Lords of Finance

by Liaquat Ahamed

  By THURSDAY, July 30, it had become apparent that what had initially appeared to be just a remote Balkan affair between a fading empire and one of its minor states was escalating toward a general European war. In response to Austria’s attack on Serbia, Russia had now ordered a general mobilization. The international political crisis brought a financial crisis in its wake. The Berlin, Vienna, Budapest, Brussels, and St. Petersburg stock exchanges all had to suspend trading. With all the bourses of Europe except Paris’s shut, the panic liquidation of securities concentrated on London.

  On Friday, July 31, when Norman arrived at his City office, just north of the Bank of England, he found the financial community solidly against any British involvement in a Continental conflict. David Lloyd George, the chancellor of the exchequer, would later recount how Walter Cunliffe, the governor of the Bank of England, a man of few words not usually given to theatrical displays, came to plead “with tears in his eyes ‘Keep us out of it. We shall be ruined if we are dragged in.’”

  London was the financial capital of the world, and the City’s livelihood depended much more on foreign finance than on providing capital to domestic industry. The merchant bankers housed in the warren of streets around the Bank of England, that select inner circle of household names—Rothschilds, Barings, Morgan Grenfell, Lazards, Hambros, Schroders, Kleinworts, and Brown Shipley, which gave the City of London its mystique—oversaw the greatest international lending operation the world had ever seen. Every year a billion dollars of foreign bonds were issued through London bankers. In the previous year, Barings and the Hongkong and Shanghai Bank had syndicated a loan of $125 million to China; Hambros had brought a loan to the Kingdom of Denmark to market; Rothschilds had underwritten a $50 million issue for Brazil and was in the midst of negotiations for another loan; there had been bond issues for Rumania, for the cities of Stockholm, Montreal, and Vancouver. In April, Schroders had even led an $80 million bond issue for the imperial government of Austria, a country against which Britain might soon be at war. All of this financing and the profits that went with it would dry up in the event of war.

  The closure of stock exchanges around Europe, and the risk that gold shipments would be prohibited, causing the entire gold standard to unravel, created a more immediate problem. It was now difficult, if not impossible, for Europeans to send money abroad to settle their trade debts. The merchant banks, which had guaranteed all this paper, were faced with bankruptcy.

  Bankers were not the only ones terrified by the threat posed to world financial order by the prospect of war. Even the foreign secretary, Sir Edward Grey, who of all the cabinet had staked his career on the ambiguous “understanding” with France and was most committed to fighting, warned the French ambassador that “the coming conflict will plunge the finances of Europe into trouble, that Britain was facing an economic and financial crisis without precedent, and that British neutrality might be the only way of averting the complete collapse of European credit.”

  At ten o’clock on Friday morning, a notice was posted on the door of the stock exchange announcing that it was to be closed until further notice, for the first time since its founding in 1773.

  Banks around the city began refusing to pay out gold sovereigns to customers. Soon a long queue assembled outside the Bank of England on Threadneedle Street, the one bank that remained legally obliged to convert five-pound notes into gold coins. There was no panic, just an atmosphere of “acute anxiety.” While the crowd, many of them women who “stood nervously fingering their notes,” was admitted into the Bank’s inner courtyard, an even larger group of bemused onlookers gathered on the steps of the Royal Exchange opposite. The Times reported that “although many hundreds of people, a great many of them foreigners, must have been in the queue in the course of the day, there was no kind of disorder.” This was in sharp contrast to the reports of panic coming from the cities of Europe and could be attributed, asserted the Times haughtily, to the “traditionally phlegmatic and cool” character of the English. On the next day, the crowd outside the Bank was even larger, but there was still no sense of real alarm. Nevertheless, just in case, the Bank’s porters, in their distinctive salmon-pink tailcoats, red waistcoats, and top hats, were sworn in as special policemen, with the right to make arrests.

  There may have been no riots in the streets, but fear was sweeping through the boardrooms of the great commercial banks. For the previous six months they had been engaged in a terrible controversy with the Bank of England over the adequacy of both their own and the Bank’s gold reserves in the event of just such a crisis. In February, a memorandum circulated to a committee of bankers had warned that “in case of an outbreak of war, foreign nations would have the power, and would use it ruthlessly, of inflicting serious financial disturbance by demanding gold.” Now faced with the prospect of large parts of the City of London going under, the commercial bankers in a panic had begun withdrawing gold from their accounts at the Bank of England. Its bullion reserves fell from over $130 million on Wednesday, July 29, to less than $50 million on Saturday, August 1, when the Bank, to attract deposits and conserve its rapidly diminishing stock of gold, announced that it had raised its interest rates to an unprecedented 10 percent.

  Meanwhile on the Continent, the crisis was inexorably ratcheting up. Germany countered the Russian mobilization with a general mobilization of its own on Friday, July 31, and dispatched an ultimatum demanding that France declare its neutrality and turn over the fortresses of Toul and Verdun as a pledge of good faith. Next day, it declared war on Russia, and France ordered its own general mobilization. By Sunday, it was clear that in a matter of hours, France, committed to its alliance with Russia, would also be at war with Germany. That weekend Norman cabled his American partners at Brown Brothers in New York, “European prospects very gloomy.”

  Over the weekend, the mood of Britain shifted decisively in favor of war. It was the August Bank Holiday weekend and thousands of people, too excited to stay home and drawn outdoors by the sunshine, crammed into the center of London all the way from Trafalgar Square across Whitehall to Buckingham Palace, blocking all car and bus traffic, cheering and singing patriotic songs—“La Marseillaise” as well as “God Save the King”—and clamoring for action.

  On Monday, the City would normally have been completely deserted for the August Bank Holiday. Instead, Norman joined 150 other bankers gathered at the Bank of England. It was a stormy meeting. As Lloyd George, the chancellor of the exchequer, would later remark, “Financiers in a fright do not make a heroic picture.” Many of the men participating did not know whether or not they had lost everything they had. Voices were raised and one banker even “shook his fist” at the governor himself. The meeting decided to recommend to the chancellor that the Bank Holiday should be extended for another three days to buy time for the panic to subside. The Treasury also announced that all trade debts would automatically be extended for an extra month while the Bank of England decided how best to go about bailing out the merchant banks threatened with insolvency or even bankruptcy.2

  Norman’s immediate concern in those first few days was simply to make sure that Brown Shipley would survive. Otherwise, he would have no hope of getting his capital out. Over the weekend, hundreds of the firm’s American clients, stranded in Europe, gathered at the Pall Mall offices, trying to cash their letters of credit. But as the dust began to settle, it became apparent that with so much of the firm’s business concentrated in the United States, which remained happily neutral, it would emerge relatively unscathed. As a member of the Court of the Bank of England, however, Norman found himself having to spend most of his time on the business of the Bank, particularly in trying to disentangle the labyrinth of unpaid trade debts.

  Strangely, the enormous tensions of the time, the burden of the workload, which left him little time to brood, actually seemed to alleviate his mental incapacities. As he wrote to a friend in the United States, “I have been at work morning and night, and not an ache or pain have
I had, nor even been better for years past.” In an odd but very real way, the war was to be good for him.

  Hjalmar Schacht

  3. THE YOUNG WIZARD

  Germany: 1914

  ’Tis a common proof That lowliness is young ambition’s ladder

  —WILLIAM SHAKESPEARE, Julius Caesar

  Across Europe that week, people were left stunned by the speed of events. The crisis seemed to have come from nowhere. And even though most of the Continent had been half expecting a war for the last decade, few could have imagined, at the end of June, that it would be the assassination of an Austrian archduke that would set off the avalanche.

  The continued complacency of most Germans during the month of July 1914, even after the assassination in Sarajevo, was very much the result of a deliberate campaign by their own government to project a surface of calm. Behind the scenes, Austria was being goaded on by the highest circles in Berlin to use the assassination as an excuse to bring Serbia to heel once and for all. Meanwhile, both the Austrian and German leaders took great pains in public to keep their intentions well disguised. All put on a great show of maintaining their usual summer holiday schedules. The emperor Franz Joseph made a point of staying at his hunting lodge at Bad Ischl for all of July. The kaiser departed on July 6 for his annual three-week holiday, aboard his yacht, Hohenzollern, in the Norwegian fjords. The chancellor, Theobald von Bethmann-Hollweg, came to Berlin for some emergency meetings in early July but rapidly resumed his holiday on his 7,500-acre estate at Hohenfinow, some thirty miles away, while the chief of the General Staff, General Helmuth von Moltke, remained in Karlsbad taking the waters, and Secretary of State Gottlieb von Jagow departed on his honeymoon.

  Among those whom the crisis took by surprise was a thirty-six-year-old banker in Berlin with the uniquely improbable name of Horace Greeley Hjalmar Schacht. In spite of the authorities’ elaborate charade, rumors of war had already begun to percolate early in July within the highest banking circles in Germany. One of those who seemed to take a particularly pessimistic view of the situation from the start was Max Warburg, scion of the prominent Hamburg banking family, who significantly was known to be close to the imperial court. The famously indiscreet kaiser himself contributed to the gossip from those circles by insisting that his friend Albert Ballin, head of the Hamburg-America Line, be informed in advance of a general mobilization. There was also talk that the crown prince had been breaking the strictest confidences to warn his friends in financial circles, including the managing director of the Dresdner Bank, Eugen Guttmann, that for all the surface calm, the optimism of the Berlin Stock Exchange was misplaced and war between Germany and Russia very likely.

  But Hjalmar Schacht, only an assistant director and branch manager at Guttmann’s Dresdner Bank, was still too far down the Berlin banking hierarchy to be party to these exalted hints from court. From his lowly point of view, he found it hard to believe that the situation had been allowed to spiral so far out of control—it seemed so profoundly irrational to let international rivalries threaten the German economic miracle.

  THOUGH SCHACHT’S POSITION at the Dresdner, one of Germany’s two largest banks, was still modest, for a young man in imperial Germany with no family connections, he had come a long way. He was certainly being noticed. In the months before the crisis began, he had been working on a loan for the city of Budapest, financed by a consortium of German, Swiss, and Dutch banks. The Swiss banker Felix Somary would later recount how Schacht even then “considerably outshone his fellow directors, all sons of rich fathers or mere time-servers.”

  With his clipped military mustache and brush-cut hair parted very precisely down the center, Schacht could easily have passed for a Prussian officer. He walked very erectly with a “curiously stiff gait,” his rigid bearing, exaggerated by the starched, high, gleaming white celluloid collars that he favored. But he was neither a Prussian nor in any way connected to the military. He came from a lower-middle-class family, originating from the area of Germany bordering on Denmark, and had been brought up in Hamburg, the most cosmopolitan city in the whole empire.

  Schacht would one day become famous for his boundless ambition and ferocious will to succeed. They were in part a reaction against a father with a long history of failure. Wilhelm Ludwig Leonhard Maximillian Schacht had been born on the western coast of North Schleswig, a narrow neck of land connecting Denmark to Germany. The Dithmarschen is a region of salt marshes and small isolated dairy farms, a bleak and wind-swept country protected by large dykes against the constantly encroaching North Sea. The people are reputedly independent and tough, laconic to the point of rudeness. Schleswig and the neighboring duchy of Holstein had historically been ruled by the Danish crown, although the population was split between German- and Danish-speakers and throughout the nineteenth century, sovereignty over the two states had been subject to a dispute between Prussia and the Kingdom of Denmark.3 In 1866, following two short wars, Bismarck annexed Schleswig and Holstein, incorporating them into the Prussian empire. After the war, in 1920, the northern parts of Schleswig, including the region from which the Schacht family had come, reverted to Denmark as a result of a plebiscite.

  Wilhelm Schacht was one of the eleven children of a country doctor. In 1869, unhappy at the prospect of having become a Prussian subject liable to the Prussian military draft, five of the Schacht brothers emigrated to the United States, where Wilhelm spent seven years. But although he became a U.S. citizen, he never quite managed to find his feet, drifting from one job to another, working for a while in a German brewery in Brooklyn and in a typewriter factory in upstate New York. Finally, in 1876, he decided to return to Germany.

  Arriving back just as the economic boom unleashed by the Franco-Prussian War was ending and a depression setting in, he continued to be plagued by the same bad luck. During the next six years, he tried his hand at various professions—schoolteacher, editor of a provincial newspaper, manager of a soap factory, bookkeeper for a firm of coffee importers—all unsuccessfully. Eventually he found a job as a clerk with the Equitable Insurance Company, where he would remain for the next thirty years. While Schacht was always a little defensive about his father, claiming that he was simply “a restless wanderer unable to remain for long in one place,” the contrast between the father’s fecklessness and the gigantic ambitions of the son could not have been greater. Even Schacht could not help observing in his autobiography that by the age of twenty-five, he was already earning more than his father.

  In contrast to his awkward and retiring father, his mother, “sentimental, gay and full of feeling,” always cheerful despite years of hardship, provided the center of affection for the family. Born the Honorable Constanze Justine Sophie von Eggers, the daughter of a Danish baron whose family had a long history of service to the crown, she had taken a large step down the social ladder by marrying Wilhelm Schacht. Her grandfather, a counselor to the king, had worked for the emancipation of serfs and had been responsible for a currency reform in Denmark in the late eighteenth century. But the family fortunes had declined over the years, leaving young Constanze von Eggers without any inheritance. She had met Wilhelm Schacht, then a penniless student, in 1869 and followed him to the United States, where they were married three years later.

  Hjalmar Schacht himself was born in 1877, a few months after his family returned to Germany, in the small town of Tingleff in North Schleswig. He was christened with the unusual names Horace Greeley Hjalmar—in a typically impractical gesture, his father had chosen his first two names as a tribute to the founder and editor of the New York Tribune, whom he had admired while living in Brooklyn. His grandmother had insisted, however, that he have at least one conventional German or Danish name, and the young Schacht grew up as Hjalmar. Later in his life, though, some of his English friends and associates would use the name Horace.

  During his early childhood, the family moved frequently as Wilhelm Schacht bounced from job to job, but in 1883, they finally settled in Hamburg. Germany in th
e last few years of the nineteenth century was a country of contradictions. Gripped by the most rigid class system in Europe—in fact almost a caste system—and governed by an autocratic constitution that still vested most of the power in the monarch and in the Junker military cadre surrounding him, it simultaneously offered Europe’s most meritocratic educational system. But for that, Schacht might have been condemned to the narrow confines of lower-middle-class existence as a clerk or perhaps a teacher. Instead, in 1886, at the age of nine, he was accepted into the Johanneum, one of the finest gymnasia in Hamburg, where he received a rigorous classical education, emphasizing Latin, Greek, and mathematics.

  He could not completely escape the constrictions of his class-ridden society. Life at school was full of petty humiliations stemming from his family’s poverty: taunts at his living in a ratty tenement district, mockery of the cheap cloth of his trousers, sharing a graduation gown because he could not afford to buy one for himself. Cold-shouldered by the richer students, he was solitary, obsessively hardworking, and conscientious.

  In 1895, Schacht graduated from the Johanneum and entered a university. Finally liberated, over the next few years he actually seemed to enjoy himself. He wrote poetry; joined a literary society; worked as a stringer for the Kleines Journal, a gossipy Berlin tabloid; and even composed the libretto for an operetta.4 While he initially enrolled at the University of Kiel, he followed the German practice of transferring from one university to another, spending semesters in Berlin, Munich, Leipzig, and in 1897, the winter semester in Paris. He began as a medical student, tried his hand at literature and philology, and eventually graduated with a major in political economy, going on to write a doctoral thesis on the foundations of English mercantilism in the eighteenth century.