The Warburgs

by Ron Chernow

  In early 1931, fear seized the banks of central Europe. In March, Germany announced plans for an Austrian-German custom union that would violate the Versailles Treaty and French investors withdrew huge amounts from both countries. The colossal Credit-Anstalt of Vienna, which was associated with the Rothschilds and controlled nearly three fourths of Austrian banking, suffered a severe blow. The government had forced it to absorb a failing agricultural bank and now it was hit by an outflow of French money. As a board member, Max rushed to Vienna in May to lunch with Baron Louis von Rothschild, the bank’s president. He arrived in time to witness the depositor run at close range. He was staggered that the bank’s managers had so profoundly lost their way and kept directors in the dark. “They had been drowned in the details of the day and lost all vision of the whole.”18 In London, Jimmy told Anthony de Rothschild that if his family ever needed help, they could count on the Warburgs—a stunning reversal of their nineteenth-century roles.19

  With Germany and Austria interwoven by financial ties, the Credit-Anstalt debacle destroyed depositor confidence in German banks. Karstadt flirted with bankruptcy. On June 16, 1931, North German Wool failed, triggering a financial crisis as it dragged down German creditors, most notably the huge Danat Bank on July 11. Financial panic seized all of Germany. To halt depositor runs, the government declared a bank holiday and German stock exchanges shut down until September. Max faulted the Reichsbank for having acted gingerly to stem the fear and he regretted his patronage of the unimaginative Dr. Luther. The government issued a blizzard of emergency decrees, but nothing could assuage the universal anxiety.

  Max had been writing to New York about bright spots and silver linings in the dismal scene. After the Credit-Anstalt, Paul and Felix sent Jimmy to Germany to investigate M. M. Warburg. Felix worried that if Paul went, Max would only charm him again and lead them all down the primrose path.

  This mission would woefully complicate Jimmy’s relationship with Max, who had long been his favorite uncle and role model. Jimmy liked Max’s savoir-faire, preferring his red-blooded swagger to his father’s eternal caution. Max worked hard, played hard; earned much, spent much—a formula Jimmy would adopt. Yet Jimmy also shared Paul’s qualms about Max as a businessman and criticized his breakneck expansion. Jimmy would spend much of the year in Germany, sifting through the wreckage. In earlier times, he had loved the old-fashioned bank, just now switching to typewriters and still reluctant to add new-fangled adding machines. Having proudly served as a trusted go-between for Max and Paul, he was now given a gravedigger’s duty. “In a strange sort of way I was forced to become the protector of both my father and his brother. It goes without saying that this was not a happy relationship.”20

  In Hamburg in June, Jimmy was shocked at Max’s cheerful and blithe complacence. And Paul had worried that Max might become suicidal! Jimmy thought the Hamburg bank a terminal case and tried to persuade Paul and Felix that all further rescue efforts were futile. Even as the unsuspecting Warburgs celebrated Max’s sixty-fourth birthday at Kösterberg, Jimmy delivered a death sentence for his firm, writing privately to Paul:

  “It’s really not a matter that any one but you and Felix can decide. So far as my interest in your fortune is concerned, go as far as you like. I don’t mind starting at scratch again, but don’t please be under any misapprehension as to what you are doing if you do it. The only safe way to regard such a job is to consider the money lost. My own inclination at the moment, cruel though it may sound, is to let them bust if they have to, and help the family afterwards rather than go practically bust yourself in trying to save the situation.… Sorry to give you this so brutally, but it is a matter of time, and besides there isn’t much I can say to make it less brutal.”21

  Paul was suffering a shinglelike back condition that he attributed to tension over Max. Felix balked at saving Max, grumbling that their older brother only approached him at “milking time.” He submitted at the insistence of Frieda, who was nonetheless furious with Max for putting them in such a situation. Nina, distraught, described the situation as a nightmare. Only Paul—ever faithful, ever loyal to Max—never wavered, even though he was keenly disappointed that Max had chosen the rescue option.

  Writing to Jimmy, Paul acknowledged the financial sacrifice involved in saving Max. Then he went on: “Still, it is the right thing to do. What good does money do us if we lose our good name and desert those we love—even though they acted like idiots.” The letter breathed a fine, selfless spirit of love for Max. “I do not like—and never did—to hit a man when he is down, and particularly not when I love him as dearly and pity him from the bottom of my heart. On the other hand, I am truly incensed and I believe that we must be severe, or things will drift along as they did in the past.… But what a terrible end [for Max] after so brave a fight and a life so full of generosity and devotion.”22 Just as Nazi propaganda was pounding the theme of Jewish greed, Paul and Felix showed an exemplary indifference to money in a matter of family honor.

  To his credit, Jimmy responded with gallantry when presented with this fait accompli. “I must say you and Felix are a great pair of brothers to have,” he wrote to his father. “In your shoes I would have done the same thing, but I honestly couldn’t have advised you to do it, because so far as the money is concerned, I think it’s thrown out of the window in a lost cause. As I said in my memo, I don’t believe that Max is capable of changing himself to the extent that would be required to give the business any kind of a chance. Nevertheless, this way we ought to be sure of a decent funeral with full military honors.…”23 Ending on a brave note, he said he and Kay were still young and healthy and could survive on his reduced salary.

  Beyond the $2.25 million given in February, Paul and Felix extended another $1 million in July. They also assumed $2.5 million in obligations Max owed to the IAB and the Bank of the Manhattan Trust and guaranteed another $1.3 million in syndicate participations. In October, the two brothers split a further $1.78 million advance to M. M. Warburg, bringing the total to almost $9 million. Paul’s contribution represented more than half his entire fortune. As corporate conduit for these loans, the American Warburgs created something called the Kara Corporation. Although this entity effectively owned the Hamburg bank, Paul and Felix transferred control back to Max and his partners, asking only for interest on their loan. They accepted junior status among creditors—that is, if bankruptcy came, they would be the last to be paid.

  Later on, Jimmy repeatedly told the story of how he had convinced the American Warburgs to save M. M. Warburg. He allowed this fallacious legend to circulate and enjoyed some family glory as a result. As he wrote, posing as the modest hero, “Later, when Max got into trouble, it was my lot to insist that he be given the extremely costly help required to keep the old family firm afloat.”24 Eric always believed that Jimmy had persuaded Paul and Felix, quite against their will, to shore up the bank. Yet Jimmy had advocated killing the bank and never completely forgave Max for demanding such a sacrifice. The need for this rescue created a certain coolness between the German and American branches of the family.

  In his autobiography, Jimmy also narrated a dramatic tale of how he put together a scheme to rescue the Danat Bank and the German banking system. What he omitted to say was that it camouflaged a scheme to save Uncle Max. At a family war council in July, Paul and Felix decided that they wouldn’t contribute further bail-out money unless M. M. Warburg merged with a stronger institution. In that event, they would provide the “dowry” for the marriage.

  At this point, Jimmy had a brainstorm. President Hoover had just declared a moratorium on reparations. American banks also agreed to extend their short-term credits to Germany, starting the so-called Standstill Agreement. This left many American firms with idle deposits sitting in German banks. A superb salesman, Jimmy convinced these firms to convert twelve and a half million dollars of such deposits into capital to bolster the Danat Bank. Danat would sell its retail deposits and branch network to the Dresdner Ba
nk, then merge its wholesale operation with M. M. Warburg. As Jimmy informed the Danat Bank, the American banks would only participate “with the stipulation that our Hamburg friends, M. M. Warburg & Co., be induced to bring the greater part of their personnel and their business.”25 The new institution would be at least partly piloted by Warburg partners. An elaborate face-saving exercise for Uncle Max, it would let him go bust with dignity intact.

  The soundings that Jimmy and his cousin, Siegmund (Aby S.’s nephew, now an M. M. Warburg partner) took in Berlin suggested that Chancellor Brüning would be pleased by the plan, which might restore confidence in the banks. In late August, Max, Siegmund, and Jimmy laid the plan before Brüning, who listened attentively. They presented an impressive list of blue-chip firms prepared to participate: General Electric; General Motors; IT&T; International Harvester; Kuhn, Loeb; and Hambros Bank. “As he listened,” recalled Jimmy, “the eyes behind his spectacles filled with tears. Finally he said, ’Gentlemen, this is like manna from heaven. I should like you to talk about this to [Reichsbank president] Luther without delay.”26 Overjoyed, Brüning told them that unless significant Reichstag opposition developed, the plan could be enacted in three days.27

  A snag developed over a secret, ten-million-mark asset at Danat that was inscrutably labeled “Account X” on the books. Bank officials wouldn’t disclose its nature and Brüning promised to probe the matter. For a week, the chancellor dodged the Warburgs until Jimmy, exasperated, said the American offer would expire in forty-eight hours unless they heard from Brüning. The chancellor invited him in that afternoon, but didn’t ask him to sit down. Again with tears in his eyes, he expressed gratitude, but, without elaborating, said he had to decline the American offer. Only years later did the Warburgs learn the mystery behind Account X, which represented a bad loan to President Hindenburg’s spendthrift son, Oskar. Rather than expose this scandal, Brüning rebuffed the rescue plan. Two years later, Hitler would blackmail Oskar about his tax evasion and other financial improprieties.28 The whole affair was an agonizing lesson in political cowardice for Jimmy. “It was now more than ever clear to me that Hitler’s accession to power was only a matter of time.… Had the banking collapse been prevented, it would have cut one leg out from under the Nazi drive for power.”29

  The strenuous summer of worry took its toll on Paul, who had to skip his usual vacation. When England went off the gold standard in September, he thought the world had been seized by financial madness. Governments were abandoning sacred rules that had governed global finance for generations. Frieda dated Paul’s irreversible illness from that news. “I have studied finance and economics and international trade all my life, and now, after these recent events, I have come to the conclusion that I know nothing whatever about any of them,” Paul was supposed to have said in his last days.30 An economic fatalist, he believed busts could only be prevented by dampening the preceding booms. Thanks to syndicates, cartels, and protectionism, the world had built and produced too much. Both Paul and Jimmy blamed the twin burdens of reparations and Allied war debt for the artificial prosperity of the 1920s and the subsequent Depression. Until his last days, Paul pleaded for a lightening of German reparations.

  Suffering fatigue and eyestrain, Paul heeded doctors’ orders and took a rest at White Sulphur Springs in West Virginia. When Paul met him at the dock in November, Jimmy saw from his drawn face that his father was a broken man. Jimmy and Bettina found something listless about Paul, his vital spark extinguished. In December, he had a stroke, though his family thought he would recover. Then he developed pneumonia and lay in a coma for weeks. On December 10, Jimmy succeeded him as president of the International Acceptance Bank. “During his lucid moments he spoke to me about many things but never once mentioned his brother Max or the Hamburg firm,” said Jimmy of his father’s last days. “I am convinced that what had destroyed his will to go on living was that Max, for whom he had throughout his life felt a younger brother’s slave-like devotion, had let him down.”31

  When Paul died on January 24, 1932, at his East Eightieth Street home, Felix, Nina, Jimmy, Kay, and Bettina congregated at his bedside. As Jimmy said, this Cassandra died “with his world tumbling about his ears.”32 Perhaps the most gifted financier of his day, he was buried at Sleepy Hollow Cemetery above the Hudson River.

  There would be acrimonious disputes among the Warburgs as to whether Max had inadvertently hastened Paul’s death. Jimmy believed Max had abused his brother’s generosity. As he told Max’s daughter, “I am not the only one who felt sure that he [Paul] simply did not want to go on living when his idol turned out to have feet of clay; it was not just my ‘assumption.” ’33 Bettina always spoke sarcastically about Max, whom she thought hid a selfish agenda behind grandiose pronouncements. She nicknamed him “Maxie the Taxi,” saying, “Max expected you to do everything, not for him, but allegedly for the firm. He was too clever to be autocratic.”34 In explaining Paul’s death, Max emphasized his worries over the frenzied finance of the 1920s. On the threshold of the Third Reich, he had lost a wise counselor and irreplaceable confidant.

  With Paul’s death, the public saw that he had pursued public service to the detriment of his personal fortune. At first, The New York Times estimated his worth at fifty million dollars and hinted that the real amount might be double or triple that. In fact, his estate came to two and a half million dollars—about half of what he had spent for brother Max. On his deathbed, Paul made Jimmy and Bettina promise to support Nina in her accustomed style. In a farewell note to Nina, he wrote: “Whatever may happen to this miserable heap of bones of mine, my love will always remain with you and shield you from loneliness.… I believe in the story of the blue bird. As long as people think of those that have departed, so long do they live.”35

  Felix commissioned Malvina Hoffman to sculpt Paul’s head, and she struggled with the assignment for a long time. Then one morning, she telephoned Felix and said, “Paul came to my studio last night and sat for the sculpture.” Felix went to the studio and, sure enough, this lady of the mystical bent had completed the head.36

  Jimmy memorialized his father in a series of highly personal poems that reveal the libertine son’s sense of guilt before the revered but straitlaced father. He dwelled on Paul’s power to avoid temptation, to stick to the straight and narrow path. He couldn’t seem to praise his father without flagellating himself. As he wrote:

  How many words of counsel, ripe and sage,

  Have fallen from your kindly lips and lain,

  Unheeded in the dust,

  When I was arrogant and vain

  And scornful of the wise and just?37

  This season of death and financial crisis forever alienated Jimmy from his family. Twice in 1932, Felix sent Jimmy back to Hamburg to straighten out the firm, and the two operated in a more bare-knuckled style than while Paul was alive. Over Max’s objections, they devised numerous schemes to salvage the bank in some shrunken form. The American Warburgs always suspected that their German relatives lived extravagantly and Jimmy oversaw an austerity drive, subjecting his older uncles to an inquisition about their spending habits. It was a degrading routine: Max and Fritz had to justify sending their daughters, Gisela and Ingrid, to Oxford. Eric and Max assured Jimmy they needed their spas and sailing trips to cope with these tense times.

  Jimmy and Felix saw the Warburg bank as consumed by turf battles. In a stunning vote of no confidence—one Paul would never have countenanced—Max was stripped of his supervisory role and prohibited from leading board meetings. Because Jimmy thought Fritz lazy and inept, he banned him outright from meetings and decreed that he couldn’t interfere with business in any way.38 It was a brutal business. Jimmy found an ally in Siegmund, the other young prodigy, who liked Jimmy’s brash intelligence and fully shared his doubts about Max’s ability.

  In late 1931, M. M. Warburg formed a joint venture with one of the few major banks that had weathered the year well: the Berliner Handels-Gesellschaft, associated with the Für
stenberg family. The venture was supposed to initiate closer links, but it never led to full fusion. From the Jimmy-Felix correspondence, it seems clear that they wanted to give M. M. Warburg a dignified funeral, not to resurrect it. Felix wouldn’t issue a blanket guarantee that it would survive and referred scornfully to Max’s “palace” on the Ferdinandstrasse, which he thought had saddled the firm with high overhead. Jimmy sold many of M. M. Warburg’s investments in central Europe and attempted to relegate Max to a humbler future role. Max resented the joint venture with the Berliner Handels-Gesellschaft, which forced him to play the junior partner. As Jimmy told Felix, “The relationship with the Handels-Gesellschaft has worked out excellently—due very largely to Siegmund’s persistency, and more or less over Max’s dead body.”39 This tension between Siegmund and Max began to intensify a feud that would eventually turn the whole Warburg empire topsy-turvy.

  In a similarly unsentimental fashion, Jimmy wanted to shutter Warburg & Co., the Amsterdam affiliate. Endowed with better instincts, Felix suspected it might someday offer a convenient escape route for the family. “It might be advisable to keep it alive just in case Hitlerism makes living for the family so outrageously disagreeable that it might want to have another pied-à-terre to move to.”40 Jimmy agreed with Felix’s political fears; by the time he left Germany in spring 1932, he thought nothing could stem the Nazi tide or protect the Warburgs. “When I said good-bye to my uncle Max and my Hamburg friends, I did so with a feeling of sad foreboding. I knew that a chapter in European history had ended.”41

  The Hamburg experience left Jimmy estranged from his relatives there and fed up with family intrigue and infighting. As intermediary in an unpleasant tug-of-war, he had been put into the unfair position of having to dictate policy to his older relatives. Before Paul died, Jimmy told him that he wished to break away from the IAB, and Paul urged him to go to Kuhn, Loeb instead. This missed the point: Jimmy wanted to escape the whole maze of family complications and renounce his place as scion of a famous banking dynasty. “I am perfectly frank to state that I have had my belly full of family businesses and would not of my own choice and free will leave one family business in order to embark upon another.”42 He said he didn’t share the feeling of martyrdom that had compelled Felix’s sons, Freddy and Paul Felix, to enter banking. Indeed, after Paul’s death, Jimmy brushed aside Felix’s offer to join Kuhn, Loeb and he would finally discard all ambition to be a banker. Henceforth, he would be the family renegade, moving apart from the other Warburgs.