Lords of Finance

by Liaquat Ahamed

  After Arizona, Strong decided to take advantage of his year off by traveling around the world. Accompanied by his eldest son, Ben, and his friend Miles, he left San Francisco in early April for Japan. They went on to China, the Philippines, Java, Sumatra, Ceylon, India, finally arriving at Marseilles in winter 1920. There Strong found a letter from Montagu Norman awaiting him. “Whenever you do come to London, let me remind you of your hotel, of which the address is ‘Thorpe Lodge, Campden Hill, W.8.’ The Booking Clerk tells me that an hour’s notice will be enough to get your room ready, or, if you are in a hurry, this can be done after you have arrived.” While Strong had been traveling, Norman had been elevated to the governorship of the Bank of England. It was the beginning of a true partnership.

  If REPARATIONS POISONED the relations among European countries, war debts did the same to the relations between the United States and its erstwhile associates, Britain and France. However hard the Americans tried to separate war debts from reparations, in the minds of most Europeans they remained inextricably linked. Indeed, in the middle of 1922, the British government made the connection explicit in a note drafted by Arthur Balfour, then acting foreign secretary, that Britain would collect no more on its loans to its Continental allies and on its share of reparations from Germany than the United States collected from it as payments on its own war debts.

  The Balfour Note provoked an outcry in the United States. Balfour, an aristocrat and philosopher of some repute—in 1895 he had published a work of great subtlety entitled The Foundations of Belief—was the elder statesman of British politics, having been prime minister before the war and foreign secretary under Lloyd George. Many were charmed by his urbane gracious manners and his air of bemused detachment—at the Peace Conference a British diplomat remarked that he “makes the whole of Paris seem vulgar.” In the United States, however, he was viewed as a “top-hatted frock-coated personification of British decadence,” and the tone of condescension and moral superiority adopted in the Note infuriated the Americans. “Lord Balfour seems to think that he can call us sheep thieves in language so elegant that we shall not understand it,” wrote one American. According to the Philadelphia Inquirer, “In the Balfour Note John Bull is depicted as the liberal, magnanimous and sympathetic creditor whose heart bleeds for his debtors’ sufferings, and who is willing and anxious to relieve them of a burden which he perceives is beyond their ability to bear; Uncle Sam is portrayed as a ruthless, relentless, hard-hearted Shylock, who is making it impossible for John Bull to follow his altruistic and benevolent instincts by stubbornly insisting upon the letter of his bond.”

  To make matters even worse, Congress had decided to get into the act. In March 1922, Congress created the five-man World War Foreign Debt Commission, which was chaired by the secretary of the treasury, Andrew Mellon, and included the secretary of state, Charles Evans Hughes; the secretary of commerce, Herbert Hoover; Senator Reed Smoot of Utah; and Representative Theodore Burton of Ohio. The commission was to negotiate the terms on which American loans were to be repaid. Concerned that the administration might be too lenient on the debtors, Congress imposed a floor on any settlement—the commission would not be permitted to accept anything less than 90 cents on the dollar.

  The congressional stipulations on war debts provided the Europeans their turn to express outrage. “Has America which but yesterday we acclaimed for her generosity and her idealism fallen to the role of a Shylock?” exclaimed a French senator in L’Éclair. Throughout Europe, newspapers began referring to Uncle Sam openly as “Uncle Shylock.” Even the Economist, by no stretch a populist newspaper, printed a letter signed “Portia” that accused the United States of attempting to “lay a tribute upon those who saved Kansas and Kentucky from the German peril.”

  In October 1922, Lloyd George’s government precipitously fell and a new Conservative government under Andrew Bonar Law took office in Britain. The incoming chancellor of the exchequer, Stanley Baldwin, was a practical and sensible businessman who believed strongly in settling one’s debts—he was so firm an advocate of this principle that in 1919 he had anonymously donated $700,000 of his own money, a fifth of his net worth, to the government as his contribution to paying off the national debt after the war.19

  With the rhetoric on both sides of the Atlantic becoming increasingly overheated, Baldwin decided to open negotiations for a settlement with the Americans, telling them he wanted “to approach the discussion as business men seeking a business solution of what fundamentally is a business problem.”

  A British delegation, led by Baldwin himself and including as its principal adviser, the governor of the Bank of England, Montagu Norman, set sail for the United States on December 30 aboard the Majestic. Norman was convinced that it was essential to settle with the Americans if Britain was to reestablish its credit, and reclaim London’s position as the world’s premier financial center. He had visited the United States in August 1921 and May 1922 to make the rounds of senior administration officials in Washington with Strong, including a secret meeting with the president, Warren Harding, to convince them that the United States should remain engaged in European finance. As a result of this groundwork, of all the British financial officials, Norman had the best firsthand knowledge of U.S. politics and the situation in Washington.

  On the stormy Atlantic crossing, which took twice as long as normal because of rough seas, gale-force winds, and fog, Baldwin and Norman became fast friends. Norman was usually suspicious of politicians, claiming somewhat disingenuously to have no political views himself—he bragged that he had never voted. The stolid uncharismatic Baldwin was the quintessential nonpolitician. They would remain lifelong friends, sharing a common taste for the pleasures of silence, of country walks and string quartets. Sir Percy Grigg, a high Treasury official who knew both well, described how “they seemed to understand each other and to communicate without having to exchange more than a few monosyllables.”

  The American negotiating team was led by Secretary Andrew Mellon. Then in his late sixties, Mellon had been born into a wealthy Pittsburgh family and by the age of forty had independently amassed a fortune of some $500 million, making him the third richest man in America, after John D. Rockefeller and Henry Ford. Taciturn, cold, and reclusive—his son Paul would compare him to the money-obsessed Soames Forsythe of John Galsworthy’s Forsyte Saga—Mellon’s riches had brought him little happiness. In his forties, he had married a frivolous young English girl of nineteen, who within a few years left him for a social-climbing con artist, dragging him through a scandalous divorce in the process. He now lived in an opulently furnished six-bedroom apartment at 1785 Massachusetts Avenue, a block east of Dupont Circle, where his daughter Ailsa, a self-involved and sickly young lady prone to all sorts of psychosomatic ailments, acted as hostess.

  The discussions were conducted in great secrecy, some sessions even taking place in Mellon’s apartment, surrounded by old masters. There were lunches and dinners—to one such event Vice President Calvin Coolidge, “Silent Cal,” was invited and did not utter a word to either of his neighbors during the entire meal. He would later famously dismiss the problem of war debts by exclaiming, “They hired the money, didn’t they?” Despite Prohibition, the British delegation was surprised to find an abundance of liquor in private homes.

  Before leaving London, they had been given to believe by the American ambassador that they should be able to reach an adjustment of 60 cents on the dollar and the cabinet had not given them the authority to go any higher. Arriving in Washington, they discovered that while the U.S. administration was keen to settle, it was limited by what Congress would accept. After two weeks of negotiations, the best that the Americans could offer was 80 cents on the dollar.

  While Baldwin was frustrated by America’s lack of generosity—at one point saying that he would like to ship them replicas of the golden calf—Norman pressed him to agree to the terms. In his view, the willingness of the Debt Commission to go beyond the limits set by Congress
reflected “a newly found desire on the part of Americans to come into Europe again,” and even a stiff settlement was a small price to pay for getting the United States back into European affairs.

  On the way home, the British team passed through New York. Strong and the Morgan partners advised them that they would not get a better deal by waiting and urged them to settle. Arriving in Southampton on January 27, 1923, Baldwin made the foolish mistake of revealing the terms to the press, even before he had had a chance to present them to the cabinet, and in the belief that his remarks were off the record, declared that he was for acceptance. He then dug himself in deeper by telling the gathered reporters that any deal would have to satisfy Congress, many of whose representatives came from the West, where they “merely sell wheat and other products and take no further interest in the international debt or international trade.” The headlines the next day announced that the British chancellor of the exchequer considered the average senator “a hick from way back.”

  The prime minister was furious. Having lost two of his sons in the war, Bonar Law had been all along deeply offended by the American view of war debts as just another commercial transaction. “I should be the most cursed Prime Minister that ever held office in England if I accepted those terms,” he told Baldwin. On January 30, Baldwin made a strong plea in the cabinet for accepting the deal. He admitted that the Americans could have been more generous, that they had made great fortunes out of the war, that they worshipped the “God Almighty Dollar” but this was best that Britain was going to get.

  Bonar Law spoke for rejecting the American offer. He had consulted Maynard Keynes, who counseled him to hold out, arguing that Britain should refuse the American offer “in order to give them [the Americans] time to discover that they are just as completely at our mercy as we are at France’s and France at Germany’s. It is the debtor who has the last word in these cases.”

  But Bonar Law was cornered—to disavow his chancellor who had so publicly endorsed the deal would create a crisis in the government. Outvoted in the cabinet, he accepted defeat, but did take the opportunity to let off steam in the traditional British manner—by writing an anonymous letter to the correspondence columns of the Times in which he vigorously attacked his own government’s decision to accede to the American terms.

  Watching Britain strike such a poor bargain for itself, France chose to wait it out. It would eventually settle its war debts in 1926, when it reluctantly conceded to pay 40 cents on the dollar—even then the arrangement was not ratified by the National Assembly until 1929. Italy did even better. When it settled, also in 1926, it would only agree to pay 24 cents on the dollar. As usual Keynes had been right—holding out would have given Britain a better deal.

  As the decade went on, and the Americans insisted on extracting these payments, they were shocked to discover how intensely disliked they were in Europe. Journalists sent home articles dissecting the various sources of American unpopularity under such titles as “Europe Scowls at Rich America” or “Does Europe Hate the U.S. and Why?” or even “Uncle Shylock in Europe.” One informal poll revealed that 60 percent of the French regarded the United States as their least favorite nation. The New York Times correspondent in Paris reported that “ninety out of a hundred regard Uncle Sam as selfish, as heartless, as grasping.” Visiting Britain, the veteran American foreign correspondent Frank Simonds discovered that “the great majority of the British people have made up their minds that American policy is selfish, sordid and contemptible.”

  But the really pernicious effect of war debts was that they made it hard, if not impossible, for Britain to forgo collecting its own debts from France and Germany, made France all the more obstinate in its efforts to collect reparations from Germany, and led Europe into a self-defeating vicious cycle of financial claims and counterclaims.

  IN December 1922, as Norman set out for Washington, the Times of London profiled him: “Mr. Montagu Collet Norman, D.S.O., the Governor of the Bank of England . . . certainly one of the most interesting, as well as one of the most able men who have occupied the Chair for a generation or more.”

  “In appearance he recalls the early Victorian statesmen,” it went on, “Aristocratic in manner and temperament . . . his Shakespearian type of head sets well upon his tall, silent and dignified figure. A lover of music, poetry and books, Mr. Norman also possesses a collection of rare and beautiful woods. Many of those who come into contact with him feel that there is an indefinable touch of mystery about him. He has the keen sensitiveness of an ‘intellectual.’ ”

  It was remarkable how enormous was the change that had come over Norman since August 1914. Then he had been a pathetic figure, unsure of himself and uncertain about his future, wracked by neuroses, his less than illustrious career cut short by mental illness. Now he was generally recognized as the most prominent and powerful banker in all Europe, if not the world.

  From the very start of his tenure at the Bank, Norman had made a point of breaking the mold. Whereas his predecessors had been driven to work, resplendent in top hat and frock coat, he turned up in a business suit by way of the Underground—the Central Line from Notting Hill—with the ticket jauntily protruding from his hatband. His whole persona seemed to have been transformed. Almost everyone remarked on his graciousness, his courtly old-world manners, and most of all, the charm with which he was “singularly gifted.” As one of his fellow directors put it, “He never made jokes or anything of that kind. He was just amusing. A continual bubble of wit.”

  In those five years, he had also acquired something of a mystique in the public mind. Before Norman, the governor of the Bank had generally been a figure of relative obscurity, known to only a few insiders within the Square Mile. But Norman’s personality seemed to exert a powerful fascination on the press, which lauded him as a financial genius of great originality. All those traits, once viewed as the harmless eccentricities of a “strange old man”—his flamboyant way of dressing, his slouch hats, his artistic interests, his knowledge of Eastern philosophy—were now invested with great significance as signs of unusual creativity. His unorthodox appearance, his air of aloof amused amiability, perhaps above all his apparent lack of interest in money, for all his place at the very center of its mysteries, all contributed to the image of austere power, half patrician, half priestly.

  This aura was reinforced by his policy of avoiding public appearances. He was rarely seen at the social events of the City, never made any speeches apart from the annual Mansion House toast required by tradition of the governor, and never submitted to newspaper interviews on the record.

  It was during those early years that Norman got into the habit of traveling under pseudonyms, which became so much a part of his myth and mystique. It was the high point in the era of the transatlantic liner. The Times of London and the New York Times regularly ran features listing the most notable passengers on the ocean liners scheduled to leave each week—generally extensions of the social pages heavily populated by ambassadors, film stars, and European nobility.

  News that the governor of the Bank of England was traveling to the United States inevitably gave rise to rumors: a settlement of war debts was imminent! Or Britain might return to the gold standard that week! To avoid all this unfounded speculation, Norman’s secretary, Edward Skinner, began booking Norman’s passage under his own surname.

  At some point in Norman’s travels across the Atlantic, plain old Skinner became Professor Clarence Skinner. The story goes—one among many—that during one such trip, a Professor Clarence Skinner, professor of applied christianity at Tufts College in Medford, Massachusetts, and a well-known Universalist who had actively campaigned to repeal the statutes prohibiting blasphemy, happened to be traveling on the same liner. The reporters, hovering at the West Side piers of Manhattan for a dockside interview, mistook Norman, with his professorial demeanor, for Professor Clarence Skinner. Norman did nothing to disabuse them of their misconception. Nor did the real professor, who, it seems, was quite
amused. The whole incident so appealed to Norman’s characteristically quirky sense of the absurd that, thereafter, he always traveled under the pseudonym, Professor Clarence Skinner. Over time, his alias was unmasked by the press. Nevertheless, he continued the practice, and talk of Professor Skinner and his travels became something of an in-joke among the cognoscenti.

  Norman’s dislike of any sort of press coverage and his attempts to conceal his activities from reporters only further fed their curiosity. Even the most ordinary incidents of his daily life were magnified and nourished speculation. The results could be comic and at times absurd.

  Take a typical incident in March 1923, only days after France had occupied the Ruhr: Norman had left for his annual month’s vacation in the south of France, where he generally stayed either with his half uncle at Costabelle, near Hyères, or at the Hermitage Hotel in Nice. On this occasion, he decided to stop off in Paris for a few days of meetings with his counterparts at the Banque de France. Making no attempt to keep his trip a secret, he stayed at the prominent and well-known Hôtel Crillon, on the Place de La Concorde. Nevertheless, because the Crillon had mistakenly registered him under the name Norman Montagu, the papers claimed that he was attempting to visit Paris incognito. When his valet was seen buying train tickets from a source other than the hotel’s bureau, and was rumored to have been overheard asking the concierge about trains to Berlin, a wire report speculated that Norman was preparing to travel to Germany, and furthermore was attempting single-handedly to negotiate a settlement to the problem of reparations. The story ran in half the London press, and was picked up by many American papers, including the New York Times, the Washington Post, and the Chicago Tribune. In fact, after a few days in Paris, he left for Nice as usual.