Lords of Finance_ The Bankers Who Broke the World Part 2

Shaken by the crisis, the U.S. Congress decided to act. In 1908, it created the National Monetary Commission, consisting of nine senators and nine representatives, and chaired by Senator Nelson Aldrich, to undertake a comprehensive study of the banking system and to make recommendations for its reform. Over the next few years, the commission produced a voluminous set of studies on central banking in Europe but not much else. Memories of how close the system had come to imploding progressively dimmed and the momentum for reform stalled.

In 1912, Davison, now a Morgan partner, frustrated by the lack of progress and fearing that without changes the next panic would be even more catastrophic, set out to convene a meeting of experts to develop a formal plan to establish an American central bank-the third in the nation's history. Only five men were invited. Besides Davison himself, there was Senator Aldrich; Frank Vanderlip, the forty-eight-year-old president of the National City Bank, the largest in the country; Paul Warburg, of the well-known Hamburg banking family, a forty-two-year-old partner at Kuhn Loeb who, although he had only just moved to New York, was probably the greatest expert on central banking in the United States; A. Piatt Andrew Jr., the thirty-nine-year-old a.s.sistant secretary of the treasury, who had been a professor at Harvard and accompanied the original commission on its European study tour; and Benjamin Strong, then thirty-nine years old.

Davison was worried, and for good reason, that any plan put together by a group from Wall Street would immediately be suspect as the misbegotten product of a bankers' cabal. He therefore chose to hold the meeting in secret on a small private island off the coast of Georgia-in effect creating the very bankers' cabal that would have aroused so much public suspicion. The preparations were elaborate. Each guest was told to go to Hoboken Station in New Jersey on November 22 and board Senator Aldrich's private railroad car, which they would find hitched with its blinds drawn to the Florida train. They were not to dine together, nor to meet up beforehand, but to come aboard singly and as un.o.btrusively as possible, all under cover of going duck hunting. As an added precaution, they were to use only their first names. Strong was to be Mr. Benjamin, Warburg Mr. Paul. Davison and Vanderlip went a step further and adopted the ringingly obvious pseudonyms Wilbur and Orville. Later in life, the group used to refer to themselves as the "First Name Club."

Disembarking at Brunswick, Georgia, they were taken by boat to Jekyll Island, one of the small barrier islands off the Georgia coast, owned by the private Jekyll Island Club, which had opened in 1888 as a hunting and winter retreat for wealthy northerners. Described by one magazine as "the richest, the most exclusive and most inaccessible club in the world," it numbered only some fifty members, including J. P. Morgan, William Vanderbilt, William Rockefeller, Joseph Pulitzer, and various Astors and Goulds. Membership was now closed and had become hereditary.

For the next ten days, the little party had the club with its skeleton staff to themselves-it had been closed for the summer and would not be open to other members for several weeks. They worked every day from early morning to midnight, convening in the luxurious rambling clubhouse with its turret, fifteen-foot ceilings, and numerous verandas and bay windows overlooking the Atlantic Ocean. Davison and Strong rose at daybreak to go riding or swimming, before settling down to work after breakfast. They ate copiously-pans of fresh oysters, country hams, wild turkey-and celebrated Thanksgiving together. Vanderlip would later write that it had been "the highest pitch of intellectual awareness that I have ever experienced." The group dispersed under an oath of secrecy, a pledge that all faithfully kept. Although the fact of the meeting came to light in a magazine some four years later, none of the partic.i.p.ants would publicly admit to having been there for another twenty years.

The plan they developed over those ten days, the final details of which were drafted by Vanderlip and Strong, was unveiled to the public on January 16, 1911. Known as the Aldrich Plan, it had at its center a single inst.i.tution-the National Reserve a.s.sociation-a central bank in everything but name that would have branches all over the country, with authority to issue currency and to lend to commercial banks. While the government was to be represented on the a.s.sociation's board, the a.s.sociation itself was to be owned and controlled by banks, a sort of bankers' cooperative.

Nelson Aldrich may have been the most knowledgeable member of the Senate about finance, but the cause of central banking in the United States could not have found a worse champion. In a Senate full of very rich men-it was becoming known as the "millionaires' club"-he was one of the richest, having supposedly sold his stake in the United Traction and Electric Company of Rhode Island for $10 million; he boasted a grand estate in Newport, Rhode Island, and his daughter Abby had married John D. Rockefeller Jr. He was a fervent supporter of big business, a bitter enemy of regulation, an advocate of high tariffs; rumors abounded, furthermore, that he traded political favors for financial contributions. In short, he was the living embodiment of everything that opponents of a central bank most feared.

Over the next few months, much to Strong's dismay, Progressives and midwestern Republicans joined forces to kill the plan; but in early 1913, the Democrats in Congress, led by Senator Carter Gla.s.s, salvaged the idea by modifying it. Rather than creating a single central bank, which would involve too great a concentration of power, the Gla.s.s Plan called for a number of autonomous regional inst.i.tutions: Federal Reserve Banks, as they were to be named. While these individual ent.i.ties were to be controlled and run by local bankers, a capstone-the Federal Reserve Board, a public agency whose members were to be appointed by the president-was placed in an oversight role over the whole structure.

Although Gla.s.s's bill copied many of the essentials of the Aldrich Plan, Strong actively campaigned against it, predicting that its decentralized structure would simply perpetuate the fragmentation and diffusion of authority that had so bedeviled American banking and would only lead to conflict and confusion. Eventually New York bankers-pragmatic as ever and recognizing that the Gla.s.s Plan at least offered something better than the status quo-came around and it was signed into law as the Federal Reserve Act by Woodrow Wilson on December 23, 1913.

DURING THE FIRST few days of August 1914, Strong was caught up in a flurry of meetings. On the morning of Sat.u.r.day, August 1, he conferred with the other bankers of the Clearing a.s.sociation at the Metropolitan Club of New York. That evening he was at the Vanderbilt Hotel for a large meeting of New York bankers with Treasury Secretary William McAdoo, who announced the issue of $100 million of emergency currency to meet the panic demand for cash. The following Monday he left for Washington.

Strong's most immediate concern was the problem of American tourists stuck in Europe. Banks and hotels, alarmed by the sharp fall in the dollar, and afraid that paper currency might lose its value, were refusing to cash travelers' checks or bank drafts. Thousands of Americans, most of them well off, found themselves marooned on the Continent without usable cash. Reports were rife of some being turned out of hotels and forced to sleep at railway stations, or walking the streets of Paris at night. Those who succeeded in cashing their checks were often able to do so only at the equivalent of 75 cents on the dollar.

Bankers Trust was then the main issuer of travelers' checks to Americans going to Europe. Luckily for Strong, Fred Kent, the man in charge of the bank's foreign exchange business, just happened to be on holiday in London. He immediately organized a two-thousand-strong ma.s.s meeting at the Waldorf Hotel on Aldwich, where he arranged to provide temporary funds to his stranded countrymen.

In the final outcome, should the Europeans not accept dollars, Americans always had the option of paying in gold. But how to get the gold into a Continent now at war? Insurance rates on private shipping had skyrocketed to prohibitive levels overnight. Strong persuaded the government to ship private gold over on a warship, and on August 6, the cruiser Tennessee Tennessee left the Brooklyn Navy Yard with $7.5 million in gold aboard. left the Brooklyn Navy Yard with $7.5 million in gold aboard.

This was what Strong was good at: taking charge to address immediate and practical problems, even if it meant stepping on a few toes. Leadership came naturally to him. While he may not have had quite the polished, cosmopolitan grace of some Morgan partners, people liked him and responded well to his dominant personality; he was well known and admired on Wall Street. "Wherever he sat was the head of the table," said a contemporary. Few people, though, could claim to know him intimately, and signs of a darker side sometimes manifested themselves from behind that gregarious and sociable veneer. He was a "Jekyll and Hyde personality, usually polite but flying at times into terrible rages" remembered one colleague. Those flashes of intense and startling anger provided brief glimpses into the pain and sorrow that he otherwise kept well hidden.

It was during that August of commuting between New York and Washington that Strong was first approached about becoming governor of the newly created Federal Reserve Bank of New York. If the Aldrich Plan of a single central bank had gone through, leaders of the New York banking community, such as Davison and Vanderlip, had long singled out Strong as the potential head. Now, under the Federal Reserve System, with multiple reserve banks and a Board in Washington, they came to the conclusion that he would be most effective and useful to them as the head of the Federal Reserve Bank of New York. Of the twelve regional reserve banks created by the new act, that of New York would be the largest.7 They correctly foresaw that the New York Fed-their reserve bank-would, by virtue of its size and its expertise, very likely come to dominate the system. They correctly foresaw that the New York Fed-their reserve bank-would, by virtue of its size and its expertise, very likely come to dominate the system.

He was the perfect choice. His career as a banker had been distinguished; he had undergone his baptism by fire during the panic of 1907; after being party to the conception of an American central bank on that Georgia island, he had become one of the experts in the field; and finally, he was well known to the partners at J. P. Morgan. Lacking perhaps the flair of a Davison or the urbane savoir faire of Thomas Lamont, his was undoubtedly a safe pair of hands.

The offer put Strong in a real dilemma and initially he refused it. Although like other New York bankers he had reconciled himself to the new system, he still thought it fundamentally flawed, and had campaigned actively to block it. He insisted that personal financial considerations did not sway him, but it is hard to believe that they were not a factor. He had no inherited wealth; he had only just been made president of Bankers Trust at the comparatively young age of forty-one, and had not yet had the opportunity to acc.u.mulate a fortune of his own. In taking the job, he would have to resign every directorship he held. The salary he would receive, $30,000 per year, while very attractive, was a fraction of what he could make as the president of a large New York bank. His father-in-law was especially strongly opposed to his taking the job, saying, "Ben is not going to live on my money"-Converse was reputed to be worth over $20 million and Katharine stood to inherit a considerable fortune. The Strongs' current lifestyle would however be impossible to sustain on his diminished income. Only the year before, the family-husband, wife, his three children from his first marriage, and his two daughters from his second-had moved into a luxurious eight-thousand-square-foot apartment in one of the city's most prestigious buildings, 903 Park Avenue, where apartments covered a full floor and rented for $15,000 a year.

In early October, Strong was invited by Davison and Warburg for a weekend in the country. They both made the case to him that it was his duty to accept a post in which he could do more for the public good than anywhere else. Davison was a hard man to argue with, especially when Strong owed him so much. On October 5, 1914, the Federal Reserve Bank of New York formally announced that Benjamin Strong had been elected its first governor.

5. L'INSPECTEUR DES FINANCES FRANCE: 1914.

There isn't a bourgeois alive who in the ferment of his youth, if only for a day or for a minute, hasn't thought himself capable of . . . n.o.ble exploits . . . in a corner of every notary's heart lie the moldy remains of a poet.

-GUSTAVE FLAUBERT, Madame Bovary

IN PARIS that summer, Aime Hilaire emile Moreau, director general of the Banque d'Algerie et Tunisie, the central bank for the French colonies of Algeria and Tunisia, was absorbed like everyone else in France in L'Affaire Caillaux. It was the latest in a long chain of scandals that had done so much to embellish the politics of the Third Republic and provide such a wonderful source of entertainment for the French public. In early 1914, Le Figaro, Le Figaro, a conservative newspaper, had launched a campaign against the introduction of an income tax by Joseph Caillaux, finance minister and leader of the Radical Party. On its front page, it ran some youthful love letters from Caillaux to a former mistress, the already married Berthe Gueydan, who had eventually divorced her husband, a high civil servant, to become the first Mme. Caillaux. Much had happened since this correspondence. After Caillaux had married Berthe, he started an affair with yet another married woman, the tall ash-blonde Henriette Claretie, divorced Berthe, and married his new mistress. a conservative newspaper, had launched a campaign against the introduction of an income tax by Joseph Caillaux, finance minister and leader of the Radical Party. On its front page, it ran some youthful love letters from Caillaux to a former mistress, the already married Berthe Gueydan, who had eventually divorced her husband, a high civil servant, to become the first Mme. Caillaux. Much had happened since this correspondence. After Caillaux had married Berthe, he started an affair with yet another married woman, the tall ash-blonde Henriette Claretie, divorced Berthe, and married his new mistress.

emile Moreau In March 1914, the second Mme. Caillaux, outraged that her husband's affairs, even those prior to her arrival in his life, should be so scandalously publicized-and perhaps fearing that some of their own adulterous correspondence might also find its way into the press-took matters into her own hands. At 3:00 p.m. on March 16, she left her home, dressed in the most elegant clothes for a reception at the Italian emba.s.sy that evening. On the way she stopped off at Gastinne Renette, the elite gun shop on the Right Bank, bought a Browning automatic, proceeded to the offices of Le Figaro Le Figaro, waited an hour for Gaston Calmette, the editor, and confronting him, declared, "You know why I have come," and calmly pumped six shots into him at point-blank range from the pistol that was hidden in her expensive fur m.u.f.fs, killing him instantly.

The scandal split France and even provoked riots in Paris between supporters of Caillaux and right-wing agitators protesting the declining standards of the country's ruling cla.s.ses. The trial began on July 20, and the daily court proceedings dominated the headlines in every newspaper and captivated the city. Parisians, it seemed, were much more interested in the melodramatic mixture of adultery and moral corruption in high political circles, of Joseph Caillaux's extensive network of mistresses, of his seduction of the heretofore simple, shy, and retiring Henriette Caillaux, than in distant rumblings from the Balkans.

For Moreau, the trial carried especial significance. He had been a student of Caillaux's at the ecole Libre des Sciences Politiques in the early 1890s, when Caillaux had been an up-and-coming glamorous young man, rich, flamboyant, and as inspecteur des finances, inspecteur des finances, a member of the elite administrative corps founded by Napoleon to conduct audits over the financial affairs of the state. The ecole Libre des Sciences Politiques-Sciences Po as it was and still is known-was an expensive private graduate school, established in 1872 after the Franco-Prussian War. Its founder had sought to create an up-to-date training ground for the new governing elite of France, capable of resisting the "democratic excesses" of the early years of the republic. The faculty was not composed of academics but was drawn from highly placed politicians, civil servants, and businessmen. In its short life, Sciences Po had become the primary recruiting ground for the upper reaches of the civil service. a member of the elite administrative corps founded by Napoleon to conduct audits over the financial affairs of the state. The ecole Libre des Sciences Politiques-Sciences Po as it was and still is known-was an expensive private graduate school, established in 1872 after the Franco-Prussian War. Its founder had sought to create an up-to-date training ground for the new governing elite of France, capable of resisting the "democratic excesses" of the early years of the republic. The faculty was not composed of academics but was drawn from highly placed politicians, civil servants, and businessmen. In its short life, Sciences Po had become the primary recruiting ground for the upper reaches of the civil service.

While Moreau was at Sciences Po, all France, including the school, was split by the Dreyfus affair. In 1894 a young Jewish artillery officer, Captain Alfred Dreyfus, was wrongly convicted of treason when French intelligence officials conspired to fabricate evidence that he had worked as a spy for Germany. The ensuing scandal pitted an old France-insular, royalist, and Catholic-against a new France seeking to modernize itself, a France that was more cosmopolitan, liberal, and outward looking. The head of Sciences Po was a committed Dreyfusard and several anti-Dreyfusard professors eventually resigned in protest.

Unlike most his fellow students at Sciences Po, with their well-to-do, sophisticated Parisian backgrounds, Moreau was a provincial who had only arrived in Paris in 1893, at the age of twenty-five, to enroll at the school. Born in Poitiers, the son of a local magistrate, Moreau had attended the lycee there and then obtained a license in law from its university. His family, minor gentry from Poitou, the ancient countryside around Poitiers, had roots there that went far back into history. One of his ancestors, Dutron de Bornier, had represented the area in the provincial a.s.sembly during the eighteenth century. His great-grandfather, Joseph Marie-Francois Moreau, had been a representative of the Third Estate when the Estates-General gathered at Versailles in 1789 to launch what was to be the Revolution; he later sat in the convention that did so much to press the Revolution home. He had subsequently become an important figure in the local administration-even after the restoration of the monarchy-as receveur general de finance receveur general de finance, responsible for collecting the taxes of the newly established department of Vienne.

In 1896, Moreau followed in Caillaux's footsteps and, after a brilliant performance in the ferociously compet.i.tive entrance exams for the upper civil service, had also become an inspecteur des finances. inspecteur des finances. Although the examination system had made the inspectorate largely meritocratic, candidates still had to have a parental guarantee of a private income of 2,000 francs per year until they were promoted. Although the examination system had made the inspectorate largely meritocratic, candidates still had to have a parental guarantee of a private income of 2,000 francs per year until they were promoted.8 Moreau was now a member of the elite administrative cla.s.s that exercised the true power in France during those years. The country was nominally governed by a clique of ministers who rotated in and out of office at the mercy of a vociferous and fractious national a.s.sembly. Governments had a typical life of less than seven months: there was a total of fifty different ministries in the forty-four years between the founding of the Third Republic in 1870 and 1914, some lasting a single day. But behind all the minor dramas of ministers resigning, governments falling, and the roundabout of the same old faces, France was run by this quiet, confident, extremely able, and well-trained college of mandarins. Moreau was now a member of the elite administrative cla.s.s that exercised the true power in France during those years. The country was nominally governed by a clique of ministers who rotated in and out of office at the mercy of a vociferous and fractious national a.s.sembly. Governments had a typical life of less than seven months: there was a total of fifty different ministries in the forty-four years between the founding of the Third Republic in 1870 and 1914, some lasting a single day. But behind all the minor dramas of ministers resigning, governments falling, and the roundabout of the same old faces, France was run by this quiet, confident, extremely able, and well-trained college of mandarins.

Once inside the civil service, Moreau rose rapidly. In 1899, Caillaux became minister of finance, the first of his eventual seven terms in that position, and Moreau worked under him. In 1902, Moreau was handpicked by the new minister of finance, Maurice Rouvier, to be his chef de cabinet. chef de cabinet. The cabinet was the minister's private secretariat, generally made up of his proteges and unusually promising junior civil servants who managed the full range of the minister's activities, dealt with his correspondence, acted as a liaison with his const.i.tuency, and prepared his briefing papers. To be The cabinet was the minister's private secretariat, generally made up of his proteges and unusually promising junior civil servants who managed the full range of the minister's activities, dealt with his correspondence, acted as a liaison with his const.i.tuency, and prepared his briefing papers. To be chef de cabinet chef de cabinet was to be the minister's princ.i.p.al aide and chief of staff, a role as much political as administrative. was to be the minister's princ.i.p.al aide and chief of staff, a role as much political as administrative.

Rouvier, a moderate republican, by profession a banker, was one of the most competent ministers of finance that the Third Republic produced. He also had an unfortunate capacity for getting involved in scandals; indeed he had the distinction of being tainted by the two best-known affaires affaires of that squalid era. In 1887, it was revealed that Daniel Wilson, son-in-law of President Jules Grevy, had been selling decorations, including nominations to the Legion d'Honneur, from his office in the elysee Palace. Rouvier was prime minister at the time, and though not directly implicated in the trafficking, was, along with the bewildered old president, forced to resign. of that squalid era. In 1887, it was revealed that Daniel Wilson, son-in-law of President Jules Grevy, had been selling decorations, including nominations to the Legion d'Honneur, from his office in the elysee Palace. Rouvier was prime minister at the time, and though not directly implicated in the trafficking, was, along with the bewildered old president, forced to resign.

Rouvier's exile was short-lived. Two years later he was back in government as minister of finance. In 1892, however, the Panama Ca.n.a.l Company went bankrupt and some 800,000 French investors lost $200 million. The investigation revealed a chain of corruption, slush funds, and influence peddling that wove through the high social and political circles of Paris. Rouvier was found to have had extensive dealings with two shadowy figures at the heart of the affair, the baron Jacques de Reinach, a German Jew with an Italian t.i.tle, who then died in suspicious circ.u.mstances in what was implausibly declared to be suicide, and Cornelius Herz, a shady international adventurer and financier who promptly skipped the country. In the parliamentary inquiry that followed, Rouvier, accused along with 104 other deputies and countless journalists of accepting payoffs, defended himself by arguing that he had only accepted the money because he thought the project was in the national interest, and after all, his fortune had not "increased abnormally" in the process. Though insufficient evidence was produced to indict him, he was forced once more to resign and spent the next ten years in the political wilderness. He had only just been rehabilitated when Moreau first went to work for him in 1902.

Moreau never allowed Rouvier's strange conception of public ethics to get in the way of his admiration for the man. Willing though he was to concede that his "beloved" mentor had suffered from a curious incapacity to distinguish between private interests and public responsibilities, he brushed it off as no worse than that of any other politician of the time-an aspect of that general "moral collapse [which was] very common in political circles" and continued to express his undying grat.i.tude and loyalty to Rouvier for the enormous generosity he had received as a young man.

In 1905, Rouvier became prime minister for the second time, with Moreau as his princ.i.p.al aide and right-hand man. Within two months, the government was faced with a major international crisis. That March, the kaiser, who had an unfortunate habit of speaking out of turn, paid a visit to Tangiers, and in a challenge to French ascendancy in North Africa proclaimed his support for Moroccan independence. Rouvier initially tried to negotiate with Germany, but the kaiser, sensing France's weakness, kept increasing his demands. As the tensions mounted, Germany mobilized its reserves and France moved troops to the frontier. Over the next few months, Rouvier skillfully defused the crisis, not only retaining France's special position in Morocco, but also engineering a graceful exit from a confrontation with Germany and setting in train the first conversations with the British that would lead to the Anglo-French entente. For Moreau, still only thirty-six, it was a heady experience to be at the center of a great international storm. But it was the fate of Third Republic ministries to last only a few months and the Rouvier government was soon voted out.

During his more than twenty years in and out of office, Rouvier had made many enemies, not least because of his own shady financial dealings. With Rouvier out of power, these enemies now targeted Moreau. On his presenting himself for rea.s.signment, he was not sent back to the ministry of finance but seconded to the Banque d'Algerie, the central bank of Algeria and Tunisia, a minor financial inst.i.tution compared to the Banque de France or the other great state banks. For a high-flying young official from the Ministry of Finance who had climbed his way to the center of things, it was a form of exile. It was not quite as onerous as it sounds, because Algeria had a special status among French possessions and the bank's headquarters were in the heart of political Paris, within a stone's throw of the National a.s.sembly and the Ministry of Foreign Affairs at 207 Boulevard Saint Germain.

While privately owned, the Banque d'Algerie was one of the key organs of colonial policy. Over the next eight years, Moreau, who was promoted to director general in 1911, was instrumental in the development of the Algerian wine industry; was at the forefront of the fight against usury among the Tunisian Berbers; and worked closely with the military governor of Morocco, the future Marechal Lyautey, to help finance public works during the military occupation and subsequent colonization of Morocco. He was, and saw himself as, much more than just a banker; he was a servant of the state. In January 1914, he was made a Commandeur de la Legion d'Honneur, a distinction restricted to no more than 1,250 people.

But for all these achievements, the Banque d'Algerie was still a backwater for so ambitious and talented an official. His former contemporaries at the ministry were now running the finances not of a mere colony but of the whole country and its empire. When he thought back on what had happened to him, he could not help being bitter-he had been stuck in this dead-end job for the last eight years, apparently forgotten.

Perhaps Moreau had risen too far and too fast, arousing resentments among his peers. Perhaps it was that he was different from the others: a man of few words, blunt and almost rude, who had made no attempt to enter salon society and had none of the airs and graces of the Parisian higher civil servant. Very much a provincial, he proudly went out of his way to remain so. In 1908, he had been elected mayor of his home commune, Saint Leomer. It was a tiny place of only a few hundred residents, but he seized every opportunity he had to go back there. His property, La Frissonaire, had been in the family since 1600. It was there that he felt most comfortable, among the friends with whom he had grown up, his fellow squires, the local notaires, notaires, and magistrates. and magistrates.

IN ANY OTHER year, the last week of July would have found Moreau avidly awaiting the circular from the Minister of Agriculture, fixing the dates of the shooting season. He tried to make a point of being at La Frissonaire at the opening of hunting. As he liked to say, there were just enough quail, partridge, and rabbit on the estate "to keep it exciting, and not so much that one got bored." But as July ran into August, it became apparent that this year, though the weather was perfect, he was going to have to leave his guns in their racks.

By Monday, July 27, several straws in the wind suggested that the Balkan crisis was beginning to a.s.sume alarming proportions. Madame Caillaux began to be progressively edged off the front pages of even the Parisian papers. Every evening, a crowd generally gathered on the Boulevard Poissoniere outside the offices of Le Matin, Le Matin, most popular of the French yellow papers, in whose windows were posted the latest bulletins. There were the inevitable fights. But no longer was it simply the opponents of Caillaux against his supporters. Brawls were now breaking out over national security, between those who opposed the extension of military service and the partisans of the Reveil National, the new patriotic movement. most popular of the French yellow papers, in whose windows were posted the latest bulletins. There were the inevitable fights. But no longer was it simply the opponents of Caillaux against his supporters. Brawls were now breaking out over national security, between those who opposed the extension of military service and the partisans of the Reveil National, the new patriotic movement.

Also gold coins began mysteriously to vanish from circulation. Having been burned by disastrous experiments with paper money twice before-once in the early eighteenth century during the ill-fated Mississippi Bubble, and then again by the a.s.signats issued during the Revolution-the French had developed a healthy mistrust of banks and all but the hardest metallic currency. At the first sign of trouble, gold coins disappeared into those countless bas de laine, bas de laine, the proverbial long woolen stockings in which every French peasant was said to keep his little h.o.a.rd of gold under the mattress or into those notaries' strongboxes where the bourgeoisie kept their savings. the proverbial long woolen stockings in which every French peasant was said to keep his little h.o.a.rd of gold under the mattress or into those notaries' strongboxes where the bourgeoisie kept their savings.

After eight days of court proceedings, at 9:30 p.m. on the night of July 28, the all-male jury voted 11 to 1 to acquit Mme. Caillaux. They concluded that she had been so uncontrollably distraught over the revelations in Le Figaro Le Figaro as to be driven to violence-the murder was therefore to be deemed as to be driven to violence-the murder was therefore to be deemed un crime pa.s.sionel un crime pa.s.sionel. For all its drama, the verdict came as something of an anticlimax. Fighting did break out outside the Palais de Justice, and a large contingent of policemen had to be deployed to disperse the royalist ultras of Action Francaise who hated Caillaux. But most Parisians were now more concerned about how to pay for their groceries-gold or silver coins were hard to come by; the shops, even the cafes, had stopped accepting banknotes, and even the food markets at Les Halles had come to a grinding halt.

By 4:00 the next morning, several hundred people gathered around the Banque de France to convert notes into gold. That afternoon, the crowd swelled to more than thirty thousand in a line that wove for over a mile along the side streets surrounding the Hotel du Toulouse, where the Banque was headquartered, along the Rue de Radziwill, past the Palais Royale, and up the Rue de Rivoli to the Jardin des Tuileries. Two hundred and fifty policemen kept order. The Times Times's reporter was taken aback by the scene. "All cla.s.ses of society mingled in the interminable queue and it was significant of the universal thriftiness in France that numbers of quite humble persons had evidently savings to withdraw from the guardianship of the National Bank."

The Banque announced that it was prepared to continue paying out gold for as long as was necessary. After all, it had the largest single h.o.a.rd of gold in the world. In 1897, its incoming governor, Georges Pallain, had gathered his staff to tell them that the Banque's duty was to prepare for "every eventuality," his code word for a war of revenge against Germany to reverse the disaster of 1870. Under Pallain, the Banque de France had steadily begun to acc.u.mulate gold. Every time the Reichsbank's gold reserves increased, the Banque was a step ahead-a sort of arms race with gold as the object. By July 1914, it had over $800 million in bullion.

The French central bank had not, however, painstakingly built up this mountain of precious metal just to see it dissipated into the hands of its own nervous citizens. The treasure was there to support the state in a national endeavor. For more than a decade, every manager of the Banque's more than 250 branches had kept locked in his safe, in a place that he was instructed should be "always easily accessible," a secret envelope, to be opened only in the event of a general mobilization. Inside this envelope was Le Circulaire Bleu.

Written on grayish blue paper over Governor Pallain's signature it contained each manager's instructions in the event of war. With general mobilization, he would face "immense and perilous duties." He was to meet this "formidable test" with "calmness, vigilance, initiative, and firmness." The first and immediate task would be to cease paying out gold immediately. Should the branch's town fall into enemy hands, he was to defend the a.s.sets in his care with "all [his] authority and . . . energy." Thus, when the order for general mobilization was issued at 4:00 p.m. on Sat.u.r.day, August 1, French gold reserves were immediately immobilized.

An hour later, it was also impossible to get a taxi in Paris. All public transport-cars, wagons, and buses-was requisitioned to move troops. The only way to get about was on foot. Within twenty-four hours, public services came to a grinding halt as every able-bodied male headed for the railway stations, the Gare du Nord and the Gare de l'Est. Even the grandest hotels, such as the Ritz and the Crillon, lost their waiters; dinner was served by chambermaids.

Within days of the outbreak of war and for the next few weeks, an unnatural calm settled over the city as it basked gloriously in the August sunshine. The grand department stores for which Paris was famous were deserted; there was no traffic-the buses had disappeared to the front; and the metro metro ran only sporadically. Theaters and cinemas were closed; the cafes shut at 8:00 p.m., the restaurants at 9.30 p.m. Before the month was out, with all the foreigners gone, the big hotels lay empty. ran only sporadically. Theaters and cinemas were closed; the cafes shut at 8:00 p.m., the restaurants at 9.30 p.m. Before the month was out, with all the foreigners gone, the big hotels lay empty.

At the end of August that silence was shattered. The German army swept through Belgium and across northern France in a great flanking movement around the French left wing, and by August 29 was just twenty-five miles from the city. Gunfire could be heard in Paris and there were reports that German soldiers had been seen on the outskirts. The next day, a Sunday, a lone German plane circled overhead and dropped three bombs, filled with lead bullets, near the Gare de l'Est. No one was injured. On Monday a second plane swooped across the rooftops and let go of its bombs near the Rue Quatre Septembre, intending them, it was said, for the Banque de France. Again only a few windows were broken.

Few people-certainly not the Germans-were yet aware that on August 18, with the invaders still two hundred miles away in Brussels, the Banque de France had already set in motion its emergency plan-Paris, after all, had fallen to foreigners three times in the previous hundred years. Its gold reserves-38,800 gold ingots and innumerable bags of coins valued at $800 million and weighing some 1,300 tons-had been shipped in the utmost secrecy by rail and truck to safety at prearranged sites in the Ma.s.sif Central and the south of France. The ma.s.sive logistical operation went off without a hitch until one of the trains carrying coins derailed at Clermont-Ferrand. Five hundred men had been required to get it back on the tracks, collect the money, and keep off curious spectators. By early September, the Banque's vaults in Paris were empty.

6. MONEY GENERALS.

CENTRAL BANKS: 1914-19.

Endless money forms the sinews of war.

-Cicero, Philippics

As THE LIGHTS started to go out over Europe that fateful first week of August, every banker and finance minister seemed to be fixated not on military preparations or the movements of armies but on the size and durability of his gold reserves. The obsession was almost medieval. This was, after all, 1914, not 1814. Paper money had been in wide use for more than two centuries, and merchants and traders had developed highly sophisticated systems of credit. The idea that the scope of the war might be limited by the amount of gold on hand seems anachronistic. Nevertheless, here was the London magazine United Empire United Empire declaring that it was "the amounts of coin and bullion in the hands of the Continental Great Powers at the outbreak of hostilities" that would largely determine "the intensity ... and probable duration of the war." declaring that it was "the amounts of coin and bullion in the hands of the Continental Great Powers at the outbreak of hostilities" that would largely determine "the intensity ... and probable duration of the war."

The focus on the prosaic matter of bank reserves was a symptom of the general complacency that surrounded those first few months of the war. Despite the hysteria of the crowds on the streets of Berlin, Paris, and London, an odd atmosphere of unreality hung in the air. No one could quite understand what this war was about or why it had come, but no one expected it to last very long. While the soldiers on both sides marched off to war, each one expecting to give the enemy a good pasting, the generals were promising they would be home for Christmas. Buoyed by such optimism from the military professionals, financial officials calculated that because the war was bound to be short, the important thing was to be in good financial shape, with gold reserves intact at the end.

So smug were the bankers and economists that they even allowed themselves to be convinced that the discipline of "sound money" itself would bring everyone to their senses and force an end to the war. On August 30, 1914, barely a month into the fighting, Charles Conant of the New York Times New York Times reported that the international banking community was very confident that there would not be the sort of "unlimited issue of paper [money] and its steady depreciation," which had wrought such inflationary havoc in previous wars. "Monetary science is better understood at the present time than in those days," declared the bankers confidently. reported that the international banking community was very confident that there would not be the sort of "unlimited issue of paper [money] and its steady depreciation," which had wrought such inflationary havoc in previous wars. "Monetary science is better understood at the present time than in those days," declared the bankers confidently.

Sir Felix Schuster, chairman of the Union of London and Smith's Bank, one of the City's most prominent bankers, went confidently around telling everyone that the fighting would grind to a halt within six months-the interruption of trade would be too great. John Maynard Keynes, then a thirty-one-year-old economics don at King's College, Cambridge, who had made himself something of an overnight expert on war finance, announced to his friends in September 1914 that "he was quite certain that war could not last more than a year" because by then the liquid wealth of Europe that could be utilized to finance the war would be "used up," and he became quite angry at the stupidity of anyone who thought otherwise. In November 1914, the Economist Economist predicted that the war would be over in a few months. That same month, at a dinner party in Paris given in honor of the visiting British secretary of state for war, Field Marshal Lord Kitchener, the French finance minister confidently proclaimed that the fighting would have to be over by July 1915 because money would have run out. And it was not only the Allied experts who were so blinkered. The Hungarian finance minister, Baron Janos Teleszky, when questioned in the cabinet about how long his country could pay for the war, replied three weeks. predicted that the war would be over in a few months. That same month, at a dinner party in Paris given in honor of the visiting British secretary of state for war, Field Marshal Lord Kitchener, the French finance minister confidently proclaimed that the fighting would have to be over by July 1915 because money would have run out. And it was not only the Allied experts who were so blinkered. The Hungarian finance minister, Baron Janos Teleszky, when questioned in the cabinet about how long his country could pay for the war, replied three weeks.

And so as the financiers of Europe watched their continent slip toward Armageddon, its credit system collapsing onto itself, world stock markets closing their doors, and the gold standard grinding to a halt,9 they clung to the illusion that global commerce would be disrupted only briefly and the world would rapidly return to "business as usual." Few imagined that they might be witnessing the last and dying convulsions of an entire economic order. they clung to the illusion that global commerce would be disrupted only briefly and the world would rapidly return to "business as usual." Few imagined that they might be witnessing the last and dying convulsions of an entire economic order.

The experts seemed to have forgotten that among the first casualties of war is not only truth but also sound finance. None of the big wars of the previous century-for example, the Napoleonic Wars or the American Civil War-had been held back by a mere lack of gold. These had been fights to the death in which the belligerents had been willing to resort to everything and anything-taxes, borrowing, the printing of ever larger quant.i.ties of money-to raise the cash to pay for the war.

By the end of 1915, eighteen million men were mobilized across Europe. On the Western Front, two gigantic armies-three million men from the Allied nations and two and a half million Germans-sat stalemated, bogged down in trenches along a five-hundred-mile front stretching from the Channel through Belgium and France to the Swiss border. Like a giant sleeping reptile stretched across the face of Western Europe, the front remained immobile. By a perverse sort of logic, as hundreds of thousands of men were led to the slaughter, their terrible sacrifice was called upon to justify pressing on, and the carnage generated its own momentum.

Still, the complacency of those first few months took a long time to evaporate. Even into 1916, the dogma that this would be a short war lingered as general after general predicted victory in another six months. By then the five major powers-Britain, France, Russia, Germany, AustriaHungary-werespending a ma.s.sive $3 billion each month, nearly 50 percent of their collective GDP. No other war in history had absorbed so much of the wealth of so many nations at one time.

Countries varied in how they raised the funds. Nevertheless, there were certain common themes. To pay for such a gigantic effort by taxation alone would have entailed tax rates at confiscatory levels and was therefore impossible. Daunted by the task, none of the governments even tried, and taxes accounted for but a tiny fraction of the new money raised. Instead, the belligerents resorted princ.i.p.ally to borrowing. Once they had exhausted every potential source of loans, they relied on a technique almost as old as war itself: inflation. Unlike medieval kings, however, who accomplished this either by shaving pieces of gold and silver off the outer edge of their coins-a practice known as clipping-or of issuing coinage made of cheaper alloys-currency debas.e.m.e.nt-governments in the Great War turned to their central banks, often relying on complex accounting ruses to disguise the process. Central banks in turn, abandoning their long-standing principle of only issuing currency backed by gold, simply printed the money.

VERY, VERY RELUCTANTLY.

Of all the European countries at war, Britain, in an effort to live up to its long history of fiscal prudence, was the most responsible in its financial policies. In four years of fighting, the government spent a total of $43 billion on the war effort, including $11 billion in loans, which it funneled to its poorer Continental allies, princ.i.p.ally France and Russia. To pay for all this, it raised about $9 billion, or 20 percent, through additional taxes and almost $27 billion by long-term borrowing, both domestically and in the United States. The remainder it borrowed from banks, including a large chunk from the Bank of England. As a result, the quant.i.ty of money in circulation within Britain doubled in four years, doubling prices with it.

Turning to the Bank of England for money was not as unprecedented a policy as City bankers reared on nineteenth-century principles of finance liked to think. For the Bank had been originally created, in fact, not to regulate the currency but to help pay for a war. In 1688, James II, the last Catholic king of England and Scotland, was driven from his throne, having alienated much of his people by attempting to restore Roman Catholicism as the official religion of the country. In his place, Parliament invited his daughter Mary and her husband, William of Orange, both Protestants, to a.s.sume the crown. James found sanctuary at the court of Louis XIV of France, who used the "Glorious Revolution" as a pretext to launch against England what was to be grandly named the War of the League of Augsburg.

In 1694, after several years of fighting a country many times its size, England found itself close to bankruptcy. A group of City merchants, all Protestants, many of them French Huguenots only very recently compelled to leave France by Louis XIV's repudiation of tolerance for Protestants, approached the chancellor of the exchequer, Charles Montagu, offering to lend the government 1.2 million in perpetuity at an interest rate of 8 percent. In return, they were to be granted the authority to set up a bank with the right to issue 1.2 million in banknotes-the first officially sanctioned paper currency in England-and to be appointed sole banker to the government. Montagu, desperate for money, jumped at the idea. Before the year was over the new bank opened its doors for business under the name The Governor and Company of the Bank of England.

For its first 150 years, it operated like any other bank, albeit much larger than its compet.i.tors, and with certain special privileges, especially its lock on government business, which provided most of its income. Like all the other banks in the country, it issued banknotes and took deposits, maintained its reserves in gold, and discounted bills of exchange-short-term loans to merchants for financing trade and goods in transit.

While the Bank certainly did not see its job as managing the currency, over time, by virtue of its size and stability, it began to acquire a superior status among its fellow banks and its notes became the country's dominant form of paper money. Its smaller compet.i.tors began to entrust it with their reserves, and it gradually evolved into a sort of bankers' bank, the City's guardian and nanny, in the process acquiring the affectionate nickname of "The Old Lady of Threadneedle Street." But its powers were never quite formalized and much ambiguity hung about its precise role and responsibilities.

Like so many British inst.i.tutions of those days, the Bank was run like a club. Control was vested in twenty-six directors of what was quaintly known as the Court of the Bank of England. Its membership was largely drawn from a closed inner circle of City bankers and merchants. They had all gone to the same small selection of schools, preferably Eton or Harrow. Some of them had even attended Oxford or Cambridge. They lived in Kensington or Knightsbridge, belonged to the same clubs, typically White's or Boodle's, and socialized with one another at their gracious but not grand country houses in the areas around London known as the Home Counties. Their daughters occasionally married into the landed aristocracy, but for the most part, they married among themselves. Few societies in the world were as comfortable, confident, and civilized.

Represented on the Court were all the major banking families of the City. There was always a Baring, a Grenfell, and a Goschen. Generally, there was also a partner of Brown Shipley and of Anthony Gibbs. Although the group included the usual smattering of baronets and even the occasional peer, none of the great landed families of Britain were represented-they went into politics. Only once had there been a Jew on the Court of the Bank of England, and that was, of course, Alfred de Rothschild, who had been elected in 1868 and resigned in 1889.

Directors were generally invited to join in their late thirties and were appointed for life, or at least until the onset of senility; many were in their seventies or eighties, and some had been on the Court for over half a century. It was part-time work and not too onerous. They met once a week. In addition, each director had to take his turn on the Committee of Daily Waiting, which required that each day three of the twenty-six directors be physically present at the Bank, responsible for the keys to the vaults, auditing the securities held there, and dining with the commander of the Bank piquet, the Brigade of Guards detachment that marched nightly from its barracks in Knightsbridge to protect the Bank. For these duties, a director received an annual honorarium of the equivalent of $2,500, equivalent to the annual pay of a colonel in the Guards or the stipend of a canon of Westminster.

Among the Court's offices, only the governorship and the deputy governorship were full-time positions. Those who filled those posts were required to take a temporary leave of absence from their own businesses. Each member of the Court was given a chance-indeed was expected-to become deputy governor for two years, and then governor for two years more. To be the governor of the Bank of England in the nineteenth and early twentieth century was therefore not a mark of any particular merit, but merely a sign of the right pedigree, patience, longevity, and the luxury of having a sufficiently profitable business with partners willing to let one take four years' leave. It was the principle of Buggin's turn. At the end of his term-terms were very rarely extended and then only for one year-a retiring governor simply went back to being an ordinary member of the Court until he died or became embarra.s.singly incoherent.

As Walter Bagehot, the great nineteenth-century editor of the Economist Economist who reveled in the quaint paradoxes of English life, described them, members of the Court were generally "quiet serious men . . . (who) have a good deal of leisure." Indeed, he felt it an ominous sign for a private banker to be fully employed. "If such a man is very busy, it is a sign of something wrong. Either he is working at detail, which subordinates would do better and which he had better leave alone or he is engaged in too many speculations . . . and so may be ruined." who reveled in the quaint paradoxes of English life, described them, members of the Court were generally "quiet serious men . . . (who) have a good deal of leisure." Indeed, he felt it an ominous sign for a private banker to be fully employed. "If such a man is very busy, it is a sign of something wrong. Either he is working at detail, which subordinates would do better and which he had better leave alone or he is engaged in too many speculations . . . and so may be ruined."

These arrangements, according to Bagehot, put the financial stability of London and, as a consequence, the world in the hands of "a shifting executive; a board of directors chosen too young for it to be known whether they are able; a committee of management in which seniority is the necessary qualification, and old age the common result." It was a strange, even eccentric way of doing things-for the most important financial inst.i.tution in Britain, in fact in the world, to be in the hands of a group of amateurs, men who generally would have preferred to be doing something else but who viewed the years they devoted to steering the Bank as a form of civic duty.10 Though the directors of the Bank were charged with governing the supply of credit in Britain, and by extension around the globe, they did not pretend to know very much about economics, central banking, or monetary policy. An economist of the 1920s once described them as resembling ship captains who not only refused to learn the principles of navigation but believed that these were unnecessary.

To the extent that they did espouse a systematic doctrine of monetary policy, it was the "real bills" theory of credit, that we now consider clearly fallacious. This held that provided banks, including the Bank of England, only made loans to finance inventories of goods-such as bales of cotton, or rolls of paper, truckloads of copper wire or steel girders-rather than for financial speculation in stocks and bonds or for long-term investments then no inflation could result. It is simple to see why this is nonsense. In periods of inflation, as the price of goods in inventory keeps rising, this doctrine would call for banks to keep on expanding credit, thus adding further fuel to the inflationary fire. That this doctrine did not lead to monetary disaster was due to the gold standard, which by keeping prices roughly stable, ensured that the "real bills' doctrine was never given a chance to be applied in an environment of rising prices.

The demands of war finance transformed the Bank. Forced to issue more and more currency notes without gold backing, it became increasingly subordinate to the needs of the UK Treasury. Despite its status as a national inst.i.tution, the respectable City burghers who ran the Bank had been very careful, over the years, to keep a wary distance from any government. They were clear in their minds that the Bank was not an organ of the state nor did they remotely wish to make it one. An apocryphal story, much circulated in the City before the war, best captures that att.i.tude. A governor was asked by the chancellor of the exchequer to testify before a royal commission. When questioned about the Bank's reserves, he was only willing to say that they were "very, very considerable." When pressed to give even an approximate figure, he was supposed to have replied that he would be "very, very reluctant to add to what he said."

As the stresses of raising money for the war mounted, tensions between the Bank and the government escalated, finally coming to a head in 1917. The governor was then Walter Cunliffe, a tall barrel-chested, John Bull sort of character who sported an imposing walrus mustache, was a renowned big game hunter, and looked more like a gentleman farmer than a City grandee. Over the years, he had become increasingly autocratic and erratic in his judgments and had developed an exaggerated sense of his own importance as governor to the point of insisting that his status required him to deal with the government through the prime minister alone, not even through the chancellor of the exchequer.

In 1917, Cunliffe became infuriated by what he believed was the cavalier way he was being treated by officials at the Treasury, among whom the chief culprit was none other than that brilliantly impertinent young upstart Maynard Keynes. Cunliffe was well known in the City as a man of few words and even more limited intelligence, a bully who acted first and thought later. In a fit of temper, without consulting any of his fellow directors, he dispatched a telegram to the Canadian government, then the North American custodian of Britain's gold reserves, forbidding it to accept any further instructions from the Treasury in London. The British government came close to the extremely embarra.s.sing position at the height of the World War of not being able to settle the bills from its American suppliers.

Lloyd George, by now prime minister, and justly furious, summoned Cunliffe to 10 Downing Street, and berated the governor, threatening to "take over the Bank." After some delicate behind-the-scenes negotiations over protocol, the shaken Cunliffe wrote the chancellor of the exchequer as cringing a letter as form would allow, asking him "to accept my unreserved apology for anything I have done to offend you." Cunliffe, who, because of the war and contrary to all tradition, had been appointed for a second two-year term, was not reappointed again.

DURING THE WAR, as the Bank kept expanding its role as chief underwriter and promoter of government debt, its few senior executives found themselves overwhelmed with work and responsibility. In 1915, the deputy governor, Brian c.o.c.kayne, invited Montagu Norman to become his adviser. Though this was to be an informal and unpaid position, Norman, then at a loose end after leaving Brown Shipley, jumped at it. He had originally joined the Court of the Bank in 1907, at the age of thirty-six, but had done so largely for tradition's sake-it was customary for a partner at Brown Shipley to be on the Court. Indeed for the first few years, he rarely went into the place and showed little interest in its workings. His a.s.sociations with the inst.i.tution, however, went far back. He came from two of the most prominent banking families in the City, that special aristocracy from which the Court of the Bank was drawn, and both of his grandfathers had been long-standing directors of some repute in their time.

His paternal grandfather, George Warde Norman, though not a full-time banker-his own inherited fortune derived from timber and real estate-had acquired a large stake in Martins Bank through marriage and was elected a director in 1821. In 1830, at the age of thirty-seven, George Norman retired from full-time business in order to devote himself to his estate in Kent, indulging his love for literature and history; promoting cricket, a family obsession; and enjoying his brood of seven sons. Nevertheless, he remained a dutiful member of the Court for more than fifty years, although in contrast to the typical member, he developed a great interest and some expertise in monetary economics. Like so many Victorian gentlemen of leisure, he published pamphlets-in his case on monetary theory-and became a leader of the move to codify gold standard rules, which were embodied in the Bank Act of 1844. He further broke with tradition at the Bank by categorically refusing to take his turn as deputy governor and governor. Unable to see any reason why he should tear himself away from the many enjoyments of life to inflict upon himself the unnecessary responsibilities and burdens of office, he claimed that his nerves could not cope with the tensions, a curious hint of the troubles that his grandson would face.

Norman's maternal grandfather, Sir Mark Collet, was very different. A self-made man, he had begun his career as a clerk in a merchant house and moved to New York in 1849. On his return to England two years later, he joined the firm of Brown Shipley, the British arm of the merchant banking house of Brown Brothers of New York and Baltimore, and eventually became senior partner in London. Elected to the Court of the Bank of England in 1866, he dutifully served his turn as governor and was knighted for his services.

Few people were surprised that with this sort of pedigree, Montagu Norman should end up at the Bank. Nevertheless, when he joined in 1915, he had had only a short and not particularly ill.u.s.trious career as a merchant banker and was not very well known in the City. In his first few weeks, Lord Cunliffe, then governor, was heard to remark, "There goes that queer-looking fish with the ginger beard again. Do you know who he is? I keep seeing him creep about this place like a lost soul with nothing better to do." Few people could then have predicted that the "fish" would accomplish an extraordinary upward swim through the inst.i.tution. Nothing in his background suggested that he would be well suited to the work of a central banker. Within three years, however, he was elected deputy governor, and two years later became governor, a post he would eventually hold for an unprecedented twenty-four years.

IN GOVERNMENT HANDS.

If Britain was the most responsible of the belligerents, its ally France balanced it out by choosing to be the most f.e.c.kless. The French government spent a total of $30 billion on its war effort. Few nations resisted paying their taxes more vigorously than the people of France-they seemed to view even the slightest official inquiry as to their financial circ.u.mstances as an unjustified intrusion by the state "into the most holy recesses of private life" and an infringement of their fundamental rights as citizens. As a result, at least for the first two years of the war, the government balked at raising taxes, not reversing itself until 1916 when it seemed on the verge of financial collapse. In total, France paid for less than 5 percent of its war expenditures out of higher taxation.

The republic was saved from complete economic disaster only by its government's ability to tap two sources: first, the notoriously thrifty French middle cla.s.ses, which bought $15 billion worth of government bonds; and second, foreign governments, specifically those of Britain and America, which, seeing France bear the brunt of the human cost of the war, lent a total of $10 billion. This still left a substantial gap, which was filled by printing money. While currency in circulation doubled in Britain, in France it tripled.

Drawing on the central bank for money was a much easier process in France than in Britain-in part because the governor of the B