Morgan &. Co. would probably enable the Nationalists in Germany to defeat the Republican Government there by raising the demagogic cry that it was a scheme of the international bankers to crush the life out of Germany instead of helping her. He gave this as the private opinion of the German Government itself.”38
Other analysts saw less strategic cunning than cowardice behind Coolidge’s desertion of his old friend. Because of its wartime role, the House of Morgan was still anathema in German-American communities of the Midwest. Coolidge’s aides apparently warned him to avoid any Morrow link. This episode shows that the Morgan bank carried serious political liabilities even in a decade dominated by conservative Republican administrations.
Bitterly disappointed, Lamont and Norman demanded a Morrow clone. The dark horse who emerged victorious was a future Morgan partner, thirty-two-year-old S. Parker Gilbert. Tall and boyish, dubbed the Thinking Machine, he was a protege of Russell Leffingwell, whom he had replaced as assistant secretary of the Treasury in 1920, becoming the wunderkind of the department. At twenty-eight, he was elevated to under secretary, and in the absence of Treasury Secretary Andrew Mellon, he ran the department—the youngest person ever to do so. Paul Warburg described him as a “practical young man with the eyes of a dreamer and the sensitive mouth of a scholar.”39 The Germans would see him far less poetically. Heinrich Kohler, the finance minister, described him thus: “Reserved and taciturn, the tall lanky man with the impenetrable features appeared considerably older than he really was and . . . made an eerie impression.”40
During his five years in Berlin, Gilbert oversaw the transfer of $2 billion in German reparations. As Germany’s economic czar, he was burned in effigy at mock coronations and vilified as a new kaiser. He apparently never learned to speak German and worked compulsively, never attending cultural events or entering into German society. Despite his youth, he was a stern taskmaster, constantly accusing the Germans of fiscal extravagance. He thought they could pay reparations by following sound fiscal policy. Another finance minister, Paul Moldenhauer, noted, “He spoke with a mixture of awkwardness and arrogance, mumbling the words so that one could hardly understand his English.”41 But Gilbert’s reports on Germany’s financial conditions would be models of lucidity and precision, winning him a tremendous reputation in Anglo-American financial circles; he would be a figure of worldwide influence in the twenties.
Dwight Morrow didn’t long regret his loss and felt that he had been spared a burden. He was soon writing to Hughes and confessing to doubts about the Dawes Plan. Even as the world celebrated the great triumph, there was an undercurrent of deep unease at the House of Morgan. Morrow declared: “It is the foreign control to which Germany is to be subjected that has made us somewhat fearful about the permanent success of the Dawes Plan. . . . It is almost inevitable that this loan will be unpopular in Germany after a few years. The people of Germany, in our opinion, are almost certain, after sufficient time has elapsed, to think not of the release of the Ruhr but of the extent to which what was once a first-class Power has been subjected to foreign control. ”42 The fear was prophetic, for it became a cardinal tenet of Nazi propaganda that Germany had been stampeded into the Dawes plan by international bankers. And the House of Morgan would reap the fruits of these mistaken policies of the twenties.
CHAPTER THIRTEEN
JAZZ
BY 1924, the House of Morgan was so influential in American politics that conspiracy buffs couldn’t tell which presidential candidate was more beholden to the bank. As far as the partners’ support of a candidate was concerned, most backed Calvin Coolidge—out of ideological comfort and respect for his friendship with Dwight Morrow. Coolidge’s running mate was Charles Dawes, who had profited from the sudden renown of his plan for Germany’s reparations payments. Others might dismiss Coolidge as dour and complacent, but Jack Morgan perceived in him an extraordinary blend of deep thinker and moralist: “In a somewhat long life, I have never seen any President who gives me just the feeling of confidence in the Country and its institutions, and the working out of its problems, that
Mr. Coolidge does.”1 He disagreed that Coolidge was a tool of business—sure proof to some that he was. Between the White House and the House of Morgan there existed clear amity, moving The New Republic’s TRB to say, “I would rather not have these Morgans boys quite so much at home around the White House.”2
The bank’s peerless renown in the Roaring Twenties was such that the Democratic candidate was the chief Morgan lawyer, John W. Davis. Davis was a backgammon and cribbage partner of Jack Morgan’s—they played for a nickel a game—and they both belonged to the Zodiac Club, a secret society in which each member took a different astrological sign. A former solicitor general and ambassador to the Court of Saint James’s, Davis was recruited by Allan Wardwell in 1920 to join the law firm that would become Davis, Polk, and Wardwell. They were counsel to both J. P. Morgan and Company and Guaranty Trust. Taking charge of Davis’s life in his vigorous style, Harry Davison had whisked him through a weekend of golf at the Piping Rock Country Club on Long Island and convinced him to join Wardwell’s firm. In his familiar role as Henry Higgins, Davison even influenced Davis’s choice of a home: “We must find the right place in our own island neighborhood.”3 Davis bought a Locust Valley estate right near Jack’s and Harry’s. He had exactly the right credentials for a Morgan man: debonair and dignified, he favored a larger U.S. role in Europe, supported the League of Nations, and opposed the welfare state and a progressive income tax. He was also a devout Anglophile and one of the duke of Windsor’s lawyers. Another friend, King George V, termed him “the most perfect gentleman” he had ever known.4