The U.S. strategy on reparations reflected three interlocking concerns. The most frequently mentioned of these was to help rebuild the war-shattered lives of ordinary Europeans, to offer refugee relief, and to satisfy similar humanitarian concerns. German reparations could ameliorate suffering in other countries, the U.S. contended, but they must not be permitted to become so high as to delay German economic recovery, which was said to provide a longer-term solution to many of the same problems.
In confidential discussions, Dulles and the U.S. delegation placed greater stress on a second concern: the possibility of revolution or civil war in Europe. Secretary of State Lansing’s comments quoted earlier concerning the “terrible … possibility of a proletarian despotism over Central Europe” directly argued that reparations must be kept low in order to avoid revolution.3 The Berlin and Budapest rebellions—both eventually suppressed with considerable bloodshed—seemed to provide vivid evidence to ruling circles that there was substance to Lansing’s fears.
Third, and perhaps most fundamentally, Dulles and the U.S. delegation were anxious to restart the engine of commerce that had been disrupted by the war. Without a German economic recovery, Norman Davis wrote, “it is impossible for the rest of Europe to get to work and be prosperous. It is most essential for the future stability of Europe that [business] confidence and credit be restored at the earliest possible moment, and these can never be restored as long as any large nation in Europe is struggling under a financial burden which the investors of the world think she cannot carry.”4 Davis was not speaking simply of stability in some abstract sense but, rather, of a particular type of order, one seen as sustainable by “the investors of the world.” The issue was how to bring Central and Eastern Europe from nineteenth-century monarchism to modern capitalism without bringing about a revolution like the one in Russia.
John Foster Dulles seemed driven to create and sustain this new structure. At Paris, he helped hammer out a compromise on reparations that, while not all that he had hoped for, was nonetheless less damaging to his vision for a prosperous Europe than the French and British alternatives. Dulles favored restricting the definition of war crimes to the greatest degree possible, then limiting the defeated powers’ obligation to pay reparations to those few cases that had been successfully prosecuted.5 While his efforts may have seemed at the time to be largely based on economics, and even to have a humanitarian tilt in their seeming compassion for defeated powers, his approach carried with it a de facto legalization of those wartime atrocities that fell outside the terms of his definitions.
The complex formula for German reparations that finally emerged from the Paris negotiations added up to the equivalent of roughly $25–$30 billion to be paid over thirty years.6 Economists such as John Maynard Keynes established their early reputations in large part by attacking this reparations plan, contending that it would debilitate the German economy and thus damage France and Britain as well. Better for all, Keynes contended, to encourage a rapid and stable recovery of private enterprise in general, and to put the wartime animosities aside.
Although the German government bitterly resented the reparations, it agreed to pay them. This it did in part by what amounted to little more than printing new currency—and the infamous German inflation crisis of the early 1920s was the result. The Germans then cut off further payments as their economy staggered toward complete collapse. That in turn prompted the French and the Belgians to occupy the Ruhr Valley, the heart of the German coal and steel industries, in an attempt to enforce Germany’s treaty obligations. By 1923, the prospect of renewed war or rebellion in Central Europe was again on the horizon.
John Foster Dulles had meanwhile returned to the law firm of Sullivan & Cromwell, where he became a full partner specializing in the legal aspects of German reparations and in international finance generally. In 1923–24, banker J. P. Morgan recommended Dulles to be special counsel to the Dawes Committee, which U.S. and British banks had helped establish in the hopes of finding a way out of the reparations morass. Dulles helped engineer a scheme under which U.S. and foreign banks made new loans to the Reichsbank (the German state bank), which used the funds to pay reparations to Britain, France, and other European powers, who in turn paid off their own war loans from the U.S.7 This financial merry-go-round generated millions of dollars in interest payments for international lenders and kept billions of dollars worth of loans current just a bit longer. How long the borrowed money could continue to revolve remained an open question, but as long as it worked, John Foster Dulles was hailed as a master of international finance.
Meanwhile Dulles’s law firm and his major clients pioneered a roughly similar system for private U.S. investment in German finance and industry. This new network of trade relations proved to be the most important single push forward in elite U.S.-German relations prior to World War II, though of course some ties between U.S. and German businessmen can be traced back to the nineteenth and even the eighteenth century.
The United States had emerged from World War I with its currency and industry stronger than ever before, at least as long as Britain and other debtors continued to pay their bills. The 1920s boom, driven by imperialism, cheap oil, and the emerging automobile economy in the U.S., created enormous pools of investment funds in the banks of New York and Boston.8 This led to an international financial situation that was similar, in some respects, to the Middle East oil crisis of the 1970s.
During the 1970s crisis, the central problem from the standpoint of international finance was to recycle the massive pools of funds that had shifted to the Middle East back through the international banking network in order to stave off a string of bankruptcies that would otherwise have resulted from illiquidity in the system.9 During the 1970s, most of this “recycling” was carried out through the Eurodollar market.
During the second half of the 1920s, the most important international market for recycling the new private U.S. wealth was Germany. This investment was carried out mainly through loans to German industry, direct U.S. investment in German companies, development loans to German cities, and millions of dollars worth of Dawes Plan credits that indirectly financed German war reparations.10 The scope of U.S.-German capital flows during the 1920s has never been fully documented, but the fraction of it that can be traced totals close to $1.5 billion, not including Dawes Plan credits. In today’s currency this sum would be measured in the tens of billions of dollars.11
There was considerable direct U.S. investment in German companies as U.S. companies sought to buy into European markets at bargain prices. ITT purchased a half-dozen German telecommunications equipment manufacturers during the late 1920s and early 1930s,12 while General Motors bought control of the Adam Opel corporation (and with it about 40 percent of the German automotive market) in 1929. Fritz Opel joined GM’s board of directors as part of the deal.13 Ford Motor Company built a vast factory at Cologne, then used it to manufacture cars for all of Central and Eastern Europe.14 There were also joint ventures, such as IG Farben’s pacts with Standard Oil of New Jersey, some of which were subsequently found to be violations of U.S. law.15 General Electric purchased substantial shares of the German electronics giants AEG and Siemens, and entered joint ventures with both companies.*16
Specialized banks, law firms, and trading companies that focused on opening the German market to U.S. capital sprang up on both sides of the Atlantic. Practically without exception, the giant U.S.-German capital flows were administered by a small group of specialists at the very top of the social structure of both countries. A number of institutions and individuals who were prominent in this trade went on to play powerful roles in U.S.-German affairs over the next five decades.17
Dillon, Read & Co., private U.S. investment bankers, specialized in loans to Deutsche Bank, Siemens, and Flick interests. Between 1925 and the stock market crash in 1929, these loans amounted to more than a quarter of a billion dollars. Friedrich Flick built his fortune during the 1920s using bonds sold by Dillon, Rea
d to finance what today might be called leveraged buyouts of German and Polish coal and steel companies. Most of Dillon, Read’s own capital was oil money, including substantial sums from the Rockefeller, Draper, and Dillon families. The bulk of the money lent to Germany, however, was raised via limited partnership bond syndications in U.S. markets. This meant that when Germany defaulted on a series of loans in the early 1930s, Dillon, Read and its major partners had already taken their share of the spoils, while the smaller investors who had bought these bonds lost tens of millions of dollars.18
Key Dillon, Read executives during this period included the company’s president, James Forrestal (later U.S. secretary of defense), William Draper (later economics chief of the U.S. Military Government during the U.S. occupation of Germany and Japan), Paul Nitze (prominent U.S. diplomat and national security advisor), Ferdinand Eberstadt (later vice chair of the War Production Board and a central figure in the creation of the CIA), and C. Douglas Dillon (U.S. diplomat and later secretary of the treasury).19
Another Wall Street firm that specialized in U.S.-German trade was Brown Brothers, Harriman, a private investment bank dominated by W. Averell Harriman, whose family fortune rivaled that of the Rockefellers. Harriman went on to become one of the most influential figures in U.S. foreign affairs over the next fifty years. His key political allies who also served as senior executives of the bank included Robert Lovett (later U.S. secretary of defense) and Prescott Bush (prominent legislator and father of the U.S. president).20
And, of course, Sullivan & Cromwell acted as agent for U.S. companies investing in Europe. The law firm represented U.S. corporate interests involved in international cartels—the Allied Chemical Company (a participant in an illegal chemical cartel organized by IG Farben) and International Nickel Company (leader of a nickel cartel). It simultaneously represented German clients, such as the international shipping combine HAPAG and the IG Farben division General Aniline & Film Corporation (today known as GAF).21
Most of the records concerning John Foster Dulles’s legal work during the 1920s have been destroyed or remain confidential. A few interesting fragments have survived, however, and have been assembled by biographer Ronald Pruessen, who used Dulles’s appointments book to reconstruct a list of his personal clients. The list includes virtually all of the important U.S. banks involved in international trade: J. P. Morgan & Co.; Kuhn, Loeb & Co.; Lee, Higginson & Co.; Brown Brothers, Harriman and the closely related W. A. Harriman & Co.; Dillon, Read & Co.; Guaranty Trust Company of New York; First National Corporation of Boston; and others of similar stature.22
In most instances, his legal work for investors consisted of complex three- and four-sided financial projects whose success depended on Dulles’s skills as a negotiator and his contacts inside U.S. and foreign governments. Typically, private banks and brokerage houses sought out leading German or other foreign companies, banks, and local governments with offers to loan U.S. dollars for the construction of new factories, municipal electrification, or similar projects. If the foreign party was interested, it would issue millions of dollars worth of bonds and sell them to Dulles’s clients for somewhat less than the market price—at a wholesale rate, so to speak. The clients would then turn around and sell the bonds to other U.S. banks and individual investors at “retail” rates, usually paying Dulles and Sullivan & Cromwell two or three percentage points of the overall value of the bond offering for their services.
The foreign borrowers included not only dozens of companies but also governments as varied as Argentina, Czechoslovakia, and Denmark. However, Dulles clearly emphasized projects for Germany, for the military junta in Poland, and for Mussolini’s fascist state in Italy. U.S. State Department documents assembled by Pruessen provide some indication of the nature and scope of the business in which Dulles played a personal role as a fixer, advisor, or middleman:
•The 1924 German External Loan of $100 million (Dawes Plan loan); managed in the U.S. by J. P. Morgan & Co., National City Co., Lee, Higginson & Co., and Kuhn, Loeb & Co.
•Bond sales underwritten by Harris Forbes & Co. for the city of Munich ($8.7 million), Electrowerke AG ($5.5 million), and Deutsche Raiffeisenbank AG ($10 million)
•A sale of $10 million worth of bonds for the First Mortgage Bank of Saxony managed by Brown Brothers, Harriman & Co.
•A 1925 loan by Lehman Brothers of $3 million to Leonhard Tietz Aktiengesellschaft
•A $5 million bond offering in 1926 for the city of Nuremberg underwritten by the Equitable Trust Co., Lee, Higginson, and one other partner
•Bonds sold by Brown Brothers, Harriman on behalf of the German Union of Mortgage Banks ($10 million), the Manfeld coal and iron syndicate ($3 million), the Hamburg railway ($8 million), the City of Berlin ($15 million), and the City of Hannover ($3.5 million)
•A 1927, $20 million bond sale for the North German Lloyd Steamship Company by Kuhn, Loeb & Co., Guaranty Trust Co., and Lee, Higginson
•A 1927 loan of at least $10 million to the Terni Societa per l’lndustria e l’Electtricita of Italy by W. A. Harriman and Co., and a large purchase by W. A. Harriman of General Electric Company of Sicily bonds undertaken the same year
•Goldman, Sachs purchase of 400,000 shares of the Creditanstalt bank of Vienna
•A 1927 Bankers Trust Company (and associates) offering of $70 million of government of Poland bonds for industrial expansion
All told, these and more than a dozen similar transactions had a combined value in excess of a billion dollars.23
For John Foster Dulles, international banking seemed to be a distinctly noble and humanitarian profession. “It is the highest function of finance to move goods from the place where they constitute a surplus to the place where they will fill a deficit,” he told a sympathetic audience at the Foreign Policy Association as the economic boom of the 1920s showed the first signs of unraveling. “[A]nd in performing this service during the past nine years our bankers have given an extraordinary demonstration of the beneficent use of financial power,” principally by opening European markets to U.S. goods through the extension of loans to European customers. International banking, he said, “is a simple story … the story of how Europe has been saved from starving and we from choking.”24
Banker and latter-day diplomat Paul Nitze describes a 1929 incident in his autobiography that captures much of the financial community’s sense of its role. Nitze was in those years a protégé of Dillon, Read chairman Clarence Dillon. As Nitze tells the story, the elder executive explained to him that over the previous fifty years “the New York banking community had wielded more influence than politicians in Washington.” Throughout history, Dillon continued, “societies have been dominated by one element of society or another—by priests, by royalty, by the military, by politicians either from the common folk or from the aristocracy, and from time to time by wealthy financiers. This last element had found its way to the top of the hierarchy for a while in ancient Greece, in Rome in the days of Lucullus, in the city-states of Italy during the days of the Medici, for a while in France, and … in the United States.” At this time, Dillon believed that a major economic depression was on the way and that the ensuing political crisis would signal the “end of an era.”25
The U.S. financial elite had great influence on U.S. foreign affairs, often manifested most directly in the Foreign Service, the career staff of the Department of State. As Nitze’s own career was to demonstrate, there was a revolving door between international service for major banks and law firms and positions in the U.S. State Department. There were many family ties, too, as when Allen Dulles remained in the Foreign Service and his brother returned to Sullivan & Cromwell.
The top Foreign Service officers and investment bankers had often trained at the same prep schools and Ivy League universities; they belonged to the same social clubs and often shared similar preconceptions on issues ranging from social class and geopolitics to men’s fashions. “Style, grace, poise, and above all, birth were the key to s
uccess” in the Foreign Service, writes historian Martin Weil. “The standards were similar to those of a fashionable Washington club: ‘Is he our kind of person?’ No one who clearly was not would pass.
“If a black slipped through the net, he was sent to Liberia until he resigned. Women were sent to the jungles of South America. Jews could not be handled as crassly, but they were made to feel unwelcome and shut out of the better assignments. Those who had the proper background, however, had a great time.”26 Not everyone in the Foreign Service actually trained at Groton and Harvard, of course, noted Supreme Court Justice Felix Frankfurter in his diary. But like some people “who have not had the advantages of the so-called well-born, but wish they had them, [they become] more ‘Grotty’ than the men who actually went to Groton in the State Department.”27
Robert Murphy, Loy Henderson, Joseph Grew, Hugh Gibson, George Kennan, James Clement Dunn, Elbridge Durbrow, Ray Atherton, Arthur Bliss Lane, and a handful of others became the backbone of the Foreign Service, particularly in all aspects of U.S.-European and (later) U.S.-Soviet relations. These self-perceived “realists” believed that the USSR was the most dangerous long-term rival to the U.S. and that Germany and Central Europe should be integrated into some form of cordon sanitaire against the Bolsheviks. Their analysis was rooted in what Daniel Yergin has dubbed the “Riga Axioms,” a collection of strongly anti-Soviet political postulates that crystallized among U.S. Foreign Service personnel during the 1920s at consulates in Riga (Latvia), Berlin, and Warsaw.28 The Riga group’s analysis was to have an enduring impact in escalating hostilities between the U.S. and USSR, as Yergin, Frederic Propas,29 Martin Weil,30 and others have documented.
The Riga faction drew much of its most important support from the foreign policy elite outside the government. John Foster Dulles was among Riga’s most articulate spokesmen, and men like James Forrestal and Paul Nitze of Dillon, Read, Charles Edward Wilson and Philip Reed of General Electric, and much of the leadership of the integrated Du Pont–General Motors–U.S. Rubber empire of that era, among others, were early supporters of the Riga postulates.31
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