It was also, however, a time of opportunity for middle-class men of talent like Schacht. The collapse of empire and an army in defeat shattered the old order. Within forty-eight hours of the kaiser’s flight, twenty-five dynasties had abdicated within Germany. The Junkers who had dominated the country were discredited, their power swept away.
Initially Schacht thought he might find his opportunity in politics. Before the war, he had been a member of the Young Liberal Association, an arm of the National Liberals, a nationalistic though not very liberal party, which had enthusiastically supported the kaiser’s expansionist policies. In 1901, he had even declined an offer from the party to stand for election to the Reichstag, knowing that power in the Kaiserreich was reserved for the nobility, especially the Prussian nobility, and that a man of his background could not aspire to political office of any consequence. But with the new president of the republic himself a former saddler and the new chancellor a former journalist, it seemed that the old caste system had now disintegrated.
On November 10, the republic only a day old, Schacht was invited to a meeting and asked to help found a new moderate party, the Deutsche Demokratische Partei (DDP), which would oppose alike the socialism of the left and the nationalism of the right. The DDP itself would briefly do very well, becoming a party of academics, journalists, and businessmen, many of them Jewish, and attracting such luminaries as Max Weber and Albert Einstein. In the 1919 election, it vaulted into third place in the Reichstag, after the Socialists and the Catholic Centrum Party.
But Schacht’s brief flirtation with democratic politics was not destined to be very successful. With his financial and business connections, he played an important role in raising funds for the DDP, and helped write the party platform. But lacking the common touch that appealed to voters and too proud to forge the necessary personal alliances, he was never able to persuade a constituency to select him as a candidate. He was also viewed with some suspicion within the leadership, whose leading light, Theodor Woolf, editor of the Berliner Tageblatt, regarded him as just one more opportunist trying to hitch a ride on the cause of democracy, with little commitment to the new republic.
For his part, Schacht would become steadily disillusioned with the party, formally breaking with it in 1925, when it voted to support the elimination of privy purses to the deposed ruling families. In the late 1920s, the DDP, like all German centrist parties, would shrink into insignificance, squeezed from both ends of the political spectrum, particularly from the right. By then, though, Schacht had moved on to bigger things.
It was perhaps not surprising that he had such little success in electoral politics. He was simply a hard man to like. People found him cold and unemotional, overly calculating and shrewd. By his own admission, he came across as “hard . . . callous . . . and buttoned down.” It was partly his appearance. One acquaintance remarked, “He managed to look like a compound of a Prussian reserve officer and a budding Prussian judge who is trying to copy the officer.” His physically distinctive characteristics—the crew cut, the rigid bearing, the stiffly upright posture, the perpetual aggressive scowl—would, after he had become famous, make him a popular target for cartoonists.13 But more than his appearance, it was his character traits—his extreme vanity, his tendency to talk about himself and his achievements, his inflexibility, his caustic wit laced with cynicism—that put people off.
He displayed an astounding self-confidence. This was not a façade, but a reflection of his astonishing sense of innate superiority. He was in many ways a classic lower-middle-class overachiever. Having grown up poor, in a society where class and family background were still overwhelming factors, he had learned the hard way that in a hostile world he could rely only on himself. Whatever success he had achieved, he owed to himself alone—his own formidable intelligence and impressive capacity for hard work. “Nothing seems sacred to him except his belief in himself, and this is so overwhelming as no longer to seem personal. He makes the most exaggeratedly egotistical statements without his hearer being aware of any personal boasting,” wrote one observer. And unlike some men on the make, who cloak their cynicism behind a veneer of charm, he displayed no particular desire to be liked. Much later, when his true colors had been revealed, one politician would write, “He was a man apart, unique, solitary, without followers or any coterie of partisans. He had no friends, only enemies.” But no one could dispute his self-discipline, energy, and unrelenting drive.
THE problem of German reparations—that is, how much of the cost of the war the victors, particularly Britain and France, could demand from Germany—was to haunt the financial landscape of Europe for the next twenty years. The war may have ended, but the conflicts did not stop. At the Paris Peace Conference, which opened in January 1919, no other issue “caused more trouble, contention, hard feeling, and delay,” recalled Thomas Lamont, one of the American negotiators.
Everyone arrived in Paris expecting France, which had suffered the worst civilian damage and heaviest casualties, to be the strongest advocate of punitive reparations against Germany. Instead, it turned out to be Britain. A strong liberal contingent within the British Treasury had developed peace plans based on a moderate settlement. But in the months leading up to the Peace Conference, the press, led by the Times and the Daily Mail, launched a cheap jingoistic campaign in favor of a harsh settlement and, during the December 1918 election campaign, the slogan that the Allies should “squeeze Germany until the pips squeak”14 struck a chord with the electorate.
The British prime minister, David Lloyd George, pandering to public opinion, appointed to the British delegation to the Reparations Commission in Paris three of the most hard-line advocates of a punitive settlement: William Hughes, the doggedly aggressive prime minister of Australia; Lord Sumner, a law lord with a reputation for being “stony-hearted”; and Lord Cunliffe, the boorish and irascible former governor of the Bank of England.
Cunliffe was supposed to be the financial brains of this trio. Although he had been a successful banker and even governor of the Bank of England, he retained his ignorance of the most basic rudiments of economics. In the weeks before departing for Paris, he recommended that Germany be required to pay $100 billion in reparations. It was an astounding figure. Germany’s annual GDP before the war had been around $12 billion. To burden it with a debt eight times its annual income would have been the height of madness. The interest on that debt alone would have consumed 40 percent of its GDP. Though Cunliffe was willing to admit that the basis for the calculation was “little more than a shot in the dark,” which he had been pressed to arrive at “between a Saturday and a Monday,” he speculated that perhaps he had even underestimated Germany’s capacity to pay, and that if anyone argued that Germany could pay $200 billion, he “would not disbelieve him.”
France’s desire for reparations arose from its own sense of vulnerability. Twice invaded by Germany in the last fifty years, France was consumed by the fear of a German revival. Germany was more aggressive, more successful, younger, richer, and more dynamic. It was also 50 percent larger—sixty million Germans versus forty million Frenchmen. Though the French prime minister, George Clemenceau, never actually made the statement attributed to him by German propaganda, that the fundamental problem was that there were twenty million too many Germans, it was clearly in his mind. France was therefore determined to weaken Germany by every means possible—by disarmament, by slicing off as many parts of its neighbor as it could, and by extracting reparations.
During the negotiations in Paris, it became apparent that to the French, money was subsidiary to security. While the French finance minister, Lucien Klotz, kept pushing for high reparations, Clemenceau, the head of the French delegation, treated him with contempt, calling him “the only Jew who knows nothing about money” and marginalizing him along with all the other French cabinet members in the negotiations.15 Clemenceau tried to be flexible on reparations as a bargaining chip with the Americans in return for security guarantees along their bo
rder with Germany. Only when the guarantees proved to be inadequate did he revert to demanding high reparations.
It fell to the American delegation, which included the famous stock market speculator Bernard Baruch; Thomas Lamont of J. P. Morgan and Co.; and a young aide, the thirty-one-year-old John Foster Dulles, to act as the advocates for moderation. They adopted the position that a large reparations bill was incompatible with the initial terms of the armistice agreement under which Germany had laid down its arms. Moreover, they argued that punitive reparations would act as a millstone, not simply around Germany’s neck but around that of all Europe.
The negotiations over reparations dragged on for ten weeks. By the end of March, they were still at an impasse. The British delegation on the Reparations Commission, led by Lord Cunliffe and Lord Sumner, who were by then nicknamed “The Heavenly Twins” because they were always together and insisted on such outrageously high figures, would not agree to a settlement of less than $55 billion.
The Americans preferred a settlement in the region of $10 to $12 billion and would go no higher than $24 billion. Although President Wilson was, for the most part, outnegotiated and outfoxed by the other leaders in Paris, on this point the American delegation stuck to their guns and refused to agree to reparations that exceeded these limits.
Several attempts were made to break the deadlock. Lloyd George himself applied his considerable political skills, but Cunliffe and Sumner refused to budge. Lloyd George’s maxim was never to enter into “costly frontal attacks, either in war or politics, if there was a way round” and he had originally appointed them in the hopes of bamboozling them into endorsing a moderate settlement. Now he found himself captive to their intransigence. His solution was to do an end run around them by proposing, at the last minute, that the Peace Conference defer the assessing of reparations to a later date, delegating it to a specially appointed body, which would be required to make its recommendation no later than May 31, 1921. He hoped that by that time, passions would have cooled, the political climate in Britain would have changed, and a more reasonable settlement could be arranged.
IN THE FIRST few months of 1919, as the Peace Conference was getting under way, Schacht, lulled like many other Germans by the high-minded pronouncements of Woodrow Wilson, still expected a generous peace. He believed that the real problem would be the overhang of debt after the war, which would lead to a general European bankruptcy. He talked naively of a grand plan for reconstruction. The great natural resources of Russia would be opened up for exploitation by a unique partnership between Great Britain and Germany, Britain providing the leadership and capital, Germany the manpower and engineering skills.
In May 1919, when the terms of the peace treaty were finally unveiled to Germany, the whole country exploded in shock and anger. It was to lose one-eighth of its territory. Alsace and Lorraine were to revert to France; the Saar coal mines were also ceded to France; North Schleswig was to be subject to a plebiscite as to whether it wished to become part of Denmark; Upper Silesia, Posen, and West Prussia went to Poland. Both banks of the Rhine were to be permanently demilitarized; the army was to be cut to no more than one hundred thousand men, the navy was to be dismantled, and the merchant marine distributed to the Allies. Though the Allies had delayed fixing the size of reparations, it was widely known that the amounts being mooted were gigantic. In the interim, Germany was required to pay an initial $5 billion before May 1, 1921. A new Reparations Commission, to be based in Paris, was created specifically to determine Germany’s liability and to supervise its collection. The worst humiliation was Article 231, the “article of shame,” which branded Germany as solely responsible for the war.
The reaction within Germany to the peace treaty reached a pitch of hysteria. All forms of public entertainment were suspended for a week as a sign of protest. Flags across the country were lowered to half-mast. The chancellor, Philipp Scheidemann, characterized the terms as “unbearable, unrealizable, and unacceptable,” and proclaimed that it would make the Germans “slaves and helots . . . doing forced labor behind barbed wire and prison bars.” The Germans were given a deadline of five days to agree to the terms or face a resumption of hostilities. Scheidemann resigned rather than put his signature on the document, of which he said, “What hand would not wither which placed this chain upon itself and upon us?” On the day that Germany accepted the terms, its Protestant churches declared a day of national mourning.
Behind all the divisions that were to wrack Germany for the next few years, the one single factor that united every class and every political party—democrats and royalists, liberals and Socialists, Catholics and Protestants, northerners and southerners, Prussians, Bavarians, Saxons, and Hessians—was the injustice of the peace treaty, or as it was called the Diktat. And of all the various penalties heaped on Germany by the treaty—disarmament, dismemberment, occupation, and reparations—it was reparations that would become the single most consuming obsession of German foreign policy. Germany had meekly agreed to reduce its military machine to a shadow of its former power, thus leaving it impotent to do anything about the loss of territory or of its colonies. Only on reparations did Germany seem able to fight back. It discovered what every large debtor at some point discovers: that when one owes a large amount of money, threatening to default can give one the upper hand.
Schacht’s first introduction to the issue of reparations came in the fall of 1919. He was asked to join a group of industrialists and businessmen sent to The Hague to negotiate with the Allied commission on the delivery of goods in kind as part of the interim settlement. The German delegation was subjected to a litany of petty humiliations: they were forced to stay at the worst hotel, given bad food, their movements restricted, and they were openly followed. Finally, during the negotiations themselves, they were not even provided with chairs but were required to stand. When Schacht complained, he was told, “You seem to forget that your country lost the war.” It was Schacht’s first encounter with what he was to call the “medieval arrogance” of the victors.
IRONICALLY, IT WAS not a German but an Englishman who launched the most devastating attack on reparations. In November 1919, John Maynard Keynes, the young Cambridge don, published The Economic Consequences of the Peace. In the book Keynes argued that in order for Germany to earn the money to pay the Allies, it would have to sell more goods than it bought, and its trade partners would have to be willing to absorb this large influx of goods, with potentially crippling consequences for their own industries. It was therefore in the Allies’ own self-interest to moderate their demands. As he put it, “If Germany is to be milked, she must not first of all be ruined.” He concluded that the most Germany could afford to pay, without causing a massive disruption of world trade, was around $6 billion.
The book became an immediate best seller; over one hundred thousand copies were bought worldwide in its first six months alone. It was serialized in the United States in the New Republic and in France by La Nouvelle Revue Française and translated into French, German, Dutch, Flemish, Danish, Swedish, Italian, Spanish, Romanian, Russian, Japanese, and Chinese. At the age of thirty-six, Keynes’s brilliant pen had carried him to fame, not merely in Britain but across the world.
From an early age, people had remarked on young Maynard’s intellect, which had been carefully nurtured from his childhood. Born in 1883, in Cambridge, England, he spent most of his life in and around Cambridge University. His father, John Neville Keynes, was a don, a philosopher, and logician of great early promise but little ambition who had drifted into university administration. Maynard spent four years at Eton, where he was one of those golden boys known both for their extraordinary academic achievement and their social popularity, and in 1902 he entered King’s College, Cambridge, to read mathematics. He was soon elected to that elite intellectual society nicknamed “the Apostles,” which already included G. E. Moore, Bertrand Russell, and Lytton Strachey. He spent his years at Cambridge absorbed in a hothouse combination of high-minded ph
ilosophical debate and homoerotic entanglements with his fellow Apostles. Even Bertrand Russell, rarely impressed by other people’s brainpower, wrote that Keynes’ intellect was “the sharpest and clearest that I have ever known.”
After graduating in 1904, Keynes briefly tried to escape the university by joining the India Office as a “clerk”—he had only come second in the civil service exams and missed being selected for the Treasury, though he would characteristically insist that it was because “I evidently knew more about economics than my examiners.” Within a year of going to the India Office, he resigned. Even though the hours were not at all taxing—he worked from 11:00 a.m to 5:00 p.m. on weekdays, 11:00 a.m. to 1:00 p.m. on Saturdays, and had eight weeks’ vacation a year plus Derby Day—he had found that he did not have enough to do. His assignments included organizing the shipment of ten Ayrshire bulls to Bombay and preparing an annual report to Parliament, “The Moral and Material Progress of India.” Amused by the Victorian pomposity of the whole exercise, he joked to Lytton Strachey that he planned to include “an illustrated appendix on Sodomy.” Bored with the work and finding it difficult to restrain his natural irreverence toward authority, he returned to Cambridge.
While he almost immediately gained a lectureship in economics at the university, his first love had always been philosophy. In 1909, he began work on a book on the philosophical foundations of probability, which he hoped would change the way philosophers thought about uncertainty. The themes of the book—that nothing can be known with certainty, that it is hard to define what is a rational course of action when the future is so indeterminate, that intuition rather than analysis provides the ultimate basis for action in these circumstances—were to color much of his later economic thinking and his almost equally remarkable ability to make money from speculating.
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