Lords of Finance

by Liaquat Ahamed

  Doctorate in hand, Schacht began a career in public relations, initially at an export trade association, writing economic commentary for a Prussian journal on the side. Diligent and reliable, eager to impress the bankers and business magnates whom he was now beginning to meet, in 1902, he finally caught the attention of a board member of the Dresdner Bank and was offered a job. He rose quickly and, by 1914, was a well-established middle-level officer of one of the powerful banks in Berlin.

  In imperial Germany, a man of Schacht’s background would have found his opportunities for advancement in the military or the civil service limited. But in the years leading up to the war, Germany had gone from being an agrarian backwater at the edge of Western Europe, to becoming its leading industrial power, overtaking even Britain—an economic surge that had thrown open enormous opportunities in business to ambitious men. It was a particularly good time to be a banker, for in no other European country were banks quite so powerful. While Berlin still could not compete with either London or even Paris as an international financial center, the large German houses dominated the domestic economic landscape as the main suppliers of long-term capital to industry.

  Disguising his social insecurities behind a stiffly formal exterior, Schacht seemed to possess a natural ability to get himself noticed. In 1905, his fluency in English got him sent with a member of the Dresdner’s board to the United States, where they met with President Theodore Roosevelt, and more important for a young banker, were invited to lunch in the partners’ dining room at J. P. Morgan & Co.

  He also married well—to the daughter of a Prussian police officer who had been assigned to the imperial court. By 1914, they had two children, the eleven-year-old Lisa and the four-year-old Jens, and were living in a small villa in the western garden suburb of Zehlendorf, from which Schacht commuted to and from work into the Potsdammerplatz station on one of the modern electric trains that now linked all of Berlin.

  As SCHACHT WATCHED the international crisis grow, he continued to hope, even until the end of July, for a last-minute diplomatic solution. Though he insisted that it would never come to war, this assertion stemmed primarily from wishful thinking. He had done well for himself in imperial Germany, had much to lose, and found it difficult to look at his own country dispassionately. For despite his liberal family background, he was a typical product of the Kaiserreich—conformist, unquestioningly nationalistic, and fiercely proud of his country and its material and intellectual achievements.

  Like most other German bankers and businessmen, he believed that the villain of the piece was a fading Britain conspiring to deny Germany its rightful place among the Great Powers. As he later wrote, “Germany’s steady advance in the world’s markets had aroused the antagonism of those older industrial countries, who felt their chances in the markets were being threatened.” England in particular had “engaged in creating a strong network of alliances and agreements directed against Germany,” designed to encircle it.

  That last few days of July 1914 constituted a whispering gallery of rumors and counterrumors. Berlin was gripped by alternating waves of war hysteria and anxiety. From the Dresdner Bank’s headquarters next to the Opera House on the Bebelplatz, Schacht had a ringside seat at the epic drama being enacted in the streets below. Daily, huge crowds of people paraded under the great limes of Unter den Linden, singing “Deutschland, Deutschland, Über Alles” and other patriotic songs. Several times that week angry mobs attempted to storm the Russian embassy, only a few blocks away from his office.

  Finally, on Friday, July 31, at 5:00 p.m. a lone lieutenant of the Grenadier Guards climbed up on the base of the giant equestrian statue of Frederick the Great, which divided Unter den Linden just outside the Dresdner’s offices, to read a proclamation in the emperor’s name. The Russians had ordered a general mobilization. A state of Drohende Kriegsfahr, imminent danger of war, was in force in Germany—still one step away from a declaration of war, but placing the city of Berlin under full military control.

  The next day, when a general mobilization was announced, the streets went wild with excitement. Pubs and beer gardens stayed open all night. A craze of spy hunting swept over the city and the country. Anyone suspected of being a Russian agent, including a few German soldiers, was beaten to death. On August 3, Germany declared war on France, and to reach France, invaded Belgium the next morning. Britain, which had guaranteed Belgian neutrality since 1839, issued an ultimatum to Germany to withdraw. When this expired at midnight on August 4 and Germany found herself at war with Britain, a large “howling mob” stoned all the windows of the British embassy, then moved on to the Hotel Adlon next door to demand the heads of English journalists staying there. Bizarre rumors spread through the country. According to one police report, “The Paris banking house of Mendelssohn is trying to send a hundred million francs, in gold, across Germany to Russia.” The hunt for “gold cars” became a curious obsession in the countryside; vehicles driven by innocent Germans were accosted by armed peasants and gamekeepers. A German countess and a duchess were even shot by accident.

  Nevertheless, despite the public hysteria, those first few days of war proved to be relatively benign. Germany seemed to be weathering the financial storm that swept across Europe remarkably well—in Schacht’s view, far better than was Britain. There were some minor debacles. The collapse of stock values in the last week of July put several banks in Germany in difficulties—the Norddeutsche Handelsbank, one of the largest banks in Hanover, had to close its doors—and was accompanied by the usual litany of suicides by overextended financiers. One of the best-known bankers in Thuringia shot himself on Wednesday, July 29, and the next day a private banker in Potsdam killed his wife, then took cyanide himself.

  But for all this turmoil among the rich, the general public remained remarkably calm. There was a nationwide run on small savings institutions, and long lines of women, many of them domestic servants and factory workers, could be seen patiently waiting outside the city municipal savings banks to withdraw their deposits. But there was none of the usual panic demand for gold that in those days routinely accompanied entry into war, and the Reichsbank lost only about $25 million of its $500 million in gold reserves in the first few days.

  It was no secret that the Reichsbank had been preparing against such an event for several years. The financial spadework had begun in earnest after the Agadir crisis of 1911 when Germany decided deliberately to provoke a confrontation with France over Morocco. In the middle of the crisis, Germany was hit by a financial panic. The stock market plunged by 30 percent in a single day, there was a run on banks across the country as the public lost its nerve and started cashing in currency notes for gold, and the Reichsbank lost a fifth of its gold reserves in the space of a month. Some of this was rumored to have been caused by a withdrawal of funds by French and Russian banks, supposedly orchestrated by the French finance minister. The Reichsbank came close to falling below the statutory minimum of gold backing against its currency notes. Faced with the potential humiliation of being driven off the gold standard, the kaiser backed down and had to watch impotently while the French ended up taking over most of Morocco.

  A few months later, the emperor, still nursing his wounded pride, summoned a group of bankers, including the president of the Reichsbank, Rudolf von Havenstein, and demanded to know whether German banks were capable of financing a European war. When they hesitated, he reputedly told them, “The next time I ask that question, I expect a different answer from you gentlemen.”

  After that episode, the German government was determined that it would never again allow itself to be financially blackmailed. Banks were told to build up their gold reserves, the Reichsbank itself increasing its holdings from $200 million at the time of Agadir to $500 million in 1914—by comparison, the Bank of England held only some $200 million. The government even revived a plan originally conceived by Frederick the Great back in the eighteenth century for a war chest of bullion—$75 million in gold and silver—stored in t
he Julius Tower in the fortress of Spandau on the western outskirts of Berlin. Furthermore, to prevent the sort of raid on the mark that the French had allegedly orchestrated in the Moroccan crisis, the Reichsbank instructed banks to curb the amount of money taken on deposit from foreigners.

  With all these measures under its belt, the Reichsbank entered August 1914 with large enough gold reserves on hand to feel confident about avoiding a replay of 1911 and was also quick, once the crisis became apparent, to take preemptive action by suspending the gold convertibility of the mark on July 31.

  But as Schacht watched the long columns of soldiers in their field-grey uniforms marching through the cheering, weeping crowds of Berlin, he could not help thinking back to Prince Bismarck. The Iron Chancellor had spent his whole career making sure that Germany would not be so isolated within Europe that it would have to fight a war on two fronts against Russia and France. As a schoolboy of seventeen, Schacht had attended a torchlight procession staged in honor of the prince, then seventy-nine years old, in retirement at his estate at Friedrichsruh in the Saxon Forest, just outside Hamburg. The image of “a tremendous solemnity [emanating] from the old man as though he alone foresaw how onerous and dark the future would be” engraved itself on Schacht’s memory. He liked to think that during the parade Bismarck had cast that piercing look directly at him in an attempt to warn the young man and the other school-boys gathered there, not to “allow his work to be carelessly destroyed.” Even in youth, Schacht had a vivid imagination and a grandiose vision of his own destiny.

  4. A SAFE PAIR OF HANDS

  THE United States: 1914

  Show me a hero and I will write you a tragedy.

  —F. SCOTT FITZGERALD

  AMONG THE MANY thousands of Americans in Europe during that last summer of peace were Benjamin Strong, the forty-one-year-old president of the Bankers Trust Company, and his beautiful twenty-six-year-old wife, Katharine. Theirs was a leisurely trip, combining work and pleasure. Strong had been elected president of the bank in January, following the retirement of his father-in-law, Edmund Converse, and this was his first extended vacation since taking over. He had left the United States in the middle of May and, after visiting Paris on business, met up with Katharine in Berlin. They spent several weeks there with Katharine’s older sister, the baroness Antoinette von Romberg, who had moved to Berlin in 1907 after a highly public divorce and child-custody battle in New York, and married Baron Maximilien von Romberg, a Prussian aristocrat and captain in the Eighteenth Fusiliers.5 The Strongs then proceeded to London and were in England when news of the archduke’s assassination arrived. However, the reaction of the financial markets was muted, and they felt no need to rush home. Instead, they remained in London for several weeks, not sailing back to America until late July.

  Benjamin Strong in 1914

  They returned to a New York more concerned about the threats to business prosperity from the Democratic administration than about a European conflagration. By the last week of July, Strong was back at his office at 14 Wall Street. At thirty-seven stories high, the Bankers Trust headquarters was one of the great signature buildings of the financial district, the third tallest in the city, its crown a granite seven-story stepped pyramid, visible for miles around. Finished from floor to ceiling in the most delicate Tavernelle Clair cream-colored Italian marble, the bank’s offices were among the most luxurious in the city.

  In the mere twelve years since its founding, Bankers Trust had grown more than thirtyfold. With deposits of close to $200 million, it was the second largest trust company in the country and considered one of the dominant institutions on Wall Street. Nevertheless, it was still surrounded with a certain mystery. In 1912, during the Pujo Committee hearings on the power of New York banks and the “money trust,” it came to light that though Bankers Trust had numerous stockholders, the entire voting power was vested in the hands of just three trustees: Henry Davison, a senior partner at J. P. Morgan & Co.; George Case of White and Case, Morgan’s principal counsel; and Daniel Reid, a founder and executive of Morgan-controlled U.S. Steel. The fact that a penthouse apartment had been specially constructed on the thirty-first floor of the Bankers Trust building for Pierpont Morgan himself6 only served to confirm the widely held view that Bankers Trust was simply one more manifestation of the power of the House of Morgan.

  The summer had been very quiet on Wall Street. After a bull market that had stretched through the first few years of the century, stocks had been flat for almost four years, and the volume of trading was low. Membersof the exchange had taken advantage of the July lull in trading to move to their summer homes on Long Island or the Jersey shore. The first signs of crisis hit New York on Tuesday, July 28, when Austria declared war on Serbia. The Dow fell by 3 points from 79 to 76, a decline of 4 percent, but the next day seemed to recover its poise, despite the suspension of trading on the major markets across Europe, from Rome to Brussels, including the largest on the Continent, Berlin. On Thursday, July 30, the United States woke to news of a Russian general mobilization, and stocks experienced their single largest down day since the panic of 1907, falling 7 percent.

  Although no one saw even a remote likelihood that the United States would become involved, it was widely feared that as the biggest importer of capital in the world, it would be badly hurt by a shutdown of international credit. Some $500 million in European loans to Americans was scheduled to fall due between the beginning of August and the end of the year. Under normal circumstances, it would have been taken for granted that these would be rolled over. But in the current situation, there was a risk that European investors would demand immediate repayment, while at the same time exports might be hit because of threats to shipping. Over the next few days, the dollar, normally fixed at $4.86 to the pound, fell dramatically as American borrowers scrambled to cover their debts falling due with gold and European currencies, especially sterling.

  Late on Thursday, July 30, Strong was summoned to a meeting at the temporary offices of J. P. Morgan & Co. at 15 Broad Street—the headquarters at 23 Wall Street were being reconstructed. The city’s inner circle of banking officials were there: Jack Morgan, the nominal head of the House of Morgan and son of the founder; Henry Davison, the senior partner; A. Barton Hepburn, chairman of the Chase National Bank; Francis L. Hine, president of the First National Bank; and Charles Sabin of the Guaranty Trust Company. The gathering broke up early. Anxious to avoid compounding the general alarm now tottering on the edge of panic, the participants adopted the time-honored tradition of captains of finance everywhere and issued a series of anodyne statements that were heavily economical with the truth: they “were so little worried that they were dispersing to go out of New York.” Jack Morgan declared that he was returning to the yacht party from which he had been summoned; Henry Davison said that he was leaving for his summer home on Long Island.

  But the following morning, once the news hit New York that even the London exchange had been forced to suspend trading, the same bankers met again—this time joined by Frank Vanderlip of the National City Bank and Dwight Morrow, one of the new Morgan partners—and decided to close the New York Stock Exchange.

  AMONG THE EIGHT men gathered at the House of Morgan that Friday morning in August, the one who seemed to understand best the significance of the tempest of events was Henry Davison, Jack Morgan’s right-hand man—he essentially ran the firm while Morgan, the largest capital partner, lived the life of an English squire. A few days after the meeting, Davison telegraphed his colleague, Thomas Lamont, who was trout fishing in Montana. “The credit of all Europe has broken down absolutely. Specie payments suspended and moratorium in force in France and practically in all countries, though not officially in England . . . it is as if we had had an earthquake, are as yet somewhat stunned, but will soon get to righting things.” Even then, as the dollar plummeted, money flooded out of the United States, and borrowers struggled to remain solvent, Davison’s intuition told him that this was to be a time of new openin
gs for himself, for the House of Morgan, and for the country.

  But then Henry Davison had a remarkable nose for opportunity. He was a self-made man. In this, he was not unusual. In fact, the only one of the eight barons of Wall Street meeting that day to have inherited his wealth was Jack Morgan. A. Barton Hepburn had been a professor of mathematics before entering the world of finance. Several had not even gone to college. Frank Vanderlip had grown up on a farm in Illinois and started his career as a journalist. Charles Sabin had begun as a flour salesman, going into banking only when an Albany firm hired him because it needed a pitcher for its baseball team. Davison himself had grown up in the hardscrabble hills of north central Pennsylvania, the son of an itinerant plow salesman.

  While Benjamin Strong, the youngest of the eight men at the Morgan meeting, had neither been born to wealth nor had attended college, he had most of the other advantages that a ruling-class background could provide. Tall and slim, good-looking but for a prematurely receding hairline and a large nose that spoke of ruthlessness, he exuded the confidence of the Ivy League athletic star. Born of good Yankee stock and able to trace his roots back to a Puritan family that had landed in Massachusetts from Taunton, England, in 1630, he came from a line of merchants and bankers. Benjamin’s great-grandfather, also named Benjamin, had been Alexander Hamilton’s clerk at the U.S. Treasury and one of the founders of the Seaman’s Bank. Members of the family, all extremely conscious of their social obligations, were very active in church affairs. The first Benjamin Strong was on the Executive Committee of the American Bible Association and his son Oliver became president of the Society for the Reformation of Delinquents. Strong’s mother’s family had similar roots—her father was a minister and sat on the Presbyterian Board of Publications.