They chose to stay at the Hôtel du Cap Eden-Roc. Before the war, the Hôtel du Cap, secluded in twenty-five acres of ornamental gardens at the tip of Cap d’Antibes, had been a favorite watering hole of European royalty. Like most resort hotels on the Riviera, it used to shut between May and September. However, in 1923, a rich young American couple, the Murphys, 30 persuaded the owner to keep it open and took over the whole hotel for the summer. Thus was born the summer season in the south of France. In the three years since the Murphys had first commandeered the Hôtel du Cap, it had become the most fashionable summer resort hotel on the Côte d’Azur.
In the last week of June, Strong and Norman and the other guests found themselves besieged by newspapermen. It seemed too much of a coincidence that the world’s two most important central bankers should happen to be in France at the very moment its currency crisis was reaching some sort of denouement. Rumors were rife that a meeting of the world’s great financiers, to be held in Antibes, of all places, was in the offing; that Schacht was on his way; that Andrew Mellon, the U.S. secretary of the treasury, would soon arrive; that Moreau was already in daily contact.
The two bankers did manage to elude the escort of reporters one evening, but were soon discovered dining at the Colombe d’Or, a small restaurant at St. Paul-de-Vence, twenty miles away. Another intrepid journalist managed to talk his way into the hotel grounds and reported encountering Norman perched acrobatically on a sort of surfboard being dragged through the waves by a small motor dinghy. The hotel management became so irritated with the inconvenience to its other guests caused by the press barrage that its employees were given strict instructions not to deliver messages to the two men. In fact, while Norman and Strong followed the events in Paris avidly, they knew that at this stage it was premature to enter into any sort of discussions with the French authorities.
At the end of July, Norman returned to England. Strong went to Paris, arriving on July 20. Three days before, the latest French government, having lasted all of four weeks, collapsed. It was followed by another left-wing coalition that survived only seventy-two hours. There was talk of revolution or a coup d’état. The streets outside the National Assembly were daily thronged with protesters. Strong found his French banking correspondents so fearful that they had begun sending their families to safety in the provinces, while the American officials he knew were preparing for violent anti-American demonstrations.
Since the founding of their republic, Americans had had a love affair with France and especially with Paris. In the early twenties, with the franc at a quarter of its prewar level, that romance had suddenly become accessible to any American with a couple of hundred dollars to spare. A tourist-class passage across the Atlantic could be had for as little as $80 and the cost of living in France was astoundingly cheap for anyone with dollars. By 1926, an estimated forty-five thousand Americans were living in Paris and every summer another two hundred thousand tourists arrived to enjoy the combination of culture, gracious living, and a risqué nightlife that made Paris, even then, the most visited city in the world.
Unfortunately, the affection of Americans for all things French was increasingly unrequited. The French press had for a while expressed its indignation at the spectacle of rich Americans taking advantage of the low franc to buy up the choicest French property on the Côte d’Azur and Côte Basque, along the Loire valley, and on the Champs de Mars in Paris. The newspaper Le Midi had taken to referring to Americans as “destructive grasshoppers.”
One incident in particular had been a lightning rod for bad feeling. In March 1924, at the height of the currency crisis, the U.S. ambassador, Myron Herrick, bought out of his own pocket a grand mansion at Two Avenue d’Iéna to house the embassy. Built in the late nineteenth century at a cost of 5 million francs, equivalent at the time to about $1 million, the mansion was now selling for 5,400,000 francs.31 Herrick astutely chose to exchange his dollars for francs on March 11, 1924, the very day that panic selling on the Bourse drove the exchange rate down to 27 francs to the dollar, which gave him the house for only $200,000. As ambassador from 1912 to 1914 Herrick had won the affection of the French for his decision to stay in the city when it seemed about to fall to the Germans. The affection was great enough that he had been asked to return as ambassador in 1921. But when the newspapers discovered that the American ambassador himself had cut a sweet deal from the franc’s collapse, there was outrage.
The tough stance adopted by the U.S. government, particularly Congress, over repayments of war debts had aroused much bitterness in France. Casualties of Frenchmen during the war had been twenty times that of Americans. Coolidge’s infamous remark—“They hired the money, didn’t they?”—had displayed a remarkable indifference to the human sacrifice of Britain and France that all Europeans found chilling. The deal over the French war debts agreed to by Victor Henri Berenger and Andrew Mellon in April 1926 did nothing to bridge that chasm but only intensified the resentment further. Americans thought they had been extraordinarily generous by reducing their claim by 60 percent. The French, on the other hand, viewed the American decision to collect at all on a debt, the liquidation of which would take sixty-two years, as simply rapacious.
On July 11, in a dramatic protest, twenty thousand mutilés—maimed war veterans—the legless in wheelchairs, the blind led by nurses, marched in silent protest up the Champs-Élysées to the Place d’Iéna overlooking the U.S. embassy, where they laid a wreath at the foot of the equestrian statue of George Washington.
On July 19, the night before Strong arrived in Paris, a bus carrying American tourists was attacked by a rabble in Montmartre. Two days later a few hundred demonstrators surrounded some Paris-by-night tourist buses near the Opéra and prevented them from taking sightseers through the more insalubrious parts of the city. Several thousand locals soon gathered around and began jeering and hurling epithets. A couple of days later another party of American tourists responded by plastering the partitions of their railway compartment with French money, and conspicuously lighting cigars with fifty- and hundred-franc notes as a mark of their contempt for the currency.
Relations between American visitors and their reluctant hosts had so deteriorated that the New York World felt compelled to proffer the following dos and don’ts to tourists planning to visit France that summer:
Don’t boast in cafes that American currency is the only real honest-to-God money in the world. It isn’t. Besides such bursts of financial patriotism are annoying to people who did not spend the years 1914 to 1916 accumulating world credit by selling munitions, cotton and wheat to other nations which were busy with a war. . . .
Don’t confide to your fellow passengers on railway trains that America is the most generous of creditors because America has cancelled all that part of debts, which nobody can collect. Talk instead of our prowess in tennis, golf or Prohibition. It comes with better grace.
It was against this backdrop that Moreau came to see Strong at his hotel in Versailles. They were to meet several times during the next days—always at Strong’s hotel, because he did not wish to be seen visiting the Banque and even requested that the mere fact of their meetings be kept a secret. He was facing severe political opposition at home to any Federal Reserve involvement in the finances of France: “Xenophobic displays in Paris,” he explained, “have produced the worst possible impression” on the American public.
The two men got on well. Moreau found Strong “friendly but reserved.” Nevertheless, the latter was noncommittal about a loan. For one, it would require some signal that the French government would respect the Banque’s independence. For another, the National Assembly would have to ratify the April deal on war debts.
On the morning of July 29, it was Norman’s turn to meet with the Banque’s new leadership. He came to call on Moreau at his office on the first floor of the Hôtel du Toulouse. The governor’s suite at the Banque was a marked contrast to the classical simplicity of his own office on Threadneedle Street. The rooms had once
been the private apartments of the princess de Lamballe, granddaughter-in-law of the comte de Toulouse, a close confidante of Marie Antoinette who had often entertained the queen there.32 The floor was covered by a floral Savonnerie carpet, the governor’s desk faced a painting by Boucher, the anteroom boasted a beautiful Fragonard park scene.
The meeting of the two governors—Norman, tall, distinguished, and cosmopolitan, with his trimmed beard and his well-cut dandyish clothes; Moreau, short, squat, and bald, looking like a provincial notary out of a novel by Flaubert—immediately got off on the wrong foot. For once, Norman’s infamous charm seemed to desert him. He was gratuitously patronizing, and despite being fluent in French, insisted on speaking to Moreau, who spoke no foreign languages, in English throughout that first encounter.
“Mr. Norman arrived at eleven o’clock,” Moreau wrote in his diary. “At first sight he is very likeable. He appears to have stepped out of a van Dyck painting, elongated figure, pointed beard, a big hat: he has the bearing of a companion of the Stuarts. It is said that Israelite blood flows in his veins. I know nothing of this, but Mr. Norman seemed, perhaps because of it, full of contempt for the Jews about whom he spoke in very bad terms. He does not like the French. He told me literally: ‘I want very much to help the Bank of France. But I detest your Government and your Treasury. For them I will do nothing at all.’ On the other hand he seems to feel the deepest sympathy for the Germans. He is very close to Dr. Schacht. They see other often and hatch secret plans. . . . Nevertheless Mr. Norman is above all profoundly English and this makes him very creditable. He is an imperialist seeking the domination of the world for his country which he loves passionately. . . . He adores the Bank of England. He told me: ‘The Bank of England is my only mistress. I think only of her and I have given her my life.’ He is not a friend to us French. Very mysterious, extremely complicated, one never knows the depths of his thoughts. Even so he is very amiable when he wants to be. . . . Norman spares nothing in his efforts to flatter [Strong] or gain influence over him. He went to spend several days at Antibes, only because Strong was staying there.”
A Bank of England official accompanying Norman wrote later that Moreau left the impression of being “stupid, obstinate, devoid of imagination and generally of understanding but a magnificent fighter for narrow and greedy ends.”
Norman essentially reiterated the conditions that Strong had set down for assistance: a change in the statutes to give the governor of the Banque security of tenure and the ratification of both the British and American war-debt settlements. Moreau did try to make both men see the political difficulties of each measure, particularly of trying to change the Banque’s statutes in such politically fractured times. Many politicians were bitter at the Banque for sitting on its remaining gold reserves when the currency collapsed that year.
Moreau had received a quick lesson in the ways of international capital markets—financial assistance was “a commodity” that his fellow central bankers were “only ready to sell . . . at a stiff price.” He would not forget. In his own mind, he blamed the sinister machinations of Norman and his malice toward the French for the failure of central bankers to come to France’s aid.
ON July 21, Raymond Poincaré was asked to form a ministry. He was then the most illustrious and experienced politician in France, had been in politics for more than forty years—twice prime minister, from 1912-13 and 1922-24, and president of the republic during the fateful years of crisis and war, from 1913-20. Though not formally associated with a party, he was a man of the center who in many ways stood above the political fray. And while he had been the architect of the disastrous and expensive decision in 1923 to occupy the Ruhr, which had left France isolated and weak, he had been equally responsible for setting in motion the Dawes Plan; and his anti-German stance had mellowed considerably in the previous three years. Within two days, he announced a national unity government that encompassed the full spectrum of political opinion, except for the Socialists, and included six former prime ministers.
What happened over the next few days illustrates the overwhelming power that psychological factors had come to exercise over the currency market. On the day that Poincaré became prime minister, the franc touched 50 to the dollar. But even before he had had a chance to outline his financial program or introduce any new tax measures, his presence alone seemed to reassure investors. Within the space of two days, the franc had rebounded to 43 to the dollar and by the following week, it was back at 35, a rise of more than 40 percent. This astonishing recovery seems to confirm the thesis that in the last stages of its collapse, the currency had lost all connection to economic reality and was being driven downward by speculators.
The franc found as much comfort in Poincaré’s personality as in his political stature. The most uncharismatic politician in all France—cold, withdrawn, and antisocial33—he made up for it by his prodigious appetite for work, married to a photographic memory, and a meticulous attention to detail. Most of all, in an era when French politicians seemed to have only the vaguest comprehension of the boundary between public obligation and private gain, he was scrupulously honest. He had a well-publicized provincial suspicion of all cosmopolitan Parisians, particularly bankers. The average French investor—the small shopkeeper from Picardy; the thrifty farmer in the Auvergne; the eminently practical village doctor from Normandy; and, of course, the glass manufacturer of Poincaré’s native Lorraine—recognized themselves in him and took comfort in his stewardship of their finances.
As the franc surged upward on in the exchanges, the prices of imported goods and the cost-of-living index began falling. That summer the papers were full of the comings and goings of American financiers in Europe. On July 24, Secretary of the Treasury Andrew Mellon arrived in Paris. In the first week of August, Strong was discovered in The Hague conferring with Schacht. On August 20, Strong and Mellon surfaced in Evian with Parker Gilbert, the agent-general for German reparations. What could all these prominent American moneymen be talking about if not the problem of the franc? In fact, while the mysterious peregrination of bankers across Europe was wonderful fodder for financial gossipmongers, it proved to be largely a sideshow. Mellon, it turned out, had come to Europe mainly to see his sick daughter in Rome and take her to Evian for the waters.
The capital that had fled France during the past two years began to wash back irresistibly, largely obviating the need for American or British financial assistance. In any case, Poincaré, confronted by enormous resistance to the war-debt agreements within the National Assembly, delayed submitting them for ratification. Without these agreements, there could be no loans from abroad.
Moreau himself was initially unsure how to respond to rebound in the franc. His initial inclination was to let it run. He was by training an old school civil servant; and though he had considerable experience in banking, his understanding of monetary economics was quite rudimentary and at times confused. The truth is that at that time, very few bankers could claim to understand fully the situation of France in 1926, particularly the complicated dynamics between the inflow of money and its effect on the exchange rate and domestic prices and, in turn, their impact on the overall economy. Moreau was lucky enough in his two subordinates, Charles Rist and Pierre Quesnay, to have stumbled across two of the few men who did.
Rist, aged fifty-two, had been an academic all his life, and was best known for the classic tome History of Economic Doctrines from the Physiocrats to the Present Age, coauthored with his fellow professor Charles Gide, the uncle of the writer. According to Moreau, Rist was something of a “slave to the books he has written and the lectures he has delivered.” In 1924, he had come to the attention of the finance bureaucracy with a short but highly influential monograph Deflation in Practice, which argued, like Keynes’s A Tract on Monetary Reform, that attempts to force down prices would impose an excessive cost on the economy and society. He had been very reluctant to escape the comforts of academia when first approached about coming to the Banque
and had only been persuaded when Caillaux, at their initial interview, exclaimed, “You are not going to remain a grammarian for the rest of your life!”
Pierre Quesnay was only thirty-one years old, a former student of Rist’s who, after being demobilized in 1919, had joined the financial service of the League of Nations. Moreau brought him in as his chief of staff, appointing him as the Banque’s director of economic research a month later.34
During the fall, the inflow of money turned into a flood, and as it carried the franc irresistibly upward, breaching 30 to the dollar, Rist and Quesnay began to worry that France might repeat the British mistake: an exchange rate that was too high, making exports chronically overpriced and uncompetitive. In mid-December, as the franc reached 25 francs to the dollar, Moreau’s two colleagues, determined to prevent the French economy from slipping into British-like stagnation, began to agitate for the Banque to intervene to cap its rise. At one point, they even threatened to resign unless Moreau persuaded the prime minister to go along.
While Quesnay and Rist provided the Banque’s intellectual horsepower, Moreau was the political strategist. He recognized that the choice of the exchange rate ultimately determined how the financial burden of the war was to be shared. It was Maynard Keynes who had first articulated the political dimension to exchange rate policy in the Tract, back in 1923: “The level of the franc is going to be settled, not by speculation or the balance of trade, or even the outcome of the Ruhr adventure, but by the proportion of his earned income which the French taxpayer will permit to be taken from him to pay the claims of the French rentier.” The higher the Banque de France let the franc rise, the higher would be the value of the government debt, the better for the French rentier and the worse for the taxpayer. As Moreau put it, fixing the exchange rate was a matter of balancing “the sacrifices demanded of the different social classes in the population.”
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