Lords of Finance

by Liaquat Ahamed

  The other was short and fat, with an enormous head, his bloated face pasty from overindulgence and lack of exercise. With his easy smile and gregarious manner, he looked like a classic lower-class Berliner, crude, brash, but good-hearted. This was Gustav Stresemann, who just three months before had become chancellor of Germany. He was indeed what he appeared to be: a Berliner from the lower middle classes, son of an innkeeper and beer distributor, though he had himself received a doctorate in economics from the University of Berlin, and had been a professional politician and corporate lobbyist since the age of twenty-two.

  November 9, the next day, was the fifth anniversary of the flight of the kaiser. The night before, the Soviet embassy had hosted a grand party to celebrate the joint anniversaries of its own revolution and that of Germany, but Stresemann had excused himself on the grounds of state business. For the last two days, he had been locked in conference with members of his cabinet trying to find a way of averting the country’s imminent bankruptcy.

  On November 5, the price of a two-kilo loaf of bread had soared from 20 billion marks to 140 billion, sparking off nationwide riots. In Berlin, thousands of men and women had paraded the streets, shouting “Bread and work!” Over a thousand shops—bakeries, butchers, and even clothing stores—had been looted. Even in the city’s chic west end, cars had been held up and the occupants robbed. In the heavily Jewish areas to the east around the Alexanderplatz, anyone who was known to be Jewish or “looked Jewish” had been attacked by gangs of young hoodlums. The worst violence was directed at Galician Jews, many of whom had their distinctive beards scissored off or their clothes ripped away. The Börse, the stock exchange, had come under siege by a mob shouting, “Kill the Börse Jews.”

  But by the evening of November 8, the streets were at last quiet, the mobs dispersed at bayonet point by military police. Heavily armed Prussian State Police in green uniforms now patrolled the city. After an abnormally hot Indian summer, the weather had turned extremely cold. That night, it had begun to rain, making life even more difficult for those innumerable Berliners forced to queue up outside the municipal food kitchens and public feeding stations spread across the city.

  The Hotel Continental was located in the center of Berlin, just off the tree-lined boulevard of Unter den Linden. Though not one of the major hotels, it was conveniently close to the Reichstag and sufficiently discreet and unobtrusive for Schacht and Stresemann to meet without drawing too much attention to themselves. Neither would have wished to be seen at one of the great fashionable meeting places, the Adlon on Pariserplatz or the Bristol on Unter den Linden, among all the nouveaux riches—the so-called Raffkes and Schiebers, fat, coarse men who had made their money from profiteering during those last few feverish years and who could always be found in the big hotels, drinking champagne and gorging on oysters and caviar.

  Despite the riots and the rain, the infamously louche and tawdry nightlife of Berlin—that new “Babylon of the world”—continued unabated. On the Friedrichstrasse and along Kurfürstendamm, the bars and dance halls were, as always, full. As on every night, hordes of prostitutes of both sexes—there were said to be a hundred thousand of them in Berlin alone—paraded outside in the strangest and most exotic costumes. “A kind of madness” had taken hold of the city, unhinging the whole society. Fortunes were made overnight and as quickly lost or dissipated. Those with money, desperate to be rid of it before it became worthless, indulged in giddy frenzies of spending, while those without sold what few possessions remained to them, including their bodies, in the struggle to survive. A quarter of the city’s schoolchildren suffered from malnutrition.

  Berlin had never been an elegant city. Before the war, people thought that it was too close a reflection of the personality of its emperor—brash, self-important, and vulgar—the “German Chicago,” Mark Twain had called it. But it had rightly prided itself on being the cleanest and most modern metropolis in Europe. Now it was shabby and going to seed, faded and run down like a “stone-grey corpse,” infested by “beggars, whores, invalids and fat-necked speculators,” its streets crowded by “legless war veterans riding the sidewalks on rolling planks” and by stunted, bowlegged children bent out of shape by rickets.

  STRESEMANN HAD BEEN called upon to form a government that August, when the previous coalition had collapsed, the sixth to fall in five years. He was thought to be the one man politically skillful enough to be able to bring together all the democratic parties—the Socialists, the Catholics, the liberals of the center—into a “Great Coalition” that could try to come to grips with a Germany on the verge of disintegration.

  He had had not one but two improbable political careers. Before the war, despite his lower-middle-class background—which twice led the kaiser to snub him conspicuously by publicly refusing to shake hands—he had been an ardent monarchist, a fervent militarist and, as head of the National Liberal Party in the Reichstag, a blind supporter of the military during the war. Known as “Ludendorff’s young man” because of his loyalty to the Imperial High Command, he had been an advocate of the whole nationalist agenda—annexation, German expansion, and the campaign of unrestricted submarine warfare that had so angered the Americans. When the military broke down at the end of the war, Stresemann had been left, like so many other politicians of the imperial era, humiliated and discredited. Though he was still only forty years old, his political career seemed to be over. But in the five years since the revolution, he had steadily rebuilt his political image, transforming himself from a jingoistic warmonger to a trusted pillar of the new democracy, though many believed that his conversion was a sham.

  Stresemann took over a country in deep crisis. The year 1923 had seen an oppressively hot summer of riots and strikes across a Germany genuinely close to breaking apart. In Saxony, the Communists had threatened to secede as an independent state, while in the south, the Bavarian government was being assailed from the right.

  Despite his genial and sentimental exterior, Stresemann was a realist who had come to power determined to end the nightmare. In his first few weeks in office, he had the Reichstag approve an act empowering him to govern by decree; suspended the campaign of passive resistance in the Ruhr, which was costing the government $10 million a day; and declared a state of emergency that gave the army the necessary authority to act against secessionist states.

  Recognizing that the political breakdown had its roots in the dislocations and chaos of rampant hyperinflation, Stresemann then turned his attention to the monetary questions. Tax revenues at the time accounted for less than 10 percent of government expenditures, and the gap was being filled by printing money.

  Stresemann had invited Schacht to dinner that night to try to persuade him to accept the position of currency commissioner, a new post with responsibility for reforming the whole German currency. It would make Schacht the financial czar of Germany, with more power than even the minister of finance.

  The two had known each other for more than twenty years. They socialized in the same circles and were both members of the Berliner Mittwochgesellschaft, the Wednesday Society, a select discussion club restricted to eighty-five members and founded in 1915. Stresemann, who thought highly of Schacht, had been trying to find a position for him in the new administration for some weeks. The previous month, during his first cabinet reshuffle, he had even tried to appoint Schacht minister of finance; but the night before he was to submit his new list of ministers to President Friedrich Ebert, he had received a letter from a high official in the ministry expressing grave doubts about Schacht’s suitability for the position, raising the old questions about Schacht’s wartime record and hinting at ethical improprieties and corruption. At the last minute, Stresemann had been compelled to drop Schacht’s name from his proposed cabinet.

  For Schacht, the new opportunity could not have come at a better time. Now independently wealthy, he was eager to enter public life. Though he owed much of his fortune to Jacob Goldschmidt, he viewed his young associate’s deal making
as dangerous. Increasingly sidelined within Danatbank, he had begun looking for a new challenge.21

  He would later describe life that summer as “living on the edge of a volcano.” The biggest danger in his view was a Bolshevik revolution. But as the political crisis began to reach a crescendo, he remained convinced that some great opportunity would present itself to him.

  At the end of the summer, he sent his wife, Luise; his twenty-year-old daughter, Inge; and his thirteen-year-old son, Jens, to the safety of Switzerland. He had been hoping that the new government would offer him a position and he wanted to be able to take decisions without, as he put it, being “hindered by personal considerations were I to be drawn into the whirlpool.” He knew that Luise, a fervent nationalist and right-wing radical with a “narrow Prussian outlook,” was unlikely to be particularly welcoming to the left-wingers and democrats with whom he would have to associate.

  At 11:30 p.m., as the two men were finishing dinner and Schacht, a chain-smoker, had lit up, one of Stresemann’s aides burst in. For weeks there had been rumors that the right-wing groups in Bavaria, one led by the local army and police commander, the other by a thirty-four-year-old ex-corporal named Adolf Hitler, were planning to seize power. They had now struck. Hitler, apparently working with the fallen general Erich Ludendorff, had taken over a Munich beer hall, drafted local political leaders to back him, and proclaiming the Berlin government deposed, was preparing to march on “that sink of iniquity.” Reports were even filtering in that some army units in Munich had gone over to the rebels. Cutting short the dinner, Stresemann raced back to an emergency cabinet meeting at the Chancellery.

  THE FOLLOWING MONDAY, November 12, Schacht received a call at his office on the Schinkelplatz from Hans Luther, minister of finance, summoning him to the ministry, located in one of those grim official buildings on the Wilhelmstrasse. Hitler’s attempt to seize power—the Beer Hall Putsch, as it was already being called—had collapsed within twenty-four hours, and the Stresemann government was getting back to business.

  Short, fat, and completely bald, Luther had become a national hero when as mayor of the city of Essen in the Ruhr valley, he had defied occupying French and Belgian troops. But for all his exploits as a doughty little burgomaster, Luther was a cold, colorless, straitlaced figure, suspicious of Schacht’s reputation for sailing too close to the wind. He had initially opposed Schacht’s nomination, but when the two other bankers whom he first approached turned him down, he felt he had little choice.

  That morning Luther formally offered Schacht the position of currency commissioner. Though Schacht pretended that he needed time to think the matter over, when Luther demanded an immediate reply, he accepted with, as one historian describes it, “an enthusiasm suitable to the as-yet-to-be revealed dimensions of his ambition.”

  Schacht came to the job with an array of qualifications. He was well known and admired in foreign banking circles, an attribute that would become very important when Germany had to go through its next cycle of wrangling over reparations. He was supported by the center and the left. In addition, it was rumored that Jacob Goldschmidt, powerful in Democratic Party circles and keen to oust Schacht from the Danatbank, was actively lobbying to kick him upstairs.

  The post he assumed carried with it unprecedented powers. He was given cabinet rank; was to be invited to all its meetings; and most important, had the right of veto over any measures that had implications for the currency, a veto that could only be overridden by a majority of the cabinet.

  Less grandly, for his office he was provided with a room in the back of the Finance Ministry that had once been a broom closet. It was dark, confined, and bare except for a writing table and a telephone. He agreed to take no salary, insisting that his $100 a month go to supplement the meager official $50 a month of his secretary, Fräulein Steffeck, whom he had brought over from the Danatbank and who was his single direct employee.

  The plan was to introduce a totally new currency, the Rentenmark, to be backed not by gold but by land. The bank issuing the new currency was granted a “mortgage” on all agricultural and industrial property, on which it could impose an annual levy of 5 percent—in effect, a tax on commercial real estate.

  Despite his new position, Schacht was as skeptical about the new plan’s chances of success as almost everyone else in Germany. From the very first, he had scoffed at the idea of a land-based currency as a pure confidence trick; currencies had to be backed by a highly liquid, easily transferable, internationally acceptable asset, such as gold. He found it hard to believe that someone being paid in the new currency would derive any comfort from the theoretical promise that those currency notes were ultimately convertible into some slab of inaccessible Thuringian woodland or Bavarian pasture or perhaps of a Communist-riddled Saar factory.

  During the debate on the various currency reform plans, Schacht had forthrightly argued for gold as the foundation for a new currency. While no one could challenge the theoretical basis of his logic, the fatal difficulty had been that Germany simply did not have enough gold for the job. Before the war, the country had had a circulating currency of $1.5 billion, backed by just under $1 billion in gold. After five years of reparations and currency collapse, less than $150 million in gold remained. Moreover, the modest amount Germany did possess was in the hands of the Reichsbank, whose president, Rudolf von Havenstein, had been adamant that he would not part with an ounce to support something over which he had no control. While Schacht, usually a realist, had suggested that Germany try to build up its gold reserves by borrowing abroad, few people believed that a country that had defaulted on reparations the previous year and was now partly occupied by foreign troops would get even a hearing from international bankers.

  The most important, perhaps the defining, characteristic of the new currency was not that it theoretically rested on land, but that the amount to be issued was to be rigidly fixed at 2.4 billion Rentenmarks, equivalent to around $600 million. Grasping that the key to its credibility was to keep it sufficiently scarce, Schacht was determined to ensure that the amount in circulation did not exceed its statutory ceiling under any circumstances. And though he encountered considerable political pressure to relent, including from his cabinet colleagues, he stuck to his position. He was obstinate, almost brutal, about turning down loan requests from everyone—government agencies, municipalities, banks, or big industrialists.

  Fräulein Steffeck has left a vivid picture of Schacht in those first few days:He sat on his chair and smoked in his little dark room at the Ministry of Finance, which still smelled of old floor cloths. Did he read letters? No, he read no letters. Did he write letters? No, he wrote no letters. But he telephoned a great deal—he telephoned in every direction and to every German and international place that had anything to with money and foreign exchange. And he smoked. We did not eat much during that time. We usually went home late, often by the last suburban train, traveling third class. Apart from that he did nothing.

  He took great pride in this portrait, which he never tired of repeating. He relished the image it evoked of the maverick financial genius operating masterfully on his own where established bankers had failed.

  For VON HAVENSTEIN, the news of Schacht’s appointment was the final humiliation. Though for the last five years he had presided over the single greatest debasement of a currency in history, he still refused to accept responsibility for the debacle. He kept insisting that it was not his fault but the result of government mismanagement and the Allies’ extortionary demands.

  When Stresemann came to power in August 1923, he tried to persuade Von Havenstein to go of his own accord, arguing that the public had lost all confidence in the currency, and that to reverse this required not just a new medium of exchange but a new president of the Reichsbank. Von Havenstein had categorically refused. By November, the chorus of demands that he resign had spread all the way across the political spectrum—everyone except the furthest-right nationalists. Only a few days earlier the leading in
dustrialists had branded him the “father of the inflation.” But the Reichsbank Autonomy Law of July 1922—ironically enacted at the insistence of the British, who hoped, by making the Reichsbank independent of the government, to curb inflation—had given the chief architect of inflation tenure for life.

  No one could understand why Von Havenstein, who prided himself on his sense of service, clung so desperately and so humiliatingly to office in the face of such clamor. But he kept repeating that if he went, things would only get worse—how, very few people could see. In many ways it was precisely his pride as a public official that prevented him from resigning and thus acknowledging responsibility for the destruction of the mark and, with it, the savings of so many God-fearing Germans like himself. The most he would concede was that he might resign after a decent interval of several months so as to “preserve his honor.”

  Saddled with Von Havenstein, Stresemann had simply bypassed him by creating the independent Currency Commissionership outside of the Reichsbank. And so, when the new currency was introduced on November 15, 1923, Germany found itself in the curious position of having two official currencies—the old Reichsmark and the new Rentenmark—circulating side by side, issued by two uniquely parallel central banks. At one end of town was Schacht, operating from his converted broom closet; at the other, Von Havenstein, holed up and increasingly isolated and irrelevant in the Reichsbank’s imposing red sandstone building on Jagerstrasse. Although the Reichsbank had now stopped providing money to the government, its printing presses still continued to roll out trillions of Reichsmarks to private businesses.

  Neither Schacht nor Von Havenstein made any attempt to communicate with the other. The contrast between the two could not have been greater—Von Havenstein, a true gentleman of the old school, kind, courteous, but completely out of his depth; and Schacht, the arrogant upstart, quite prepared to confront the financial establishment, and not caring on whose toes he trod.