Lords of Finance_ The Bankers Who Broke the World Part 7

11. THE DAWES OPENING.

Germany: 1924 Be extremely subtle, even to the point of formlessness.

Be extremely mysterious, even to the point of soundlessness.

Thereby you can be director of the opponent's fate.

-SUN Tzu, The Art of War

SCHACHT ARRIVED at Liverpool Street Station in London on the boat train from Berlin at 10:00 p.m. on New Year's Eve, 1923. London cafe society was back in full swing after the war, the streets crowded with revelers. Schacht had arranged to be met by the economic counselor at the German emba.s.sy, Albert Dufour-Feronce. As he stepped off the train, he also found waiting "a tall man with a pointed grayish beard and shrewd discerning eyes" who, much to Schacht's surprise, introduced himself as Montagu Norman. "I do hope we shall be friends," Norman said confidingly in his soft voice as he led Schacht to a cab. Before they parted, Norman insisted that they meet at Threadneedle Street the following morning, even though it was a holiday and the whole City would be shut.

Schacht was taken aback by the warmth of his welcome and was even more bemused when he learned from Dufour-Feronce how keen the governor had seemed to establish a personal bond with his German counterpart, insisting, "I want to get on well with him."

Schacht was more than flattered that Norman would turn out to welcome him on a cold and foggy December evening when most people were celebrating. After all, he was the supplicant come to enlist help with the German economic crisis. He was also touched by the graciousness of the gesture. After the war, loathing of things German had run high across Europe, and Schacht had become accustomed to slights and petty insults by Allied officials when he traveled abroad.

The next day Norman collected Schacht from the Carlton Hotel in Mayfair and they made their way to the Bank through the empty streets. Covering a full block at the corner of Threadneedle and Princess streets in the heart of the City, the Bank, surrounded by a forty-foot windowless wall topped by bal.u.s.trades, looked like some medieval citadel. One entered this fortress through two great bronze doors, behind which, hidden from public view, lay a labyrinth of colonnaded courtyards and domed banking halls. By the entrance rose a giant rotunda modeled on the Pantheon in Rome, and next to it was a beautiful private garden with a fountain and a lime tree, planted in the spring with hundreds of flower bulbs. It was a most unusual setting for the headquarters of a central bank and very unlike the stern official-looking building from which Schacht now operated.

After the enormous wartime expansion of the Bank's activities, the halls and courtyards would normally have been as bustling and overcrowded as a bazaar with young clerks, bill brokers, and top-hatted bankers from the discount houses scurrying between the Bank and the investment firms located in the nearby streets and lanes. But that day the warren was silent and deserted, like some vast disused stage set. The governor's room was on the ground floor, overlooking a private courtyard. Norman, with his unbankerly taste for solitude and no family to hold him at home, could often be found here on weekends and holidays. Decorated in a neocla.s.sical style, with paneled walls and a magnificent fireplace, the room was dominated by a large square mahogany table in the center. Instead of using a desk, the governor worked from this table, which was clear-no papers, just two phones. As the two men settled down for the day, they might have been sitting in the master's study of some historic Oxford college.

After spending much of the morning discussing the German situation, Schacht finally got to his main object in coming to London. Though the Rentenmark was for the moment stable, it was not yet acceptable to foreigners, and hence could not provide the basis for loans to import goods from abroad. True recovery depended on getting international commerce moving again. Schacht proposed that the Bank of England lend a certain amount of capital to a new subsidiary of the Reichsbank to build up its sterling reserves and funds. He was asking for a mere $25 million, which, supplemented by a further $25 million that he hoped to raise from capital held abroad by German banks, would be enough to give the new subsidiary access to the London market and provide the nucleus for as much as $200 million in loans.

This was a typically bold Schacht proposal-given the circ.u.mstances, almost outrageous. Germany was essentially bankrupt. It had destroyed its own currency, owed the Allies over $12 billion in reparations-and had defaulted on these-was partially occupied by French and Belgian troops and now on the verge of disintegration. Schacht himself had barely been in office for two weeks; had been appointed in the teeth of fierce opposition, especially from within his own inst.i.tution; and had yet to put his stamp on the place. For the Bank to lend money to Germany and a deeply divided Reichsbank in the current circ.u.mstances would be almost foolhardy. Norman could not help being impressed with the audacity of his new acquaintance.

Both men knew that a loan at this moment from an inst.i.tution with the authority and prestige of the Bank of England would represent a dramatic gesture of support for Germany, and for Schacht personally. There could be no better seal of approval anywhere in the banking world, one that might in itself set in train a self-reinforcing migration of money back into the country.

Norman had been trying over the years to find a way to help Germany. He had been shocked by the extent of the collapse of the German currency. In 1922, Von Havenstein had come to see him for help. Though he had found his visitor to be "quiet, modest, convincing, and [a] very attractive man: but so sad. . . (with) an att.i.tude of almost hopelessness," he had declined to get involved, believing that the old president was not up to the task.

One element in Schacht's plan was specifically designed to appeal to Norman: the proposal to base the new bank on the pound sterling. Not only was its capital to be denominated in sterling, it would make loans in sterling, and perhaps issue bank notes in pounds to circulate in Germany. Norman had been working to strengthen the pound by having other European central banks hold some of their reserves in sterling rather than gold. He had so far had some modest success with the idea. Austria and Hungary, like Germany ravaged by postwar inflation, had both pegged their currencies to the pound. But they were small nations of little economic significance. To bring a country such as Germany, despite its troubles still the largest economy within Europe, into the ambit of the pound would enormously bolster sterling's faltering position.

Schacht's grasp of the multiple dimensions of the situation, his virtuosity in matters of finances, and his determination clearly impressed Norman, who agreed to the German plan after a single night's reflection. During the next few days he shepherded Schacht around the City to introduce him to the directors of the Bank. Few took to Schacht, finding him to be a pompous blowhard. But for these two polar opposites-the German parvenu, with a direct and aggressive style, and his English guide, with his old-fashioned manners and elliptical ways of thinking and talking-it was the beginning of a genuine and enduring friendship.

For four years, Norman had stood on the sidelines and watched powerlessly as the situation in Germany had progressively deteriorated. With Schacht's arrival on the scene, however, he had found reason for hope. On January 7, three days after Schacht left London, he wrote to Strong, "You know, of course, how precarious the position of Germany has been. . . . None the less we are disposed to believe that there is now a chance, and probably the last chance, of preventing a complete collapse. The new President of the Reichsbank has been here for several days. He seems to know the situation from A to Z and to have, temporarily, more control of it than I should have believed possible: he is acting more resolutely than his predecessor, Havenstein."

WHILE SCHACHT AND Norman were concocting their scheme, a team of American "experts," with even greater ambitions to resolve the problems of German finances, was in mid-Atlantic steaming toward Europe on board a liner. Over the years, Germany had had no shortage of foreign "experts" willing to tell it how to stabilize its currency. The British amba.s.sador, Viscount d'Abernon, himself a currency expert, remarked that on arriving in Berlin, these advisers would be invited to "entertainments after dinner-like actresses with doubtful pasts," thereafter generally to meet a "sad fate. During life, they empty every room in which they hold forth, and death finds them in madhouses." The monetary technicians had universally failed because it was not intellectual but financial help that Germany needed. This time, however, the "experts" were Americans, coming with the blessing of the U.S. government and the promise, so everyone hoped, of American money.

Though the United States, frustrated by Europe and its quarrels, had withdrawn from active involvement in world affairs, there remained a faction within the administration, led by Herbert Hoover, the secretary of commerce, and Charles Evans Hughes, the secretary of state, who had continued to push for some degree of engagement in the belief that European recovery was essential to American prosperity. In October 1923, Hughes took advantage of a Europe-wide mood of exhaustion with the issue of reparations to propose the creation of a new committee of experts. It was to include some prominent Americans, although in deference to the country's isolationist state of mind, they were not to have any official standing but were to act as concerned private citizens.

Even Raymond Poincare, the French prime minister, recognized that by invading the Ruhr, he had overplayed his hand and that France was for the present a spent force within Europe. He consented to the proposal subject to one firm condition: under no circ.u.mstances was the committee to reconsider the total amount of reparations agreed to by all parties. The word reparations reparations was not even to appear in the committee's remit. It was only to be asked to consider "the means of balancing the budget and the measures to be taken to stabilize the currency," though no one could quite fathom how it was to accomplish these tasks without addressing the unmentionable issue. was not even to appear in the committee's remit. It was only to be asked to consider "the means of balancing the budget and the measures to be taken to stabilize the currency," though no one could quite fathom how it was to accomplish these tasks without addressing the unmentionable issue.

On November 30, 1923, the Reparations Commission announced the appointment of two international committees of experts-the first to consider how to balance the German budget and stabilize the currency, the second to investigate how much German capital had been exported. The first and more important was to be composed of ten men, two each from the United States, Britain, France, Belgium, and Italy. All Europe now awaited the arrival of the Americans.

The leader of that delegation was Charles Gates Dawes, a Chicago banker, who had risen to the rank of brigadier general while serving in France with the American Expeditionary Force and had gone on to become the director of the budget in the Harding administration. He was a straight-talking midwesterner with a long ba.s.set hound face who smoked an underslung Sherlock Holmes-style pipe and peppered his conversation with picturesque swearwords.23 Asked by reporters, as he was preparing to embark, whether he was hopeful that reparations would ever be paid, he replied, "None of your d.a.m.ned business. It's no use you fellows getting brain f.a.g by thinking up conundrums to put to me before the ship sails, because I do not intend to answer them. I can tell you that I am paying my own fare to France, and am not receiving any pay for my services on the committee." When the reporters kept pressing him, he roared back, "h.e.l.l and Maria, go away from me, I am about to lose my temper." Asked by reporters, as he was preparing to embark, whether he was hopeful that reparations would ever be paid, he replied, "None of your d.a.m.ned business. It's no use you fellows getting brain f.a.g by thinking up conundrums to put to me before the ship sails, because I do not intend to answer them. I can tell you that I am paying my own fare to France, and am not receiving any pay for my services on the committee." When the reporters kept pressing him, he roared back, "h.e.l.l and Maria, go away from me, I am about to lose my temper."

His fellow expert was Owen D. Young, a farm boy from upstate New York who at the age of forty had become president and chairman of the board of the General Electric Company, the tenth largest company in America, and was now also the president of the Radio Corporation of America, the darling of Wall Street. Young, tall, and lanky, with thinning black hair and the "hollow deep-set eyes of an ascetic," was a contrast to the garrulous Dawes, a man of few but well-chosen words. Both he and Dawes were wealthy men who not only refused to accept any compensation for the a.s.signment but also insisted on paying their own expenses.

Though the American party was eagerly awaited in Europe, few people gave the committees much chance of success. The gap between the Germans and the French seemed unbridgeable. The Germans argued that the collapse of the mark was proof enough of their bankruptcy and that for them to pay reparations was impossible. The French, by contrast, saw the collapse of the mark as evidence of capital flight from Germany. How could it claim to be bankrupt when so many rich Germans seemed to be wandering around Europe? Every newspaper was filled with stories of German nouveaux riches flaunting their newly acquired wealth in foreign watering holes, calling attention to themselves by their bad manners and flagrantly conspicuous consumption. The British were caught in the middle. Since the occupation of the Ruhr, public opinion had shifted decisively in favor of Germany, which the French were seen to be trying to dismember, using reparations as an excuse. The British government argued that reparations had to be scaled back.

It was hard to see how a committee of technical experts, even if it did include some prominent Americans, could get the various parties to agree. After all, the premiers of Germany, France, Britain, Belgium, and Italy had met at least a dozen times-at Spa, at San Remo, at Cannes, and several times at conferences in Paris and London-without being able to find common ground, leaving a trail of failed negotiations, torn-up agreements, and bitter ill feeling.

Moreover, with the pa.s.sage of time, the issue had become hopelessly entangled and complicated. The commission itself had held some four hundred sessions since its creation in 1919. The two Americans were amateurs who knew very little about the technical details, but each represented that new and distinctively American breed, the businessman-turned-political-troubleshooter who was much like his cousin, the Wall Street-lawyer-turned-diplomat. They were down-to-earth practical men who, though they might know little about the precise problem at hand, prided themselves on their ability to cut through rhetoric and obfuscation, and come up with a solution by applying simple old-fashioned American common sense.

On the transatlantic voyage, the American team-General Dawes; his brother Rufus, who was to be the committee's chief of staff; Owen Young; and various aides seconded from government departments in Washington-debated their strategy. Some argued that the committee should cut through the confusion and go directly to the heart of the matter-explicitly recognize that Germany simply could not pay what was demanded of it, estimate what it could come up with, and recommend that figure as what it should pay.

Young took the position that the simple and direct approach would not work. The total figure for reparations, $12.5 billion, was too politically charged a number, particularly in France. Tampering with it would inevitably lead to confrontation. To challenge the French at this stage of the negotiations would bog them down in the sort of wrangling that had produced no results for the last three years. Instead, Young proposed that the committee focus on the very limited but achievable goal of reducing the amount Germany would have to pay in the immediate future to a more manageable level.

The committee should jettison the whole concept of "capacity to pay," he argued. It was impossible to know what this number was. Too many imponderables entered into the calculation, involving such questions as: How much could taxes be raised without triggering ma.s.s protest? How tightly could imports be squeezed without precipitating a collapse in production? How far could wages be reduced without provoking labor unrest? No one could agree on the answers to such cosmic questions. What was needed was a completely new approach to the problem.

In its place, he proposed an alternative criterion: the German public should be required to shoulder the same tax burden as British and French taxpayers. Britain and France had to tap their tax revenues to pay interest on their own internal debts. Germany had inflated away its internal public debt-the Germans, therefore, had a natural surplus from which they could afford to pay reparations. Here was a principle that was easily quantifiable, would be viewed as fair in the court of world public opinion, and would be hard for Germany to argue against. It injected "both the element of novelty and a defensible moral principle" into the whole discussion.

Landing at Le Havre on January 7, the Americans traveled by train to Paris, where they checked into the Ritz. On January 14, the ten-man expert committee held its first meeting at the offices of the Reparations Commission, housed in the Hotel Astoria, a Belle epoque hotel de luxe hotel de luxe situated at the top of the Champs-elysees by the Arc de Triomphe. Before the war, the hotel had been popular with rich visiting shoppers. But its conveniently central location and wonderful view of the Arc doomed it to spend the next thirty years under constant requisition by whichever government happened to be in power. The German invasion plans of 1914 had it earmarked for the kaiser's Paris headquarters. In August 1914, it had been shut down by the French authorities because the owner was suspected of being a German spy. In 1919, it had provided one of the homes of the two-hundred-strong British delegation to the Peace Conference. In 1921, while all the other great hotels were profiting from the enormous influx of tourists drawn to Paris by the cheap franc, the Astoria was taken over by the reparations commission. situated at the top of the Champs-elysees by the Arc de Triomphe. Before the war, the hotel had been popular with rich visiting shoppers. But its conveniently central location and wonderful view of the Arc doomed it to spend the next thirty years under constant requisition by whichever government happened to be in power. The German invasion plans of 1914 had it earmarked for the kaiser's Paris headquarters. In August 1914, it had been shut down by the French authorities because the owner was suspected of being a German spy. In 1919, it had provided one of the homes of the two-hundred-strong British delegation to the Peace Conference. In 1921, while all the other great hotels were profiting from the enormous influx of tourists drawn to Paris by the cheap franc, the Astoria was taken over by the reparations commission.24 Though the Europeans were the most knowledgeable on the technical details about reparations, the Americans came to dominate the proceedings. Dawes neither possessed, nor pretended to, the financial expertise to unravel the tangle of claims and counterclaims. He was the cheerleader of the committee, its public face, who used an extensive network of friends within France acc.u.mulated during the war to smooth relations with the p.r.i.c.kly French. The press loved him. With his quaint pipe and his picturesque language-he called the German nationalists "those foul and carrion-loving vultures" and derided economic experts for their "impenetrable and colossal fog-bank" of opinion-he made great copy.

Young was the brains of the operation. He and Dawes were joined by a third American, Colonel James Logan, Strong's fraternity mate from The Family, who had first come to Paris in 1914 and stayed on after the war and was now the U.S. observer to the Reparations Commission. Through a combination of charm and force of personality, he had become a figure of some renown in Parisian social and diplomatic circles, entertaining so frequently at Voisins, the famous three-star restaurant on the Rue Saint Honore that it was nicknamed "Logies" by visiting American diplomats. Though only an observer, without any official status, Logan had done more than almost anyone else to keep the United States engaged in Continental affairs and was viewed as the unofficial U.S. amba.s.sador to Europe.

As the committee began its deliberations, it found itself facing two tasks. The first was to persuade the French to accede to a lower payment schedule, at least temporarily, to which they would only agree if stringent foreign controls were imposed on the management of German finances. The French saw German hyperinflation as part of a deliberate campaign by its officials to wreck their own economy and thus prevent reparations from being paid. Some mechanism for preventing any future sabotage of Germany's finances had to be put in place. The second task was therefore to persuade the Germans to accept such an imposition.

The first task became much easier when within a week of the delegation's arrival, France was plunged into its own financial crisis. French finances since the war had been a cross between those of Germany and of Britain. The war had cost it dearly-in blood and money. In the immediate aftermath it was forced to spend $4 billion on reconstructing the liberated territories. Still unreconciled to its enormous sacrifices, the French government refused to raise taxes to pay for this, stubbornly clinging to the illusion that the costs would eventually be recouped from Germany. "Les Boches paieront" "The Krauts will pay"-was the refrain. Like Germany, therefore, France had been slow to bring its deficits under control; five years after the war, the government was still borrowing $1 billion a year.

The French financial situation was exacerbated by a hopelessly primitive system of public accounts. Despite its much vaunted corps of inspecteurs des finances inspecteurs des finances, there were huge gaps in its books and no one seemed to know precisely how much had been spent during the war, on what and by whom. It was even hard to reckon the total amount of borrowings-in 1922, an audit discovered that the volume of National Defense Bonds issued had been overestimated by the equivalent of $500 million. Controls over money flowing in and out of the treasury were so rudimentary that during the coming crisis, in a swindle that was never to be solved, $150 million of National Defense Bonds that were generally issued in bearer form and therefore untraceable, disappeared mysteriously from the treasury-in relative terms the equivalent today would be a fraud of $30 billion.

But unlike its German counterpart, the Banque de France was determined to rea.s.sert its independence after the war and refused to float the government any longer. Though the French government was able to borrow in the open market because of the high savings rate of its citizens, most of the debt was short term, had to be constantly rolled over, and the government was forced to live a sort of hand-to-mouth existence, always nervous that suddenly its creditors would get fed up and go on a lending strike.

Before the war, there had been just over 5 French francs to the dollar. By the early 1920s, following the wartime trebling of French prices, the franc had stabilized at about a third of its prewar level, about 15 to the dollar. During the latter half of 1923, it became apparent that the invasion of the Ruhr had been a failure and the likelihood of France being able to cover its budget deficit from reparations was increasingly remote. By the beginning of 1924, the exchange rate had fallen to 20 francs to the dollar.

On January 14, the day the Dawes Committee, as it was now being called, began its deliberations, the exchange value of the franc plunged by around 10 percent in a single day. Though it appeared to steady during the next few weeks, it began falling again after mid-February and in two days, March 6 and 7, lost another 10 percent, reaching 27 francs to the dollar on March 8. There were scenes of pandemonium in the Salle des Banquiers at the Bourse as a wildly gesticulating crowd of currency brokers and bankers' agents frantically tried to unload their francs.

The authorities were adamant that foreign speculators, orchestrated in a grand conspiracy by the German government, were to blame. Convinced that finance had become war by other means, officials resorted to military a.n.a.logies. Prime Minister Poincare declared in the National a.s.sembly that he had in his possession a secret doc.u.ment outlining a "plan for an offensive against the franc," which Stresemann was supposed to have circulated to a conclave of German bankers at the Hotel Adlon. The "attack" was to be "launched" from Amsterdam, where German business houses had allegedly acc.u.mulated a reserve fund of 13 billion francs. It was reported in a U.S. newspaper that the Lutheran pastors of America had received a letter suggesting that they urge their flock to dump francs in order to "a.s.sist in bringing France to her knees." The French were then, and would remain for many decades, obsessed with the specter of foreign speculators. Keynes described their att.i.tude in the preface specially written for the French edition the Tract on Monetary Reform: Tract on Monetary Reform: "Each time the franc loses value, the Minister of Finance is convinced that the fact arises from everything but economic causes. He attributes it to the presence of a foreigner in the neighborhood of the Bourse or to the mysterious and malignant influences of speculation. This is not far removed intellectually from an African witch doctor's ascription of cattle disease to the 'evil eye' of a bystander and of bad weather to the unsatisfied appet.i.tes of an idol." "Each time the franc loses value, the Minister of Finance is convinced that the fact arises from everything but economic causes. He attributes it to the presence of a foreigner in the neighborhood of the Bourse or to the mysterious and malignant influences of speculation. This is not far removed intellectually from an African witch doctor's ascription of cattle disease to the 'evil eye' of a bystander and of bad weather to the unsatisfied appet.i.tes of an idol."

On March 13, the French government announced that J. P. Morgan & Co. had lent it $100 million on the security of its gold reserves. The conditions attached were made public, including the usual clauses about the government taking steps to balance its budget, reduce expenditures, and float no new loans. But it was also rumored that Morgans, normally considered one of the most pro-French of all American investment houses, had also secretly insisted that the French government bind itself to accepting whatever plan the Dawes Committee might issue. Just the announcement of the loan was enough to turn things around and the franc rebounded from 29 to 18 to the dollar, an appreciation of more than 60 percent in two weeks.

As for Germany, the Dawes Committee quickly recognized that much had changed in the month since it had been appointed. The economic situation had been transformed: the currency was stabilized and the budget was swinging back into balance. Meanwhile, everyone was acclaiming Schacht "the miracle worker."

In the middle of January 1924, Schacht, by now back in Berlin, received an invitation-he called it a "summons"-to appear before the committee in Paris. Arriving on Sat.u.r.day, January 19, he made the first of his many presentations to the experts at the Hotel Astoria that same afternoon. As he sat on a "stool of repentance" in the middle of the room, like a prisoner in the dock, with the experts ranked before him like hanging judges, it was hard for him to hide his resentment at his country's future being determined in a converted hotel dining room in Paris.

On Monday, January 21, he appeared again for three hours, and testified the next day as well. Although he grumbled that all these presentations were taking him away from the important business of getting the German currency into shape, he clearly relished the spotlight. Speaking without notes, he described the situation in Germany in 1919, "drained dry by the war": the impact of reparations and inflation, the currency reform, the workings of the new Rentenmark, and the plans for the new gold discount bank he was putting together. As he responded in fluent French or English to the committee's questions, he found it hard to keep that inevitable note of self-congratulation out of his replies. "His pride is equaled only by his ability and desire for domination," wrote Dawes in his journal that evening. Nevertheless, the committee could not help being impressed by his grasp of the situation.

Alerted from the start to the size of Schacht's ego-Dawes noting that the most "remarkable revelation of character" came when Schacht baldly told the commission, "As long he was President [of the Reichsbank], he was the Bank"-the committee went out of its way to court him and involve him at every stage in their deliberations.

It decided that it was essential to get Schacht on board in any scheme of foreign supervision of German monetary policy. It dared not risk a confrontation that might undermine or derail his very successful efforts to stabilize the currency, thus provoking a flight of capital that would only compound its difficulties; but it also feared that if it allowed him to get too far ahead of it in his own plans, it might later prove difficult to rein him in.

In the s.p.a.ce of only two months, Schacht had gone from being a relatively obscure banker to becoming the key German official to deal with, the man who could deliver. Alexandre Millerand, the president of the republic, invited him to the elysee. It was even strongly suggested that he call on the germanophobe Poincare, instigator of the Ruhr invasion. When Schacht declared that he was open to such an invitation, he was told that protocol required that he take the initiative by requesting an audience. He duly complied, presenting himself punctually at 5:00 p.m. one evening at Poincare's offices on the Quai d'Orsay; but when the prime minister kept him waiting for thirty minutes, Schacht, p.r.i.c.kly as ever, stormed out and had to be coaxed back by a group of alarmed functionaries.

On January 31, the committee of experts traveled to Berlin by special train, the first train to go directly from Paris to Berlin since the war, to see for itself the hardships wrought thus far by reparations. German officials, keen to ensure that the visitors obtain enough of an impression of their people's privations, arranged for the electricity in the hotels housing the commission to be deliberately shut off early.

In dealing with the committee, Schacht faced a real dilemma. On the one hand, he was enough of a realist to recognize that while it needed him, he could not afford to alienate it. He could only go so far on his own. Only a group of foreign experts would have the stature to negotiate lower reparations or make it possible to mobilize a foreign loan. Typically, though, one of his biggest concerns seems to have been that the foreigners might try to take the credit for his achievements.

On the other hand, he remained convinced that Germany could not afford to pay anywhere close to the reparations envisaged by the London schedule. He believed that the Dawes approach of not tampering with the total amount of obligations was fundamentally flawed. For the moment, however, he held his peace. Over the next few weeks, Schacht became the critical German interlocutor for the committee when it came to financial reform and the Reichsbank. Although mutual interest kept both parties scrupulously polite to each other, there nevertheless remained an undercurrent of tension in their dealings.

On April 9, the committee issued its plan. As Young had insisted, it very deliberately avoided p.r.o.nouncing either on the total amount of reparations that Germany should owe or the period over which they should be paid, but focused purely on what should be paid over the next few years. It proposed that Germany begin at $250 million in the first year, and progressively increase the amount to $600 million a year by the end of the decade. By one calculation, using some plausible a.s.sumptions about the total period over which Germany might remain obligated, the practical effect of the Dawes Plan was to reduce Germany's debt from $12.5 billion to around $8 to $10 billion.

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 partic.i.p.ant, 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 edouard Herriot, the new Radical prime minister of France, the prime ministers of Belgium and of Italy, and the amba.s.sador of j.a.pan. The United States had initially planned not to attend, for fear of being tainted by too close an a.s.sociation 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. amba.s.sador to Great Britain, was a.s.signed 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 a.s.sociation, while Andrew Mellon, the secretary of the treasury, decided that this was an opportune moment to pa.s.s 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 Napoleon 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 Napoleon'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. 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 New York Tribune, but finding it hard to raise a family on a journalist's salary, 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 j.a.pan; 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 New York Evening Post and helped start and finance the and helped start and finance the Sat.u.r.day Review of Literature Sat.u.r.day Review of Literature. He had friends who were writers-at his dinner table one might find H. G. Wells or Andre 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 st.i.tch 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 pa.s.sionate 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 emba.s.sy 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 Pet.i.t Bleu Le Pet.i.t Bleu declared that "Europe shall not become a vast field of exploitation with its only government a vast bankers' combine." Edwin James of the 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 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 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 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. . . ." 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 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.

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 pa.s.ses-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 a.s.sociated 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 n.o.bel 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.

Whereas in Germany, a demobilized army officer might find his calling in a right-wing death squad, his counterpart in Britain had plunged into commercial life-it was said that most of the fleets of motor buses that jammed the streets of London were owned and operated by syndicates of former army officers. There was a new freedom in the air. At night, in the West End, the bright young things who set the pace for London society had discovered dancing: the jog-trot, the vampire, the camel-walk, the shimmy, and most infamous of all, the Charleston. That, and a modest relaxation in the wartime liquor-licensing laws, had fueled an explosion in the number of nightclubs. On Bond Street was the Emba.s.sy Club, a favorite haunt of the Prince of Wales and the smart set. In the Haymarket was the fashionable Kit-Kat Club, which boasted a dance floor for four hundred and was where Edwina and d.i.c.kie Mountbatten could be found most evenings. At 43 Gerard Street was the more raffish and bohemian "43" Club, frequented by, among others, the crown prince of Sweden, Prince Nicholas of Romania, Tallulah Bankhead, Augustus John, and Joseph Conrad. In April 1924, in a scandal that shook all London society, it was raided by the police and one its members, the well-known London restaurateur "Brilliant" Chang, was arrested for running a cocaine ring.

But while London and the Southeast were celebrating the return of peace and prosperity, not more than a hundred miles north of the capital was another country. The industrial heartland of Britain-the Midlands and the North-was struggling while London danced. The great traditional industries-the cotton mills of Lancashire, the coal mines of Nottinghamshire and South Wales, and the shipbuilding yards along the Tyne-once the engines of the Victorian boom, but now priced out of world markets, had fallen into a severe slump. Textile exports were half of what they had been in 1913, and it was the same with coal. Over a million and a quarter men were unemployed and another million were on part-time work. In some places-the dreary colliery districts of Yorkshire or the blighted ship-building town of Jarrow-one man out of every two was on the dole.

The irony was that Britain's economic troubles were not the result of inept.i.tude or the wages of financial sin but the unfortunate side effect of a high degree of financial piety and rect.i.tude. The decision to deflate the economy in 1920 and 1921 to reverse wartime inflation had partially succeeded. Prices came down by 50 percent from their postwar peak and the weakness in the currency was reversed-the pound, which had touched $3.20, had rebounded fitfully and erratically to $4.30. But the price of financial orthodoxy had been stiff. While Britain had recovered from the recession of 1921, the rebound had been muted. The City of London, finding it difficult to compete with New York for funds, had been forced to impose a regime of high interest rates, and unemployment remained stubbornly stuck above 10 percent.