Lords of Finance

by Liaquat Ahamed

  But the plan’s most novel feature was to put in place an ingenious mechanism to ensure that reparations could not undermine the mark as they had in 1922-23. The money to pay reparations was to be raised initially in marks by the German government and paid into a special escrow account in the Reichsbank, where it would fall under the control of an agent-general for reparations who would be responsible for deciding whether these funds could be safely transferred abroad without disrupting the value of the mark. The power was vested in this new office to decide how these funds should be put to use—whether to be paid out abroad, used to buy German goods, or even to provide credit to local businesses. The agent-general would be in a remarkably strong position, a sort of economic proconsul or viceroy. To make his impartiality completely transparent, the committee recommended that he be an American.

  A second and ultimately the central feature of the Dawes Plan was that a loan of $200 million be raised abroad to help pay the first year of reparations, to recapitalize the Reichsbank and build up enough gold reserves to jump-start the domestic economy.

  Although the French pressed to move the Reichsbank totally out of Germany, possibly to Amsterdam, the rest of the committee recognized that this would be the ultimate humiliation, putting Germany on the same footing as the indigent nations of Egypt and Turkey—in the words of one participant, it would “turkify” the German economy. Instead, the committee managed to persuade all parties, even the French and the Germans, that the Reichsbank should be kept in Berlin but placed under the control of a fourteen-member board, seven foreigners and seven Germans, one of whom would of course be Schacht.

  IN July 1924, the allies convened a conference in London on how to implement the Dawes Plan. It was the greatest gathering of statesmen since the Paris Peace Conference of 1919. Ramsay MacDonald, the first Socialist prime minister of Britain, who doubled as his own foreign secretary, presided. Among his guests were Édouard Herriot, the new Radical prime minister of France, the prime ministers of Belgium and of Italy, and the ambassador of Japan. The United States had initially planned not to attend, for fear of being tainted by too close an association with reparations, then viewed as a horrible European disease. However, when the British government allowed its official invitation to the United States to be leaked, the Coolidge administration, which had played such an important part in getting the Dawes Plan started, felt that it could not refuse without undermining its own efforts, and decided on a public show of support. Frank Kellogg, the white-haired U.S. ambassador to Great Britain, was assigned to lead the U.S. delegation.

  Such was the interest within the administration in the outcome of the Dawes Plan, that several cabinet members contrived to find excuses to be in London. Charles Evans Hughes, the secretary of state, arrived ostensibly to attend the annual meeting of the American Bar Association, while Andrew Mellon, the secretary of the treasury, decided that this was an opportune moment to pass through London for some grouse shooting and possibly to see his Savile Row tailor.

  Despite all these political luminaries, the central figures in the negotiations were to be two bankers: Montagu Norman and Thomas Lamont of J. P. Morgan & Co. Norman had been at first skeptical of the Dawes Committee. Asked by the prime minister to be one of the British delegates, he had begged off with the excuse that he was too busy at the Bank. If past experience was anything to go by, any committee appointed by the Reparations Commission was bound to get bogged down in political wrangling and would end up deadlocked. As he wrote to Strong, “It looks to me as if that Committee will be finding themselves in great difficulties . . . it is clear that there are as many angles of vision as there are members on that committee.”

  But during February and March, as the nature of the Dawes Committee’s recommendations gradually filtered out, he had begun to change his mind. The heart of the plan, and the reparations settlement it envisaged, was the international loan, over whose terms, Norman realized, he was in a position to exert enormous leverage.

  The business of lending to foreign governments was historically one of the more glamorous aspects of banking. Before the war, lending had been firmly in the hands of two British banks with long and storied histories—Baring Brothers and Rothschilds.

  Barings was the oldest merchant bank in London—the male descendants of all five of the sons of the original founder, Thomas Baring, now sat in the House of Lords. In 1802, it had helped the U.S. government finance the purchase of the Louisiana Territory from a Napoléon desperate for cash. So great was its authority at one time, that the Duc de Richelieu in 1817 spoke of the “six main powers in Europe; Britain, France, Austria-Hungary, Russia, Prussia and Baring Brothers.”

  Rothschilds had had an even more eventful history. The family had made its fortune during the Napoleonic Wars. With five branches of the family spread across Europe—in London, Paris, Frankfurt, Vienna, and Naples—it had the most extensive network of contacts of any bank, and its sources of information were legendary. One story was that the family had learned, by homing pigeon, of Napoléon’s defeat at Waterloo a day before the rest of London, including before the government itself, and had made an enormous fortune by buying up government bonds. The story was, in fact, seriously wrong—although Rothschilds did learn of the victory before anyone else in London, it actually lost money from betting that the war would still go on for a while by having large amounts of gold bullion in stock—but the myth remained. So great was the Rothschild mystique that the economist J. A. Hobson, echoing a widely shared opinion, wrote in 1902 that no great war could be “undertaken by any European state . . . if the house of Rothschild and its connections set their face against it.”

  But after the war, with London itself short of capital, the Bank of England had had to impose an unofficial embargo on foreign loans by British houses, and both banks were shadows of their former selves. The mantle of “Banker to the World” shifted from Britain to the United States, though American money, unused to the vagaries of international politics, flowed in fits and starts. The three American firms that had come to dominate the sovereign loan market were the National City Bank, Kuhn Loeb, and—not the largest but the most prestigious—J. P. Morgan & Co.

  The House of Morgan had been powerful before the war, helping to finance and restructure the steel, railway, and shipping industries; it had even bailed out the U.S. government in 1895 and saved the banking system in 1907. But its business had been largely domestic. Pierpont Morgan himself had indeed been a well-known figure in Europe, and his father, Junius Morgan, had helped the French government raise money to pay the indemnity after the Franco-Prussian war of 1870; but in international ranking, J. P. Morgan & Co. had been a second-tier house.

  The war had transformed its position. Chosen as the sole purchasing agent of both the British and the French governments in 1914, it had become a power unto itself. Its fourteen partners, who sat together in a large gloomy common office where they could overhear one another’s conversations, now supposedly earned an average of $2 million a year. When the war ended, Morgans became the natural conduit of American money into Europe. Its status as one of the great powers to be reckoned with was confirmed in July 1920, when a group of anarchists, instead of targeting a head of state or government as it might have done before the war, chose to place a bomb outside the offices of J. P. Morgan & Co. at 23 Wall Street.25 The partners were unscathed, but thirty-eight bystanders were killed and another four hundred injured.

  No one exemplified the new role of banker-statesman better than Thomas Lamont, by 1924 the most senior partner after Jack Morgan. The urbane and ever-charming Lamont seemed to have been born under a lucky star. The son of an austere Methodist minister, young Thomas had spent his youth growing up in New England village parsonages, brought up to believe that dancing, playing cards, and even leisurely Sunday strolls were sinful. He attended Phillips Exeter Academy and Harvard on scholarship, and became a financial reporter for the New York Tribune, but finding it hard to raise a family on a journalist’s s
alary, he entered the food distribution business. Like Benjamin Strong, a resident of Englewood, New Jersey, he had been plucked from obscurity by Henry Davison, whom he encountered one evening on the commuter train from New York and who is supposed to have recruited him then and there as secretary-treasurer at Bankers Trust.

  In 1911, following in Davison’s footsteps, Lamont was offered a partnershipby Pierpont Morgan—then the most prestigious and lucrative job on Wall Street. Lamont initially declined, saying that he wished to have the freedom to travel for three months a year. But Mr. Morgan insisted and Lamont unsurprisingly gave way.

  His involvement, as a Morgan partner, in the wartime finances of Britain and France brought him a place on the U.S. reparations team at the Peace Conference. After the war, though a Republican, he broke with the isolationist wing of his party and became a committed internationalist. In those early postwar years, he was the financial emissary par excellence. In 1920, he was in China and Japan; in 1921, in Mexico City as chairman of the International Committee of Bankers for Mexico; in early 1923, in Europe planning a loan to Austria and advising the Italian government. Everywhere he went he was received with the pomp and the deference due to a head of state. In May 1922, when Davison suddenly died of cancer, Lamont stepped into his shoes.

  His outside activities not only reinforced the impression that here was a man of the new aristocracy, they also added to his aura of effortless grace. He acquired Alexander Hamilton’s old newspaper the New York Evening Post and helped start and finance the Saturday Review of Literature. He had friends who were writers—at his dinner table one might find H. G. Wells or André Maurois or John Masefield.

  Just before the conference was to open, Lamont was dispatched to London with a watching brief for the House of Morgan during the negotiations. He quickly fell under the spell of Norman, who seemed to have an uncanny ability to take visiting American bankers under his wing and fashion them to his own ends. Though Norman suddenly collapsed from “nervous exhaustion” just as the conference was about to open and lay bedridden for a week, by July 15, he was back in the thick of the action.

  At the invitation of Prime Minister MacDonald, the two bankers set forth the main conditions that investors would demand before lending money under the Dawes Plan. Recognizing that those who would provide the capital had enormous leverage, Norman insisted that neither British nor American bankers touch the loan “until the French are out of the Ruhr bag and baggage”; and to preclude any further such preemptive and unilateral military actions by France, the right to declare Germany in default of its payments was to be vested, not in the Reparations Commission, dominated as it was by the French, but in an independent agency to be run by a neutral American.

  For the next four weeks the negotiations centered on these two points. Every time the politicians seemed about to stitch together a compromise, and to paper over their differences, the two bankers—led largely by Norman, although Lamont was the spokesman—would return insistently to these core proposals, which, they kept reiterating, were not political dictates set by some hidden money power but simply the most elementary conditions that any investors would require as security before committing capital to Germany.

  Prime Minister MacDonald, a Socialist and erstwhile pacifist, with a jaundiced view of bankers and their motives, tried to bully the pair with denunciations of their meddling in politics. Owen Young tried to browbeat them into softening their conditions, threatening to go around Morgans and arrange a loan though Dillon Read. All to no avail.

  The leader of the French delegation, Prime Minister Herriot, by background a historian more at home in the Left Bank literary salons of Paris than laboring over financial minutiae in a conference room, came to the negotiating table radically unprepared and found himself outfoxed at every turn. A passionate and emotional intellectual, he injected a certain operatic quality into the proceedings by more than once publicly bursting into tears of frustration. He was constantly at odds with his forty-man team, a motley crew of cabinet colleagues, Socialist deputies, and provincial Radical committee presidents, a “swarming, gesticulating, vociferous horde” of amateur diplomats, who turned the lobby of the French embassy in London into “a public meeting hall without a chairman to arbitrate disputes and without police to throw out the disorderly.” At one point, Herriot and his minister of war, General Charles Nollet, got into such a long altercation at an evening meeting at 10 Downing Street that MacDonald declared an adjournment and went to bed. Even then, the two Frenchmen continued to harangue each other as they left the building, and stood screaming insults at each other in the middle of Downing Street.

  Herriot called upon Lamont at his residence in Audley Square to plead with him, reminding him of the historic ties between France and the House of Morgan, but Lamont refused to make any concessions. Instead, over the next few weeks, Lamont tightened the screws by making it clear that unless the French became more amenable, Morgans might find it extremely difficult to roll over the loan it had raised for them earlier in the year.

  The humiliating spectacle of Anglo-Saxon bankers dictating to their politicians infuriated French public opinion. The Parisian paper Le Petit Bleu declared that “Europe shall not become a vast field of exploitation with its only government a vast bankers’ combine.” Edwin James of the New York Times reported that many Frenchmen were convinced that “America’s only purpose is to make some more money out of Europe’s misfortunes, and that instead of helping France get reparations, the Americans are working on Shylock lines for the preliminary loan.” In the United States, as highly respected a newspaper as the Springfield Republican commented, “In the lean years that follow an exhausting war, financiers outrank generals. . . . No loan, no Dawes plan. No Dawes plan, no settlement. No settlement, no peace in Europe. . . .”

  By the beginning of August the bankers had won. The only concession the French were able to extract was to delay their withdrawal from the Ruhr by a year. Germany was invited to send a delegation to finalize the arrangements. On August 3, the German delegation, led by Chancellor Marx and including Gustav Stresemann, now foreign minister; Finance Minister Hans Luther; Secretary of State Schubert; and Schacht, arrived at the London Ritz. The first plenary session took place on August 5—the first formal meeting between the respective heads of the German and French governments since the Franco-Prussian war of 1870. For the next ten days, as the interminable wrangling began, the conference staggered from one crisis to another, constantly verging on the edge of collapse.

  The procedure for declaring a default specified that sanctions could be imposed only in the event of a “flagrant” failure on the part of Germany to fulfill its obligations. The Germans demanded a definition of flagrant. That bickering consumed a day. The French had agreed to withdraw from the Ruhr after a year. The Germans wanted to know when the year would begin, and further demanded that the evacuation be completed within a year.

  Finally, on August 14, the definitive terms were submitted to the German delegation, who were granted the night to accept or reject them. The Germans gathered in one of the rooms at the Ritz for an all-night session. Each of them spoke his mind. As dawn arrived, the chancellor went around the room with a last poll. All voted for acceptance, except for Schacht, who said, in his harsh Frisian accent, “We cannot accept the terms—we can never fulfill them.” He insisted that the Dawes Plan’s failure to reduce the total level of reparations was its fatal flaw. But it was Stresemann who had the final word. “We must get the French out of the Ruhr. We must free the Rhineland. We must accept.”

  ON THE SURFACE, the Dawes Plan appeared to be the turning point for Europe. The wrangling over reparations, which had consumed the energy of officials for the last five years, seemed to be over. In September, the loan that formed the basis of the plan was successfully floated in New York and London. It started a boom in lending to Germany by American banks that was to fuel a recovery in its economy for the next several years and bring stability to the new currency.
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br />   Young, the true architect of the plan, had believed that in the climate of bitterness and recrimination prevailing in 1924, Europe would be able to improvise its way toward an eventual solution only by avoiding confronting its problems head-on. The plan had therefore very deliberately swept a whole series of issues under the carpet. The total bill for reparations remained unspecified. As a result, resentment within Germany continued to fester just below the surface. Moreover, the new German prosperity depended on what Keynes described as “ a great circular flow of paper” across the Atlantic: “The United States lends money to Germany, Germany transfers its equivalent to the Allies, the Allies pay it back to the United States government. Nothing real passes—no one is a penny the worse. The engravers’ dies, the printers’ forms are busier. But no one eats less, no one works more.” No one was willing to predict what would happen once the music stopped.

  Nevertheless, the initial fanfare associated with the plan did catapult Charles Dawes, hitherto a relatively obscure financier, to fame and fortune. In the summer of 1924, Coolidge selected him to be his running mate; Dawes was elected vice president of the United States that autumn. For having bought time for Europe and at least created the illusion that the Continent’s battles over money were finally over, he was awarded the 1925 Nobel Prize for peace.

  12. THE GOLDEN CHANCELLOR

  Britain: 1925

  “I never knew a man who had better motives for all the trouble he caused.”

  —GRAHAM GREENE, The Quiet American

  By 1924, London had shaken off the grim austerity of the war years and was basking happily and prosperously, as Robert Graves put it, “in the full sunshine of Peace.” The shops were crowded, the theaters and cinemas filled to capacity, the streets jammed with traffic. Regent Street had been made over and transformed into a broad thoroughfare, its refurbished buildings gleaming.