The Warburgs

by Ron Chernow

  Gershwin was a magnetic figure for a musical woman, and with Jimmy often away on business, the situation was ripe for mischief. As one Gershwin biographer notes, “… the Warburgs were an enlightened couple who often went their separate ways without overt frictions or jealousies. Whether seeing Kay in their customary Manhattan haunts or horseback riding with her at the Warburg farm in Connecticut, Gershwin did not have to contend with a righteously indignant or jealous husband.”28 For all his affected worldliness, Jimmy had been a sheltered boy with scant knowledge of Bohemian circles. He was a man about town, not a true free spirit, and was in way over his head. Kay and George began visiting galleries, concerts, and parties together. She became his secretary, proofread his scores, and joined him for duets. Parts of some important Gershwin scores exist in her hand. An unsuspecting observer would have assumed they were married, for Kay would insert a fresh flower in George’s lapel before concerts, then wait backstage to applaud him lovingly afterward. Possibly in homage to her, Gerschwin named his November 1926 musical Oh, Kay.

  Later Jimmy was very bitter about the affair, but he didn’t put his foot down soon enough. With George and Kay already inseparable, Jimmy proved remarkably obliging. The night before Gershwin’s departure for his last European trip in March 1928, Jimmy and Kay threw a bon voyage party and the carousing went on until five in the morning. Jimmy agreed to give Gershwin a guesthouse at their Greenwich farm where he could compose parts of An American in Paris and ride horseback with Kay. When Jimmy was away, George cropped up at breakfast in a bathrobe. After the premiere of An American in Paris at Carnegie Hall that December, George and Kay left the concert hall together to celebrate, with George buying her two bracelets on 57th Street.

  Jimmy was accustomed to being the unrivaled lady-killer, and the sparkling Gershwin must have been punishing competition. Jimmy was in a painful quandary. Kay had provided him with escape from everything he found stifling—banking, Judaism, puritanism, the claustrophobic Warburgs—yet he felt devalued and peripheral in her world. How could he elevate his status in their rarefied artistic circles?

  Only the versatile Jimmy could have answered the question as he did. Capitalizing on his poetic gifts, this precocious young banker became lyricist for Kay’s show tunes. As he explained, the decision came about partly “because her interest was contagious and partly because I feared that our lives might otherwise drift apart.”29 Since Paul couldn’t understand his son’s desire to write lyrics, Jimmy wrote under the stage name Paul James, while his wife used her maiden name, Kay Swift. Libby Holman crooned one of their torch songs, “Can’t We Be Friends?” in the Little Show of 1920.

  This set the stage for Kay and Jimmy’s collaboration on a musical comedy, Fine & Dandy, starring Joe Cook. When the show’s producers went bust right before opening night, Jimmy convinced his friends Marshall Field and Averell Harriman to throw in money with him to save the show. (The three had invested in a Soviet manganese venture together some years before.) The play ran for more than 250 performances, yielding two hit songs, “Fine & Dandy” and “Can This Be Love?” which would pay royalties for three decades. As a Broadway musical composed by a woman, it was an important first in theater history.

  But the show’s success didn’t solve the Warburgs’ marital problems. If anything, this new phase accentuated the strain on Jimmy as he tried to resolve his identity crisis not by choosing a single identity, but by simultaneously adopting several. On an ocean crossing in 1930, he showed his verse to Alfred Knopf, who published it in a thin volume, And Then What? Then came a second volume, Shoes and Ships and Sealing Wax, again under the name Paul James. Jimmy knew, however, that he was fighting a losing competition against Kay’s artistic friends. “It was particularly exhausting for a lyric writer whose banking career demanded that he get to his office at nine in the morning when most of the theatrical world was still in bed.”30

  The tensions only grew in the weird triangular relationship of Jimmy, Kay, and George Gershwin. When Gershwin conducted the opening of his antiwar operetta, Strike Up the Band, on January 14, 1930, Kay sat behind him in the first row. Two of the Warburg daughters liked to do a little song-and-dance routine to “I’ve Got a Crush on You,” and when he came to that point in the overture, Gershwin turned to Kay and whispered, “April and Andy.” Afterward, Kay and Jimmy hosted a party at their apartment to which Gershwin brought Sergei Prokofiev. Jimmy had to watch as Gershwin exulted in the ecstatic reviews read aloud to guests.

  By this point, Jimmy and Kay’s marriage was probably doomed. They were clever children playing with firecrackers that were bound to explode in their faces. But they didn’t see how soon it would occur or that the 1929 crash would claim them, too, as indirect victims. For the thunderous collapse of stocks on Wall Street would have profound financial repercussions in Hamburg, demanding Jimmy’s extended absence from home just when his marriage could least afford it.

  ——

  The “Famous Five” brothers pose for a last photo at the Warburg library, August 21, 1929. At the last moment, Abu cupped his hands to symbolize his lifelong supplication. (Warburg Institute)

  CHAPTER 23

  ––

  Account X

  On his business trips to Germany in the 1920s, Jimmy Warburg experienced confused feelings toward his native country. Sometimes taken aback by his nostalgia for childhood scenes, he was also appalled by the street fights that enfeebled the Weimar Republic. In 1929, he heard Adolf Hitler speak at a Bremen rally and saw a crowd transfixed by his shrill gibberish. “Just watching the effect he had on people while talking what to me seemed like sheer nonsense, I had a goose-pimply feeling that this was a phenomenon that wasn’t as unimportant as it might seem.”1 When he tried to coax uncles Fritz and Max into reading Mein Kampf, they dismissed it as a heap of idiot scribblings.

  Capitalizing on the agricultural depression, the Nazis began making inroads among indebted farmers in the late 1920s. Hamburg merchants still found it hard to fathom the potential Nazi threat. When Rudolf Hess came to town in 1929, he asked a local Nazi to scout up some interested business leaders, but the man could only muster five or six souls. That summer, a Nazi major informed Hitler that only three of two hundred leading Hamburg personalities favored their party. Business leaders worried about the socialist content of a National Socialist party that mingled extremists of Left and Right, while they tended to dismiss its anti-Semitism as a mere propaganda ploy to lure a crackpot fringe.

  Nineteen twenty-nine was a banner year for M. M. Warburg & Co., which now ranked as the largest and most prestigious private bank in Germany, giving Max preeminence in the Jewish community. To some outside observers, he seemed a naïve superpatriot, striding blindfolded into the future. That year, Norman Bentwich visited Kösterberg and would recall being “entertained by Max Warburg at his pleasance on the Elbe. The leader of German Jewry at that time had no misgivings.…”2 The portrait was overdrawn, for Max had vague but persistent forebodings. Reluctantly he stayed in the conservative German People’s Party (DVP) to keep its anti-Semitic wing in check. The electoral decline of such centrist parties would set the stage for the drift to authoritarian extremes in the early 1930s.

  As since the end of the war, Max hesitated to assert his power or enlist the influence of the overseas Jewish community to combat anti-Semitism. He was always on the defensive, always afraid of playing into the hands of the enemy. He had kept some distance from both Friedrich Ebert and Gustav Stresemann so they wouldn’t be tainted by association with a prominent Jew. As he told Felix in 1929, “We must, under all circumstances, avoid an international battle against anti-Semitism, since we will otherwise naturally be accused of mixing foreign elements in domestic German relations.…”3 There was a cruel irony here: To disprove Nazi propaganda, German Jews were isolating and weakening themselves. This same tendency made them chary of Zionism. In 1930, several hundred Jewish leaders signed an ad asserting their German loyalty and rejecting a Jewish homeland: “We regar
d ourselves, along with the overwhelming majority of German Jews, as members of the German, not of the Jewish, people.”4 The more insecure they felt, the more avidly German Jews would rush to prove their patriotic credentials.

  A staunch supporter of the Weimar Republic, Max feared that intemperate criticism of the young republic was eroding its legitimacy. He endorsed a tepid form of social democracy and believed that German business should recognize unions, pay higher wages, and assist impoverished workers. While at Baden-Baden in 1930, he learned from caddies and chauffeurs that they couldn’t find winter work, so he wrote to government officials, advocating relief work instead of the dole. Conservative at the core, Max mostly worried about Bolshevism, deficit spending, high taxes, and excessive indulgence of unions. Nevertheless, a quixotic, eccentric streak often made his views extremely inconsistent and unpredictable.

  In 1929, the Nazis reaped a propaganda bonanza from the Young Conference in Paris. The German delegation was led by Reichsbank president Dr. Hjalmar Schacht. His deputy was Max’s distinguished partner, Carl Melchior. With his trim mustache, cultured manner, and deep sad eyes, Carl Melchior symbolized the best in German public service. For ten years, he had tried to reduce reparations through well-reasoned argument. While Dr. Schacht blustered, Melchior maintained his unruffled calm and held informal talks with the other side. After the conference, Melchior’s health broke down from overwork and his doctors warned him against overexertion. Yet he remained active on the reparations issue. Henceforth, he often wore dark glasses, shunned young people, and brooded about his health, all the while despairing that reason would save the political situation.

  The Young agreement abolished Allied controls over German banks and railroads and provided for a reduced, but extremely long, reparations schedule through 1988. In the future, payments would be channeled through a Bank for International Settlements in Basel, with the ubiquitous Melchior named to its administrative board.

  Instead of acknowledging that the Young Plan improved matters, the Nazis branded it a fresh insult to German honor and organized a campaign to reject it. Agitators fulminated against “Three generations of forced labor!”5 Doubtless thinking of Melchior, they dubbed it “a Jewish machination” and “a product of the Jewish spirit.”6 Ruhr industrialists joined the chorus of denunciation. Even though he signed the document, Dr. Schacht then turned against it and, to court the extreme Right, issued bombastic attacks from his country estate. To explain this reversal, he blamed cosmetic changes made in the Young Plan at the Hague in January 1930. Feeling shaken and betrayed, Melchior saw the bare-faced opportunism in Schacht’s volte-face.

  When Schacht threatened to resign from the Reichsbank over the Young Plan, Max decided to call his bluff. As a member of the Reichsbank Advisory Council, he had a meeting convened to consider Schacht’s behavior. “I moved that the resignation which he had threatened be accepted,” Max wrote. “Of course, Schacht knew that I was the power behind his dismissal.”7 The council unanimously accepted Schacht’s resignation and Max resisted a move to have Melchior succeed him. Instead, on behalf of the council, he telephoned Dr. Hans Luther and asked him to become the next president. The incident is worth noting since it not only made Schacht heroic to the Nazis but perhaps gave Schacht a concealed motive for later revenge against Max.

  The Wall Street crash ushered in the sort of depressed economy in which extremism thrives. German exports fell, foreign credit dried up, and unemployment more than doubled in a year. Meanwhile, the massive short-term debt run up in the 1920s began to fall due. In 1930, the Weimar Republic died the death of a thousand lashes as the new chancellor, Heinrich Brüning, began to govern by presidential decree. A quiet Catholic conservative and financial expert, Brüning would end up crippling the young democracy with his resort to emergency measures. While claiming a bogus respect for democratic forms, the Nazis pushed political conflict into the streets, and the Brownshirts chanted, “Possession of the streets is the key to power in the State.”8 Profiting from agitation over the Young Plan, Hitler emerged again as a national figure.

  In elections that September, the Nazis scored their first stunning electoral success. In 1928, the party had polled a scant 810,000 votes. Now, just two years later, it received 6.4 million votes, swelling its Reichstag representation from 12 to 107 seats and dwarfing substantial Communist gains. It was a terrifying portent for German Jews, especially the bankers. After the election, Goebbels said the Nazis would expropriate banks, a view taken up by the enlarged Nazi contingent in the Reichstag. German stocks plunged as spooked foreign creditors pulled their money from Germany.

  German Jews wondered if the Nazi victory was a fleeting aberration or prelude to a nightmare. The American Warburgs always had a clearer picture of the situation than their German relatives. After the 1930 elections, Jimmy returned to New York and told his father that Hitler was a madman who would try to conquer Europe. “He thought I was out of my mind,” said Jimmy.9 Over lunch, Jimmy repeated the prophecy to Albert Wiggin, head of the Chase Bank, who afterward wisecracked to Paul, “You ought to put your son away somewhere and not let him scare people like that.”10 That November, Felix warned an eminent group of American Jews about the Nazi menace, but they, too, thought Hitler would fade away before long.11

  Max was staggered that so many Germans would heed the rhetoric of these coarse, uneducated anti-Semites. “Their knowledge is small;” he told Paul, “they possess great energy, but it is partly the energy of the hopeless and the desperate.”12 Having watched their agitators give speeches on buses and trains, Max knew that the Nazis had well-drilled recruits. Nevertheless, he thought the phenomenon would be short-lived and likened events to the wave of anti-Semitism that passed over France during the Dreyfus Affair.13 Carl Melchior thought the Nazi demagogy might be curbed if they participated in a coalition government, whereas Max shied away from this risky course.

  Max’s wife, Alice, was so profoundly disconcerted by the 1930 elections that she made Max promise to curtail his political and business activities. On October 3, 1930, he signed a statement that said: “I hereby give to my beloved wife—Alice, born Magnus—my assurance, that on the basis of the recent agitated election period I have decided to arrange my life in future in a freer fashion. I promise, gradually, to give up my honorary posts, to withdraw increasingly from public life, to shorten my work time, to spare more time for longer trips and to dedicate myself more to my family.”14 Max signed this pledge to pacify Alice but he was incapable of honoring it. As the episode shows, the German Jews weren’t cavalier about the Nazis. Rather, they would hesitate, procrastinate, and rationalize inaction for far too long.

  The Nazis appealed to the petite bourgeoisie—disgruntled shopkeepers, teachers, lower-level civil servants—and had less appeal to the Hamburg patricians. Twice in 1930, when Hitler visited Hamburg, Max noted that he had to soften his anti-Semitic rhetoric to cater to local tastes. That September, Hitler assured HAPAG chief Wilhelm Cuno that the Nazis didn’t want to persecute the Jews, but just to reduce their political predominance. Cuno was so pleased by this “moderate” Hitler that he arranged for him to address the Hamburg National Club, where the latter avoided anti-Semitic themes and stressed the benefits of Eastern conquest. In another Nazi breakthrough in business circles, Emil Georg von Stauss of Deutsche Bank invited Dr. Schacht to a private dinner at Hermann Göring’s home in January 1931. Hitler knew the value of having a respectable financier in the party ranks.

  The Depression nearly killed off the Warburg bank before Hitler had a chance to do so. Everything conspired against the firm: capital flight after the Nazi victory, the wholesale liquidation of German securities by Americans, and the plunge in German share prices. This made the bank increasingly vulnerable to some shaky commercial loans made in the 1920s, especially a large one to the Rudolf Karstadt department store.

  In October 1930, Max sailed to New York to discuss the elections and the economic crisis with his brothers. Even though Paul and Felix d
idn’t accept Jimmy’s scenario about Hitler, they were frightened by the Nazis and dubious about M. M. Warburg’s economic future. They suggested that Max end the bank’s 132-year independent existence and merge it with a larger bank. This was anathema to Max. “To this I could not agree,” he wrote. “Inspired by my basic individualism in all economic matters, I desired to continue the firm as an independent private enterprise. I was unwilling to furl my sails.”15

  The sheer exuberance that had served him so well in a growing, optimistic Imperial Germany would shackle Max with false hopes in a disintegrating Weimar. As ever, he had a hypnotic hold on his brothers, especially Paul, and made such a brilliant sales pitch that Paul and Felix poured more of their own money into the firm. In February 1931, Paul put up an astounding two million dollars, while Felix chipped in another quarter million. Troubled by the German outlook, the American brothers also pumped capital into the new Amsterdam operation, Warburg & Company. This cash infusion bought time for Max, for during the next year the firm would lose 80 percent of its foreign and 50 percent of its domestic deposits.

  The most serious threat came from Karstadt. Warburg credit had accelerated the store’s expansion and Fritz sat on its supervisory board. The Warburgs invited Carola’s husband, Walter Rothschild, to come and file a report on Karstadt. As the genial head of the A&S department store in Brooklyn, he seemed the ideal person to appraise the situation. After he arrived, Walter strolled around the corner to the department store then returned with surprising speed. “Karstadt is going to go bankrupt,” he said with Delphic conviction. Amazed, Max asked how could he tell so quickly? “Any department store that sells pillows on the ground floor is going to fail.”16 Walter further noted that department stores suffered disproportionate harm in economic crises. Petrified, Eric told his father that he wanted to flee the sinking ship, but Max termed desertion out of the question.17