The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance

by Ron Chernow

  For New Deal reformers, it was also hard to believe that J. P. Morgan and Company didn’t lurk somewhere in the shadows. That Morgan Stanley assumed so many former J. P. Morgan clients bred suspicion. One powerful enemy who resolutely tracked Morgan Stanley conquests was Interior Secretary Harold L. Ickes. After the firm’s formation, he wrote in his diary, “Meanwhile, taking advantage of the depression, the Morgan people have extended their financial domination. Ordered to put a stop to the underwriting business of their bank, they have organized a separate company which is doing even more business than was done by the bank itself along this line.”35 Ickes and other enemies bided their time. But they would soon strike back in a sustained attack, through Congress and the courts.

  For J. P. Morgan partners down the street, the sudden boom in the securities market was bitterly ironic, for the parent firm was sleepy in the late 1930s. Almost the entire bank was squeezed into 23 Wall, with some scattered offices in 15 Broad Street, next door. With $430 million in total resources, J. P. Morgan and Company still ranked as the biggest private bank in the world. But Glass-Steagall had meant more than a loss of business, money, and power. It robbed the bank of some ineffable mystery that had surrounded it. With the Pecora hearings, the bank had published a balance sheet for the first time. Now the firm had to publish statements and submit to government examination. Likewise in London, Monty Norman asked Teddy Grenfell for the firm’s balance sheet for the first time in 1936. Slowly, gradually, the gentleman bankers’ world was being bureaucratized, and the financiers were emerging, dazed and blinking, into unaccustomed sunlight.

  CHAPTER TWENTY

  WIZARD

  IT was now the twilight of the Diplomatic Age for the House of Morgan. Far from enjoying privileged access to the White House as it had in the twenties, it bore a special stigma. This new detachment from Washington was most apparent as the bank wrestled with the fate of the huge German loans from the 1920s—the celebrated 1924 Dawes loan and 1930 Young loan. Although these appeared under quasi-governmental auspices, Washington now dodged responsibility for their repayment and even showed a cavalier indifference. The New Dealers didn’t want to jeopardize trade and security interests to enforce debt repayment, and the Morgan partners felt cheated. After all, dating back to the first China consortium, they had cooperated with the government on the assumption that they would receive official support in negotiating with defaulting debtors. That was the quid pro quo. Now the House of Morgan, after carrying out the bidding of its political masters, felt abandoned as Germany threatened default with Hitler’s advent as chancellor in 1933.

  To follow the saga of the Morgan involvement with the German reparations payments, it is helpful to retrace the odyssey of Dr. Hjalmar Schacht, who alternately posed as friend and foe of the House of Morgan. In 1930, he had resigned from the Reichsbank to protest the final terms of the Young Plan. After the Nazi election success in 1932, he sided with that party and prodded fellow bankers at the Deutsche and Dresdner banks to lend financial support. Among the German industrial class, Dr. Schacht conferred legitimacy on Hitler’s thugs. At Hermann Göring’s home in early 1933, he helped Hitler raise M 3 million from businessmen, a meeting climaxed by Gustav Krupp von Bohlen und Halbach’s pledge, on behalf of the rich guests, to give staunch support to the Nazis. Schacht even consented to a request from Hitler that he administer the new campaign fund.

  Hindenburg, yielding to Hitler’s wishes, restored Schacht to his post as Reichsbank president. After 1934, Schacht was also the minister of economics. As financial overlord of the Third Reich, Schacht would supervise public works, including construction of the Autobahn, his services winning him a reputation as the evil wizard of Nazi finance, the mountebank who could make financial magic for the Fuhrer. According to William Shirer, “No single person was as responsible as Schacht for Germany’s economic preparation for the war which Hitler provoked in 1939.”1 In one panegyric, Hitler said that Schacht had accomplished more in a three-year period than had the entire Nazi party combined.

  As a Nuremberg war criminal, Schacht would portray himself as an early foe of Hitler’s, a beleaguered man trying to stop the mad progress of the war machine. He never joined the Nazi party and claimed that he had opposed the persecution of the Jews. But there was a great deal of humbug about Schacht, who liked to pretend his pure intentions were being subverted by unscrupulous German politicians. In his duplicitous style, he would tell Jewish bankers that Hitler was a temporary evil needed to restore order, and he would vocally oppose persecution of the Jews. (He feared that such persecution would tarnish Germany’s image in overseas banking circles.) Then he would boast privately to Hitler that he had blocked Jewish bank accounts and channeled the money into German rearmament. Because there was some truth to his self-defense, his story is more complex than that of his unreservedly diabolic associates. In the words of Nuremberg prosecutor Telford Taylor, “This self-righteous and stiff-necked individual was and remains the most enigmatic and controversial person of the pre-war years.”2

  Dr. Schacht was an anomaly among high German officials. He remained a gentleman banker of the old school, giving Nazi finance a patina of dignity. Sporting rimless spectacles, parting his fine, white hair down the middle, smoking cigars, and wearing pinstripes and suspenders, he was indispensable to Hitler, not only for the ingenious way in which he harnessed German banking to a war economy, but for the respectability he won abroad. Having slain the 1923 hyperinflation, Schacht could fool international bankers into thinking they had a friend in Berlin who adhered to their own financial standards. And he had already won the lasting friendship of Montagu Norman. Where others saw a Nazi collaborator, Norman saw a courageous central banker fighting inflation and combating German rearmament for its incompatibility with sound finance. Schacht once told Hitler, “Only two things can bring about the downfall of the National-Socialist regime, war and inflation.”3 This was the Hjalmar Schacht that Monty Norman preferred to see. The Morgan partners were more quickly disillusioned, believing that Schacht never wanted to pay reparations and had misled them into thinking he did.

  Unlike the many flunkies who surrounded Hitler, the arrogant Schacht exercised real power; finance was an area beyond the pale of the Fiihrer’s obsessions. At first, he gave Schacht carte blanche in running the Reichsbank. “He understood nothing whatever about economics,” Schacht later explained. “So long as I maintained the balance of trade and kept him supplied with foreign exchange he didn’t bother about how I managed it.”4 Bullheaded and conceited, Schacht wouldn’t hesitate to yell at Hitler and took liberties that would have cost others their heads. Once the Fiihrer gave him a painting as a gift; Schacht returned it, saying it was a forgery. Nothing fazed him, and the cocksure banker had Hitler a bit bamboozled. Albert Speer noted of Hitler, “All his life he respected but distrusted professionals such as . . . Schacht.”5

  From a political standpoint, no instant alarm sounded at the House of Morgan when Hitler took office in 1933 and gained the power to rule by decree. Jack Morgan still nursed the old grudges against the Hun, but his reservations about Hitler were less moral than nationalistic. As he told his friend the Countess Buxton, “If I could feel more easy about your friends, the Boche, I should feel myself that we were all going to get along pretty well; but, except for his attitude toward the Jews, which I consider wholesome, the new Dictator of Germany seems to me very much like the old Kaiser.”6

  Nevertheless, a shift in Germany’s policy toward foreign debt appeared quickly. In May 1933, Hitler dispatched Schacht to Washington for eight days of talks. To divert him on his transatlantic crossing, Lamont sent biographies of Napoléon and Marie-Antoinette—volumes that perhaps contained their own tacit message about the corruption of absolute power. Meeting with Roosevelt and Secretary of State Cordell Hull, Schacht boisterously insisted that stories about the harassment of Jews were grossly exaggerated and said that foreign protest would only backfire. He also warned that Germany was running short of foreig
n exchange to service the $2 billion in debt held by American investors. This White House meeting occurred during the Pecora hearings, and Schacht recorded this curious reaction from the president: “Roosevelt gave his thigh a resounding smack and exclaimed with a laugh: ’Serves the Wall Street bankers right!’ ”7 Afraid that Schacht might take this literally, Roosevelt’s advisers warned the president of the potential damage of his little jest. The next day, Hull rushed to tell Schacht that Roosevelt was actually shocked by the default threat. “It occurred to me that the President had not expressed any shock until twenty-four hours had elapsed,” observed Schacht.8 Roosevelt’s attitude may well have emboldened Schacht in his determination to repudiate German debt held in America.

  That June, Schacht announced a moratorium on long-term overseas debt. The big German loans had been multinational—the Young loan, for instance, had appeared in nine markets and currencies—but the various creditor countries didn’t mount a united defense. Rather, they behaved like panicky creditors in a crowded bankruptcy court, each trying to get Germany to pay off his own bonds first. Articles appeared in the U.S. press reporting that European creditors wanted to strike separate deals with the Nazis. As a lever to pry open foreign markets to German goods, Schacht favored deals with countries running trade surpluses with Germany. The implicit message was buy more from us, and we might look more favorably upon your bonds. It was a policy of selective default, a clever divide-and-conquer strategy that broke down creditors’ unity and set them against each other. Schacht hoped that by stalling the creditors and driving down the price of the German bonds, he could buy them back at a price significantly lower than their face value—a tactic that apparently pleased Hitler.

  When Lamont learned that Schacht was contemplating selective repudiation in 1934, he reminded him that Morgans had supplied over half the Dawes funds and a third of the Young funds. With pardonable overstatement, he said the bank had always advocated moderation toward Germany. Most of all, Lamont appealed loftily to international law, promises made to investors that these loans superseded all others and enjoyed special political protection. Lamont was speaking reasonably to a man already hip-deep in diabolic machinations: “Of course, we expect to see the Reich obligations on [the Young Loan], as on the Dawes loan, carried out. Otherwise all international agreements might as well be torn up.”9

  From Dr. Schacht’s reply, it was clear that the usual norms of business behavior no longer applied in Germany. Written in an extravagant, hysterical style, it was not the sort of letter people usually sent to the sedate precincts of 23 Wall. Schacht began by saying Germany’s problem was not default but a transfer difficulty resulting from a lack of foreign exchange. Then he veered off into bombast and mad whimsy:

  Whether you may threaten me with death or not will not alter the situation because here is the plain fact that I have no foreign valuta [foreign exchange], and whether you may call me immoral or stupid or whatever you like it is beyond my power to create dollars and pounds because you would not like falsified banknotes but good currency. . . .

  I would be willing to sell my brain and my body if any foreigner would pay for it and would place the proceeds into the hands of the Loan Trustees, but I am afraid that even the proceeds of such a sale would not be sufficient to cover the existing liabilities.10

  Schacht may have wanted to drive a wedge between England and America, perpetuating tensions over war debts and reparations. By threatening to strike a separate bargain by which British bondholders received some payments (albeit at lower interest rates) and Americans didn’t, he delivered a blow to Anglo-American amity. (Schacht argued that Germany’s trade surplus with England allowed it to make the interest payments. )The fight over unequal treatment, first with German, then with Austrian, debt, would prove the most divisive issue ever between J. P. Morgan and Company and Morgan Grenfell.

  There had always been a latent contradiction at the heart of the Anglo-American Morgan empire. So long as U.S. and British interests coincided, it could be straddled. When those interests diverged, however, British and American partners were obliged to follow the wishes of their respective governments. They were too deep in politics to do otherwise. With J. P. Morgan and Company now a minority stockholder rather than a partner in Morgan Grenfell, there was also a new structural distance between the two firms.

  For more than twenty years, Teddy Grenfell had been the Morgan ambassador to the British government. Now, somewhat unwillingly, he conveyed stiff protests from his New York partners to Whitehall. With rumours of a separate German deal with England swirling around Wall Street, Lamont drafted a letter to the British government, demanding that it take responsibility for American bondholders of German debt. Morgan Grenfell partners argued against its testy wording, but Lamont and Leffingwell refused to back down. Biting his tongue, Grenfell duly delivered the cable to Prime Minister Ramsay MacDonald. For a letter to a chief of state, it struck a faintly arrogant chord, a tone of mild menace:

  Prior to the issue of the External Loan of 1924, we had not been associated with German finance, public or private, and we venture most respectfully to remind you that in your then capacity as Prime Minister you did us the honor of addressing our firm . . . by which you conveyed to us the requests of His Majesty’s Government that we should undertake the placing of the Dawes Loan in this country. . . . Meanwhile, however, for the reasons indicated above, we believe that His Majesty’s Government . . . will wish to use its good offices in every way possible for the protection of interests of all holders of these loans irrespective of nationality. . . .11

  Two weeks later, Lamont followed this up by meeting with Neville Chamberlain, then chancellor of the Exchequer. It was a vintage Lamont performance—tough resolve beneath suave civility. He said Morgans had become involved with Germany only because the Bank of England wanted to put Weimar Germany back on its feet and enable it to make reparations. Affable and noncommittal, Chamberlain asked what he would recommend. Lamont asked whether Chamberlain would scuttle a separate accord with Germany if no justice were done to American investors.

  Chamberlain: I should not feel justified in going so far as to cancel my British arrangements if they fail to accede to my request re U.S.A.

  Lamont: No, I agree, nor should I expect you to do so. I believe that the representations you make will be so clear and strong as to go far toward getting similar treatment accorded to us.12

  The British never rode to the rescue. What made this so galling to Lamont was that he always believed Britain had initiated the side deal with Schacht. Morgan partners were thunderstruck by what they saw as British cynicism and the end of financial leadership they had always associated with the City. Schacht himself didn’t seem to dispute Lamont’s version of events. When George Harrison went to Germany with Roosevelt’s encouragement, Schacht professed dismay over discrimination against American bondholders. He said the British had blackmailed him into their deal and kept telling Harrison “God bless you!” for protesting to the foreign minister. Harrison came back to New York very disturbed. “He utterly disagrees with Monty about Hitler and Hitler-ism,” Leffingwell told Lamont about Harrison’s visit. “He didn’t see a smile on any face in Germany in two days.”13

  To press his case, Lamont got Secretary of State Cordell Hull worked up about the discriminatory treatment of American bondholders. As he told Grenfell, “The American Government feels very strongly that the American investment community was had.”14 Jack Morgan appealed to Monty Norman, whom he believed to be the one person outside Germany with any influence over Schacht.

  Norman wasn’t so upset by the German actions and was willing to make allowances for the Nazis. He continued to harbor more hostility toward France than toward Germany. In July 1934, he arrived in New York looking sickly and dispirited. He immediately telephoned Russell Leffingwell and took a cab down to 23 Wall. Leffingwell summarized their meeting for Lamont: “Monty says that Hitler and Schacht are the bulwarks of civilization in Germany and the only
friends we have. They are fighting the war of our system of society against communism. If they fail, communism will follow in Germany, and anything may follow in Europe.”15 This high regard for German culture had led Norman to back the 1924 Dawes loan in the first place. But the admiration now persisted under altered circumstances. As we shall see, most Morgan partners took a relatively benign view of German intentions, although there were skeptics from the start. The cynically acute Grenfell first penetrated Schacht’s disguises, already believing in 1934 that he was building up stocks of raw materials with which to prepare Germany for war.

  Meeting with Schacht at Baden-Baden in 1935, Lamont worked out a debt settlement that provided about 70 percent of the interest due on the two large German loans. After this meeting, Lamont and Schacht continued to perform a strange duet by mail. They pretended to be normal bankers in normal times, although Schacht’s behavior seemed increasingly erratic. In 1936, Morgan Grenfell partner Francis Rodd visited Schacht in Berlin and found him in a crazily jocular mood. He rather giddily instructed Rodd to “send his love” to Lamont and praised Morgans as the world’s premier bank. Schacht even invited Lamont to attend the Olympic Games, held that year in Berlin.

  In a power struggle, Schacht finally lost out to his arch rival, Göring. His downfall began when he balked at buying foreign exchange for Nazi propaganda efforts abroad and tried to limit military imports of raw materials to what could be obtained by barter arrangements. In the last analysis, Schacht was too orthodox a banker, favoring slower growth and civilian production rather than a permanent war economy. In 1936, sitting on the terrace at Berchtesgaden, Albert Speer overheard Schacht arguing with Hitler in his office. As Speer recalled: “Some time around 1936 Schacht had come to the salon of the Berghof to report. . . . Hitler was shouting at his Finance Minister, evidently in extreme excitement. We heard Schacht replying firmly in a loud voice. The dialogue grew increasingly heated on both sides and then ceased abruptly. Furious, Hitler came out on the terrace and ranted on about this disobliging, limited minister who was holding up the rearmament program.16