The Warburgs

by Ron Chernow

  In political exile ever since leaving Washington, Paul was eager to start afresh and forget that “stupid struggle between nations.”3 Under Fed rules, he couldn’t return to private banking for three years. After his bruising, disillusioning Washington stint, his melancholy was deeper, his pessimism more engrained. He contemplated his next step from the comfort of the six-story limestone mansion he and Nina occupied at 17 East 80th Street. Designed by Cass Gilbert, it had sixty-five rooms and twenty-five thousand square feet of space. Paul might mock Felix’s extravagance, but he was no pauper. His house had a squash court and a pipe organ and an interior of heavily upholstered comfort. The sofas had velvet cushions set in massive frames of polished wood. In a rich candelabra glow, Dutch Old Masters hung from the walls in ornate gold frames.

  It grated on Paul that German-born Americans had been suspected of wartime treachery and that even their mother tongue remained taboo. During a Friday soirée at the Schiffs in 1919, he watched with cynical amusement as an entertainer sang German Lieder—in English. Afterward, he told daughter Bettina, now at Bryn Mawr, “This business of taking a German’s mind and work as koscher, but his poor language as treife [unkosher], is more than I can stomach.”4 Paul took pride in his German background, but seemed self-conscious about his religion. In January 1920, he wrote Bettina, “Last night at the theatre there was a crowd of coreligionists dressed (or undressed) as a theatre party—I felt sore and ashamed to look at them, and blessed my stars that you were at Bryn Mawr!”5

  Once again Paul could advocate better American-German relations, free of any political encumbrance. Flush with cash from booming exports to Europe, America had emerged as the world’s supreme financial power. The Liberty Bonds had spawned a vast new market of American investors, who were ripe for the first time to buy foreign bonds. Paul hoped this trend would help to resurrect central Europe.

  Like Max, Paul often seemed blind to the Pandora’s box of fears, hatreds, and resentments opened by Germany’s defeat. He naïvely believed Germany cleansed of militaristic tendencies. In late 1918, he told Colonel House that “we must treat Germany as we did Russia when freed from the yoke of the Czar—as a new friend, a chastened being that has sinned much and has suffered more.… I am not worrying about Germany, I think the chastening defeat will bring about a healthy rejuvenation.”6 Yet he knew the Versailles Treaty threatened to polarize German politics and subvert the fragile Weimar democracy.

  For Germany, Paul envisioned a middle path between sharp-elbowed capitalism and totalitarian Bolshevism. In March 1919—before he visited Europe—Paul ardently told Morti Schiff, “Every bit of news that we get from Germany gives a clear indication that the military spirit has been broken, and that they do not care what happens to their army and navy in the future; that they want peace and a chance to vindicate themselves before the eyes of the world.”7 Unlike Paul, Morti had just been in Germany and had seen unsettling attitudes persisting behind the shifting masks of monarchy and the Republic. Cautioning Paul against soothing illusions, Morti said he had found no regret whatever among Germans “for murder of women and children, for rape and outrage; for wanton and unnecessary pillage and destruction.…”8 A subtle anglophile shift at Kuhn, Loeb—not to mention his dislike of Morti Schiff—made Paul reluctant to return to the old firm, which he feared would thwart his desire to aid Germany and brother Max. Already he mulled over a scheme to restore their business relationship.

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  Max Warburg in the 1920s.

  (Warburg family, Hamburg)

  In early August 1919, Paul sailed to Europe, hoping to repair the torn fabric of the past. He told Alice, “The main thing is to see mother and you all again and talk over the future—and forget about the past.”9 In Saint Moritz, Paul was reunited with Max who was trying to arrange German trade finance with Swiss banks. The two brothers discussed their postwar business relationship. Stripped of official position and fretting over an isolationist America, Paul would now serve as a sort of freelance statesman. In Europe, he was recruited into an effort by bankers and private citizens to end the stalemate over postwar economic issues and counter virulent nationalism. His friend, Dr. Gerard Vissering, governor of the Netherlands Bank, invited him to an Amsterdam meeting in October to discuss reparations and other economic issues.10

  With Amsterdam a devil’s nest of espionage, the group met privately in Dr. Vissering’s mansion. Keynes would vividly remember this emotional talk, set against a somber, steady drizzle. He had also invited Carl Melchior. After the stifling secrecy of Versailles, it was a great luxury for these German, English, and American experts to enjoy candid discussions about economic matters. Keynes stated that Germany was the key to solving the global debt problem. With fervor, Paul replied, “If people in Germany could only get a germ of hope that their situation is seriously considered by the other countries, it would do a lot of good.”11 Keynes thought England dangerously oblivious to Continental affairs. To alert world opinion to impending trouble, he proposed an appeal to the new League of Nations, which would hold its first sitting in January 1920.

  Paul and Keynes drafted the appeal, which warned that excessive reparations would cripple German productive capacity and harm creditors as well as debtors. Paul wanted to spread this message through an advertising campaign. Much as in his early Fed crusade, he displayed a messianic fire, a homiletic style. However restrained in demeanor, he was extremely passionate and forthright in his judgments. After Amsterdam, he told John W. Davis, the U.S. ambassador in London, “Let us get back to peace; let us forget hatred; let us stop destroying and let us begin to construct!”12 Again, he was a man captured by a mission.

  After one session, Paul walked through Amsterdam with Keynes and Melchior. They ended up at Keynes’s hotel room, where he read aloud from his manuscript of The Economic Consequences of the Peace, with its acerbic portrayals of Allied statesmen at Versailles. “I noted its effect on the two Jews,” Keynes wrote. “Warburg, for personal reasons, hated the President [Wilson] and felt a chuckling delight at his discomfiture; he laughed and giggled and thought it an awfully good hit. But Melchior, as I read, grew ever more solemn, until at the end he appeared almost to be in tears.”13

  On January 15, 1920, the appeal authored by Keynes and Paul Warburg and signed by many luminaries was issued to the press. Herbert Hoover, William Howard Taft, and J. P. Morgan, Jr., cosigned the American version with Paul. They stated that burdensome reparations could foster revolution in Germany and Austria as popular revulsion against unjust debt bred an ugly, desperate mood. The affected governments would print money to pacify the populace, generating inflation.14 This prescient document had no effect, as Hoover had warned Paul. Indeed, the U.S. Treasury Department thought its dire predictions overblown and resented Paul’s involvement as possibly conveying an impression of official American favor. In April 1921, the Allies set the reparations tab at a stupendous 132 billion gold marks or $33 billion.

  Paul developed a heavily tragic sense of politics as he saw emotions producing disasters that reason had clearly foreseen. As he later said of these postwar days, “madness ran its course” instead of timely diplomacy. During a German trip in 1920, his pessimism grew as he saw shabby scientists sweeping the streets. Equipped with the acute Warburg antennae for the Zeitgeist, he saw further danger in the offing. As he wrote, “Europe at present is like a big steamer sunk by a torpedo. It is idle to discuss today what kind of Ritz restaurant or social hall she should have when she is afloat again.”15

  In economics, Paul’s prophetic powers were as unerring as Aby’s in the cultural sphere, and he initiated a new phase as an embattled Cassandra. Whether from his Jewish background, personal sensitivity, or outsider status as an immigrant, he had a coldly detached vision of things. His Washington defeat had only sharpened his loathing for political folly and ineptitude. For the past five years, he thought, the world had consumed more than it produced, creating inflationary pressures. Now governments were printing money inste
ad of submitting to needed austerity. “The world lives in a fool’s paradise based upon fictitious wealth, rash promises, and mad illusions,” he said.16 “We must beware of booms based on false prosperity which has its roots in inflated credits and prices.”17 Indeed, global inflation crested in 1920, followed by a severe slump—the first confirmation of Paul’s grim prophecies.

  There was a moralistic dimension to his predictions. Paul saw wartime sacrifice giving way to intoxicated self-indulgence—a theme he would sound up to the 1929 crash. He criticized America’s selfish retreat from global responsibility and the materialistic frivolity of the Jazz Age. He thought America morally obligated to assist European recovery by reducing German reparations and war debts owed to America by its Allies. Paul took on the stoic, unbending tone of a prophet who knew the world was weak, selfish, and deaf to his warnings.

  In April 1921, Paul, encouraged by Max, launched the International Acceptance Bank in New York. The IAB’s blue-ribbon shareholders ranged from Kuhn, Loeb to the London Rothschilds. Paul, Felix, and M. M. Warburg also held large blocks of stock. Bank was a misnomer for the IAB, which didn’t take deposits. It specialized in a form of trade finance called banker’s acceptances, which had long existed in Europe, but only became possible in America under the Fed. An acceptance was a short-term credit extended by a bank to a customer. With these credits, Paul hoped to rebuild a shattered Germany and by July he was financing German grain imports. Since the Nazis later accused Jewish bankers of sabotaging the economy, it is worth noting that Paul and Max acted as a critical conduit of Wall Street money at a time when credit was scarce. Already in 1920, the Warburgs pulled off a big transatlantic deal for the German electrical company, AEG, selling a quarter of its new loan issue to the Guggenheims.

  Perhaps Paul’s most compelling motive in forming the IAB was to help Max and the Hamburg firm. The IAB gave unique advantages to M. M. Warburg, which served as its European agent and executed much of its European business. Bolstered by the New York connection, Max participated in share issues for Friedrich Krupp and Daimler Motors in 1921. In the end, this Wall Street link would prove a mixed blessing, for the cautious Paul funneled money to Max that only fed his ebullient speculative instincts. But in the early 1920s, the New York connection buoyed the Hamburg bank while other banks struggled to recuperate from the war.

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  Pictures of Max Warburg from the early 1920s show a barrel-chested figure with powerful, squared shoulders and a buccaneer’s charm. He radiates a sense of massive willpower and native optimism. In early 1920, he seemed mildly hopeful even as new extremist voices were heard. It was, after all, at this time, February 1920, that a small workers’ party, started in a Munich tavern a year before, was restyled the National Socialist German Workers’ Party. Its leader, Adolf Hitler, blasted the Versailles Treaty and called for an end to Jewish citizenship. He railed against Jewish financiers who had allegedly delivered Germany to the “thralldom of interest payments.”18 This faint drumbeat would grow much louder.

  For a man comfortable with the middle ground, Max was alarmed by the polarized politics of Weimar Germany and he would try repeatedly to orchestrate coalitions of his conservative DVP with Social Democrats and other liberal parties to shore up the center. On March 13, 1920, the new Republic’s fragility became evident when a naval brigade, headed by Dr. Wolfgang Kapp, marched on Berlin in an aborted putsch. At first, government troops wouldn’t fire on the rebels, and Max feared the military would side with them. The putsch was eventually put down thanks to the combined strength of the Social Democratic party and the trade unions. But for overseas investors, the Kapp putsch reinforced uneasiness about German stability.

  At the Spa conference in July 1920, the reparations issue dovetailed with resurgent anti-Semitism. France threatened to seize the Ruhr if Germany didn’t deliver two million tons of coal yearly. Hugo Stinnes, the German coal baron, preached defiance. While he acknowledged that this might create chaos, perhaps even a fleeting bout of Bolshevism, he thought that Germany could then blame the Allies. Max didn’t feel quite so cavalier. Melchior, a Spa delegate, reluctantly submitted to Allied reparations demands. When another courageous Jewish delegate, Walther Rathenau, said Germany had no choice but to submit, Stinnes published a letter interpreting German acquiescence, not as a grim, unpleasant necessity, but as a form of Jewish guile. In chilling anticipation of Nazi propaganda, he claimed to detect a pattern of racial voting in the German delegation: “Because of a foreign psyche, a number of representatives at Spa have broken the German resistance against shameful demands.”19

  As the year progressed, Max slid into growing pessimism, especially about Germany’s currency. Several factors were contributing to inflation. The government had financed the war through loans, not taxes, thus providing an incentive to repay in debased coin. Committed to a lavish social welfare agenda, Weimar politicians were powerfully tempted to print money. And as the mark dipped in value, it made imports more expensive. The Warburgs saw friends auctioning off family heirlooms to pay bills or yanking their children from expensive private schools.

  A lethal gloom settled over Hamburg. The train station was crowded with slovenly men who marched daily to the harbor to seek nonexistent work. The Warburgs themselves had trouble supporting pet charities. As chairman of the Jewish Hospital, Fritz kept it alive through monthly checks from Paul. “The disintegration of Germany is becoming evident on all sides,” Max wrote in the bank’s 1920 annual report. “There is a silent poverty that is developing.…”20 The gathering inflation forced postponement of a historical volume commemorating the bank’s 125th anniversary.

  With mounting postwar anti-Semitism, Jews were reluctant to seize political opportunities available in Weimar Germany. Melchior declined offers to become German reconstruction minister and head of the Economics Ministry and Max also resisted highly tempting offers. In June 1921, he dined in a Berlin club with Walther Rathenau, the Jewish reconstruction minister. As Max said afterward, “He pestered me to enter the Cabinet, as Finance Minister or Minister of the Foreign Office, but I reassured him that I would stay by my last.”21 Max again believed he had a double liability, for the left would attack him as a banker, the right as a Jew.

  The inflation exacerbated social tensions in Germany, producing a handful of winners and legions of embittered losers. Uneducated people fantasized that Jewish bankers orchestrated this complex monetary phenomenon for their gain. Disproportionately represented in private banking, well-to-do Jews were generally better equipped to deal with inflation, while elderly people on pensions and depositors with small bank accounts fared worst. People ravaged by inflation resentfully watched financiers shuffle money into foreign currencies or tangible assets to preserve their capital.

  Max moved about with a fearfulness at odds with his native ebullience. When Matthias Erzberger, the finance minister and a Catholic moderate, was murdered by two former officers in August 1921, bloodthirsty supporters rejoiced in the streets. Alarmed, Max decided to hold the October wedding of his eldest daughter, Lola, at Mittelweg 17 instead of at the local synagogue. He rejected another offer to become the German ambassador to the United States, trying to reduce his political visibility.22

  With his Wall Street connections, Max was courted by Berlin and the Foreign Office prodded him to travel to New York to lobby for an international loan. Agreeing that only such a loan could prop up the plunging German currency, he pursued this theme with Colonel House at the American embassy in Berlin in June 1921. He told House not to be fooled by Germany’s surface calm and evoked a nation exhausted by war, terror, hunger, and revolution.23 Max still thought America could urge moderation upon France.

  Already the new republic coped with endless Cabinet shuffles and a doomed air of perpetual crisis. Germany couldn’t seem to regain its balance. By early 1922, the mark had dipped to 4 percent of its prewar value, thinning the Warburg fortune. In January 1922, Chancellor Josef Wirth invited Melchior to join a team drawing up
plans for an April reparations conference in Genoa. With Hugo Stinnes angling to head the delegation, Max and Melchior scented trouble ahead. When Wirth asked Max to attend with Melchior, he refused and instructed Melchior on how to avoid being scapegoated. “I consider it de facto incorrect for our firm to be too strongly represented at this conference.…” he said. “I should like only to ask in advance that you immediately leave the room if in connection with an international loan there is a demand for financial supervision of Germany.”24

  While Max navigated warily through these treacherous waters, a Jewish friend abandoned all such restraint: Walther Rathenau. Rathenau’s father had founded the foremost German electrical concern, AEG, a prime Warburg client, and Walther succeeded him. He was a curious compound of visionary economist, Utopian philosopher, and down-to-earth pragmatist. A cultured, gifted linguist, he inveighed against the machine civilization that had spawned his family’s wealth. In a 1912 book, he proposed that three hundred men controlled Europe’s economic destiny—an assertion later perverted by the Nazis into the myth that three hundred Jewish bankers controlled Europe. Rathenau thought anti-Semitism would wane in Germany as a new technocratic class overtook the effete aristocratic order.

  The dapper Rathenau, with his trim Van Dyke beard, frequently visited Kösterberg. On one visit, he laid out a plan to redesign the gardens into a French park, with terraces descending to the Elbe River. Max had reservations about Rathenau, having sparred with him over the War Metal Society. He found Rathenau highly literate and a superb orator, but also a vain, insufferable windbag who once droned on through an entire dinner while Max and Alice stared in stupefied silence. Max saw himself as a simplifier and Rathenau as someone who tended to confuse complexity with profundity.