Lords of Finance

by Liaquat Ahamed

  His fellow expert was Owen D. Young, a farm boy from upstate New York who at the age of forty had become president and chairman of the board of the General Electric Company, the tenth largest company in America, and was now also the president of the Radio Corporation of America, the darling of Wall Street. Young, tall, and lanky, with thinning black hair and the “hollow deep-set eyes of an ascetic,” was a contrast to the garrulous Dawes, a man of few but well-chosen words. Both he and Dawes were wealthy men who not only refused to accept any compensation for the assignment but also insisted on paying their own expenses.

  Though the American party was eagerly awaited in Europe, few people gave the committees much chance of success. The gap between the Germans and the French seemed unbridgeable. The Germans argued that the collapse of the mark was proof enough of their bankruptcy and that for them to pay reparations was impossible. The French, by contrast, saw the collapse of the mark as evidence of capital flight from Germany. How could it claim to be bankrupt when so many rich Germans seemed to be wandering around Europe? Every newspaper was filled with stories of German nouveaux riches flaunting their newly acquired wealth in foreign watering holes, calling attention to themselves by their bad manners and flagrantly conspicuous consumption. The British were caught in the middle. Since the occupation of the Ruhr, public opinion had shifted decisively in favor of Germany, which the French were seen to be trying to dismember, using reparations as an excuse. The British government argued that reparations had to be scaled back.

  It was hard to see how a committee of technical experts, even if it did include some prominent Americans, could get the various parties to agree. After all, the premiers of Germany, France, Britain, Belgium, and Italy had met at least a dozen times—at Spa, at San Remo, at Cannes, and several times at conferences in Paris and London—without being able to find common ground, leaving a trail of failed negotiations, torn-up agreements, and bitter ill feeling.

  Moreover, with the passage of time, the issue had become hopelessly entangled and complicated. The commission itself had held some four hundred sessions since its creation in 1919. The two Americans were amateurs who knew very little about the technical details, but each represented that new and distinctively American breed, the businessman-turned-political-troubleshooter who was much like his cousin, the Wall Street-lawyer-turned-diplomat. They were down-to-earth practical men who, though they might know little about the precise problem at hand, prided themselves on their ability to cut through rhetoric and obfuscation, and come up with a solution by applying simple old-fashioned American common sense.

  On the transatlantic voyage, the American team—General Dawes; his brother Rufus, who was to be the committee’s chief of staff; Owen Young; and various aides seconded from government departments in Washington—debated their strategy. Some argued that the committee should cut through the confusion and go directly to the heart of the matter—explicitly recognize that Germany simply could not pay what was demanded of it, estimate what it could come up with, and recommend that figure as what it should pay.

  Young took the position that the simple and direct approach would not work. The total figure for reparations, $12.5 billion, was too politically charged a number, particularly in France. Tampering with it would inevitably lead to confrontation. To challenge the French at this stage of the negotiations would bog them down in the sort of wrangling that had produced no results for the last three years. Instead, Young proposed that the committee focus on the very limited but achievable goal of reducing the amount Germany would have to pay in the immediate future to a more manageable level.

  The committee should jettison the whole concept of “capacity to pay,” he argued. It was impossible to know what this number was. Too many imponderables entered into the calculation, involving such questions as: How much could taxes be raised without triggering mass protest? How tightly could imports be squeezed without precipitating a collapse in production? How far could wages be reduced without provoking labor unrest? No one could agree on the answers to such cosmic questions. What was needed was a completely new approach to the problem.

  In its place, he proposed an alternative criterion: the German public should be required to shoulder the same tax burden as British and French taxpayers. Britain and France had to tap their tax revenues to pay interest on their own internal debts. Germany had inflated away its internal public debt—the Germans, therefore, had a natural surplus from which they could afford to pay reparations. Here was a principle that was easily quantifiable, would be viewed as fair in the court of world public opinion, and would be hard for Germany to argue against. It injected “both the element of novelty and a defensible moral principle” into the whole discussion.

  Landing at Le Havre on January 7, the Americans traveled by train to Paris, where they checked into the Ritz. On January 14, the ten-man expert committee held its first meeting at the offices of the Reparations Commission, housed in the Hotel Astoria, a Belle Époque hotel de luxe situated at the top of the Champs-Élysées by the Arc de Triomphe. Before the war, the hotel had been popular with rich visiting shoppers. But its conveniently central location and wonderful view of the Arc doomed it to spend the next thirty years under constant requisition by whichever government happened to be in power. The German invasion plans of 1914 had it earmarked for the kaiser’s Paris headquarters. In August 1914, it had been shut down by the French authorities because the owner was suspected of being a German spy. In 1919, it had provided one of the homes of the two-hundred-strong British delegation to the Peace Conference. In 1921, while all the other great hotels were profiting from the enormous influx of tourists drawn to Paris by the cheap franc, the Astoria was taken over by the reparations commission.24

  Though the Europeans were the most knowledgeable on the technical details about reparations, the Americans came to dominate the proceedings. Dawes neither possessed, nor pretended to, the financial expertise to unravel the tangle of claims and counterclaims. He was the cheerleader of the committee, its public face, who used an extensive network of friends within France accumulated during the war to smooth relations with the prickly French. The press loved him. With his quaint pipe and his picturesque language—he called the German nationalists “those foul and carrion-loving vultures” and derided economic experts for their “impenetrable and colossal fog-bank” of opinion—he made great copy.

  Young was the brains of the operation. He and Dawes were joined by a third American, Colonel James Logan, Strong’s fraternity mate from The Family, who had first come to Paris in 1914 and stayed on after the war and was now the U.S. observer to the Reparations Commission. Through a combination of charm and force of personality, he had become a figure of some renown in Parisian social and diplomatic circles, entertaining so frequently at Voisins, the famous three-star restaurant on the Rue Saint Honoré that it was nicknamed “Logies” by visiting American diplomats. Though only an observer, without any official status, Logan had done more than almost anyone else to keep the United States engaged in Continental affairs and was viewed as the unofficial U.S. ambassador to Europe.

  As the committee began its deliberations, it found itself facing two tasks. The first was to persuade the French to accede to a lower payment schedule, at least temporarily, to which they would only agree if stringent foreign controls were imposed on the management of German finances. The French saw German hyperinflation as part of a deliberate campaign by its officials to wreck their own economy and thus prevent reparations from being paid. Some mechanism for preventing any future sabotage of Germany’s finances had to be put in place. The second task was therefore to persuade the Germans to accept such an imposition.

  The first task became much easier when within a week of the delegation’s arrival, France was plunged into its own financial crisis. French finances since the war had been a cross between those of Germany and of Britain. The war had cost it dearly—in blood and money. In the immediate aftermath it was forced to spend $4 billion on reconstructing the l
iberated territories. Still unreconciled to its enormous sacrifices, the French government refused to raise taxes to pay for this, stubbornly clinging to the illusion that the costs would eventually be recouped from Germany. “Les Boches paieront” “The Krauts will pay”—was the refrain. Like Germany, therefore, France had been slow to bring its deficits under control; five years after the war, the government was still borrowing $1 billion a year.

  The French financial situation was exacerbated by a hopelessly primitive system of public accounts. Despite its much vaunted corps of inspecteurs des finances, there were huge gaps in its books and no one seemed to know precisely how much had been spent during the war, on what and by whom. It was even hard to reckon the total amount of borrowings—in 1922, an audit discovered that the volume of National Defense Bonds issued had been overestimated by the equivalent of $500 million. Controls over money flowing in and out of the treasury were so rudimentary that during the coming crisis, in a swindle that was never to be solved, $150 million of National Defense Bonds that were generally issued in bearer form and therefore untraceable, disappeared mysteriously from the treasury—in relative terms the equivalent today would be a fraud of $30 billion.

  But unlike its German counterpart, the Banque de France was determined to reassert its independence after the war and refused to float the government any longer. Though the French government was able to borrow in the open market because of the high savings rate of its citizens, most of the debt was short term, had to be constantly rolled over, and the government was forced to live a sort of hand-to-mouth existence, always nervous that suddenly its creditors would get fed up and go on a lending strike.

  Before the war, there had been just over 5 French francs to the dollar. By the early 1920s, following the wartime trebling of French prices, the franc had stabilized at about a third of its prewar level, about 15 to the dollar. During the latter half of 1923, it became apparent that the invasion of the Ruhr had been a failure and the likelihood of France being able to cover its budget deficit from reparations was increasingly remote. By the beginning of 1924, the exchange rate had fallen to 20 francs to the dollar.

  On January 14, the day the Dawes Committee, as it was now being called, began its deliberations, the exchange value of the franc plunged by around 10 percent in a single day. Though it appeared to steady during the next few weeks, it began falling again after mid-February and in two days, March 6 and 7, lost another 10 percent, reaching 27 francs to the dollar on March 8. There were scenes of pandemonium in the Salle des Banquiers at the Bourse as a wildly gesticulating crowd of currency brokers and bankers’ agents frantically tried to unload their francs.

  The authorities were adamant that foreign speculators, orchestrated in a grand conspiracy by the German government, were to blame. Convinced that finance had become war by other means, officials resorted to military analogies. Prime Minister Poincaré declared in the National Assembly that he had in his possession a secret document outlining a “plan for an offensive against the franc,” which Stresemann was supposed to have circulated to a conclave of German bankers at the Hotel Adlon. The “attack” was to be “launched” from Amsterdam, where German business houses had allegedly accumulated a reserve fund of 13 billion francs. It was reported in a U.S. newspaper that the Lutheran pastors of America had received a letter suggesting that they urge their flock to dump francs in order to “assist in bringing France to her knees.” The French were then, and would remain for many decades, obsessed with the specter of foreign speculators. Keynes described their attitude in the preface specially written for the French edition the Tract on Monetary Reform: “Each time the franc loses value, the Minister of Finance is convinced that the fact arises from everything but economic causes. He attributes it to the presence of a foreigner in the neighborhood of the Bourse or to the mysterious and malignant influences of speculation. This is not far removed intellectually from an African witch doctor’s ascription of cattle disease to the ‘evil eye’ of a bystander and of bad weather to the unsatisfied appetites of an idol.”

  On March 13, the French government announced that J. P. Morgan & Co. had lent it $100 million on the security of its gold reserves. The conditions attached were made public, including the usual clauses about the government taking steps to balance its budget, reduce expenditures, and float no new loans. But it was also rumored that Morgans, normally considered one of the most pro-French of all American investment houses, had also secretly insisted that the French government bind itself to accepting whatever plan the Dawes Committee might issue. Just the announcement of the loan was enough to turn things around and the franc rebounded from 29 to 18 to the dollar, an appreciation of more than 60 percent in two weeks.

  As for Germany, the Dawes Committee quickly recognized that much had changed in the month since it had been appointed. The economic situation had been transformed: the currency was stabilized and the budget was swinging back into balance. Meanwhile, everyone was acclaiming Schacht “the miracle worker.”

  In the middle of January 1924, Schacht, by now back in Berlin, received an invitation—he called it a “summons”—to appear before the committee in Paris. Arriving on Saturday, January 19, he made the first of his many presentations to the experts at the Hotel Astoria that same afternoon. As he sat on a “stool of repentance” in the middle of the room, like a prisoner in the dock, with the experts ranked before him like hanging judges, it was hard for him to hide his resentment at his country’s future being determined in a converted hotel dining room in Paris.

  On Monday, January 21, he appeared again for three hours, and testified the next day as well. Although he grumbled that all these presentations were taking him away from the important business of getting the German currency into shape, he clearly relished the spotlight. Speaking without notes, he described the situation in Germany in 1919, “drained dry by the war”: the impact of reparations and inflation, the currency reform, the workings of the new Rentenmark, and the plans for the new gold discount bank he was putting together. As he responded in fluent French or English to the committee’s questions, he found it hard to keep that inevitable note of self-congratulation out of his replies. “His pride is equaled only by his ability and desire for domination,” wrote Dawes in his journal that evening. Nevertheless, the committee could not help being impressed by his grasp of the situation.

  Alerted from the start to the size of Schacht’s ego—Dawes noting that the most “remarkable revelation of character” came when Schacht baldly told the commission, “As long he was President [of the Reichsbank], he was the Bank”—the committee went out of its way to court him and involve him at every stage in their deliberations.

  It decided that it was essential to get Schacht on board in any scheme of foreign supervision of German monetary policy. It dared not risk a confrontation that might undermine or derail his very successful efforts to stabilize the currency, thus provoking a flight of capital that would only compound its difficulties; but it also feared that if it allowed him to get too far ahead of it in his own plans, it might later prove difficult to rein him in.

  In the space of only two months, Schacht had gone from being a relatively obscure banker to becoming the key German official to deal with, the man who could deliver. Alexandre Millerand, the president of the republic, invited him to the Élysée. It was even strongly suggested that he call on the germanophobe Poincaré, instigator of the Ruhr invasion. When Schacht declared that he was open to such an invitation, he was told that protocol required that he take the initiative by requesting an audience. He duly complied, presenting himself punctually at 5:00 p.m. one evening at Poincaré’s offices on the Quai d’Orsay; but when the prime minister kept him waiting for thirty minutes, Schacht, prickly as ever, stormed out and had to be coaxed back by a group of alarmed functionaries.

  On January 31, the committee of experts traveled to Berlin by special train, the first train to go directly from Paris to Berlin since the war, to see for itself the hardships wrough
t thus far by reparations. German officials, keen to ensure that the visitors obtain enough of an impression of their people’s privations, arranged for the electricity in the hotels housing the commission to be deliberately shut off early.

  In dealing with the committee, Schacht faced a real dilemma. On the one hand, he was enough of a realist to recognize that while it needed him, he could not afford to alienate it. He could only go so far on his own. Only a group of foreign experts would have the stature to negotiate lower reparations or make it possible to mobilize a foreign loan. Typically, though, one of his biggest concerns seems to have been that the foreigners might try to take the credit for his achievements.

  On the other hand, he remained convinced that Germany could not afford to pay anywhere close to the reparations envisaged by the London schedule. He believed that the Dawes approach of not tampering with the total amount of obligations was fundamentally flawed. For the moment, however, he held his peace. Over the next few weeks, Schacht became the critical German interlocutor for the committee when it came to financial reform and the Reichsbank. Although mutual interest kept both parties scrupulously polite to each other, there nevertheless remained an undercurrent of tension in their dealings.

  On April 9, the committee issued its plan. As Young had insisted, it very deliberately avoided pronouncing either on the total amount of reparations that Germany should owe or the period over which they should be paid, but focused purely on what should be paid over the next few years. It proposed that Germany begin at $250 million in the first year, and progressively increase the amount to $600 million a year by the end of the decade. By one calculation, using some plausible assumptions about the total period over which Germany might remain obligated, the practical effect of the Dawes Plan was to reduce Germany’s debt from $12.5 billion to around $8 to $10 billion.