The whole justification for the new currency was to provide a stable alternative to the collapsed Reichsmark. The question immediately arose: At what rate could people convert their Reichsmarks into Rentenmarks? On November 12, the Reichsmark was trading at 630 billion to the dollar. Some argued that the rate of conversion should be fixed at that point, but Schacht decided to wait. The black market price was still falling, and he wished to allow the selling to exhaust itself before he committed to a rate of conversion. Every day the Reichsmark plunged further, and every day he insisted on holding back. On November 14, when it fell to 1.3 trillion, he did nothing. A day later, it was at 2.5 trillion and still he sat on his hands. Finally, on November 20, when the Reichsmark stood, if that is the word, at 4.2 trillion to the dollar, he fixed the conversion rate at 1 trillion Reichsmarks to a Rentenmark.
The decision to wait those extra days, allowing the old currency to sink by another 80 percent, was a brilliant tactical move. The Reichsmark became so worthless that the government was able to buy back its many trillions of debt, valued at $30 billion when first issued, for only 190 million Rentenmarks, equivalent to about $45 million.22
For the next few days, marks, both new and old, continued to fall on the black market. On November 26, the Reichsmark was trading at 11 trillion to the dollar in Cologne. Then the strangest thing began to happen. The exchange rate began to reverse itself. By December 10, it was back at 4.2 trillion to the dollar. Within a few days prices stabilized.
When prices were so insanely rising, the average German had done everything he could to get rid of any cash he received as fast as possible. Now this spiral reversed itself. As prices began to hold and then fall, it became profitable to hang on to cash. Farmers, their confidence in money restored, began bringing produce to market, food reappeared in the shops, and those interminable queues began to melt away. Lord d’Abernon, the British ambassador, wrote of the “astonishing appeasement and relief brought about by a touch of the magical wand of “Currency Stability. . . . The economic détente has brought in its train political pacification—dictatorships and putsches are no longer discussed, and even the extreme parties have ceased, for the moment, from troubling. ”
Not all of this was Schacht’s doing. Stresemann and his cabinet colleagues backed the Rentenmark with a series of budgetary measures, suspending all subsidy payments to workers in the Ruhr, firing a quarter of the government workforce, and indexing all taxes to inflation, thus eliminating the incentive for taxpayers to delay payment. By January 1924, the budget was balanced. But it was Schacht who received the prime credit, feted in the press as “The Wizard” or the “Miracle Man.”
MAX WARBURG ONCE remarked that he supported Schacht because “he always had good luck.” That good fortune once more manifested itself. In early November, Von Havenstein took a few days’ leave of absence, in order to get out of Berlin during the humiliation of Schacht’s appointment; but he was also known to be seriously ill. In mid-November, he returned to his official apartment on the top floor of the Reichsbank. On November 20, the day that Schacht fixed the conversion value of the new currency, Von Havenstein after a late evening meeting with his board, suddenly collapsed and died of a heart attack at 3:30 a.m. He was sixty-six.
There was something terribly tragic about this deeply well-intentioned man. Not simply a dutiful bureaucrat, he was by all accounts a wonderful human being, to Max Warburg “an extraordinarily sympathetic personality, with an unbending sense of duty and honorable character.” He was universally admired, kind, principled, and considerate, always living up to the highest virtues of his class. During the war, while most households supplemented their rations by buying under the counter, Von Havenstein not only refused to use the black market, but even donated some of his own paltry bread and meat ration stamps to the poor. In the last year, however, he seemed to have lost his grip on reality—some said that the pressure he was under had made him prematurely senile—and few mourned his passing.
While Schacht was Von Havenstein’s logical successor, his unusual gift for making enemies continued to dog him. The strongest opposition came from within the Reichsbank board, which considered him an unprincipled interloper. The whole Belgian episode resurfaced all over again. The only rival candidate, however, was Karl Helfferich, who as wartime secretary of the treasury had been responsible for the disastrous policies that had left Germany so buried under debt. Helfferich’s political views, allied to a taste for polemics, had propelled him into the vanguard of the right-wing nationalists. Because of his vicious ad hominem attacks on democratic politicians, he was blamed for instigating the wave of assassinations by paramilitary vigilantes. Whatever reservations politicians of the center and left who formed the backbone of the government might have held about Schacht, he was infinitely better than Helfferich. On December 20, Schacht was appointed president of the Reichsbank.
But despite the early success of the currency reform, Schacht was acutely aware that Germany’s problems would not be solved by its efforts alone. Monetary stability was sustainable only while Germany could stall paying reparations. Ultimately, it would have to strike a deal with the Allies and resume some payments; and at that point, the mark would begin to plummet again.
Schacht believed, moreover, that the Rentenmark, based as it was on the fictional security of land, could only offer a temporary solution, “a bridge between chaos and hope,” as he called it. Ultimately any stable German currency would have to be backed by gold. Since the Reichsbank held less than $100 million of the metal, wholly insufficient as the basis for an economy the size of Germany’s, he would have to find some way of borrowing from abroad to bring the gold backing to an adequate level.
The United States was the obvious place to go—of all the powers after the war, it was the only one with surplus capital. But for the past three years it had withdrawn from European affairs, though there were some signs that it was waking up to the need to reengage. During his first few days in office, Schacht received some encouraging signals through many intermediaries, such as Gerard Vissering, the governor of the Nederlandische Bank, that Montagu Norman at the Bank of England was keen to find some way of bringing Germany back into the world economy. Norman had to be one of the keys to reestablishing Germany’s credit abroad. No major bank, in either London or New York, would think of lending money to Germany without a nod from him. Schacht’s first action after taking over at the Reichsbank was to bring his family back from Switzerland; the second was to arrange a meeting with Norman in London.
11. THE DAWES OPENING
Germany: 1924
Be extremely subtle, even to the point of formlessness.
Be extremely mysterious, even to the point of soundlessness.
Thereby you can be director of the
opponent’s fate.
—SUN Tzu, The Art of War
SCHACHT ARRIVED at Liverpool Street Station in London on the boat train from Berlin at 10:00 p.m. on New Year’s Eve, 1923. London café society was back in full swing after the war, the streets crowded with revelers. Schacht had arranged to be met by the economic counselor at the German embassy, Albert Dufour-Feronce. As he stepped off the train, he also found waiting “a tall man with a pointed grayish beard and shrewd discerning eyes” who, much to Schacht’s surprise, introduced himself as Montagu Norman. “I do hope we shall be friends,” Norman said confidingly in his soft voice as he led Schacht to a cab. Before they parted, Norman insisted that they meet at Threadneedle Street the following morning, even though it was a holiday and the whole City would be shut.
Schacht was taken aback by the warmth of his welcome and was even more bemused when he learned from Dufour-Feronce how keen the governor had seemed to establish a personal bond with his German counterpart, insisting, “I want to get on well with him.”
Schacht was more than flattered that Norman would turn out to welcome him on a cold and foggy December evening when most people were celebrating. After all, he was the supplicant come to enlist
help with the German economic crisis. He was also touched by the graciousness of the gesture. After the war, loathing of things German had run high across Europe, and Schacht had become accustomed to slights and petty insults by Allied officials when he traveled abroad.
The next day Norman collected Schacht from the Carlton Hotel in Mayfair and they made their way to the Bank through the empty streets. Covering a full block at the corner of Threadneedle and Princess streets in the heart of the City, the Bank, surrounded by a forty-foot windowless wall topped by balustrades, looked like some medieval citadel. One entered this fortress through two great bronze doors, behind which, hidden from public view, lay a labyrinth of colonnaded courtyards and domed banking halls. By the entrance rose a giant rotunda modeled on the Pantheon in Rome, and next to it was a beautiful private garden with a fountain and a lime tree, planted in the spring with hundreds of flower bulbs. It was a most unusual setting for the headquarters of a central bank and very unlike the stern official-looking building from which Schacht now operated.
After the enormous wartime expansion of the Bank’s activities, the halls and courtyards would normally have been as bustling and overcrowded as a bazaar with young clerks, bill brokers, and top-hatted bankers from the discount houses scurrying between the Bank and the investment firms located in the nearby streets and lanes. But that day the warren was silent and deserted, like some vast disused stage set. The governor’s room was on the ground floor, overlooking a private courtyard. Norman, with his unbankerly taste for solitude and no family to hold him at home, could often be found here on weekends and holidays. Decorated in a neoclassical style, with paneled walls and a magnificent fireplace, the room was dominated by a large square mahogany table in the center. Instead of using a desk, the governor worked from this table, which was clear—no papers, just two phones. As the two men settled down for the day, they might have been sitting in the master’s study of some historic Oxford college.
After spending much of the morning discussing the German situation, Schacht finally got to his main object in coming to London. Though the Rentenmark was for the moment stable, it was not yet acceptable to foreigners, and hence could not provide the basis for loans to import goods from abroad. True recovery depended on getting international commerce moving again. Schacht proposed that the Bank of England lend a certain amount of capital to a new subsidiary of the Reichsbank to build up its sterling reserves and funds. He was asking for a mere $25 million, which, supplemented by a further $25 million that he hoped to raise from capital held abroad by German banks, would be enough to give the new subsidiary access to the London market and provide the nucleus for as much as $200 million in loans.
This was a typically bold Schacht proposal—given the circumstances, almost outrageous. Germany was essentially bankrupt. It had destroyed its own currency, owed the Allies over $12 billion in reparations—and had defaulted on these—was partially occupied by French and Belgian troops and now on the verge of disintegration. Schacht himself had barely been in office for two weeks; had been appointed in the teeth of fierce opposition, especially from within his own institution; and had yet to put his stamp on the place. For the Bank to lend money to Germany and a deeply divided Reichsbank in the current circumstances would be almost foolhardy. Norman could not help being impressed with the audacity of his new acquaintance.
Both men knew that a loan at this moment from an institution with the authority and prestige of the Bank of England would represent a dramatic gesture of support for Germany, and for Schacht personally. There could be no better seal of approval anywhere in the banking world, one that might in itself set in train a self-reinforcing migration of money back into the country.
Norman had been trying over the years to find a way to help Germany. He had been shocked by the extent of the collapse of the German currency. In 1922, Von Havenstein had come to see him for help. Though he had found his visitor to be “quiet, modest, convincing, and [a] very attractive man: but so sad. . . (with) an attitude of almost hopelessness,” he had declined to get involved, believing that the old president was not up to the task.
One element in Schacht’s plan was specifically designed to appeal to Norman: the proposal to base the new bank on the pound sterling. Not only was its capital to be denominated in sterling, it would make loans in sterling, and perhaps issue bank notes in pounds to circulate in Germany. Norman had been working to strengthen the pound by having other European central banks hold some of their reserves in sterling rather than gold. He had so far had some modest success with the idea. Austria and Hungary, like Germany ravaged by postwar inflation, had both pegged their currencies to the pound. But they were small nations of little economic significance. To bring a country such as Germany, despite its troubles still the largest economy within Europe, into the ambit of the pound would enormously bolster sterling’s faltering position.
Schacht’s grasp of the multiple dimensions of the situation, his virtuosity in matters of finances, and his determination clearly impressed Norman, who agreed to the German plan after a single night’s reflection. During the next few days he shepherded Schacht around the City to introduce him to the directors of the Bank. Few took to Schacht, finding him to be a pompous blowhard. But for these two polar opposites—the German parvenu, with a direct and aggressive style, and his English guide, with his old-fashioned manners and elliptical ways of thinking and talking—it was the beginning of a genuine and enduring friendship.
For four years, Norman had stood on the sidelines and watched powerlessly as the situation in Germany had progressively deteriorated. With Schacht’s arrival on the scene, however, he had found reason for hope. On January 7, three days after Schacht left London, he wrote to Strong, “You know, of course, how precarious the position of Germany has been. . . . None the less we are disposed to believe that there is now a chance, and probably the last chance, of preventing a complete collapse. The new President of the Reichsbank has been here for several days. He seems to know the situation from A to Z and to have, temporarily, more control of it than I should have believed possible: he is acting more resolutely than his predecessor, Havenstein.”
WHILE SCHACHT AND Norman were concocting their scheme, a team of American “experts,” with even greater ambitions to resolve the problems of German finances, was in mid-Atlantic steaming toward Europe on board a liner. Over the years, Germany had had no shortage of foreign “experts” willing to tell it how to stabilize its currency. The British ambassador, Viscount d’Abernon, himself a currency expert, remarked that on arriving in Berlin, these advisers would be invited to “entertainments after dinner—like actresses with doubtful pasts,” thereafter generally to meet a “sad fate. During life, they empty every room in which they hold forth, and death finds them in madhouses.” The monetary technicians had universally failed because it was not intellectual but financial help that Germany needed. This time, however, the “experts” were Americans, coming with the blessing of the U.S. government and the promise, so everyone hoped, of American money.
Though the United States, frustrated by Europe and its quarrels, had withdrawn from active involvement in world affairs, there remained a faction within the administration, led by Herbert Hoover, the secretary of commerce, and Charles Evans Hughes, the secretary of state, who had continued to push for some degree of engagement in the belief that European recovery was essential to American prosperity. In October 1923, Hughes took advantage of a Europe-wide mood of exhaustion with the issue of reparations to propose the creation of a new committee of experts. It was to include some prominent Americans, although in deference to the country’s isolationist state of mind, they were not to have any official standing but were to act as concerned private citizens.
Even Raymond Poincaré, the French prime minister, recognized that by invading the Ruhr, he had overplayed his hand and that France was for the present a spent force within Europe. He consented to the proposal subject to one firm condition: under no circumstances was the commit
tee to reconsider the total amount of reparations agreed to by all parties. The word reparations was not even to appear in the committee’s remit. It was only to be asked to consider “the means of balancing the budget and the measures to be taken to stabilize the currency,” though no one could quite fathom how it was to accomplish these tasks without addressing the unmentionable issue.
On November 30, 1923, the Reparations Commission announced the appointment of two international committees of experts—the first to consider how to balance the German budget and stabilize the currency, the second to investigate how much German capital had been exported. The first and more important was to be composed of ten men, two each from the United States, Britain, France, Belgium, and Italy. All Europe now awaited the arrival of the Americans.
The leader of that delegation was Charles Gates Dawes, a Chicago banker, who had risen to the rank of brigadier general while serving in France with the American Expeditionary Force and had gone on to become the director of the budget in the Harding administration. He was a straight-talking midwesterner with a long basset hound face who smoked an underslung Sherlock Holmes-style pipe and peppered his conversation with picturesque swearwords.23 Asked by reporters, as he was preparing to embark, whether he was hopeful that reparations would ever be paid, he replied, “None of your damned business. It’s no use you fellows getting brain fag by thinking up conundrums to put to me before the ship sails, because I do not intend to answer them. I can tell you that I am paying my own fare to France, and am not receiving any pay for my services on the committee.” When the reporters kept pressing him, he roared back, “Hell and Maria, go away from me, I am about to lose my temper.”
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