The Warburgs
Page 41
To disburse this money, Felix drafted a Harvard instructor named Maurice Hexter as his personal emissary, “his ear phone and mouthpiece,” in Palestine. Hexter, hesitating, consulted Harvard president Lowell, who said, “Dr. Hexter, the University owes Felix Warburg and his father-in-law so much for their generous gifts that we feel we can’t refuse anything he asks of us.”37 One morning in September 1929, Hexter went to Kuhn, Loeb and was provided with a ten-thousand-dollar letter of credit. At a farewell dinner at 1109 Fifth Avenue that evening, Hexter found a mysterious manila envelope slipped under his plate and marked “To be opened on the boat.” Overcome by curiosity, Hexter opened the envelope in the car that took him to the midnight departure of the Île de France. He found a second ten-thousand-dollar letter of credit, with a note from Felix describing it for expenses that “you might be embarrassed to put on the other letter of credit.”38 Hexter would have many such experiences of Felix’s generosity. On his sixtieth birthday in 1931, Felix gave him a gift of six thousand dollars, causing Hexter to wonder, “Who else gives presents on his birthday?”39
In Palestine, Hexter carried a gun and had a guard/chauffeur to drive the fancy but overly conspicuous Packard that Felix bought him. Whatever the threat, Hexter typed out a weekly report for Felix on Saturday mornings. For security reasons, he would take a four-hour train trip to Cairo if he needed to telephone.
The conflict between Jews who favored compromise with the Arabs and hard-line Zionists tore at the temporary unity reached in Zurich. As Albert Einstein told Weizmann, “If we don’t find a way to cooperate with the Arabs, then we have learned nothing from the Via Dolorosa of two thousand years, and deserve our fate.”40 Tutored by Judah Magnes, the Warburgs were extremely sensitive to the Arab plight. Even before Zurich, Felix supported unofficial talks between Rabbi Magnes and Harry St. John Philby, a colorful adventurer and adviser to King Ibn Saud of Arabia. Their goal was to create a legislative council, with Arabs and Jews represented in proportion to their population; in exchange, the Arabs would recognize the Balfour Declaration. Magnes was severely reprimanded by the Zionists for these extracurricular talks. Years later, while crossing a Zurich bridge, Weizmann blurted out testily to Felix’s son, “I don’t see why you Warburgs think that Magnes is so sacrosanct.”41
The Warburgs were badly shaken by the 1929 riots, which they believed underscored the futility of any Jewish state that uprooted Arabs. Max feared a self-sustaining cycle of Jewish-Arab reprisals. “We’re all convinced that the development of Palestine, as we wish it, is only possible, if Arabs and Jews live peacefully together,” he told Felix.42 The Arab backlash reinforced a Warburg preference for a cultural homeland instead of a Jewish state. Writing to a cousin, Felix alluded to the awakened Arab masses, concluding, “I am therefore convinced that we must honestly and officially give up the idea of a Jewish nation, but I hope that we can succeed in establishing our ‘national home’ there.…”43 Felix thought Weizmann paid lip-service to the Arab issue, but dodged it. When Hexter asked Felix if relief money could be used to arm Jewish settlers, “He said no, very firmly,” according to Hexter.44
The 1929 Arab riots created a split in the British government over Zionism, and the following spring the British temporarily limited Jewish immigration to Palestine. As his colonial secretary, Ramsay MacDonald had named the socialist, anti-Zionist Lord Passfield, a.k.a. Sidney Webb, who ordered an investigation of the Arab disturbances. Felix had an encouraging talk with Ramsay MacDonald at Chequers and even with Lord Passfield.
That summer, Felix and Max took the waters at Baden-Baden and discussed the Mideast situation. Max was very worried about Lola, who was now having an affair with Weizmann and had visited Palestine with him. He had warned her that Weizmann was really after the Warburg money for the Zionist movement. Hexter recalled that Max at Baden-Baden “confided to me that he was worried about the free-and-easy ways of one of his daughters, Lola.… Lola was reputed to have a long affair with Chaim Weizmann, whose wife, Vera, had long become accustomed to his ‘flirtations.” ’45
In October 1930, the Zionists were stunned when the Passfield White Paper advocated drastic restrictions on Jewish immigration and land purchases in Palestine. The Arabs were correspondingly overjoyed, since the British document seemed to repudiate the Balfour Declaration. Weizmann thought Zionism was dead. Because the Jewish Agency hadn’t been consulted, Weizmann, Lord Melchett, and Felix resigned their posts in protest. Felix felt personally betrayed by Passfield, who had promised him that Jewish emigration to Palestine would continue. “I have asked people to believe the intentions of the British government,” he told the press. “I have helped to bring about the agency. I have invested more than $1,000,000 in Palestine, hoping that others would do likewise. Through me, the Jewish people were misled.”46 The Zionist intrigue and British duplicity took their toll on Felix, who was unaccustomed to all the squabbling in the Zionist movement. As he told Magnes that fall, “I am blue, overworked, ugly, green and hard to live with just now.”47 So vital was Felix to the cause that his resignation nearly crippled the Jewish Agency finances, which were already seriously hurt by the 1929 crash. As the depression set in, Felix had to limit himself to gifts of about fifty thousand dollars.
Felix strenuously lobbied in London to reverse the British policy. In February 1931, Ramsay MacDonald sent a letter to Weizmann that reinterpreted and, in effect, renounced the Passfield White Paper. Though some Zionists scoffed, it was a significant victory, for it reopened the gates of Palestine on the eve of the Nazi takeover in Germany, which would send forth a massive stream of wandering Jews into a world that effectively barred them. Soon the slender strip of land by the Mediterranean would acquire an importance unforeseen by even the most zealous Zionists.
CHAPTER 22
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A Stranger in Paradise
Paul Warburg was never in step with the Roaring Twenties, its isolationism and speculation, its sensuality and frothy escapism. It was too gaudy an age for a man of such sober judgments who never bought the moonshine rhetoric that America had entered a New Era of perpetual prosperity. Paul adhered to old-fashioned banker’s wisdom that in prosperous times one should meditate upon past crises. In the 1920s, he played the ancient Jewish role of the martyred prophet shunned for his fearless truth-telling. When Paul strode into the Century Country Club one day in 1928, a member exclaimed, “Here comes old Gloomy Gus!” a gibe that summed up his uncomfortable situation.1 Paul had an innate sense of tragedy that was quite foreign to the exuberant American spirit.
Like Felix, Paul indulged a nostalgia for things old, beautiful, and sanctified by time. He still warmed to Brahms and Bach, not the new dance bands. He bought a beautiful collection of manuscripts called the Locker-Lampson Album that contained letters from Voltaire, Mozart, Rembrandt, Swift, and many other historic figures. In painting, he preferred Old Masters, works of richness and depth, and rejected modern art as crudely shallow. For Paul, the Jazz Age was a decadent time that had cast off the old, established values at its peril.
If sober in style, Paul was never a narrow financial man. “He was a real Renaissance man,” said Benjamin Buttenwieser of Kuhn, Loeb, “for not only did he know as much or more about banking as anybody in the world, but also he had wide knowledge of literature, history, economics, music and art.”2 He also showed an open-mindedness foreign to the image of the stodgy banker. As chairman of the International Acceptance Bank, he donated generously to the Juilliard School of Music; sustained the Loeb Classical Library when his brother-in-law fell ill; befriended Booker T. Washington and served as treasurer of Tuskegee College; and protested the arrest of birth control advocate Margaret Sanger. Generous but discreet in charity, Panina believed Friedaflix a bit too showy in their gifts.
While he harvested the distinctions of an illustrious career, receiving honorary degrees from Heidelberg, New York University, and Occidental College, Paul never recovered from the blow Woodrow Wilson had dealt him in 1918. As Jimmy la
ter said of his father in a poem, “He could forgive betrayal, boast or threat/He could forgive but never would forget.”3 Paul viewed the world through skeptical eyes and the resigned melancholy of a man who knew his best accomplishments lay behind him. In a typical mood of sad whimsy, he joked to daughter Bettina of being in a “reminiscing gaga mood” and complained of being tired and bored.4 For all their love, Paul and Nina didn’t buoy each other. Nina had developed into a stout, matronly woman, with gray hair parted down the middle, and a soft, open, jowly face. Her dark brown eyes still had an electric sparkle, but she suffered from heart palpitations and occasional depression and Paul often seemed downcast as well. By the late 1920s, he was also in poor health.
With Bettina, Paul exhibited the warmth and charm too often edited out of his public personality. Behind the austere image of banker rectitude, he could show a playful side, scribbling puns to her and funny poetry. To care-worn Paul, Bettina seemed the precious bluebird of Youth. They had a secret, flirtatious relationship, with a fair amount of baby talk. When Paul gave her a bracelet in 1926, he wrote couplets that ended, “It pleases me quite fearful-lee/To chain said daughter’s heart—to me!”5 In their relationship Paul even hazarded Yiddish humor. Once, commenting on his hopeless golf, he asked, “must I go and swing a stick like a goy?”6 Even Paul’s most intimate friends never heard this voice.
Paul exhorted Bettina to enjoy life and savor youth instead of emulating his own work addiction. He was that rare Jewish father who advocated a more relaxed approach to life. “The whole story goes by much too quickly, and then one is old, bald, and philosophic,” he warned.7 Bowed by duty, Paul told Bettina that he had wasted half his life in needless worry. These homilies had their effect upon Bettina and Jimmy, who would try to combine intellectual accomplishments with a busy social calendar.
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From left: Joe Cook, Dave Chasen, Kay Swift, and Jimmy Warburg in a rehearsal for Fine & Dandy, 1930. (New York Public Ubrary)
It pained Paul to see the speculative bandwagon proceed on Wall Street, especially when the central bank he had helped to forge wouldn’t prick the speculative bubble. From 1921 to 1926, Paul sat on the advisory council of the Federal Reserve Board, sometimes as vice-president, giving him a ringside seat but small influence. Once again, his prophecies about the Fed were chillingly correct. From the outset, he had warned that the body lacked the necessary insulation from political pressure. The U.S. Treasury secretary served as board chairman and the president needed Senate approval to reappoint members. Hence, the board was packed with presidential cronies, not banking experts, producing a bias toward easy money and indulging speculation. An unchecked vogue for consumer credit also stimulated artificial demand, masking a global glut of products.
In the late 1920s, Paul compiled his monumental, two-volume history of the Fed. He wrote it to refute what he saw as the exaggerated claims for himself made by Senator Carter Glass in his book, An Adventure in Constructive Finance. Even though Paul had praised Glass’s contribution to the Fed, he felt Glass overstated things. A stickler for facts—there was a pedantic streak in Paul—he was dismayed by the host of claimants now sporting the title “Father of the Fed.” “I really don’t know who was the baby’s father,” he said, “but, judging from the number of men who claim the honor, all I can say is that its mother must have been a most immoral woman.”8 In 1927, when Paul and Nina went to Pasadena for a three-month rest, staying in a charming cottage, Paul dictated a portion of his tome each afternoon. During a second Pasadena stay a year later, he finished it. It was published in April 1930.
In the book, Paul laid out, side-by-side, sections of the Aldrich Plan and the Federal Reserve Act. With the scrupulosity of a talmudic scholar, he showed how the banker plan he had largely crafted at Jekyll Island had provided the technical rudiments for the reserve system. In recounting the Fed’s genesis, Paul stressed the banking fundamentals, not the final political crafting of the bill, which perhaps accounted for a different slant from Glass. It is telling that the self-effacing Paul spent so much time in this self-vindication. As Jimmy explained: “My father was a very quiet man, and people who didn’t know him well said he was an extremely modest man, which wasn’t strictly true … he definitely wanted recognition for what he did, and rarely got his due because he was so diffident.”9
Beyond recognition, Paul wanted to publish his book in time to promote debate about the Fed’s role during the stock market boom. In 1927, the Fed cut interest rates and spurred financial markets, but then failed to reverse course in late 1928 and 1929 despite signs of a dangerous overheating on Wall Street. Instead of flowing into productive investment, surplus corporate funds fueled the stock exchange frenzy. The Warburgs especially worried about this trend because the bull market diverted investment capital from Germany and the rest of Europe.
In light of this uncertain foreign outlook, Paul and Jimmy executed a well-timed, cautionary maneuver in 1928. The International Acceptance Bank had issued foreign credits without a saving cushion of domestic deposits. Sensing trouble ahead and no less concerned than Paul by the massive overhang of global debt, Jimmy prevailed upon his father to merge the IAB with a solid domestic institution. In late 1928, the IAB was absorbed by America’s oldest bank, the Bank of the Manhattan Company. Dating back to 1799, it had a large branch system with abundant deposits. The safer, more rounded institution that emerged helped the IAB weather the 1929 crisis. Paul and Jimmy joined the board of the Bank of the Manhattan (itself later merged into Chase Manhattan) while Jimmy became president of its new securities affiliate, the International Manhattan Company, in March 1929. Since Jimmy had originated European securities issues for Kuhn, Loeb, he was well versed in the political situation there.
The Bank of the Manhattan wanted to have a European foothold. In September 1929, M. M. Warburg established an Amsterdam bank called Warburg & Company that helped to implement this wish. This first outpost beyond German borders ended a 131-year precedent of operating only domestically and it had the pleasant effect of reuniting the family. Max was chairman, Paul and Fritz deputy chairmen, and Eric and a new Hamburg partner, Dr. Ernst Spiegelberg, were to lead the venture. The Amsterdam bank would provide the Warburgs with a critical financial lifeline outside Germany on the eve of the Third Reich.
Paul later contended that scarcely a day passed in 1929 when he didn’t fret about the Wall Street madness. It disturbed him that stocks were now valued, not by past earnings or current worth, but by uninformed guesswork about future prospects. As a Jew, a naturalized citizen, and eternal outsider, he seemed immune to the euphoria that affected others. He warned Frieda’s brother, Morti, about the coming debacle and convinced him to shift some of his personal wealth into cash. (Morti still ended up sacrificing half his wealth after 1929.) Paul’s advice emboldened Morti to overrule Otto Kahn and shift Kuhn, Loeb capital from risky stock exchange loans into safe municipal bonds, sparing the firm the worst of the crash. Thanks to Paul, the Warburgs generally endured the crash better than other rich families. Felix fully shared Paul’s fright about the market.
In March 1929, Paul publicized his prophecy at a time when Wall Street considered such pessimism traitorous. As in 1907, he felt duty-bound to act, even though he knew he would be crucified. As he said, “It is a desperately unpopular undertaking to dare to sound a discordant note of warning in an atmosphere of cheer, even though one might be able to forecast with certainty that the ice, on which the mad dance was going on, was bound to break.”10 Paul issued his warning in the annual report of the International Acceptance Bank of March 7, 1929. He thought it politic to warn Washington of this thunderbolt and alerted Treasury Under Secretary Ogden Mills the day before. He told Mills that Washington had chosen to let speculation run its course, “which means to leave the gamblers in control until a crash will bring speculation to an end.”… 11 He sent a copy of the report to Treasury Secretary Andrew W. Mellon, whom he faulted for sacrificing economic prudence to political expediency.
Other financiers saw the coming calamity, Paul knew, but feared the abuse that would greet any public expressions of concern.
Paul’s report was a spectacular act of prescience in which he foresaw both the crash and the Depression. He staked his prestige outright and didn’t mince words. After deploring that America’s savings were being siphoned off into speculation, he drew the policy choices starkly for the Fed: It could either yield to speculators or curb them. “If a stock-exchange debauch is quickly arrested by prompt and determined action, it is not too much to hope that a shrinkage of inflated stock prices may be brought about without seriously affecting the wider circle of general business. If orgies of unrestrained speculation are permitted to spread too far, however, the ultimate collapse is certain not only to affect the speculators themselves, but also to bring about a general depression involving the entire country.”12 It was one of the great calls in American financial history.
In follow-up newspaper interviews, Paul conceded that higher interest rates might cause a painful liquidation of shares. If the Fed didn’t act, however, it would require more agonizing future remedies. Paul’s warning set off a temporary sinking spell in the market and stirred apprehension in Washington. On March 14, Mellon suddenly told the press that bonds presented a good buying opportunity but that stocks were “too high in price to be good buys.”13 It was a cup of water thrown on a bonfire.
As Paul suspected, his report was regarded as sacrilege in financial circles. People whispered that he was selling the market short. Jeered at board meetings, he was accused of “sandbagging American prosperity.”14 Just as Aby had had simultaneous intimations of personal and universal doom, so Paul’s premonition of a crash coincided with a heightened awareness of his own mortality. In late June, he made out a will that contained a touching farewell note to Nina.