by Adam LeBor
Reaching agreement on German reparations was a slow, complicated, and politically fraught task. The First World War had internationalized conflict to an unprecedented degree. Its financial fallout was similarly globalized. The war had exacted a terrible cost on Europe’s economies, as well as its populations. The fledgling international financial system was ill-designed to deal with the complex demands that were now being placed on it. Where would Germany find the money to pay? What would be the mechanisms by which it would do so? Who would oversee and regulate the reparations payments? These arcane discussions shaped the role, structure, and privileged legal status of the BIS.
In 1919—just as there would be in 1945—there were, broadly, two schools of thought: the punishers and the rebuilders. France led the punishers. “Les Boches,” said the French, must, and will, pay for their crimes, many of which were carried out on French soil. Norman and the rebuilders, who included most of Wall Street, believed otherwise. Europe could be reconstructed, but its future lay in trade and financial cooperation. The aim was not to reduce Germany to penury, but to help it fix its economy and start trading again as soon as possible.
In April 1921 the Reparations Commission announced that Germany would pay a total of 132 billion gold marks ($31.5 billion), payable at 2 billion marks a year. The commission might as well have demanded ten times as much. Germany was still reeling from its defeat, society was collapsing, unemployment soared, and there were severe shortages of food. Right-wing extremists—the Freikorps—battled Marxist militants in the streets. Workers’ councils took control of Hamburg, Bremen, Leipzig, and central Berlin. This was not the salon Marxism of Greenwich Village or San Francisco, but the real thing—raw and bloody. Hostages were taken, factories were seized, and prisoners were lined up against walls and shot.
Karl Marx’s predictions about the inevitable destruction of capitalism seemed to be becoming truer by the hour—especially in his homeland. The bankers’ fears that Germany was about to follow Russia into Communism seemed entirely justified. Hyperinflation set in as the government printed money to keep the economy functioning. Shoppers used wheelbarrows to move the bundles of notes needed to buy basic staples. The chaos had to be stopped. On November 13, 1923, five days after Adolf Hitler’s failed Beer Hall Putsch in Munich, a tall, imperious German started work as Reich currency commissioner. Hjalmar Schacht demanded, and got, near-dictatorial powers. Working out of a former janitor’s closet, he set to work on stabilizing the value of Germany’s new currency, the rentenmark. Currencies were usually backed by gold, but the rentenmark was backed by the value of Germany’s land and holdings since there was no gold available to back the new currency. This was a somewhat hazy idea—how could the bearer of a rentenmark redeem his money? Would he be given a small piece of a field?
This concern did not matter. As long as Schacht was in office, nobody would want to redeem a rentenmark. He brilliantly understood the key point of the psychology of money, which is as valid today as it was in the hyperinflation of the 1920s: the appearance of financial stability creates monetary value. If people believed that someone was in charge, that the chaos would end, and that the rentenmark had value, then it would be valued. The first notes were printed on November 15, 1923. One rentenmark could be exchanged for one trillion old marks (1,000,000,000,000). One U.S. dollar cost 4.2 rentenmarks, a return to the pre-WWI exchange rate. The aim, Schacht said, was to “make German money scarce and valuable.” Other than the logistics of printing and distributing the bank notes and convincing Schacht’s foreign colleagues that order had been returned to the German economy, there was not that much more to it.
When German reporters asked Clara Steffeck, Schacht’s secretary, what he did all day, she replied,
What did he do? He sat in his dark room, which smelled of old cleaning rags, and he smoked. Did he read letters? No. And he dictated no letters. But he phoned a lot all over the world, about domestic and foreign currency. Then he smoked some more. We didn’t eat much. He usually left late and took public transportation to go home. That was all.4
Not quite “all.” Taxes were raised, and four hundred thousand German public employees were sacked. But the rentenmark successfully stopped the German inflation so well that on December 22, 1923, Schacht was promoted to be president of the Reichsbank, while retaining his position as currency commissioner. He could now attend cabinet meetings. “Within a few weeks,” notes John Weitz, Schacht’s biographer, “he had virtually become Germany’s economic dictator.”5
Schacht certainly looked the part of a strict Prussian banker: his hair was parted precisely down the middle, and his moustache flared briefly under his nose before stopping at a determined mouth. His eyes stared out suspiciously through a pair of pince-nez. He walked with a rigid, almost military manner and wore shirts with high celluloid collars. In fact he was not Prussian at all but was born in North Schleswig, in a land perennially shunted back and forth between Germany and Denmark. Whoever ruled the province, its inhabitants were a stubborn, hardy people. They adapted easily to their alternating masters but retained their tenacity and independence—qualities that would serve Schacht well. His grandfather, Wilhelm, was a country doctor who raised twelve children and charged every patient, rich or poor, sixty Pfennigs. Schacht’s father, also called Wilhelm, was a schoolteacher who immigrated to the United States. He worked in a German brewery in Brooklyn and became a naturalized citizen. Hjalmar’s mother was a feisty noblewoman, Baroness Constanze von Eggers.
The Schachts settled in New York City, but they did not prosper, and Wilhelm brought his family back to Europe. In 1876 they moved to Tinglev, now in Denmark, and the following year their second son was born. At first they wanted to name him in honor of Horace Greeley, an influential New York journalist and politician who campaigned against the slave trade. The baroness was proud of her radical views—her father had worked to abolish serfdom in Denmark. The infant’s grandmother argued that the boy should at least have a proper Danish name first, so the family compromised on Hjalmar Horace Greeley Schacht.
The family was constantly on the move. They lived for a while in Hamburg and then relocated to Berlin. Hjalmar proved to be a diligent student. He enrolled at Kiel University and studied political economy. He worked as a journalist, tried public relations, and then joined the Dresdner Bank. His diligence, attention to detail, and austere manner helped ensure he was soon noticed. Schacht traveled to the United States with other bank officials. They met President Franklin Roosevelt and were invited to lunch in the partners’ dining room at J. P. Morgan. Schacht’s understanding of the world outside Germany, and his fluent English, proved invaluable. He was promoted to be deputy director of Dresdner Bank and joined the board of the Reichsbank.
So in 1923, with the rentenmark established, the next step was to build a gold reserve to give the new currency real backing. This is why, on the evening of December 31, the Reichsbank president stepped off the train at Liverpool Street station in central London. To Schacht’s surprise and delight, he was met on the platform by Montagu Norman himself. “I do hope we shall become friends,” said Norman, with a shy smile. Schacht told Norman that he wanted the Bank of England to lend $25 million to a new subsidiary of the Reichsbank, the Gold Discount Bank. The new bank would instantly alter global perceptions of the country’s financial prospects. The imprimatur of the governor of the Bank of England would open doors throughout Wall Street and the City of London.
Tenacious as ever, Schacht got his money.
SCHACHT HAD SWEET-TALKED Norman, but the reparations question remained unresolved. America was tired of squabbling Europeans who could not get their houses in order and also recognized that there could be no lasting prosperity while Europe lurched from one financial crisis to another. A new reparations committee was set up under the chairmanship of Charles Dawes, an irascible American banker. The Dawes Committee met in Paris in January 1924. Owen D. Young, the president and chairman of the General Electric Company and the RCA, accompan
ied Dawes. Young was a consummate diplomat and needed to be. His job was to persuade France to ease the terms of the reparations schedule, which was destroying the German economy, and thus preventing a European recovery, and then to persuade Germany to accept much more stringent external control of its finances.
The Dawes Committee issued its recommendations on April 9. Germany’s payments would be reduced for a while, and would increase later, after the economy had stabilized. That stabilization would be based in part on a loan of 800 million gold marks, to be floated on the international market. The German government would hold the funds in marks, which would then paid into an escrow account at the Reichsbank. This account would be controlled by a foreign official known as the agent-general, who could decide how the monies would be used and when they would be released—so as not to flood the markets and affect the value of the Reichsmark. The Reichsbank was placed under the control of a fourteen-man board of seven foreigners and seven Germans.
American companies rushed to invest in Germany. The Great War had triggered an economic boom in the United States. Unlike Europe, mainland America had been spared war damage. Its factories and farms and its mines and industrial plants were all untouched and operating at full capacity. The Dawes Plan loan was floated in New York and London in October and was quickly oversubscribed. American banks soon clamored to finance the companies now investing in the Germany economy.
Between 1924 and 1928, Germany borrowed $600 million a year, half of which was provided by American banks. Much of it swiftly returned from whence it had come. Like modern bailouts, the money swirled back and forth, raising and lowering balance sheets, boosting confidence and keeping the markets happy. As John Maynard Keynes wrote, “The United States lends money to Germany, Germany transfers its equivalent to the Allies, the Allies pay it back to the United States Government. Nothing real passes—no one is a penny the worse. The engravers’ dies, the printers’ forms are busier. But no one eats less, no one works more.”6 Some, like Schacht, believed that no one was a penny the better—and he was right. The vast sums were merely a financial adhesive strip. And in October 1929, when Wall Street crashed, American investors frantically pulled out of their German investments in droves.
Once again, Germany faced economic disaster. But if Weimar Germany defaulted, the global economy might crash. It was clear that the reparations issue had to be settled. Even Seymour Parker Gilbert, the agent-general in charge of implementing the Dawes Plan, argued that the country needed to take control of its financial destiny. Gilbert was not popular. In 1928 German nationalists staged his mock coronation. Ten thousand people watched his effigy crowned “the new German Kaiser who rules with a top hat for a crown and a coupon clipper for scepter.”7
The answer to the never-ending German reparations question was, of course, another conference. This one was named after its chairman, Owen Young. The delegations arrived in Paris in February 1929 in the coldest winter for nearly a century. The gap between France and Germany over Germany’s reparations bill was as cavernous as ever. Schacht made his opening offer: $250 million a year for the next thirty-seven years. Emil Moreau, the equally stubborn governor of the Bank of France, demanded $600 million a year for sixty-two years. Perhaps even that might not be enough, he informed Young. France might yet settle for nothing less than $1 billion.
Moreau refused to budge, and so did Schacht. Any initial optimism soon soured. The Germans were unnerved by the French secret police, who were tapping the German telephones. Schacht and his colleagues communicated with Berlin in coded telegrams. He traveled back every fortnight to consult with the government. Lord Revelstoke, the second in command of the British delegation, wrote in his diary that Schacht had resumed “his most negative attitude” was “unhelpful to the last degree.” With his “hatchet, Teuton face and burly neck and badly fitting collar,” he resembled “a sea-lion at the zoo.”8
Whatever sum was finally agreed upon, there was at least some consensus that a new bank would be needed to manage Germany’s reparations. Schacht and Norman argued that the new bank would keep the issue free of politics and manage it on a purely financial basis. This was unlikely, as there were no more politically charged issues than reparations, but it showed how the two governors both saw the benefit of a bank free of political constraints. Years later, Schacht titled his autobiography The Old Wizard. He certainly cast his spell over Owen Young. Germany was paying its reparations by borrowing from other countries, Schacht explained to the conference chairman. Such a system was no longer feasible. If the Allies really wanted Germany to be able to pay its obligations, the country needed to become productive again. Instead of lending to Germany, the Allies should lend to underdeveloped countries so they could buy their industrial equipment from Germany.
Young asked how such a plan could be put into practice. Schacht had a ready answer: by setting up a bank. “A bank of this kind,” argued Schacht, “will demand financial cooperation between vanquished and victors that will lead to community of interests, which in turn will give rise to mutual confidence and understanding and thus promote and ensure peace.” Schacht recalled the setting in his memoirs:
Owen Young, seated in his armchair, puffing away at his pipe, his legs outstretched, his great keen eyes fixed unswervingly on me. As is my habit when propounding such arguments, I was doing a quiet and steady “quarter deck” up and down the room. When I had finished there was a brief pause. Then his whole face lighted up and his resolve found utterance in words: “Dr. Schacht, you gave me a wonderful idea and I am going to sell it to the world.”9
The Allies then presented their proposal: Germany would pay $525 million a year for thirty-seven years and $400 million a year for the following twenty-one years.
Schacht would have none of it. He proclaimed that to meet these terms Germany must take possession again of all its former colonies, most of which were in Africa. He also demanded the return of the Danzig corridor, which linked Poland to the Baltic Sea, which would tear up the postwar peace treaty. When Moreau heard this he slammed the table with his fist and hurled his ink blotter across the room. A cartoon in a French newspaper summed up the local mood. It showed Moreau asking Schacht, “All right, Excellency, how much do we owe you?”
On April 19, 1929, Lord Revelstoke suddenly died. The Young Conference was adjourned. All sides finally reached agreement on June 7. Germany would pay almost $29 billion, over fifty-eight years. Control of German economic policy was returned to Berlin. A new bank would administer the payments. Schacht wrote of its birth: “In the meantime my idea of a Bank for International Settlements had met with such enthusiastic response from all those taking part in the Young Conference that soon there was not one among them who would not have liked to claim the suggestion as his own.”10 As the delegates signed the final version, the curtains in the meeting hall caught fire.
The Young Plan was accepted in principle at the First Hague Conference, and seven committees were set up to work out the technical details. At Schacht’s suggestion, the seventh, the Organization Committee, gathered in Baden-Baden. This was the most important committee, and it was responsible for drafting the statutes of the new bank and its relations with the host country, which would regulate its legal status. The delegates argued about governance, the role of the directors and managers, and even the official language of the new bank’s statutes. It was eventually agreed that both the French and English texts would be authentic. The bank would hold central banks’ gold and convertible currency deposits. These deposits could be used to settle international payments without having to either physically move the gold between banks or trade the currency through foreign exchange markets. The BIS would be an international clearinghouse for central banks, the world’s first. And with the broad outline settled, the next question was where the new bank should be located. Montagu Norman and the British government pushed for London. France objected, on principle, and argued that the new bank should be located in a small country. There was some talk of
Amsterdam, and finally the delegates settled on Basel, Switzerland, which was conveniently located on several international railway lines and on the borders of France and Germany.
MEANWHILE IN LONDON, Walter Layton, the editor of The Economist, was still grappling with the new bank’s constitution. The key point, as Layton recalled, was to “work out some form of words that would place the bank beyond the reach of governments.” Layton “struggled hopelessly” and then told Norman that he had failed.
“Why do you insist it can’t be done?” Norman demanded, annoyed.
“Because it’s the right of every democratic government to reserve its freedom of action,” Layton replied—an argument that would resonate through the decades.11 Layton admitted defeat. The constitution was eventually drafted by one of the many committees set up to establish the BIS. But Norman was victorious: the bank’s statutes, still extant today, enshrined its absolute independence from interfering politicians and governments. As for Schacht, chastened and unhappy about the reparations demands of the Young Plan, he traveled to the spa of Marienbad, in Czechoslovakia, to spend time with his wife, Luise. Narrowminded, rigid, and intensely Prussian (as he later described her), Luise met him at the train station. She shouted, “You should never have signed.”
But Schacht, and Montagu Norman, had their bank.
CHAPTER TWO
A COZY CLUB IN BASEL
“The hangover of secrecy was, indeed, so strong that the attendants would not permit a look into that sacred room even after all the directors had left.”
— Clarence K. Streit, on the BIS boardroom after the directors’ meeting, writing in the New York Times Magazine, July 1930
