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Table of Contents

Title PageCopyright PageDedicationEpigraphIntroduction

PART ONE - THE UNEXPECTEDSTORM

1. PROLOGUE2. A STRANGE AND LONELY MAN - Bri-tain: 19143. THE YOUNG WIZARD - Germany: 19144. A SAFE PAIR OF HANDS - THE UnitedStates: 1914

5. L’INSPECTEUR DES FINANCES -FRANCE: 19146. MONEY GENERALS - CENTRAL BANKS:1914-19

PART TWO - AFTER THEDELUGE

7. DEMENTED INSPIRATIONS - GermanREPARATIONS8. UNCLE SHYLOCK - War Debts9. A BARBAROUS RELIC - THE GOLDStandard

PART THREE - SOWING A NEWWIND

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10. A BRIDGE BETWEEN CHAOS ANDHOPE - Germany: 192311. THE DAWES OPENING - Germany: 192412. THE GOLDEN CHANCELLOR - Britain:192513. LA BATAILLE - FRANCE: 192614. THE FIRST SQUALLS - 1926-2715. UN PETIT COUP DE WHISKY - 1927-28

PART FOUR - REAPINGANOTHER WHIRLWIND

16. INTO THE VORTEX - 1928-2917. PURGING THE ROTTENNESS - 1929-3018. MAGNETO TROUBLE - 1930-3119. A LOOSE CANNON ON THE DECK OFTHE WORLD - 193120. GOLD FETTERS - 1931-33

PART FIVE - AFTERMATH

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21. GOLD STANDARD ON THE BOOZE -193322. THE CARAVANS MOVE ON - 1933-4423. EPILOGUE

TRANSLATING SUMS OF MONEYAcknowledgementsNOTESBIBLIOGRAPHYINDEX

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TO MEENA

Read no history—nothing but biography, for that islife without theory.

—BENJAMIN DISRAELI

Montagu Norman on the Duchess of York,August 15, 1931

INTRODUCTION

ON AUGUST 15, 1931, the following pressstatement was issued: “The Governor of theBank of England has been indisposed as aresult of the exceptional strain to which hehas been subjected in recent months. Actingon medical advice he has abandoned all workand has gone abroad for rest and change.”The governor was Montagu Collet Norman,D.S.O.—having repeatedly turned down atitle, he was not, as so many people assumed,Sir Montagu Norman or Lord Norman.Nevertheless, he did take great pride in thatD.S.O after his name—the Distinguished Ser-vice Order, the second highest decoration forbravery by a military officer.

Norman was generally wary of the pressand was infamous for the lengths to which hewould go to escape prying

reporters—traveling under a false identity;skipping off trains; even once, slipping overthe side of an ocean vessel by way of a ropeladder in rough seas. On this occasion,however, as he prepared to board the linerDuchess of York for Canada, he was unusu-ally forthcoming. With that talent for under-statement that came so naturally to his classand country, he declared to the reportersgathered at dockside, “I feel I want a rest be-cause I have had a very hard time lately. Ihave not been quite as well as I would likeand I think a trip on this fine boat will do megood.”

The fragility of his mental constitution hadlong been an open secret within financialcircles. Few members of the public knew thereal truth—that for the last two weeks, as theworld financial crisis had reached a cres-cendo and the European banking systemteetered on the edge of collapse, the gov-ernor had been incapacitated by a nervous

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breakdown, brought on by extreme stress.The Bank press release, carried in newspa-pers from San Francisco to Shanghai, there-fore came as a great shock to investorseverywhere.

It is difficult so many years after theseevents to recapture the power and prestige ofMontagu Norman in that period between thewars—his name carries little resonance now.But at the time, he was considered the mostinfluential central banker in the world, ac-cording to the New York Times, the “mon-arch of [an] invisible empire.” For Jean Mon-net, godfather of the European Union, theBank of England was then “the citadel of cit-adels” and “Montagu Norman was the manwho governed the citadel. He wasredoubtable.”

Over the previous decade, he and theheads of the three other major central bankshad been part of what the newspapers haddubbed “the most exclusive club in the

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world.” Norman, Benjamin Strong of theNew York Federal Reserve Bank, HjalmarSchacht of the Reichsbank, and Émile Mor-eau of the Banque de France had formed aquartet of central bankers who had taken onthe job of reconstructing the global financialmachinery after the First World War.

But by the middle of 1931, Norman was theonly remaining member of the original four-some. Strong had died in 1928 at the age offifty-five, Moreau had retired in 1930, andSchacht had resigned in a dispute with hisown government in 1930 and was flirtingwith Adolf Hitler and the Nazi Party. And sothe mantle of leadership of the financialworld had fallen on the shoulders of this col-orful but enigmatic Englishman with his“waggish” smile, his theatrical air of mystery,his Van Dyke beard, and his conspiratorialcostume: broad-brimmed hat, flowing cape,and sparkling emerald tie pin.

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For the world’s most important centralbanker to have a nervous breakdown as theglobal economy sank yet deeper into thesecond year of an unprecedented depressionwas truly unfortunate. Production in almostevery country had collapsed—in the twoworst hit, the United States and Germany, ithad fallen 40 percent. Factories throughoutthe industrial world—from the car plants ofDetroit to the steel mills of the Ruhr, fromthe silk mills of Lyons to the shipyards ofTyneside—were shuttered or working at afraction of capacity. Faced with shrinking de-mand, businesses had cut prices by 25 per-cent in the two years since the slump hadbegun.

Armies of the unemployed now hauntedthe towns and cities of the industrial nations.In the United States, the world’s largest eco-nomy, some 8 million men and women, closeto 15 percent of the labor force, were out ofwork. Another 2.5 million men in Britain and

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5 million in Germany, the second and thirdlargest economies in the world, had joinedthe unemployment lines. Of the four greateconomic powers, only France seemed tohave been somewhat protected from the rav-ages of the storm sweeping the world, buteven it was now beginning to slidedownward.

Gangs of unemployed youths and menwith nothing to do loitered aimlessly at streetcorners, in parks, in bars and cafés. As moreand more people were thrown out of workand unable to afford a decent place to live,grim jerry-built shantytowns constructed ofpacking cases, scrap iron, grease drums, tar-paulins, and even of motor car bodies hadsprung up in cities such as New York and Ch-icago—there was even an encampment inCentral Park. Similar makeshift colonieslittered the fringes of Berlin, Hamburg, andDresden. In the United States, millions ofvagrants, escaping the blight of inner-city

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poverty, had taken to the road in search ofsome kind—any kind—of work.

Unemployment led to violence and revolt.In the United States, food riots broke out inArkansas, Oklahoma, and across the centraland south-western states. In Britain, theminers went out on strike, followed by thecotton mill workers and the weavers. Berlinwas almost in a state of civil war. During theelections of September 1930, the Nazis, play-ing on the fears and frustrations of the un-employed and blaming everyone else—theAllies, the Communists, and the Jews—forthe misery of Germany, gained close to 6.5million votes, increasing their seats in theReichstag from 12 to 107 and making themthe second largest parliamentary party afterthe Social Democrats. Meanwhile in thestreets, Nazi and Communist gangs clasheddaily. There were coups in Portugal, Brazil,Argentina, Peru, and Spain.

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The biggest economic threat now camefrom the collapsing banking system. InDecember 1930, the Bank of United States,which despite its name was a private bankwith no official status, went down in thelargest single bank failure in U.S. history,leaving frozen some $200 million in deposit-ors’ funds. In May 1931, the biggest bank inAustria, the Creditanstalt, owned by theRothschilds no less, with $250 million in as-sets, closed its doors. On June 20, PresidentHerbert Hoover announced a one-yearmoratorium on all payments of debts and re-parations stemming from the war. In July,the Danatbank, the third largest in Germany,foundered, precipitating a run on the wholeGerman banking system and a tidal wave ofcapital out of the country. The chancellor,Heinrich Brüning, declared a bank holiday,restricted how much German citizens couldwithdraw from their bank accounts, and sus-pended payments on Germany’s short-term

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foreign debt. Later that month the crisisspread to the City of London, which, havinglent heavily to Germany, found these claimsnow frozen. Suddenly, faced with the previ-ously unthinkable prospect that Britain itselfmight be unable to meet its obligations, in-vestors around the world started withdraw-ing funds from London. The Bank of Eng-land was forced to borrow $650 million frombanks in France and the United States, in-cluding the Banque de France and the NewYork Federal Reserve Bank, to prevent itsgold reserves from being completelydepleted.

As the unemployment lines lengthened,banks shut their doors, farm prices col-lapsed, and factories closed, there was talk ofapocalypse. On June 22, the noted economistJohn Maynard Keynes told a Chicago audi-ence, “We are today in the middle of thegreatest catastrophe—the greatest cata-strophe due almost to entirely economic

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causes—of the modern world. I am told thatthe view is held in Moscow that this is thelast, the culminating crisis of capitalism, andthat our existing order of society will not sur-vive it.” The historian Arnold Toynbee, whoknew a thing or two about the rise and fall ofcivilizations, wrote in his annual review ofthe year’s events for the Royal Institute of In-ternational Affairs, “In 1931, men and wo-men all over the world were seriously con-templating and frankly discussing the pos-sibility that the Western system of Societymight break down and cease to work.”

During the summer a letter that MontaguNorman had written just a few months be-fore to his counterpart at the Banque deFrance, Clément Moret, appeared in thepress. “Unless drastic measures are taken tosave it, the capitalist system throughout thecivilized world will be wrecked within ayear,” declared Norman, adding in thewaspish tone that he reserved for the French,

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“I should like this prediction to be filed forfuture reference.” It was rumored that beforehe went off to convalesce in Canada, he hadinsisted that ration books be printed in casethe country reverted to barter in the wake ofa general currency collapse across Europe.

At times of crisis, central bankers gener-ally believe that it is prudent to obey the ad-monition that mothers over the centurieshave passed on to their children: “If youcan’t say anything nice, don’t say anything atall.” It avoids the recurring dilemma thatconfronts financial officials dealing with apanic—they can be honest in their publicstatements and thereby feed the frenzy orthey can try to be reassuring, which usuallyentails resorting to outright untruths. That aman in Norman’s position was willing to talkquite openly about the collapse of Westerncivilization signaled loud and clear that, inthe face of the “economic blizzard,”

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monetary leaders were running out of ideasand ready to declare defeat.

Not only was Norman the most eminentbanker in the world, he was also admired asa man of character and judgment by financi-ers and officials of every shade of politicalopinion. Within that bastion of the pluto-cracy the partnership of the House of Mor-gan, for example, no one’s advice or counselwas more highly valued—the firm’s seniorpartner, Thomas Lamont, would later ac-claim him as “the wisest man he had evermet.” At the other end of the political spec-trum, the British chancellor of the ex-chequer, Philip Snowden, a fervent Socialistwho had himself frequently predicted thecollapse of capitalism, could write gushinglythat Norman “might have stepped out of theframe of the portrait of the most handsomecourtier who ever graced the court of aqueen,” that “his sympathy with the sufferingof nations is as tender as that of a woman for

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her child,” and that he had “in abundantmeasure the quality of inspiring confidence.”

Norman had acquired his reputation foreconomic and financial perspicacity becausehe had been so right on so many things. Eversince the end of the war, he had been a fer-vent opponent of exacting reparations fromGermany. Throughout the 1920s, he hadraised the alarm that the world was runningshort of gold reserves. From an early stage,he had warned about the dangers of thestock market bubble in the United States.

But a few lonely voices insisted that it washe and the policies he espoused, especiallyhis rigid, almost theological, belief in the be-nefits of the gold standard, that were toblame for the economic catastrophe that wasovertaking the West. One of them was that ofJohn Maynard Keynes. Another was that ofWinston Churchill. A few days before Nor-man left for Canada on his enforced holiday,Churchill, who had lost most of his savings in

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the Wall Street crash two years earlier, wrotefrom Biarritz to his friend and former secret-ary Eddie Marsh, “Everyone I meet seemsvaguely alarmed that something terrible isgoing to happen financially. . . . I hope weshall hang Montagu Norman if it does. I willcertainly turn King’s evidence against him.”

THE COLLAPSE of the world economy from1929 to 1933—now justly called the GreatDepression—was the seminal economicevent of the twentieth century. No countryescaped its clutches; for more than ten yearsthe malaise that it brought in its wake hungover the world, poisoning every aspect of so-cial and material life and crippling the futureof a whole generation. From it flowed theturmoil of Europe in the “low dishonest dec-ade” of the 1930s, the rise of Hitler and

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Nazism, and the eventual slide of much ofthe globe into a Second World War evenmore terrible than the First.

The story of the descent from the roaringboom of the twenties into the Great Depres-sion can be told in many different ways. Inthis book, I have chosen to tell it by lookingover the shoulders of the men in charge ofthe four principal central banks of the world:the Bank of England, the Federal ReserveSystem, the Reichsbank, and the Banque deFrance.

When the First World War ended in 1918,among its innumerable casualties was theworld’s financial system. During the latterhalf of the nineteenth century, an elaboratemachinery of international credit, centeredin London, had been built upon the founda-tions of the gold standard and brought withit a remarkable expansion of trade andprosperity across the globe. In 1919, that ma-chinery lay in ruins. Britain, France, and

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Germany were close to bankruptcy, theireconomies saddled with debt, their popula-tions impoverished by rising prices, theircurrencies collapsing. Only the United Stateshad emerged from the war economicallystronger.

Governments then believed matters of fin-ance were best left to bankers; and so thetask of restoring the world’s finances fell intothe hands of the central banks of the fourmajor surviving powers: Britain, France,Germany, and the United States.

This book traces the efforts of these centralbankers to reconstruct the system of interna-tional finance after the First World War. Itdescribes how, for a brief period in themid-1920s, they appeared to succeed: theworld’s currencies were stabilized, capitalbegan flowing freely across the globe, andeconomic growth resumed once again. Butbeneath the veneer of boomtown prosperity,cracks began to appear and the gold

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standard, which all had believed wouldprovide an umbrella of stability, proved to bea straitjacket. The final chapters of the bookdescribe the frantic and eventually futile at-tempts of central bankers as they struggledto prevent the whole world economy fromplunging into the downward spiral of theGreat Depression.

The 1920s were an era, like today’s, whencentral bankers were invested with unusualpower and extraordinary prestige. Four menin particular dominate this story: at the Bankof England was the neurotic and enigmaticMontagu Norman; at the Banque de France,Émile Moreau, xenophobic and suspicious;at the Reichsbank, the rigid and arrogant butalso brilliant and cunning Hjalmar Schacht;and finally, at the Federal Reserve Bank ofNew York, Benjamin Strong, whose veneer ofenergy and drive masked a deeply woundedand overburdened man.

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These four characters were, for much ofthe decade, at the center of events. Theirlives and careers provide a distinctive win-dow into this period of economic history,which helps to focus the complex history ofthe 1920s—the whole sorry and poisonousstory of the failed peace, of war debts and re-parations, of hyperinflation, of hard times inEurope and bonanza in America, of theboom and then the ensuing bust—to a morehuman, and manageable, scale.

Each in his own way illuminates the na-tional psyche of his time. Montagu Norman,with his quixotic reliance on his faulty intu-ition, embodied a Britain stuck in the pastand not yet reconciled to its newly dimin-ished standing in the world. Émile Moreau,in his insularity and rancor, reflected all tooaccurately a France that had turned inwardto lick the terrible wounds of war. BenjaminStrong, the man of action, represented a newgeneration in America, actively engaged in

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bringing its financial muscle to bear in worldaffairs. Only Hjalmar Schacht, in his angryarrogance, seemed out of tune with the weakand defeated Germany for which he spoke,although perhaps he was simply expressing ahidden truth about the nation’s deepermood.

There is also something very poignant inthe contrast between the power these fourmen once exerted and their almost completedisappearance from the pages of history.Once styled by newspapers as the “World’sMost Exclusive Club,” these four once famili-ar names, lost under the rubble of time, nowmean nothing to most people.

The 1920s were a time of transition. Thecurtain had come down on one age and anew age had yet to begin. Central banks werestill privately owned, their key objectives topreserve the value of the currency and dousebanking panics. They were only just

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beginning to espouse the notion that it wastheir responsibility to stabilize the economy.

During the nineteenth century, the gov-ernors of the Bank of England and theBanque de France were shadowy figures,well known in financial circles but otherwiseout of the public eye. By contrast, in the1920s, very much like today, central bankersbecame a major focus of public attention.Rumors of their decisions and secret meet-ings filled the daily press as they confrontedmany of the same economic issues and prob-lems that their successors do today: dramaticmovements in stock markets, volatile curren-cies, and great tides of capital spilling fromone financial center to another.

They had to operate, however, in old-fash-ioned ways with only primitive tools andsources of information at their disposal. Eco-nomic statistics had only just begun to becollected. The bankers communicated bymail—at a time when a letter from New York

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to London took a week to arrive—or, in situ-ations of real urgency, by cable. It was onlyin the very last stages of the drama that theycould even contact one another on the tele-phone, and then only with some difficulty.

The tempo of life was also different. Noone flew from one city to another. It was thegolden age of the ocean liner when a transat-lantic crossing took five days, and onetraveled with one’s manservant, eveningdress being de rigueur at dinner. It was anera when Benjamin Strong, head of the NewYork Federal Reserve, could disappear toEurope for four months without raising toomany eyebrows—he would cross the Atlanticin May, spend the summer crisscrossingamong the capitals of Europe consulting withhis colleagues, take the occasional break atsome of the more elegant spas and wateringholes, and finally return to New York inSeptember.

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The world in which they operated wasboth cosmopolitan and curiously parochial.It was a society in which racial and nationalstereotypes were taken for granted as mat-ters of fact rather than prejudice, a world inwhich Jack Morgan, son of the mighty Pier-pont Morgan, might refuse to participate in aloan to Germany on the grounds that Ger-mans were “second rate people” or opposethe appointment of Jews and Catholics to theHarvard Board of Overseers because “theJew is always a Jew first and an Americansecond, and the Roman Catholic, I fear, toooften, a Papist first and an Americansecond.” In finance, during the late nine-teenth century and early twentieth century,whether in London or New York, Berlin orParis, there was one great divide. On oneside stood the big Anglo-Saxon bankingfirms: J. P. Morgan, Brown Brothers, Bar-ings; on the other the Jewish concerns: thefour branches of the Rothschilds, Lazards,

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the great German Jewish banking houses ofWarburgs and Kuhn Loeb, and maverickssuch as Sir Ernest Cassel. Though theWASPs were, like so many people in thosedays, casually anti-Semitic, the two groupstreated each other with a wary respect. Theywere all, however, snobs who looked downon interlopers. It was a society that could besmug and complacent, indifferent to theproblems of unemployment or poverty. Onlyin Germany—and that is part of thisstory—did those undercurrents of prejudiceeventually become truly malevolent.

As I began writing of these four centralbankers and the role each played in settingthe world on the path toward the Great De-pression, another figure kept appearing, al-most intruding into the scene: JohnMaynard Keynes, the greatest economist ofhis generation, though only thirty-six whenhe first appears in 1919. During every act ofthe drama so painfully being played out, he

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refused to keep quiet, insisting on at leastone monologue even if it was from offstage.Unlike the others, he was not a decisionmaker. In those years, he was simply an in-dependent observer, a commentator. But atevery twist and turn of the plot, there he washolding forth from the wings, with his irrev-erent and playful wit, his luminous and con-stantly questioning intellect, and above allhis remarkable ability to be right.

Keynes proved to be a useful counterpointto the other four in the story that follows.They were all great lords of finance,standard-bearers of an orthodoxy thatseemed to imprison them. By contrast,Keynes was a gadfly, a Cambridge don, aself-made millionaire, a publisher, journalist,and best-selling author who was breakingfree from the paralyzing consensus thatwould lead to such disaster. Though only adecade younger than the four grandees, he

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might have been born into an entirely differ-ent generation.

TO UNDERSTAND THE role of centralbankers during the Great Depression, it isfirst necessary to understand what a centralbank is and a little about how it operates.Central banks are mysterious institutions,the full details of their inner workings so ar-cane that very few outsiders, even econom-ists, fully understand them. Boiled down toits essentials, a central bank is a bank thathas been granted a monopoly over the issu-

ance of currency.1 This power gives it theability to regulate the price of credit—in-terest rates—and hence to determine howmuch money flows through the economy.

Despite their role as national institutionsdetermining credit policy for their entirecountries, in 1914 most central banks werestill privately owned. They therefore occu-pied a strange hybrid zone, accountable

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primarily to their directors, who were mainlybankers, paying dividends to their share-holders, but given extraordinary powers forentirely nonprofit purposes. Unlike today,however, when central banks are required bylaw to promote price stability and full em-ployment, in 1914 the single most important,indeed overriding, objective of these institu-tions was to preserve the value of thecurrency.

At the time, all major currencies were onthe gold standard, which tied a currency invalue to a very specific quantity of gold. Thepound sterling, for example, was defined asequivalent to 113 grains of pure gold, a grainbeing a unit of weight notionally equal tothat of a typical grain taken from the middleof an ear of wheat. Similarly, the dollar wasdefined as 23.22 grains of gold of similarfineness. Since all currencies were fixedagainst gold, a corollary was that they wereall fixed against one another. Thus there

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were 113/23.22 or $4.86 dollars to thepound. All paper money was legally obligatedto be freely convertible into its gold equival-ent, and each of the major central banksstood ready to exchange gold bullion for anyamount of their own currencies.

Gold had been used as a form of currencyfor millennia. As of 1913, a little over $3 bil-lion, about a quarter of the currency actuallycirculating around the world, consisted ofgold coins, another 15 percent of silver, andthe remaining 60 percent of paper money.Gold coinage, however, was only a part, andnot the most important part, of the picture.

Most of the monetary gold in the world,almost two-thirds, did not circulate but layburied deep underground, stacked up in theform of ingots in the vaults of banks. In eachcountry, though every bank held some bul-lion, the bulk of the nation’s gold was con-centrated in the vaults of the central bank.This hidden treasure provided the reserves

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for the banking system, determined the sup-ply of money and credit within the economy,and served as the anchor for the goldstandard.

While central banks had been granted theright to issue currency—in effect to printmoney—in order to ensure that that privilegewas not abused, each one of them was re-quired by law to maintain a certain quantityof bullion as backing for its paper money.These regulations varied from country tocountry. For example, at the Bank of Eng-land, the first $75 million equivalent ofpounds that it printed were exempt, but anycurrency in excess of this amount had to befully matched by gold. The Federal Reserve(the Fed), on the other hand, was required tohave 40 percent of all the currency it issuedon hand in gold—with no exemption floor.But varied as these regulations were, theirultimate effect was to tie the amount of eachcurrency automatically and almost

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mechanically to its central banks’ goldreserves.

In order to control the flow of currency in-to the economy, the central bank varied in-terest rates. It was like turning the dials upor down a notch on a giant monetary ther-mostat. When gold accumulated in its vaults,it would reduce the cost of credit, encour-aging consumers and businesses to borrowand thus pump more money into the system.By contrast, when gold was scarce, interestrates were raised, consumers and businessescut back, and the amount of currency in cir-culation contracted.

Because the value of a currency was tied,by law, to a specific quantity of gold and be-cause the amount of currency that could beissued was tied to the quantity of gold re-serves, governments had to live within theirmeans, and when strapped for cash, couldnot manipulate the value of the currency. In-flation therefore remained low. Joining the

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gold standard became a “badge of honor,” asignal that each subscribing government hadpledged itself to a stable currency and ortho-dox financial policies. By 1914, fifty-ninecountries had bound their currencies to gold.

Few people realized how fragile a systemthis was, built as it was on so narrow a base.The totality of gold ever mined in the wholeworld since the dawn of time was barelyenough to fill a modest two-story townhouse. Moreover, new supplies were neitherstable nor predictable, coming as they did infits and starts and only by sheer coincidencearriving in sufficient quantities to meet theneeds of the world economy. As a result, dur-ing periods when new gold finds were lean,such as between the California and Australi-an gold rushes of the 1850s and the discover-ies in South Africa in the 1890s, prices ofcommodities fell across the world.

The gold standard was not without its crit-ics. Many were simply cranks. Others,

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however, believed that allowing the growthof credit to be restricted by the amount ofgold, especially during periods of fallingprices, hurt producers and debtors—espe-cially farmers, who were both.

The most famous spokesman for loosermoney and easier credit was Williams Jen-nings Bryan, the populist congressman fromthe farm state of Nebraska. He campaignedtirelessly to break the privileged status ofgold and to expand the base upon whichcredit was created by including silver as a re-serve metal. At the Democratic convention of1896 he made one of the great speeches ofAmerican history—a wonderfully overripeflight of rhetoric delivered in that deep com-manding voice of his—in which, addressingEastern bankers, he declared, “You came totell us that the great cities are in favor of thegold standard; we reply that the great citiesrest upon our broad and fertile plains. Burndown your cities and leave our farms, and

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your cities will spring up again as if by ma-gic. But destroy our farms and the grass willgrow in the city. . . . You shall not press downupon the brow of labor this crown of thorns.You shall not crucify mankind upon a crossof gold.”

It was a message whose time had comeand gone. Ten years before he delivered thatspeech, two gold prospectors in South Africa,while out for a Sunday walk on a farm in theWitwatersrand, stumbled across a rockyformation that they recognized as gold-bear-ing reef. It proved to be an outcrop of thelargest goldfield in the world. By the time ofBryan’s speech, gold production had jumped50 percent, South Africa had overtaken theUnited States as the world’s largest produ-cer, and the gold drought was over. Prices forall goods, including agricultural commodit-ies, once again began to rise. Bryan won theDemocratic nomination then and twice

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more, in 1900 and 1908, but he was neverelected president.

Though prices rose and fell in great cyclesunder the gold standard due to ebbs andflows in the supply of the precious metal, theslope of these curves was gentle and at theend of the day prices returned to where theybegan. While it may have succeeded in con-trolling inflation, the gold standard was in-capable of preventing the sort of financialbooms and busts that were, and continue tobe, such a feature of the economic landscape.These bubbles and crises seem to be deep-rooted in human nature and inherent to thecapitalist system. By one count there havebeen sixty different crises since the early sev-enteenth century—the first documentedbank panic can, however, be dated to A.D. 33when the Emperor Tiberius had to inject onemillion gold pieces of public money into theRoman financial system to keep it fromcollapsing.

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Each of these episodes differed in detail.Some originated in the stock market, some inthe credit market, some in the foreign ex-change market, occasionally even in theworld of commodities. Sometimes they af-fected a single country, sometimes a group ofcountries, very occasionally the whole world.All, however, shared a common pattern: aneerily similar cycle from greed to fear.

Financial crises would generally begin in-nocently enough with a surge of healthy op-timism among investors. Over time, rein-forced by cavalier attitudes to risk amongbankers, this optimism would transform it-self into overconfidence, occasionally eveninto a mania. The accompanying boomwould go on for much longer than anyoneexpected. Then would come a suddenshock—a bankruptcy, a surprisingly largeloss, a financial scandal involving fraud.Whatever the event, it would provoke a sud-den and dramatic shift in sentiment. Panic

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would ensue. As investors were forced to li-quidate into a falling market, losses wouldmount, banks would cut back their loans,and frightened depositors would start pullingtheir money out of banks.

If all that happened during these periodsof so-called distress was that foolish in-vestors and lenders lost money, no one elsewould have cared. But a problem in one bankraised fears of problems at other banks. Andbecause financial institutions were so inter-connected, borrowing large amounts ofmoney from one another even in the nine-teenth century, difficulties in one area wouldtransmit themselves through the entire sys-tem. It was precisely because crises had away of spreading, threatening to underminethe integrity of the whole system, that centralbanks became involved. In addition to keep-ing their hands on the levers of the goldstandard, they therefore acquired a second

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role—that of forestalling bank panics andother financial crises.

The central banks had powerful tools todeal with these outbursts—specifically theirauthority to print currency and their abilityto marshal their large concentrated holdingsof gold. But for all of this armory of instru-ments, ultimately the goal of a central bankin a financial crisis was both very simple andvery elusive—to reestablish trust in banks.

Such breakdowns are not some historicalcuriosity. As I write this in October 2008, theworld is in the middle of one such panic—themost severe for seventy-five years, since thebank runs of 1931-1933 that feature so prom-inently in the last few chapters of this book.The credit markets are frozen, financial insti-tutions are hoarding cash, banks are goingunder or being taken over by the week, stockmarkets are crumbling. Nothing brings homethe fragility of the banking system or the po-tency of a financial crisis more vividly than

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writing about these issues from the eye of thestorm. Watching the world’s central bankersand finance officials grappling with the cur-rent situation—trying one thing after anotherto restore confidence, throwing everythingthey can at the problem, coping daily withunexpected and startling shifts in marketsentiment—reinforces the lesson that there isno magic bullet or simple formula for dealingwith financial panics. In trying to calmanxious investors and soothe skittish mar-kets, central bankers are called upon towrestle with some of the most elemental andunpredictable forces of mass psychology. Itis the skill that they display in navigatingthese storms through uncharted waters thatultimately makes or breaks their reputation.

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PART ONE

THE UNEXPECTED STORM

AUGUST 1914

1. PROLOGUE

What an extraordinary episode inthe economic progress of man thatage was which came to an end inAugust 1914!

—JOHN MAYNARD KEYNES, The Economic Con-sequences of the Peace

IN 1914, London stood at the center of anelaborate network of international credit,built upon the foundations of the gold stand-ard. The system had brought with it a re-markable expansion of trade and prosperityacross the globe. The previous forty yearshad seen no big wars or great revolutions.The technological advances of the mid-

nineteenth century—railways, steamships,and the telegraph—had spread across theworld, opening up vast territories to settle-ment and trade. International commerceboomed as European capital flowed freelyaround the globe, financing ports in India,rubber plantations in Malaya, cotton inEgypt, factories in Russia, wheat fields inCanada, gold and diamond mines in SouthAfrica, cattle ranches in Argentina, theBerlin-to-Baghdad Railway, and both theSuez and the Panama canals. Although everyso often the system was shaken by financialcrises and banking panics, depressions intrade were short-lived and the world eco-nomy had always bounced back.

More than anything else, more even thanthe belief in free trade, or the ideology of lowtaxation and small government, the goldstandard was the economic totem of the age.Gold was the lifeblood of the financial sys-tem. It was the anchor for most currencies, it

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provided the foundation for banks, and in atime of war or panic, it served as a store ofsafety. For the growing middle classes of theworld, who provided so much of the savings,the gold standard was more than simply aningenious system for regulating the issue ofcurrency. It served to reinforce all thoseVictorian virtues of economy and prudencein public policy. It had, in the words of H. G.Wells, “a magnificent stupid honesty” aboutit. Among bankers, whether in London orNew York, Paris or Berlin, it was reveredwith an almost religious fervor, as a gift ofprovidence, a code of behavior transcendingtime and place.

In 1909, the British journalist Norman An-gell, then Paris editor of the French editionof the Daily Mail, published a pamphlet en-titled Europe’s Optical Illusion. The thesis ofhis slim volume was that the economic bene-fits of war were so illusory—hence thetitle—and the commercial and financial

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linkages between countries now so extensivethat no rational country should contemplatestarting a war. The economic chaos, espe-cially the disruptions to international credit,that would ensue from a war among theGreat Powers would harm all sides and thevictor would lose as much as the vanquished.Even if war were to break out in Europe byaccident, it would speedily be brought to anend.

Angell was well placed to write about glob-al interdependence. All his life he had beensomething of a nomad. Born into a middle-class Lincoln-shire family, he had been sentat an early age to a French lycée in St. Omer.At seventeen he became the editor of anEnglish-language newspaper in Geneva, at-tending the university there, and then, des-pairing of the future of Europe, emigrated tothe United States. Though only five feet talland of slight build, he plunged into a life ofmanual labor, working in California for

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seven years variously as a vine planter,irrigation-ditch digger, cowpuncher, mailcarrier, and prospector, before eventuallysettling down as a reporter for the St. LouisGlobe-Democrat and the San FranciscoChronicle. Returning to Europe in 1898, hemoved to Paris, where he joined the DailyMail.

Angell’s pamphlet was issued in book formin 1910 under the title The Great Illusion.The argument that it was not so much thecruelty of war as its economic futility thatmade it unacceptable as an instrument ofstate power struck a chord in that material-istic era. The work became a cult. By 1913, ithad sold more than a million copies andbeen translated into twenty-two languages,including Chinese, Japanese, Arabic, andPersian. More than forty organizations wereformed to spread its message. It was quotedby Sir Edward Grey, the British foreign sec-retary; by Count von Metternich; and by

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Jean Jaurès, the French Socialist leader.Even Kaiser Wilhelm, better known for hisbellicosity than his embrace of pacifism, wassaid to have expressed some interest in thetheory.

Angell’s most prominent disciple was Re-ginald Brett, second Viscount Esher, a liber-ally minded establishment figure, and closeconfidant of King Edward VII. Though LordEsher had been offered numerous high posi-tions in government, he preferred to remainmerely deputy constable and lieutenant gov-ernor of Windsor Castle while exerting hisconsiderable influence behind the scenes.Most important, he was a founding memberof the Committee of Imperial Defense, an in-formal but powerful organization formedafter the debacles of the Boer War to reflectand advise on the military strategy of theBritish Empire.

In February 1912, the committee conduc-ted hearings on issues related to trade in

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time of war. Much of the German merchantmarine was then insured through Lloyds ofLondon, and the committee was dumbfoun-ded to hear the chairman of Lloyds testifythat in the event of war, were German shipsto be sunk by the Royal Navy, Lloyds wouldbe both honor-bound and, according to itslawyers, legally obliged to cover the losses.The possibility that while Britain and Ger-many were at war, British insurance com-panies would be required to compensate theKaiser for his sunken tonnage made it hardeven to conceive of a European conflict.

It was no wonder that during a series oflectures on The Great Illusion delivered atCambridge and the Sorbonne, Lord Esherwould declare that “new economic factorsclearly prove the inanity of war,” and that the“commercial disaster, financial ruin and in-dividual suffering” of a European war wouldbe so great as to make it unthinkable. LordEsher and Angell were right about the

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meager benefits and the high costs of war.But trusting too much in the rationality ofnations and seduced by the extraordinaryeconomic achievements of the era—a periodthe French would later so evocatively call LaBelle Époque—they totally misjudged thelikelihood that a war involving all the majorEuropean powers would break out.

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2. A STRANGE AND LONELYMAN

Britain: 1914

Anybody who goes to see a psychiat-rist ought to have his headexamined.

—SAMUEL GOLDWYN

ON TUESDAY, July 28, 1914, Montagu Nor-man, then one of the partners in the Anglo-American merchant banking firm of BrownShipley, came up to London for the day. Itwas the height of the holiday season, and like

almost everyone else of his class in Britain,he had spent much of the previous week inthe country. He was in the process of dissolv-ing his partnership and was required brieflyin the City. That same afternoon it was re-ported that Austria had declared war on Ser-bia and was already bombarding Belgrade.Despite this news, Norman, “feeling far fromwell” under the strain of the painful negoti-ations, decided to return to the country.

Neither he nor almost anyone else in Bri-tain imagined that over the next few days thecountry would face the most severe bankingcrisis in its history; that the international fin-ancial system, which had brought so muchprosperity to the world, would completelyunravel; and that, within less than a week,most of Europe, Britain included, wouldhave stumbled blindly into war.

Norman, indeed most of his countrymen,had paid only cursory attention to the brew-ing European crisis over the previous month.

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The assassination in Sarajevo of the arch-duke Franz Ferdinand, heir presumptive tothe Austrian Empire, and his wife Sophie bya comic-opera band of bomb-throwing Serbi-an nationalists on June 28 had seemed at thetime to be just another violent chapter in thedisturbed history of the Balkans. It did fi-nally capture the news headlines in Britainwhen Austria issued an ultimatum to Serbiaon July 24, accusing it of being complicit inthe assassination and threatening war. Buteven then, most people blithely continuedwith their relaxed summer schedule. It washard to get too concerned about a crisis inCentral Europe when the prime ministerhimself, H. H. Asquith, felt sufficiently atease to insist upon his weekend of golfing inBerkshire, and the foreign secretary, Sir Ed-ward Grey, had gone off, as he did everyweekend in the summer, to his lodge inHampshire for a spot of trout fishing.

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It had been one of those glorious Englishsummers, not a cloud in the sky for days onend, with temperatures in the 90s. Normanhad taken an earlier extended two-monthholiday in the United States, spending histime, as he usually did on his annual visits,in New York and Maine. He had sailed backto England at the end of June, to spend aleisurely July in London, enjoying the goodweather, catching up with old friends fromEton, and passing the days at Lord’s watch-ing cricket, a family obsession. He had alsofinally settled with his partners about with-drawing his capital, and going his own way.It had been a painful decision. His grand-father had been the senior partner at BrownShipley, an affiliate of the U.S. investmenthouse of Brown Brothers, for more thanthirty-five years. Norman himself hadworked there since 1894. But a combinationof ill health and recurring conflicts with theother members of the firm had seemed to

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leave him with little choice but to sever hisconnections.

Norman returned to Gloucestershire onthe morning of Wednesday, July 29, to findan urgent telegram recalling him to London.Taking a train the same day, he arrived in theevening, too late to attend a frantic meetingof the “Court”—the board of directors—of theBank of England. Norman had been a mem-ber of this exclusive club since 1905.

Though forty-three years old, Norman wasstill not married and lived alone in a largetwo-story stucco house, Thorpe Lodge, justoff Holland Park in West London. The houseand his staff of seven servants were his twogreat luxuries. When he had bought it in1905, it was a wreck; over the next sevenyears, he had devoted his energies to a com-plete reconstruction. He had designed muchof the interior himself, including the fur-niture. Influenced by the ideals of WilliamMorris and the Arts and Crafts movement,

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he had hired the best craftsmen and em-ployed the most expensive materials, evenoccasionally stopping by the workshops onhis way home from the City to help with thecarpentry.

His taste in decoration was, it has to besaid, a little idiosyncratic, even odd. Thehouse was paneled in exotic woods importedfrom Africa and the Americas, giving it theaustere and gloomy air of a sort of million-aire’s monastery. There was little ornament-ation: an entrance hall of shimmering bricks,which looked like mother-of pearl but werein fact a type of industrial silicone; two giantembroidered Japanese panels depicting pea-cocks; and a gigantic seventeenth-centuryItalian fireplace. But it was his haven fromthe world. On one side, he had built a hugegroin-vaulted music room, in which he heldsmall concerts: string quartets playing cham-ber music by Brahms or Schubert, occasion-ally for Norman alone. And below the house,

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he had converted a small paddock into an ex-quisite little terraced garden shaded by fruittrees, overlooked by a pergola where he tookhis meals in summer.

Although he had some inherited wealth,the house aside, Norman lived quite simply.He had passed his father’s estate at MuchHadham, in Hertfordshire, on to his youngerbrother, who was married and had a family,while he contented himself with a little farm-yard cottage on the grounds.

NORMAN NEITHER LOOKED nor dressedlike a banker. Tall, with a broad foreheadand a pointed beard, already white, he hadthe long fine hands of an artist or a musician.He looked more like a grandee out ofVelázquez or a courtier from the time ofCharles II. But despite appearances, his pro-fessional pedigree was impeccable: his father

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and mother had come from two of the mostestablished and well-known English bankingfamilies.

Born in 1871, Montagu Norman, from hisearly childhood, had never quite seemed tofit in. He was sickly from birth and as a boysuffered from terrible migraines. His emo-tional and highly strung mother, herself sub-ject to depressions and imaginary illnesses,fussed over him excessively. Like his grand-father and father before him, he went toEton. But unlike his grandfather, father,uncle, and eventually his brother, who hadall been captains of the cricket XI, Montagudid not excel in the atmosphere of competi-tion and athleticism, and was a mis-fit—lonely, isolated, and generally moody. In1889 he went up to King’s College, Cam-bridge, but again unhappy and out of place,he withdrew after a year.

Even as a young adult, he seemed to have ahard time finding himself. He spent a

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desultory couple of years traveling inEurope, living for a year in Dresden, wherehe picked up German and an interest inspeculative philosophy, and a year inSwitzerland. In 1892, he returned to Englandto join the family concern, Martins Bank, inwhich his father and an uncle were partners,as a trainee clerk in the Lombard Streetbranch. Unable to muster much enthusiasmor interest in the dull business of commercialbanking, in 1894, he decided to try out hismaternal grandfather’s bank, Brown Shipley.Its main activity was financing trade betweenthe United States and Britain, which at leastgot him out of London and enabled him tospend almost two years working at the of-fices of Brown Brothers in New York City. Hefound life in America, with its fewer socialrestrictions, more liberating and less hide-bound than the constricted world of Londonbanking and even began to contemplate set-tling in the United States.

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Instead, he found his deliverance in war.In October 1899, the Boer War broke out.Norman, who had joined the militia in 1894,spending several weeks in training everysummer, and by now a captain, immediatelyvolunteered for active service. He was not aparticularly fervent imperialist. Rather heseems to have been motivated by a romanticquest for adventure and a desire to escapehis mundane existence.

By the time he arrived in South Africa inMarch 1900, the British occupying force ofsome 150,000 men was engaged in a bitterguerrilla war with a Boer insurgency of some20,000 men. Placed in command of a coun-terinsurgency unit, whose job it was to huntdown Boer commandos, Norman became achanged man in the field. Despite the diffi-cult conditions, poor food, oppressive heat,and lack of sleep, he relished the danger anddiscovered a newfound confidence. “I feel adifferent person now . . . ,” he wrote to his

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parents. “One looks ahead with something ofdismay to the time when one will again haveto settle down to civilized life.”

He was eventually awarded a D.S.O.—theDistinguished Service Order, the secondhighest decoration for bravery by an officer.It would remain one of his proudest achieve-ments—for many years, even when he hadattained worldwide prominence, it was theonly distinction that he insisted on includingin his entry in the British edition of Who’sWho. But sheer physical hardship took itstoll on his frail constitution, and in October1901, he developed severe gastritis and wasinvalided home.

Back in civilian life, he spent the next twoyears rebuilding his health, including severalmonths convalescing at his uncle’s villa atHyères on the Riviera, thus beginning a longaffair with the Côte d’Azur. Not until 1905was he able to resume full-time work atBrown Shipley, where for the next six years

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he was one of the four main partners—an es-pecially dispiriting time marred by endlessdisagreements with his colleagues over busi-ness strategy.

But it was his personal life that weighedmost on him. In 1906, a broken engagementdrove him into the first of his nervous break-downs. Thereafter he displayed the classicsigns of manic depression: periods of eu-phoria followed by severe despondency.Normally one of the most charming of com-panions, when afflicted by one of his blackmoods, which could last for weeks, he wouldbecome extremely irritable, indulging in tan-trums and lashing out irrationally at anyoneand everyone around him. After 1909, theseepisodes intensified until in September 1911he collapsed. Advised by his doctors to take acomplete rest, he worked only intermittentlyfor the next three years, becoming progress-ively more reclusive. As if searching forsomething, he traveled a great deal. He

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embarked on a three-month holiday throughEgypt and the Sudan in December 1911, andset off, a year later, on another extendedjourney through the West Indies and SouthAmerica.

In Panama, a friendly bank manager re-commended that he consult the Swiss psy-chiatrist Dr. Carl Jung. He immediately re-turned to Europe and arranged for an ap-pointment in Zurich. In April 1913, followinga few days of tests, including blood and spin-al fluid tests, the rising young psychiatrist in-formed Norman that he was suffering from“general paralysis of the insane” (GPI), aterm then used to describe the onset of men-tal illness associated with tertiary syphilis,and that he would be dead in a few months.While some of the symptoms of GPI were infact similar to those associated with manicdepression—sudden shifts between euphoriaand profound melancholy, bursts of creativ-ity followed by suicidal tendencies, delusions

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of grandeur—this was an egregiousmisdiagnosis.

Profoundly shaken, Norman sought asecond opinion from another Swiss doctor,Dr. Roger Vittoz, a specialist in nervous dis-eases, under whose care he spent the nextthree months in Zurich. Vittoz had de-veloped a method of alleviating mentalstress, using techniques similar to those usedin meditation. His patients were taught tocalm themselves by concentrating on a seriesof elaborate patterns, or sometimes on asingle word. Vittoz would later become verypopular in certain social circles in London,where his patients included Lady OttolineMorrell, Julian Huxley, and T. S. Eliot.

For Norman it was the beginning of alifelong history of experimenting with esoter-ic religions and spiritual practices. For awhile, he was a practicing Theosophist. Inthe 1920s, he became a follower of ÉmileCoué, a French psychologist who preached

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the power of self-mastery through consciousautosuggestion, a sort of New Age positive-thinking cult very much in vogue duringthose years. He even dabbled in spiritualism.He would end up embracing all sorts ofstrange ideas, insisting to one of his col-leagues, for example, that he could walkthrough walls. Because he also took a certainmischievous pleasure in twitting people withhis more unconventional notions, it was al-ways difficult to know how seriously to takehim.

It was perhaps not surprising that Normanshould have acquired a reputation as anoddity and an eccentric. He was viewed byhis City acquaintances as a strange andlonely man who spent his evenings alone inhis grand house immersed in Brahms, andwho frequently quoted the Chinese sage LaoTzu. He certainly made no attempt to fit intothe clubby atmosphere of the City. His in-terests were primarily aesthetic and

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philosophical, and though he counted a fewbankers among his close friends, he gener-ally preferred to mix in a more eclectic circleof artists and designers.

By THURSDAY, July 30, it had become ap-parent that what had initially appeared to bejust a remote Balkan affair between a fadingempire and one of its minor states was escal-ating toward a general European war. In re-sponse to Austria’s attack on Serbia, Russiahad now ordered a general mobilization. Theinternational political crisis brought a finan-cial crisis in its wake. The Berlin, Vienna,Budapest, Brussels, and St. Petersburg stockexchanges all had to suspend trading. Withall the bourses of Europe except Paris’s shut,the panic liquidation of securities concen-trated on London.

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On Friday, July 31, when Norman arrivedat his City office, just north of the Bank ofEngland, he found the financial communitysolidly against any British involvement in aContinental conflict. David Lloyd George, thechancellor of the exchequer, would later re-count how Walter Cunliffe, the governor ofthe Bank of England, a man of few words notusually given to theatrical displays, came toplead “with tears in his eyes ‘Keep us out ofit. We shall be ruined if we are dragged in.’”

London was the financial capital of theworld, and the City’s livelihood dependedmuch more on foreign finance than onproviding capital to domestic industry. Themerchant bankers housed in the warren ofstreets around the Bank of England, that se-lect inner circle of household names—Roth-schilds, Barings, Morgan Grenfell, Lazards,Hambros, Schroders, Kleinworts, and BrownShipley, which gave the City of London itsmystique—oversaw the greatest international

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lending operation the world had ever seen.Every year a billion dollars of foreign bondswere issued through London bankers. In theprevious year, Barings and the Hongkongand Shanghai Bank had syndicated a loan of$125 million to China; Hambros had broughta loan to the Kingdom of Denmark to mar-ket; Rothschilds had underwritten a $50 mil-lion issue for Brazil and was in the midst ofnegotiations for another loan; there had beenbond issues for Rumania, for the cities ofStockholm, Montreal, and Vancouver. InApril, Schroders had even led an $80 millionbond issue for the imperial government ofAustria, a country against which Britainmight soon be at war. All of this financingand the profits that went with it would dryup in the event of war.

The closure of stock exchanges aroundEurope, and the risk that gold shipmentswould be prohibited, causing the entire goldstandard to unravel, created a more

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immediate problem. It was now difficult, ifnot impossible, for Europeans to send moneyabroad to settle their trade debts. The mer-chant banks, which had guaranteed all thispaper, were faced with bankruptcy.

Bankers were not the only ones terrified bythe threat posed to world financial order bythe prospect of war. Even the foreign secret-ary, Sir Edward Grey, who of all the cabinethad staked his career on the ambiguous “un-derstanding” with France and was most com-mitted to fighting, warned the French am-bassador that “the coming conflict willplunge the finances of Europe into trouble,that Britain was facing an economic and fin-ancial crisis without precedent, and thatBritish neutrality might be the only way ofaverting the complete collapse of Europeancredit.”

At ten o’clock on Friday morning, a noticewas posted on the door of the stock exchangeannouncing that it was to be closed until

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further notice, for the first time since itsfounding in 1773.

Banks around the city began refusing topay out gold sovereigns to customers. Soon along queue assembled outside the Bank ofEngland on Threadneedle Street, the onebank that remained legally obliged to convertfive-pound notes into gold coins. There wasno panic, just an atmosphere of “acute anxi-ety.” While the crowd, many of them womenwho “stood nervously fingering their notes,”was admitted into the Bank’s inner court-yard, an even larger group of bemused on-lookers gathered on the steps of the RoyalExchange opposite. The Times reported that“although many hundreds of people, a greatmany of them foreigners, must have been inthe queue in the course of the day, there wasno kind of disorder.” This was in sharp con-trast to the reports of panic coming from thecities of Europe and could be attributed, as-serted the Times haughtily, to the

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“traditionally phlegmatic and cool” characterof the English. On the next day, the crowdoutside the Bank was even larger, but therewas still no sense of real alarm. Nevertheless,just in case, the Bank’s porters, in theirdistinctive salmon-pink tailcoats, red waist-coats, and top hats, were sworn in as specialpolicemen, with the right to make arrests.

There may have been no riots in thestreets, but fear was sweeping through theboardrooms of the great commercial banks.For the previous six months they had beenengaged in a terrible controversy with theBank of England over the adequacy of boththeir own and the Bank’s gold reserves in theevent of just such a crisis. In February, amemorandum circulated to a committee ofbankers had warned that “in case of an out-break of war, foreign nations would have thepower, and would use it ruthlessly, of inflict-ing serious financial disturbance by demand-ing gold.” Now faced with the prospect of

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large parts of the City of London going un-der, the commercial bankers in a panic hadbegun withdrawing gold from their accountsat the Bank of England. Its bullion reservesfell from over $130 million on Wednesday,July 29, to less than $50 million onSaturday, August 1, when the Bank, to attractdeposits and conserve its rapidly diminish-ing stock of gold, announced that it hadraised its interest rates to an unprecedented10 percent.

Meanwhile on the Continent, the crisiswas inexorably ratcheting up. Germanycountered the Russian mobilization with ageneral mobilization of its own on Friday,July 31, and dispatched an ultimatum de-manding that France declare its neutralityand turn over the fortresses of Toul and Ver-dun as a pledge of good faith. Next day, it de-clared war on Russia, and France ordered itsown general mobilization. By Sunday, it wasclear that in a matter of hours, France,

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committed to its alliance with Russia, wouldalso be at war with Germany. That weekendNorman cabled his American partners atBrown Brothers in New York, “Europeanprospects very gloomy.”

Over the weekend, the mood of Britainshifted decisively in favor of war. It was theAugust Bank Holiday weekend and thou-sands of people, too excited to stay home anddrawn outdoors by the sunshine, crammedinto the center of London all the way fromTrafalgar Square across Whitehall to Buck-ingham Palace, blocking all car and bustraffic, cheering and singing patrioticsongs—“La Marseillaise” as well as “GodSave the King”—and clamoring for action.

On Monday, the City would normally havebeen completely deserted for the AugustBank Holiday. Instead, Norman joined 150other bankers gathered at the Bank of Eng-land. It was a stormy meeting. As Lloyd Ge-orge, the chancellor of the exchequer, would

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later remark, “Financiers in a fright do notmake a heroic picture.” Many of the menparticipating did not know whether or notthey had lost everything they had. Voiceswere raised and one banker even “shook hisfist” at the governor himself. The meetingdecided to recommend to the chancellor thatthe Bank Holiday should be extended for an-other three days to buy time for the panic tosubside. The Treasury also announced thatall trade debts would automatically be exten-ded for an extra month while the Bank ofEngland decided how best to go about bail-ing out the merchant banks threatened with

insolvency or even bankruptcy.2

Norman’s immediate concern in those firstfew days was simply to make sure thatBrown Shipley would survive. Otherwise, hewould have no hope of getting his capital out.Over the weekend, hundreds of the firm’sAmerican clients, stranded in Europe,gathered at the Pall Mall offices, trying to

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cash their letters of credit. But as the dustbegan to settle, it became apparent that withso much of the firm’s business concentratedin the United States, which remained happilyneutral, it would emerge relatively un-scathed. As a member of the Court of theBank of England, however, Norman foundhimself having to spend most of his time onthe business of the Bank, particularly in try-ing to disentangle the labyrinth of unpaidtrade debts.

Strangely, the enormous tensions of thetime, the burden of the workload, which lefthim little time to brood, actually seemed toalleviate his mental incapacities. As he wroteto a friend in the United States, “I have beenat work morning and night, and not an acheor pain have I had, nor even been better foryears past.” In an odd but very real way, thewar was to be good for him.

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Hjalmar Schacht

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3. THE YOUNG WIZARD

Germany: 1914

’Tis a common proof That lowlinessis young ambition’s ladder

—WILLIAM SHAKESPEARE, Julius Caesar

Across Europe that week, people were leftstunned by the speed of events. The crisisseemed to have come from nowhere. Andeven though most of the Continent had beenhalf expecting a war for the last decade, fewcould have imagined, at the end of June, that

it would be the assassination of an Austrianarchduke that would set off the avalanche.

The continued complacency of most Ger-mans during the month of July 1914, evenafter the assassination in Sarajevo, was verymuch the result of a deliberate campaign bytheir own government to project a surface ofcalm. Behind the scenes, Austria was beinggoaded on by the highest circles in Berlin touse the assassination as an excuse to bringSerbia to heel once and for all. Meanwhile,both the Austrian and German leaders tookgreat pains in public to keep their intentionswell disguised. All put on a great show ofmaintaining their usual summer holidayschedules. The emperor Franz Joseph madea point of staying at his hunting lodge at BadIschl for all of July. The kaiser departed onJuly 6 for his annual three-week holiday,aboard his yacht, Hohenzollern, in the Nor-wegian fjords. The chancellor, Theobald vonBethmann-Hollweg, came to Berlin for some

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emergency meetings in early July but rapidlyresumed his holiday on his 7,500-acre estateat Hohenfinow, some thirty miles away,while the chief of the General Staff, GeneralHelmuth von Moltke, remained in Karlsbadtaking the waters, and Secretary of StateGottlieb von Jagow departed on hishoneymoon.

Among those whom the crisis took by sur-prise was a thirty-six-year-old banker in Ber-lin with the uniquely improbable name ofHorace Greeley Hjalmar Schacht. In spite ofthe authorities’ elaborate charade, rumors ofwar had already begun to percolate early inJuly within the highest banking circles inGermany. One of those who seemed to take aparticularly pessimistic view of the situationfrom the start was Max Warburg, scion of theprominent Hamburg banking family, whosignificantly was known to be close to theimperial court. The famously indiscreet kais-er himself contributed to the gossip from

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those circles by insisting that his friend Al-bert Ballin, head of the Hamburg-AmericaLine, be informed in advance of a generalmobilization. There was also talk that thecrown prince had been breaking the strictestconfidences to warn his friends in financialcircles, including the managing director ofthe Dresdner Bank, Eugen Guttmann, thatfor all the surface calm, the optimism of theBerlin Stock Exchange was misplaced andwar between Germany and Russia verylikely.

But Hjalmar Schacht, only an assistantdirector and branch manager at Guttmann’sDresdner Bank, was still too far down theBerlin banking hierarchy to be party to theseexalted hints from court. From his lowlypoint of view, he found it hard to believe thatthe situation had been allowed to spiral sofar out of control—it seemed so profoundlyirrational to let international rivalriesthreaten the German economic miracle.

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THOUGH SCHACHT’S POSITION at theDresdner, one of Germany’s two largestbanks, was still modest, for a young man inimperial Germany with no family connec-tions, he had come a long way. He was cer-tainly being noticed. In the months beforethe crisis began, he had been working on aloan for the city of Budapest, financed by aconsortium of German, Swiss, and Dutchbanks. The Swiss banker Felix Somary wouldlater recount how Schacht even then “consid-erably outshone his fellow directors, all sonsof rich fathers or mere time-servers.”

With his clipped military mustache andbrush-cut hair parted very precisely downthe center, Schacht could easily have passedfor a Prussian officer. He walked very erectlywith a “curiously stiff gait,” his rigid bearing,exaggerated by the starched, high, gleaming

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white celluloid collars that he favored. But hewas neither a Prussian nor in any way con-nected to the military. He came from alower-middle-class family, originating fromthe area of Germany bordering on Denmark,and had been brought up in Hamburg, themost cosmopolitan city in the whole empire.

Schacht would one day become famous forhis boundless ambition and ferocious will tosucceed. They were in part a reaction againsta father with a long history of failure. Wil-helm Ludwig Leonhard Maximillian Schachthad been born on the western coast of NorthSchleswig, a narrow neck of land connectingDenmark to Germany. The Dithmarschen isa region of salt marshes and small isolateddairy farms, a bleak and wind-swept countryprotected by large dykes against the con-stantly encroaching North Sea. The peopleare reputedly independent and tough, lacon-ic to the point of rudeness. Schleswig and theneighboring duchy of Holstein had

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historically been ruled by the Danish crown,although the population was split betweenGerman- and Danish-speakers andthroughout the nineteenth century, sover-eignty over the two states had been subject toa dispute between Prussia and the Kingdom

of Denmark.3 In 1866, following two shortwars, Bismarck annexed Schleswig and Hol-stein, incorporating them into the Prussianempire. After the war, in 1920, the northernparts of Schleswig, including the region fromwhich the Schacht family had come, revertedto Denmark as a result of a plebiscite.

Wilhelm Schacht was one of the elevenchildren of a country doctor. In 1869, un-happy at the prospect of having become aPrussian subject liable to the Prussian milit-ary draft, five of the Schacht brothers emig-rated to the United States, where Wilhelmspent seven years. But although he became aU.S. citizen, he never quite managed to findhis feet, drifting from one job to another,

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working for a while in a German brewery inBrooklyn and in a typewriter factory in up-state New York. Finally, in 1876, he decidedto return to Germany.

Arriving back just as the economic boomunleashed by the Franco-Prussian War wasending and a depression setting in, he con-tinued to be plagued by the same bad luck.During the next six years, he tried his handat various professions—schoolteacher, editorof a provincial newspaper, manager of a soapfactory, bookkeeper for a firm of coffee im-porters—all unsuccessfully. Eventually hefound a job as a clerk with the Equitable In-surance Company, where he would remainfor the next thirty years. While Schacht wasalways a little defensive about his father,claiming that he was simply “a restless wan-derer unable to remain for long in oneplace,” the contrast between the father’sfecklessness and the gigantic ambitions ofthe son could not have been greater. Even

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Schacht could not help observing in his auto-biography that by the age of twenty-five, hewas already earning more than his father.

In contrast to his awkward and retiringfather, his mother, “sentimental, gay and fullof feeling,” always cheerful despite years ofhardship, provided the center of affection forthe family. Born the Honorable ConstanzeJustine Sophie von Eggers, the daughter of aDanish baron whose family had a long his-tory of service to the crown, she had taken alarge step down the social ladder by marry-ing Wilhelm Schacht. Her grandfather, acounselor to the king, had worked for theemancipation of serfs and had been respons-ible for a currency reform in Denmark in thelate eighteenth century. But the family for-tunes had declined over the years, leavingyoung Constanze von Eggers without any in-heritance. She had met Wilhelm Schacht,then a penniless student, in 1869 and

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followed him to the United States, wherethey were married three years later.

Hjalmar Schacht himself was born in 1877,a few months after his family returned toGermany, in the small town of Tingleff inNorth Schleswig. He was christened with theunusual names Horace Greeley Hjalmar—ina typically impractical gesture, his father hadchosen his first two names as a tribute to thefounder and editor of the New York Tribune,whom he had admired while living in Brook-lyn. His grandmother had insisted, however,that he have at least one conventional Ger-man or Danish name, and the young Schachtgrew up as Hjalmar. Later in his life, though,some of his English friends and associateswould use the name Horace.

During his early childhood, the familymoved frequently as Wilhelm Schachtbounced from job to job, but in 1883, they fi-nally settled in Hamburg. Germany in thelast few years of the nineteenth century was

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a country of contradictions. Gripped by themost rigid class system in Europe—in fact al-most a caste system—and governed by anautocratic constitution that still vested mostof the power in the monarch and in theJunker military cadre surrounding him, itsimultaneously offered Europe’s most mer-itocratic educational system. But for that,Schacht might have been condemned to thenarrow confines of lower-middle-class exist-ence as a clerk or perhaps a teacher. Instead,in 1886, at the age of nine, he was acceptedinto the Johanneum, one of the finest gym-nasia in Hamburg, where he received a rigor-ous classical education, emphasizing Latin,Greek, and mathematics.

He could not completely escape the con-strictions of his class-ridden society. Life atschool was full of petty humiliations stem-ming from his family’s poverty: taunts at hisliving in a ratty tenement district, mockery ofthe cheap cloth of his trousers, sharing a

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graduation gown because he could not affordto buy one for himself. Cold-shouldered bythe richer students, he was solitary, obsess-ively hardworking, and conscientious.

In 1895, Schacht graduated from the Jo-hanneum and entered a university. Finallyliberated, over the next few years he actuallyseemed to enjoy himself. He wrote poetry;joined a literary society; worked as a stringerfor the Kleines Journal, a gossipy Berlintabloid; and even composed the libretto for

an operetta.4 While he initially enrolled atthe University of Kiel, he followed the Ger-man practice of transferring from one uni-versity to another, spending semesters inBerlin, Munich, Leipzig, and in 1897, thewinter semester in Paris. He began as a med-ical student, tried his hand at literature andphilology, and eventually graduated with amajor in political economy, going on to writea doctoral thesis on the foundations of Eng-lish mercantilism in the eighteenth century.

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Doctorate in hand, Schacht began a careerin public relations, initially at an exporttrade association, writing economic com-mentary for a Prussian journal on the side.Diligent and reliable, eager to impress thebankers and business magnates whom hewas now beginning to meet, in 1902, he fi-nally caught the attention of a board memberof the Dresdner Bank and was offered a job.He rose quickly and, by 1914, was a well-established middle-level officer of one of thepowerful banks in Berlin.

In imperial Germany, a man of Schacht’sbackground would have found his opportun-ities for advancement in the military or thecivil service limited. But in the years leadingup to the war, Germany had gone from beingan agrarian backwater at the edge of WesternEurope, to becoming its leading industrialpower, overtaking even Britain—an econom-ic surge that had thrown open enormous op-portunities in business to ambitious men. It

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was a particularly good time to be a banker,for in no other European country were banksquite so powerful. While Berlin still couldnot compete with either London or even Par-is as an international financial center, thelarge German houses dominated the domest-ic economic landscape as the main suppliersof long-term capital to industry.

Disguising his social insecurities behind astiffly formal exterior, Schacht seemed topossess a natural ability to get himself no-ticed. In 1905, his fluency in English got himsent with a member of the Dresdner’s boardto the United States, where they met withPresident Theodore Roosevelt, and more im-portant for a young banker, were invited tolunch in the partners’ dining room at J. P.Morgan & Co.

He also married well—to the daughter of aPrussian police officer who had been as-signed to the imperial court. By 1914, theyhad two children, the eleven-year-old Lisa

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and the four-year-old Jens, and were livingin a small villa in the western garden suburbof Zehlendorf, from which Schacht com-muted to and from work into the Potsdam-merplatz station on one of the modern elec-tric trains that now linked all of Berlin.

As SCHACHT WATCHED the internationalcrisis grow, he continued to hope, even untilthe end of July, for a last-minute diplomaticsolution. Though he insisted that it wouldnever come to war, this assertion stemmedprimarily from wishful thinking. He haddone well for himself in imperial Germany,had much to lose, and found it difficult tolook at his own country dispassionately. Fordespite his liberal family background, he wasa typical product of the Kaiserreich—con-formist, unquestioningly nationalistic, and

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fiercely proud of his country and its materialand intellectual achievements.

Like most other German bankers and busi-nessmen, he believed that the villain of thepiece was a fading Britain conspiring to denyGermany its rightful place among the GreatPowers. As he later wrote, “Germany’s steadyadvance in the world’s markets had arousedthe antagonism of those older industrialcountries, who felt their chances in the mar-kets were being threatened.” England in par-ticular had “engaged in creating a strong net-work of alliances and agreements directedagainst Germany,” designed to encircle it.

That last few days of July 1914 constituteda whispering gallery of rumors and counter-rumors. Berlin was gripped by alternatingwaves of war hysteria and anxiety. From theDresdner Bank’s headquarters next to theOpera House on the Bebelplatz, Schacht hada ringside seat at the epic drama being en-acted in the streets below. Daily, huge

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crowds of people paraded under the greatlimes of Unter den Linden, singing “Deutsch-land, Deutschland, Über Alles” and otherpatriotic songs. Several times that weekangry mobs attempted to storm the Russianembassy, only a few blocks away from hisoffice.

Finally, on Friday, July 31, at 5:00 p.m. alone lieutenant of the Grenadier Guardsclimbed up on the base of the giant equestri-an statue of Frederick the Great, which di-vided Unter den Linden just outside theDresdner’s offices, to read a proclamation inthe emperor’s name. The Russians hadordered a general mobilization. A state ofDrohende Kriegsfahr, imminent danger ofwar, was in force in Germany—still one stepaway from a declaration of war, but placingthe city of Berlin under full military control.

The next day, when a general mobilizationwas announced, the streets went wild withexcitement. Pubs and beer gardens stayed

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open all night. A craze of spy hunting sweptover the city and the country. Anyone sus-pected of being a Russian agent, including afew German soldiers, was beaten to death.On August 3, Germany declared war onFrance, and to reach France, invaded Belgi-um the next morning. Britain, which hadguaranteed Belgian neutrality since 1839, is-sued an ultimatum to Germany to withdraw.When this expired at midnight on August 4and Germany found herself at war with Bri-tain, a large “howling mob” stoned all thewindows of the British embassy, then movedon to the Hotel Adlon next door to demandthe heads of English journalists stayingthere. Bizarre rumors spread through thecountry. According to one police report, “TheParis banking house of Mendelssohn is try-ing to send a hundred million francs, in gold,across Germany to Russia.” The hunt for“gold cars” became a curious obsession inthe countryside; vehicles driven by innocent

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Germans were accosted by armed peasantsand gamekeepers. A German countess and aduchess were even shot by accident.

Nevertheless, despite the public hysteria,those first few days of war proved to be relat-ively benign. Germany seemed to be weath-ering the financial storm that swept acrossEurope remarkably well—in Schacht’s view,far better than was Britain. There were someminor debacles. The collapse of stock valuesin the last week of July put several banks inGermany in difficulties—the NorddeutscheHandelsbank, one of the largest banks inHanover, had to close its doors—and was ac-companied by the usual litany of suicides byoverextended financiers. One of the best-known bankers in Thuringia shot himself onWednesday, July 29, and the next day aprivate banker in Potsdam killed his wife,then took cyanide himself.

But for all this turmoil among the rich, thegeneral public remained remarkably calm.

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There was a nationwide run on small savingsinstitutions, and long lines of women, manyof them domestic servants and factory work-ers, could be seen patiently waiting outsidethe city municipal savings banks to withdrawtheir deposits. But there was none of theusual panic demand for gold that in thosedays routinely accompanied entry into war,and the Reichsbank lost only about $25 mil-lion of its $500 million in gold reserves inthe first few days.

It was no secret that the Reichsbank hadbeen preparing against such an event for sev-eral years. The financial spadework had be-gun in earnest after the Agadir crisis of 1911when Germany decided deliberately to pro-voke a confrontation with France over Mo-rocco. In the middle of the crisis, Germanywas hit by a financial panic. The stock mar-ket plunged by 30 percent in a single day,there was a run on banks across the countryas the public lost its nerve and started

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cashing in currency notes for gold, and theReichsbank lost a fifth of its gold reserves inthe space of a month. Some of this wasrumored to have been caused by a withdraw-al of funds by French and Russian banks,supposedly orchestrated by the French fin-ance minister. The Reichsbank came close tofalling below the statutory minimum of goldbacking against its currency notes. Facedwith the potential humiliation of being driv-en off the gold standard, the kaiser backeddown and had to watch impotently while theFrench ended up taking over most ofMorocco.

A few months later, the emperor, stillnursing his wounded pride, summoned agroup of bankers, including the president ofthe Reichsbank, Rudolf von Havenstein, anddemanded to know whether German bankswere capable of financing a European war.When they hesitated, he reputedly told them,

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“The next time I ask that question, I expect adifferent answer from you gentlemen.”

After that episode, the German govern-ment was determined that it would neveragain allow itself to be financially black-mailed. Banks were told to build up theirgold reserves, the Reichsbank itself increas-ing its holdings from $200 million at thetime of Agadir to $500 million in 1914—bycomparison, the Bank of England held onlysome $200 million. The government even re-vived a plan originally conceived by Freder-ick the Great back in the eighteenth centuryfor a war chest of bullion—$75 million ingold and silver—stored in the Julius Tower inthe fortress of Spandau on the western out-skirts of Berlin. Furthermore, to prevent thesort of raid on the mark that the French hadallegedly orchestrated in the Moroccancrisis, the Reichsbank instructed banks tocurb the amount of money taken on depositfrom foreigners.

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With all these measures under its belt, theReichsbank entered August 1914 with largeenough gold reserves on hand to feel confid-ent about avoiding a replay of 1911 and wasalso quick, once the crisis became apparent,to take preemptive action by suspending thegold convertibility of the mark on July 31.

But as Schacht watched the long columnsof soldiers in their field-grey uniformsmarching through the cheering, weepingcrowds of Berlin, he could not help thinkingback to Prince Bismarck. The Iron Chancel-lor had spent his whole career making surethat Germany would not be so isolated with-in Europe that it would have to fight a war ontwo fronts against Russia and France. As aschoolboy of seventeen, Schacht had atten-ded a torchlight procession staged in honorof the prince, then seventy-nine years old, inretirement at his estate at Friedrichsruh inthe Saxon Forest, just outside Hamburg. Theimage of “a tremendous solemnity

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[emanating] from the old man as though healone foresaw how onerous and dark the fu-ture would be” engraved itself on Schacht’smemory. He liked to think that during theparade Bismarck had cast that piercing lookdirectly at him in an attempt to warn theyoung man and the other school-boysgathered there, not to “allow his work to becarelessly destroyed.” Even in youth, Schachthad a vivid imagination and a grandiose vis-ion of his own destiny.

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4. A SAFE PAIR OF HANDS

THE United States: 1914

Show me a hero and I will write youa tragedy.

—F. SCOTT FITZGERALD

AMONG THE MANY thousands of Americ-ans in Europe during that last summer ofpeace were Benjamin Strong, the forty-one-year-old president of the Bankers TrustCompany, and his beautiful twenty-six-year-old wife, Katharine. Theirs was a leisurelytrip, combining work and pleasure. Strong

had been elected president of the bank inJanuary, following the retirement of hisfather-in-law, Edmund Converse, and thiswas his first extended vacation since takingover. He had left the United States in themiddle of May and, after visiting Paris onbusiness, met up with Katharine in Berlin.They spent several weeks there with Kathar-ine’s older sister, the baroness Antoinettevon Romberg, who had moved to Berlin in1907 after a highly public divorce and child-custody battle in New York, and marriedBaron Maximilien von Romberg, a Prussianaristocrat and captain in the Eighteenth Fu-

siliers.5 The Strongs then proceeded to Lon-don and were in England when news of thearchduke’s assassination arrived. However,the reaction of the financial markets wasmuted, and they felt no need to rush home.Instead, they remained in London for severalweeks, not sailing back to America until lateJuly.

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Benjamin Strong in 1914

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They returned to a New York more con-cerned about the threats to business prosper-ity from the Democratic administration thanabout a European conflagration. By the lastweek of July, Strong was back at his office at14 Wall Street. At thirty-seven stories high,the Bankers Trust headquarters was one ofthe great signature buildings of the financialdistrict, the third tallest in the city, its crowna granite seven-story stepped pyramid, vis-ible for miles around. Finished from floor toceiling in the most delicate Tavernelle Claircream-colored Italian marble, the bank’s of-fices were among the most luxurious in thecity.

In the mere twelve years since its found-ing, Bankers Trust had grown more thanthirtyfold. With deposits of close to $200million, it was the second largest trust com-pany in the country and considered one ofthe dominant institutions on Wall Street.Nevertheless, it was still surrounded with a

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certain mystery. In 1912, during the PujoCommittee hearings on the power of NewYork banks and the “money trust,” it came tolight that though Bankers Trust had numer-ous stockholders, the entire voting powerwas vested in the hands of just three trust-ees: Henry Davison, a senior partner at J. P.Morgan & Co.; George Case of White andCase, Morgan’s principal counsel; and DanielReid, a founder and executive of Morgan-controlled U.S. Steel. The fact that a pent-house apartment had been specially con-structed on the thirty-first floor of theBankers Trust building for Pierpont Morgan

himself6 only served to confirm the widelyheld view that Bankers Trust was simply onemore manifestation of the power of theHouse of Morgan.

The summer had been very quiet on WallStreet. After a bull market that had stretchedthrough the first few years of the century,stocks had been flat for almost four years,

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and the volume of trading was low. Member-sof the exchange had taken advantage of theJuly lull in trading to move to their summerhomes on Long Island or the Jersey shore.The first signs of crisis hit New York onTuesday, July 28, when Austria declared waron Serbia. The Dow fell by 3 points from 79to 76, a decline of 4 percent, but the next dayseemed to recover its poise, despite the sus-pension of trading on the major marketsacross Europe, from Rome to Brussels, in-cluding the largest on the Continent, Berlin.On Thursday, July 30, the United Stateswoke to news of a Russian general mobiliza-tion, and stocks experienced their singlelargest down day since the panic of 1907,falling 7 percent.

Although no one saw even a remote likeli-hood that the United States would becomeinvolved, it was widely feared that as thebiggest importer of capital in the world, itwould be badly hurt by a shutdown of

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international credit. Some $500 million inEuropean loans to Americans was scheduledto fall due between the beginning of Augustand the end of the year. Under normal cir-cumstances, it would have been taken forgranted that these would be rolled over. Butin the current situation, there was a risk thatEuropean investors would demand immedi-ate repayment, while at the same time ex-ports might be hit because of threats to ship-ping. Over the next few days, the dollar, nor-mally fixed at $4.86 to the pound, fell dra-matically as American borrowers scrambledto cover their debts falling due with gold andEuropean currencies, especially sterling.

Late on Thursday, July 30, Strong wassummoned to a meeting at the temporary of-fices of J. P. Morgan & Co. at 15 BroadStreet—the headquarters at 23 Wall Streetwere being reconstructed. The city’s innercircle of banking officials were there: JackMorgan, the nominal head of the House of

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Morgan and son of the founder; Henry Dav-ison, the senior partner; A. Barton Hepburn,chairman of the Chase National Bank; Fran-cis L. Hine, president of the First NationalBank; and Charles Sabin of the GuarantyTrust Company. The gathering broke upearly. Anxious to avoid compounding thegeneral alarm now tottering on the edge ofpanic, the participants adopted the time-honored tradition of captains of financeeverywhere and issued a series of anodynestatements that were heavily economicalwith the truth: they “were so little worriedthat they were dispersing to go out of NewYork.” Jack Morgan declared that he was re-turning to the yacht party from which he hadbeen summoned; Henry Davison said that hewas leaving for his summer home on LongIsland.

But the following morning, once the newshit New York that even the London exchangehad been forced to suspend trading, the

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same bankers met again—this time joined byFrank Vanderlip of the National City Bankand Dwight Morrow, one of the new Morganpartners—and decided to close the New YorkStock Exchange.

AMONG THE EIGHT men gathered at theHouse of Morgan that Friday morning inAugust, the one who seemed to understandbest the significance of the tempest of eventswas Henry Davison, Jack Morgan’s right-hand man—he essentially ran the firm whileMorgan, the largest capital partner, lived thelife of an English squire. A few days after themeeting, Davison telegraphed his colleague,Thomas Lamont, who was trout fishing inMontana. “The credit of all Europe hasbroken down absolutely. Specie paymentssuspended and moratorium in force inFrance and practically in all countries,

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though not officially in England . . . it is as ifwe had had an earthquake, are as yet some-what stunned, but will soon get to rightingthings.” Even then, as the dollar plummeted,money flooded out of the United States, andborrowers struggled to remain solvent, Dav-ison’s intuition told him that this was to be atime of new openings for himself, for theHouse of Morgan, and for the country.

But then Henry Davison had a remarkablenose for opportunity. He was a self-mademan. In this, he was not unusual. In fact, theonly one of the eight barons of Wall Streetmeeting that day to have inherited his wealthwas Jack Morgan. A. Barton Hepburn hadbeen a professor of mathematics before en-tering the world of finance. Several had noteven gone to college. Frank Vanderlip hadgrown up on a farm in Illinois and started hiscareer as a journalist. Charles Sabin had be-gun as a flour salesman, going into bankingonly when an Albany firm hired him because

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it needed a pitcher for its baseball team.Davison himself had grown up in the hard-scrabble hills of north central Pennsylvania,the son of an itinerant plow salesman.

While Benjamin Strong, the youngest ofthe eight men at the Morgan meeting, hadneither been born to wealth nor had atten-ded college, he had most of the other advant-ages that a ruling-class background couldprovide. Tall and slim, good-looking but for aprematurely receding hairline and a largenose that spoke of ruthlessness, he exudedthe confidence of the Ivy League athletic star.Born of good Yankee stock and able to tracehis roots back to a Puritan family that hadlanded in Massachusetts from Taunton, Eng-land, in 1630, he came from a line of mer-chants and bankers. Benjamin’s great-grand-father, also named Benjamin, had been Alex-ander Hamilton’s clerk at the U.S. Treasuryand one of the founders of the Seaman’sBank. Members of the family, all extremely

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conscious of their social obligations, werevery active in church affairs. The first Ben-jamin Strong was on the Executive Commit-tee of the American Bible Association and hisson Oliver became president of the Societyfor the Reformation of Delinquents. Strong’smother’s family had similar roots—her fatherwas a minister and sat on the PresbyterianBoard of Publications.

Benjamin was born in a small Hudson Val-ley town in 1872, the fourth child of five, andgrew up in the New Jersey suburbs. When hegraduated from Montclair High School in1891, he had intended to follow his elderbrother to Princeton, but his father, whohelped manage the private finances and phil-anthropies of the railroad millionaire MorrisK. Jesup, was going through a period of fin-ancial difficulty; so Benjamin had to skip col-lege and instead joined a Wall Street broker-age firm, which he quit in 1900 to join abank.

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In 1895, Strong married Margaret Le-boutillier; in 1898, the young couple movedto Englewood, New Jersey, and over the nextfew years had two boys and two girls, and es-tablished themselves as an up-and-comingyoung couple among the socially prominentof the town. Strong played golf and bridge,was a member of the Englewood tennisteam, and became treasurer of the Engle-wood Hospital. It was there he met Davison.

In later years, when Davison had becomeone of the great figures in banking, it waspart of the folk wisdom of the Street that thepath to fame and fortune lay on the 8:22a.m. train from Englewood that Harry Davis-on took into the city every morning. If youhappened to strike up an acquaintance withhim and he liked you, it was said, then youwere made. As with all myths, there wassome truth to this. Two of Davison’s futurepartners, Thomas Lamont and Dwight Mor-row, had been discovered and launched on

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their Wall Street careers because they wereneighbors to Davison; and in 1904, Davisonoffered Strong a job as secretary of theBankers Trust Company, which he hadhelped found the year before.

Strong owed Davison more than his ca-reer. In May 1905, while he was away atwork, his wife, Margaret, apparently in thegrip of postpartum depression after the birthof their fourth child, and recently releasedfrom a sanatorium in Atlantic City, chancedupon a revolver that the Strongs had justbought after a burglary scare in the neigh-borhood and shot herself. The next yearStrong’s eldest daughter died of scarlet fever.The Davisons immediately took Strong’sthree surviving children—Benjamin Jr.,Philip, and Katherine—into their home.

In 1907, after less than two years of wid-owhood, Strong remarried—some thoughtwith undue haste. His new wife, Katharine, ashy girl of eighteen, seventeen years his

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junior, was the daughter of Edmund Con-verse, the extremely rich president ofBankers Trust and a longtime associate of Pi-erpont Morgan. Henry Davison served asbest man, and the new couple moved fromEnglewood to a house on the Converse estatein Greenwich, Connecticut, where Katharinecould be close to her family.

A few months later, in October 1907, theUnited States was rocked by a severe finan-cial crisis. The panic began, like so many be-fore it, with the failure of a large speculativeventure, this time an attempt by a couple ofunscrupulous characters to corner the mar-ket in the stock of a copper company. Whenthey failed and one of them, the president ofa Brooklyn-based bank, was rumored to havelost $50 million, most of it borrowed, a runon his bank set in. By the end of October, thefear had infected the whole city and therewere runs on a variety of banks across New

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York, including the Knickerbocker TrustCompany, the third largest in the city.

The United States was then the only majoreconomic power without a central bank.Throughout its history, the country had dis-played an unusually ambivalent attitude tothe whole institution of central banking.While East Coast financiers, who werelenders of money, kept pressing the case forplacing authority over the country’s monet-ary system in a single over-arching bank,there was much support for the argument,particularly from farmers, who typically bor-rowed money, that putting so much power inthe hands of one institution was somehowun-American and undemocratic. Because ofthis fundamental disagreement, bankingpolicy in the United States had careenedfrom one extreme to another.

In 1791, Alexander Hamilton, the secretaryof the treasury, had created the country’sfirst central bank, the First Bank of the

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United States, although its domain was notvery grand because there were only four oth-er banks in the whole country at the time. In1811, the First Bank’s charter was allowed toexpire. In 1816, the country tried again, set-ting up what came to be known as the Se-cond Bank of the United States. In 1836, therepublic had second thoughts once again andunder President Andrew Jackson, the Se-cond Bank’s charter was also not renewed.For the next seventy-plus years, the UnitedStates survived and even prospered withouta central bank, albeit at the price of having aprimitive, fragmented, and unstable bankingsystem especially prone to periodic panicsand crises.

In 1907, as one New York bank after an-other fell victim to a run, the financial com-munity, without any central bank to look to,turned to J. Pierpont Morgan, the preemin-ent financier of his generation. He had livedthrough more panics than had any other

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banker, in 1895 actually bailing out the Un-ited States government itself when it waswithin days of running out of gold and de-faulting on its debts to Europe. Though J. P.Morgan & Co. was by no means the country’sbiggest bank, Pierpont Morgan himself hadacquired an extraordinary aura of authoritythat gave him the right, indeed the obliga-tion, to take command during financialcrises. It helped that he was believed to benot simply rich, but extremely rich—like theRockefellers or the Vanderbilts or AndrewCarnegie—and that with his fierce gloweringstare and terrible temper, he intimidatedmost people, including his own partners. Itwould turn out that the first of these attrib-utes was exaggerated, for he was not nearlyas wealthy as most people thought—when hedied in 1913, leaving an estate then valued at$80 million, John D. Rockefeller, who him-self was worth $1 billion, is said to have

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shaken his head and said, “And to think thathe wasn’t even a rich man.”

Morgan swiftly assembled the very bestfinanciers to assist him with the rescue ef-fort, drafting Davison and Strong to act ashis principal lieutenants—they were exactlythe type of young men with which he liked tosurround himself: athletic, good-looking, de-cisive, and confident. The task force had twoassignments. The first, on which Davisonand Strong concentrated, was to decidewhich banks caught in the upheavals were tobe bailed out and which left to go under. Thesecond, which Morgan led, was to raise themoney for the rescue effort. By early Novem-ber, despite having injected $3 million of hisown cash, raised over $8 million from theother banks collectively, secured a commit-ment from the secretary of the treasury toprovide $25 million in deposits, and evenmanaged to extract $10 million from John D.Rockefeller Sr., Morgan had been unable to

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check the panic. Depositors continued towithdraw their money and one of the largesttrust companies in the country, with over$100 million in deposits, tottered on theedge of collapse.

Finally, on the night of Sunday, November3, Morgan summoned the presidents of themajor New York banks to his new library, atthe corner of Madison Avenue and Thirty-sixth Street, an Italian Renaissance-stylepalace he had built next door to his house toshowcase his collection of rare books,manuscripts, and other artwork. Its marblefloors, frescoed ceilings, walls lined withtapestries and triple-tiered bookcases of Cir-cassian walnut, crammed full of rare Biblesand illuminated medieval manuscripts, madeit an incongruous setting for a meeting of thebanking establishment. Once the moneymenhad gathered, Morgan had the great orna-mented bronze doors to the library lockedand refused to let anyone leave until all had

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collectively agreed to commit a further $25million to the rescue fund.

The 1907 panic exposed how fragile andvulnerable was the country’s banking system.Though the panic had finally been containedby decisive action on Morgan’s part, the pan-ic became clear that the United States couldnot afford to keep relying on one man toguarantee its stability, especially since thatman was now seventy years old, semiretired,and focused primarily on amassing an un-surpassed art collection and yachting tomore congenial climes with his bevy ofmiddle-aged mistresses.

Shaken by the crisis, the U.S. Congress de-cided to act. In 1908, it created the NationalMonetary Commission, consisting of ninesenators and nine representatives, andchaired by Senator Nelson Aldrich, to under-take a comprehensive study of the bankingsystem and to make recommendations for itsreform. Over the next few years, the

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commission produced a voluminous set ofstudies on central banking in Europe but notmuch else. Memories of how close the sys-tem had come to imploding progressivelydimmed and the momentum for reformstalled.

In 1912, Davison, now a Morgan partner,frustrated by the lack of progress and fearingthat without changes the next panic would beeven more catastrophic, set out to convene ameeting of experts to develop a formal planto establish an American central bank—thethird in the nation’s history. Only five menwere invited. Besides Davison himself, therewas Senator Aldrich; Frank Vanderlip, theforty-eight-year-old president of the Nation-al City Bank, the largest in the country; PaulWarburg, of the well-known Hamburg bank-ing family, a forty-two-year-old partner atKuhn Loeb who, although he had only justmoved to New York, was probably thegreatest expert on central banking in the

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United States; A. Piatt Andrew Jr., the thirty-nine-year-old assistant secretary of the treas-ury, who had been a professor at Harvardand accompanied the original commissionon its European study tour; and BenjaminStrong, then thirty-nine years old.

Davison was worried, and for good reason,that any plan put together by a group fromWall Street would immediately be suspect asthe misbegotten product of a bankers’ cabal.He therefore chose to hold the meeting insecret on a small private island off the coastof Georgia—in effect creating the verybankers’ cabal that would have aroused somuch public suspicion. The preparationswere elaborate. Each guest was told to go toHoboken Station in New Jersey on Novem-ber 22 and board Senator Aldrich’s privaterailroad car, which they would find hitchedwith its blinds drawn to the Florida train.They were not to dine together, nor to meetup beforehand, but to come aboard singly

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and as unobtrusively as possible, all undercover of going duck hunting. As an addedprecaution, they were to use only their firstnames. Strong was to be Mr. Benjamin, War-burg Mr. Paul. Davison and Vanderlip went astep further and adopted the ringingly obvi-ous pseudonyms Wilbur and Orville. Later inlife, the group used to refer to themselves asthe “First Name Club.”

Disembarking at Brunswick, Georgia, theywere taken by boat to Jekyll Island, one ofthe small barrier islands off the Georgiacoast, owned by the private Jekyll IslandClub, which had opened in 1888 as a huntingand winter retreat for wealthy northerners.Described by one magazine as “the richest,the most exclusive and most inaccessibleclub in the world,” it numbered only somefifty members, including J. P. Morgan, Willi-am Vanderbilt, William Rockefeller, JosephPulitzer, and various Astors and Goulds.

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Membership was now closed and had be-come hereditary.

For the next ten days, the little party hadthe club with its skeleton staff to them-selves—it had been closed for the summerand would not be open to other members forseveral weeks. They worked every day fromearly morning to midnight, convening in theluxurious rambling clubhouse with its turret,fifteen-foot ceilings, and numerous verandasand bay windows overlooking the AtlanticOcean. Davison and Strong rose at daybreakto go riding or swimming, before settlingdown to work after breakfast. They ate copi-ously—pans of fresh oysters, country hams,wild turkey—and celebrated Thanksgivingtogether. Vanderlip would later write that ithad been “the highest pitch of intellectualawareness that I have ever experienced.” Thegroup dispersed under an oath of secrecy, apledge that all faithfully kept. Although thefact of the meeting came to light in a

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magazine some four years later, none of theparticipants would publicly admit to havingbeen there for another twenty years.

The plan they developed over those tendays, the final details of which were draftedby Vanderlip and Strong, was unveiled to thepublic on January 16, 1911. Known as theAldrich Plan, it had at its center a single in-stitution—the National Reserve Associ-ation—a central bank in everything but namethat would have branches all over the coun-try, with authority to issue currency and tolend to commercial banks. While the govern-ment was to be represented on the associ-ation’s board, the association itself was to beowned and controlled by banks, a sort ofbankers’ cooperative.

Nelson Aldrich may have been the mostknowledgeable member of the Senate aboutfinance, but the cause of central banking inthe United States could not have found aworse champion. In a Senate full of very rich

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men—it was becoming known as the “mil-lionaires’ club”—he was one of the richest,having supposedly sold his stake in the Un-ited Traction and Electric Company of RhodeIsland for $10 million; he boasted a grandestate in Newport, Rhode Island, and hisdaughter Abby had married John D. Rocke-feller Jr. He was a fervent supporter of bigbusiness, a bitter enemy of regulation, an ad-vocate of high tariffs; rumors abounded, fur-thermore, that he traded political favors forfinancial contributions. In short, he was theliving embodiment of everything that oppon-ents of a central bank most feared.

Over the next few months, much toStrong’s dismay, Progressives and midwest-ern Republicans joined forces to kill theplan; but in early 1913, the Democrats inCongress, led by Senator Carter Glass,salvaged the idea by modifying it. Ratherthan creating a single central bank, whichwould involve too great a concentration of

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power, the Glass Plan called for a number ofautonomous regional institutions: FederalReserve Banks, as they were to be named.While these individual entities were to becontrolled and run by local bankers, a cap-stone—the Federal Reserve Board, a publicagency whose members were to be appointedby the president—was placed in an oversightrole over the whole structure.

Although Glass’s bill copied many of theessentials of the Aldrich Plan, Strong activelycampaigned against it, predicting that its de-centralized structure would simply perpetu-ate the fragmentation and diffusion of au-thority that had so bedeviled American bank-ing and would only lead to conflict and con-fusion. Eventually New York bankers—prag-matic as ever and recognizing that the GlassPlan at least offered something better thanthe status quo—came around and it wassigned into law as the Federal Reserve Act byWoodrow Wilson on December 23, 1913.

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DURING THE FIRST few days of August1914, Strong was caught up in a flurry ofmeetings. On the morning of Saturday,August 1, he conferred with the otherbankers of the Clearing Association at theMetropolitan Club of New York. That even-ing he was at the Vanderbilt Hotel for a largemeeting of New York bankers with TreasurySecretary William McAdoo, who announcedthe issue of $100 million of emergency cur-rency to meet the panic demand for cash.The following Monday he left forWashington.

Strong’s most immediate concern was theproblem of American tourists stuck inEurope. Banks and hotels, alarmed by thesharp fall in the dollar, and afraid that papercurrency might lose its value, were refusingto cash travelers’ checks or bank drafts.

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Thousands of Americans, most of them welloff, found themselves marooned on theContinent without usable cash. Reports wererife of some being turned out of hotels andforced to sleep at railway stations, or walkingthe streets of Paris at night. Those who suc-ceeded in cashing their checks were oftenable to do so only at the equivalent of 75cents on the dollar.

Bankers Trust was then the main issuer oftravelers’ checks to Americans going toEurope. Luckily for Strong, Fred Kent, theman in charge of the bank’s foreign exchangebusiness, just happened to be on holiday inLondon. He immediately organized a two-thousand-strong mass meeting at the Wal-dorf Hotel on Aldwich, where he arranged toprovide temporary funds to his strandedcountrymen.

In the final outcome, should theEuropeans not accept dollars, Americans al-ways had the option of paying in gold. But

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how to get the gold into a Continent now atwar? Insurance rates on private shipping hadskyrocketed to prohibitive levels overnight.Strong persuaded the government to shipprivate gold over on a warship, and onAugust 6, the cruiser Tennessee left theBrooklyn Navy Yard with $7.5 million in goldaboard.

This was what Strong was good at: takingcharge to address immediate and practicalproblems, even if it meant stepping on a fewtoes. Leadership came naturally to him.While he may not have had quite the pol-ished, cosmopolitan grace of some Morganpartners, people liked him and respondedwell to his dominant personality; he was wellknown and admired on Wall Street.“Wherever he sat was the head of the table,”said a contemporary. Few people, though,could claim to know him intimately, andsigns of a darker side sometimes manifestedthemselves from behind that gregarious and

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sociable veneer. He was a “Jekyll and Hydepersonality, usually polite but flying at timesinto terrible rages” remembered one col-league. Those flashes of intense and startlinganger provided brief glimpses into the painand sorrow that he otherwise kept wellhidden.

It was during that August of commutingbetween New York and Washington thatStrong was first approached about becominggovernor of the newly created FederalReserve Bank of New York. If the AldrichPlan of a single central bank had gonethrough, leaders of the New York bankingcommunity, such as Davison and Vanderlip,had long singled out Strong as the potentialhead. Now, under the Federal Reserve Sys-tem, with multiple reserve banks and aBoard in Washington, they came to the con-clusion that he would be most effective anduseful to them as the head of the FederalReserve Bank of New York. Of the twelve

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regional reserve banks created by the new

act, that of New York would be the largest.7

They correctly foresaw that the New YorkFed—their reserve bank—would, by virtue ofits size and its expertise, very likely come todominate the system.

He was the perfect choice. His career as abanker had been distinguished; he had un-dergone his baptism by fire during the panicof 1907; after being party to the conceptionof an American central bank on that Georgiaisland, he had become one of the experts inthe field; and finally, he was well known tothe partners at J. P. Morgan. Lacking per-haps the flair of a Davison or the urbane sa-voir faire of Thomas Lamont, his was un-doubtedly a safe pair of hands.

The offer put Strong in a real dilemma andinitially he refused it. Although like otherNew York bankers he had reconciled himselfto the new system, he still thought it

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fundamentally flawed, and had campaignedactively to block it. He insisted that personalfinancial considerations did not sway him,but it is hard to believe that they were not afactor. He had no inherited wealth; he hadonly just been made president of BankersTrust at the comparatively young age offorty-one, and had not yet had the opportun-ity to accumulate a fortune of his own. Intaking the job, he would have to resign everydirectorship he held. The salary he would re-ceive, $30,000 per year, while very attract-ive, was a fraction of what he could make asthe president of a large New York bank. Hisfather-in-law was especially strongly op-posed to his taking the job, saying, “Ben isnot going to live on my money”—Conversewas reputed to be worth over $20 millionand Katharine stood to inherit a considerablefortune. The Strongs’ current lifestyle wouldhowever be impossible to sustain on his di-minished income. Only the year before, the

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family—husband, wife, his three childrenfrom his first marriage, and his two daugh-ters from his second—had moved into aluxurious eight-thousand-square-foot apart-ment in one of the city’s most prestigiousbuildings, 903 Park Avenue, where apart-ments covered a full floor and rented for$15,000 a year.

In early October, Strong was invited byDavison and Warburg for a weekend in thecountry. They both made the case to him thatit was his duty to accept a post in which hecould do more for the public good than any-where else. Davison was a hard man to arguewith, especially when Strong owed him somuch. On October 5, 1914, the FederalReserve Bank of New York formally an-nounced that Benjamin Strong had beenelected its first governor.

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5. L’INSPECTEUR DESFINANCES

FRANCE: 1914

There isn’t a bourgeois alive who inthe ferment of his youth, if only for aday or for a minute, hasn’t thoughthimself capable of . . . noble exploits .. . in a corner of every notary’s heartlie the moldy remains of a poet.

—GUSTAVE FLAUBERT, Madame Bovary

IN PARIS that summer, Aimé Hilaire ÉmileMoreau, director general of the Banque d’Al-gérie et Tunisie, the central bank for the

French colonies of Algeria and Tunisia, wasabsorbed like everyone else in France inL’Affaire Caillaux. It was the latest in a longchain of scandals that had done so much toembellish the politics of the Third Republicand provide such a wonderful source of en-tertainment for the French public. In early1914, Le Figaro, a conservative newspaper,had launched a campaign against the intro-duction of an income tax by Joseph Caillaux,finance minister and leader of the RadicalParty. On its front page, it ran some youthfullove letters from Caillaux to a former mis-tress, the already married Berthe Gueydan,who had eventually divorced her husband, ahigh civil servant, to become the first Mme.Caillaux. Much had happened since this cor-respondence. After Caillaux had marriedBerthe, he started an affair with yet anothermarried woman, the tall ash-blonde Henri-ette Claretie, divorced Berthe, and marriedhis new mistress.

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Émile Moreau

In March 1914, the second Mme. Caillaux,outraged that her husband’s affairs, even

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those prior to her arrival in his life, should beso scandalously publicized—and perhapsfearing that some of their own adulterouscorrespondence might also find its way intothe press—took matters into her own hands.At 3:00 p.m. on March 16, she left her home,dressed in the most elegant clothes for a re-ception at the Italian embassy that evening.On the way she stopped off at GastinneRenette, the elite gun shop on the RightBank, bought a Browning automatic, pro-ceeded to the offices of Le Figaro, waited anhour for Gaston Calmette, the editor, andconfronting him, declared, “You know why Ihave come,” and calmly pumped six shots in-to him at point-blank range from the pistolthat was hidden in her expensive fur muffs,killing him instantly.

The scandal split France and even pro-voked riots in Paris between supporters ofCaillaux and right-wing agitators protestingthe declining standards of the country’s

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ruling classes. The trial began on July 20,and the daily court proceedings dominatedthe headlines in every newspaper and captiv-ated the city. Parisians, it seemed, weremuch more interested in the melodramaticmixture of adultery and moral corruption inhigh political circles, of Joseph Caillaux’s ex-tensive network of mistresses, of his seduc-tion of the heretofore simple, shy, and retir-ing Henriette Caillaux, than in distant rum-blings from the Balkans.

For Moreau, the trial carried especial sig-nificance. He had been a student of Cail-laux’s at the École Libre des Sciences Poli-tiques in the early 1890s, when Caillaux hadbeen an up-and-coming glamorous youngman, rich, flamboyant, and as inspecteur desfinances, a member of the elite administrat-ive corps founded by Napoléon to conductaudits over the financial affairs of the state.The École Libre des Sciences Poli-tiques—Sciences Po as it was and still is

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known—was an expensive private graduateschool, established in 1872 after the Franco-Prussian War. Its founder had sought to cre-ate an up-to-date training ground for thenew governing elite of France, capable of res-isting the “democratic excesses” of the earlyyears of the republic. The faculty was notcomposed of academics but was drawn fromhighly placed politicians, civil servants, andbusinessmen. In its short life, Sciences Pohad become the primary recruiting groundfor the upper reaches of the civil service.

While Moreau was at Sciences Po, allFrance, including the school, was split by theDreyfus affair. In 1894 a young Jewish artil-lery officer, Captain Alfred Dreyfus, waswrongly convicted of treason when Frenchintelligence officials conspired to fabricateevidence that he had worked as a spy forGermany. The ensuing scandal pitted an oldFrance—insular, royalist, and Cathol-ic—against a new France seeking to

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modernize itself, a France that was more cos-mopolitan, liberal, and outward looking. Thehead of Sciences Po was a committed Drey-fusard and several anti-Dreyfusard profess-ors eventually resigned in protest.

Unlike most his fellow students at SciencesPo, with their well-to-do, sophisticatedParisian backgrounds, Moreau was a provin-cial who had only arrived in Paris in 1893, atthe age of twenty-five, to enroll at the school.Born in Poitiers, the son of a local magis-trate, Moreau had attended the lycée thereand then obtained a license in law from itsuniversity. His family, minor gentry fromPoitou, the ancient countryside around Poiti-ers, had roots there that went far back intohistory. One of his ancestors, Dutron deBornier, had represented the area in the pro-vincial assembly during the eighteenth cen-tury. His great-grandfather, Joseph Marie-François Moreau, had been a representativeof the Third Estate when the Estates-General

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gathered at Versailles in 1789 to launch whatwas to be the Revolution; he later sat in theconvention that did so much to press the Re-volution home. He had subsequently becomean important figure in the local administra-tion—even after the restoration of the mon-archy—as receveur général de finance, re-sponsible for collecting the taxes of the newlyestablished department of Vienne.

In 1896, Moreau followed in Caillaux’sfootsteps and, after a brilliant performancein the ferociously competitive entrance ex-ams for the upper civil service, had also be-come an inspecteur des finances. Althoughthe examination system had made the in-spectorate largely meritocratic, candidatesstill had to have a parental guarantee of aprivate income of 2,000 francs per year until

they were promoted.8 Moreau was now amember of the elite administrative class thatexercised the true power in France duringthose years. The country was nominally

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governed by a clique of ministers who ro-tated in and out of office at the mercy of avociferous and fractious national assembly.Governments had a typical life of less thanseven months: there was a total of fifty dif-ferent ministries in the forty-four yearsbetween the founding of the Third Republicin 1870 and 1914, some lasting a single day.But behind all the minor dramas of ministersresigning, governments falling, and theroundabout of the same old faces, Francewas run by this quiet, confident, extremelyable, and well-trained college of mandarins.

Once inside the civil service, Moreau roserapidly. In 1899, Caillaux became minister offinance, the first of his eventual seven termsin that position, and Moreau worked underhim. In 1902, Moreau was handpicked by thenew minister of finance, Maurice Rouvier, tobe his chef de cabinet. The cabinet was theminister’s private secretariat, generally madeup of his protégés and unusually promising

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junior civil servants who managed the fullrange of the minister’s activities, dealt withhis correspondence, acted as a liaison withhis constituency, and prepared his briefingpapers. To be chef de cabinet was to be theminister’s principal aide and chief of staff, arole as much political as administrative.

Rouvier, a moderate republican, by profes-sion a banker, was one of the most compet-ent ministers of finance that the Third Re-public produced. He also had an unfortunatecapacity for getting involved in scandals; in-deed he had the distinction of being taintedby the two best-known affaires of that squal-id era. In 1887, it was revealed that DanielWilson, son-in-law of President Jules Grévy,had been selling decorations, including nom-inations to the Légion d’Honneur, from hisoffice in the Élysée Palace. Rouvier wasprime minister at the time, and though notdirectly implicated in the trafficking, was,

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along with the bewildered old president,forced to resign.

Rouvier’s exile was short-lived. Two yearslater he was back in government as ministerof finance. In 1892, however, the PanamaCanal Company went bankrupt and some800,000 French investors lost $200 million.The investigation revealed a chain of corrup-tion, slush funds, and influence peddlingthat wove through the high social and polit-ical circles of Paris. Rouvier was found tohave had extensive dealings with two shad-owy figures at the heart of the affair, the bar-on Jacques de Reinach, a German Jew withan Italian title, who then died in suspiciouscircumstances in what was implausibly de-clared to be suicide, and Cornelius Herz, ashady international adventurer and financierwho promptly skipped the country. In theparliamentary inquiry that followed, Rouvi-er, accused along with 104 other deputiesand countless journalists of accepting

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payoffs, defended himself by arguing that hehad only accepted the money because hethought the project was in the national in-terest, and after all, his fortune had not “in-creased abnormally” in the process. Thoughinsufficient evidence was produced to indicthim, he was forced once more to resign andspent the next ten years in the political wil-derness. He had only just been rehabilitatedwhen Moreau first went to work for him in1902.

Moreau never allowed Rouvier’s strangeconception of public ethics to get in the wayof his admiration for the man. Willingthough he was to concede that his “beloved”mentor had suffered from a curious incapa-city to distinguish between private interestsand public responsibilities, he brushed it offas no worse than that of any other politicianof the time—an aspect of that general “moralcollapse [which was] very common in politic-al circles” and continued to express his

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undying gratitude and loyalty to Rouvier forthe enormous generosity he had received asa young man.

In 1905, Rouvier became prime ministerfor the second time, with Moreau as his prin-cipal aide and right-hand man. Within twomonths, the government was faced with amajor international crisis. That March, thekaiser, who had an unfortunate habit ofspeaking out of turn, paid a visit to Tangiers,and in a challenge to French ascendancy inNorth Africa proclaimed his support for Mo-roccan independence. Rouvier initially triedto negotiate with Germany, but the kaiser,sensing France’s weakness, kept increasinghis demands. As the tensions mounted, Ger-many mobilized its reserves and Francemoved troops to the frontier. Over the nextfew months, Rouvier skillfully defused thecrisis, not only retaining France’s special po-sition in Morocco, but also engineering agraceful exit from a confrontation with

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Germany and setting in train the first con-versations with the British that would lead tothe Anglo-French entente. For Moreau, stillonly thirty-six, it was a heady experience tobe at the center of a great internationalstorm. But it was the fate of Third Republicministries to last only a few months and theRouvier government was soon voted out.

During his more than twenty years in andout of office, Rouvier had made many en-emies, not least because of his own shadyfinancial dealings. With Rouvier out ofpower, these enemies now targeted Moreau.On his presenting himself for reassignment,he was not sent back to the ministry of fin-ance but seconded to the Banque d’Algérie,the central bank of Algeria and Tunisia, aminor financial institution compared to theBanque de France or the other great statebanks. For a high-flying young official fromthe Ministry of Finance who had climbed hisway to the center of things, it was a form of

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exile. It was not quite as onerous as itsounds, because Algeria had a special statusamong French possessions and the bank’sheadquarters were in the heart of politicalParis, within a stone’s throw of the NationalAssembly and the Ministry of Foreign Affairsat 207 Boulevard Saint Germain.

While privately owned, the Banque d’Al-gérie was one of the key organs of colonialpolicy. Over the next eight years, Moreau,who was promoted to director general in1911, was instrumental in the development ofthe Algerian wine industry; was at the fore-front of the fight against usury among theTunisian Berbers; and worked closely withthe military governor of Morocco, the futureMaréchal Lyautey, to help finance publicworks during the military occupation andsubsequent colonization of Morocco. He was,and saw himself as, much more than just abanker; he was a servant of the state. InJanuary 1914, he was made a Commandeur

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de la Légion d’Honneur, a distinction restric-ted to no more than 1,250 people.

But for all these achievements, the Banqued’Algérie was still a backwater for so ambi-tious and talented an official. His formercontemporaries at the ministry were nowrunning the finances not of a mere colonybut of the whole country and its empire.When he thought back on what hadhappened to him, he could not help beingbitter—he had been stuck in this dead-endjob for the last eight years, apparentlyforgotten.

Perhaps Moreau had risen too far and toofast, arousing resentments among his peers.Perhaps it was that he was different from theothers: a man of few words, blunt and almostrude, who had made no attempt to entersalon society and had none of the airs andgraces of the Parisian higher civil servant.Very much a provincial, he proudly went outof his way to remain so. In 1908, he had been

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elected mayor of his home commune, SaintLéomer. It was a tiny place of only a fewhundred residents, but he seized every op-portunity he had to go back there. His prop-erty, La Frissonaire, had been in the familysince 1600. It was there that he felt mostcomfortable, among the friends with whomhe had grown up, his fellow squires, the localnotaires, and magistrates.

IN ANY OTHER year, the last week of Julywould have found Moreau avidly awaitingthe circular from the Minister of Agriculture,fixing the dates of the shooting season. Hetried to make a point of being at La Frisson-aire at the opening of hunting. As he liked tosay, there were just enough quail, partridge,and rabbit on the estate “to keep it exciting,and not so much that one got bored.” But asJuly ran into August, it became apparent

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that this year, though the weather was per-fect, he was going to have to leave his guns intheir racks.

By Monday, July 27, several straws in thewind suggested that the Balkan crisis was be-ginning to assume alarming proportions.Madame Caillaux began to be progressivelyedged off the front pages of even the Parisianpapers. Every evening, a crowd generallygathered on the Boulevard Poissonière out-side the offices of Le Matin, most popular ofthe French yellow papers, in whose windowswere posted the latest bulletins. There werethe inevitable fights. But no longer was itsimply the opponents of Caillaux against hissupporters. Brawls were now breaking outover national security, between those whoopposed the extension of military service andthe partisans of the Réveil National, the newpatriotic movement.

Also gold coins began mysteriously to van-ish from circulation. Having been burned by

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disastrous experiments with paper moneytwice before—once in the early eighteenthcentury during the ill-fated MississippiBubble, and then again by the assignats is-sued during the Revolution—the French haddeveloped a healthy mistrust of banks and allbut the hardest metallic currency. At the firstsign of trouble, gold coins disappeared intothose countless bas de laine, the proverbiallong woolen stockings in which every Frenchpeasant was said to keep his little hoard ofgold under the mattress or into those notar-ies’ strongboxes where the bourgeoisie kepttheir savings.

After eight days of court proceedings, at9:30 p.m. on the night of July 28, the all-male jury voted 11 to 1 to acquit Mme. Cail-laux. They concluded that she had been souncontrollably distraught over the revela-tions in Le Figaro as to be driven to viol-ence—the murder was therefore to bedeemed un crime passionel. For all its

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drama, the verdict came as something of ananticlimax. Fighting did break out outsidethe Palais de Justice, and a large contingentof policemen had to be deployed to dispersethe royalist ultras of Action Française whohated Caillaux. But most Parisians were nowmore concerned about how to pay for theirgroceries—gold or silver coins were hard tocome by; the shops, even the cafés, hadstopped accepting banknotes, and even thefood markets at Les Halles had come to agrinding halt.

By 4:00 the next morning, several hun-dred people gathered around the Banque deFrance to convert notes into gold. That after-noon, the crowd swelled to more than thirtythousand in a line that wove for over a milealong the side streets surrounding the Hoteldu Toulouse, where the Banque washeadquartered, along the Rue de Radziwill,past the Palais Royale, and up the Rue deRivoli to the Jardin des Tuileries. Two

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hundred and fifty policemen kept order. TheTimes’s reporter was taken aback by thescene. “All classes of society mingled in theinterminable queue and it was significant ofthe universal thriftiness in France that num-bers of quite humble persons had evidentlysavings to withdraw from the guardianshipof the National Bank.”

The Banque announced that it was pre-pared to continue paying out gold for as longas was necessary. After all, it had the largestsingle hoard of gold in the world. In 1897, itsincoming governor, Georges Pallain, hadgathered his staff to tell them that theBanque’s duty was to prepare for “everyeventuality,” his code word for a war of re-venge against Germany to reverse the dis-aster of 1870. Under Pallain, the Banque deFrance had steadily begun to accumulategold. Every time the Reichsbank’s gold re-serves increased, the Banque was a stepahead—a sort of arms race with gold as the

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object. By July 1914, it had over $800 mil-lion in bullion.

The French central bank had not, however,painstakingly built up this mountain of pre-cious metal just to see it dissipated into thehands of its own nervous citizens. The treas-ure was there to support the state in a na-tional endeavor. For more than a decade,every manager of the Banque’s more than250 branches had kept locked in his safe, in aplace that he was instructed should be “al-ways easily accessible,” a secret envelope, tobe opened only in the event of a general mo-bilization. Inside this envelope was Le Circu-laire Bleu.

Written on grayish blue paper overGovernor Pallain’s signature it containedeach manager’s instructions in the event ofwar. With general mobilization, he wouldface “immense and perilous duties.” He wasto meet this “formidable test” with“calmness, vigilance, initiative, and

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firmness.” The first and immediate taskwould be to cease paying out gold immedi-ately. Should the branch’s town fall into en-emy hands, he was to defend the assets in hiscare with “all [his] authority and . . . energy.”Thus, when the order for general mobiliza-tion was issued at 4:00 p.m. on Saturday,August 1, French gold reserves were immedi-ately immobilized.

An hour later, it was also impossible to geta taxi in Paris. All public transport—cars,wagons, and buses—was requisitioned tomove troops. The only way to get about wason foot. Within twenty-four hours, publicservices came to a grinding halt as everyable-bodied male headed for the railway sta-tions, the Gare du Nord and the Gare del’Est. Even the grandest hotels, such as theRitz and the Crillon, lost their waiters; din-ner was served by chambermaids.

Within days of the outbreak of war and forthe next few weeks, an unnatural calm

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settled over the city as it basked gloriously inthe August sunshine. The grand departmentstores for which Paris was famous weredeserted; there was no traffic—the buses haddisappeared to the front; and the métro ranonly sporadically. Theaters and cinemaswere closed; the cafés shut at 8:00 p.m., therestaurants at 9.30 p.m. Before the monthwas out, with all the foreigners gone, the bighotels lay empty.

At the end of August that silence wasshattered. The German army swept throughBelgium and across northern France in agreat flanking movement around the Frenchleft wing, and by August 29 was just twenty-five miles from the city. Gunfire could beheard in Paris and there were reports thatGerman soldiers had been seen on the out-skirts. The next day, a Sunday, a lone Ger-man plane circled overhead and droppedthree bombs, filled with lead bullets, near theGare de l’Est. No one was injured. On

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Monday a second plane swooped across therooftops and let go of its bombs near the RueQuatre Septembre, intending them, it wassaid, for the Banque de France. Again only afew windows were broken.

Few people—certainly not the Ger-mans—were yet aware that on August 18,with the invaders still two hundred milesaway in Brussels, the Banque de France hadalready set in motion its emergencyplan—Paris, after all, had fallen to foreignersthree times in the previous hundred years.Its gold reserves—38,800 gold ingots and in-numerable bags of coins valued at $800 mil-lion and weighing some 1,300 tons—hadbeen shipped in the utmost secrecy by railand truck to safety at prearranged sites inthe Massif Central and the south of France.The massive logistical operation went offwithout a hitch until one of the trains carry-ing coins derailed at Clermont-Ferrand. Fivehundred men had been required to get it

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back on the tracks, collect the money, andkeep off curious spectators. By early Septem-ber, the Banque’s vaults in Paris were empty.

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6. MONEY GENERALS

CENTRAL BANKS: 1914-19

Endless money forms the sinews ofwar.

—Cicero, Philippics

As THE LIGHTS started to go out overEurope that fateful first week of August,every banker and finance minister seemed tobe fixated not on military preparations or themovements of armies but on the size anddurability of his gold reserves. The obsessionwas almost medieval. This was, after all,

1914, not 1814. Paper money had been inwide use for more than two centuries, andmerchants and traders had developed highlysophisticated systems of credit. The idea thatthe scope of the war might be limited by theamount of gold on hand seems anachronist-ic. Nevertheless, here was the Londonmagazine United Empire declaring that itwas “the amounts of coin and bullion in thehands of the Continental Great Powers at theoutbreak of hostilities” that would largely de-termine “the intensity ... and probable dura-tion of the war.”

The focus on the prosaic matter of bankreserves was a symptom of the general com-placency that surrounded those first fewmonths of the war. Despite the hysteria ofthe crowds on the streets of Berlin, Paris,and London, an odd atmosphere of unrealityhung in the air. No one could quite under-stand what this war was about or why it hadcome, but no one expected it to last very

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long. While the soldiers on both sidesmarched off to war, each one expecting togive the enemy a good pasting, the generalswere promising they would be home forChristmas. Buoyed by such optimism fromthe military professionals, financial officialscalculated that because the war was bound tobe short, the important thing was to be ingood financial shape, with gold reserves in-tact at the end.

So smug were the bankers and economiststhat they even allowed themselves to be con-vinced that the discipline of “sound money”itself would bring everyone to their sensesand force an end to the war. On August 30,1914, barely a month into the fighting,Charles Conant of the New York Times re-ported that the international banking com-munity was very confident that there wouldnot be the sort of “unlimited issue of paper[money] and its steady depreciation,” whichhad wrought such inflationary havoc in

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previous wars. “Monetary science is betterunderstood at the present time than in thosedays,” declared the bankers confidently.

Sir Felix Schuster, chairman of the Unionof London and Smith’s Bank, one of theCity’s most prominent bankers, went confid-ently around telling everyone that the fight-ing would grind to a halt within sixmonths—the interruption of trade would betoo great. John Maynard Keynes, then athirty-one-year-old economics don at King’sCollege, Cambridge, who had made himselfsomething of an overnight expert on war fin-ance, announced to his friends in September1914 that “he was quite certain that warcould not last more than a year” because bythen the liquid wealth of Europe that couldbe utilized to finance the war would be “usedup,” and he became quite angry at the stu-pidity of anyone who thought otherwise. InNovember 1914, the Economist predictedthat the war would be over in a few months.

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That same month, at a dinner party in Parisgiven in honor of the visiting British secret-ary of state for war, Field Marshal LordKitchener, the French finance minister con-fidently proclaimed that the fighting wouldhave to be over by July 1915 because moneywould have run out. And it was not only theAllied experts who were so blinkered. TheHungarian finance minister, Baron JanosTeleszky, when questioned in the cabinetabout how long his country could pay for thewar, replied three weeks.

And so as the financiers of Europewatched their continent slip towardArmageddon, its credit system collapsingonto itself, world stock markets closing theirdoors, and the gold standard grinding to a

halt,9 they clung to the illusion that globalcommerce would be disrupted only brieflyand the world would rapidly return to “busi-ness as usual.” Few imagined that they might

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be witnessing the last and dying convulsionsof an entire economic order.

The experts seemed to have forgotten thatamong the first casualties of war is not onlytruth but also sound finance. None of the bigwars of the previous century—for example,the Napoleonic Wars or the American CivilWar—had been held back by a mere lack ofgold. These had been fights to the death inwhich the belligerents had been willing to re-sort to everything and anything—taxes, bor-rowing, the printing of ever larger quantitiesof money—to raise the cash to pay for thewar.

By the end of 1915, eighteen million menwere mobilized across Europe. On theWestern Front, two gigantic armies—threemillion men from the Allied nations and twoand a half million Germans—sat stalemated,bogged down in trenches along a five-hundred-mile front stretching from theChannel through Belgium and France to the

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Swiss border. Like a giant sleeping reptilestretched across the face of Western Europe,the front remained immobile. By a perversesort of logic, as hundreds of thousands ofmen were led to the slaughter, their terriblesacrifice was called upon to justify pressingon, and the carnage generated its ownmomentum.

Still, the complacency of those first fewmonths took a long time to evaporate. Eveninto 1916, the dogma that this would be ashort war lingered as general after generalpredicted victory in another six months. Bythen the five major powers—Britain, France,Russia, Germany, AustriaHun-gary—werespending a massive $3 billioneach month, nearly 50 percent of their col-lective GDP. No other war in history had ab-sorbed so much of the wealth of so many na-tions at one time.

Countries varied in how they raised thefunds. Nevertheless, there were certain

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common themes. To pay for such a giganticeffort by taxation alone would have entailedtax rates at confiscatory levels and was there-fore impossible. Daunted by the task, none ofthe governments even tried, and taxes ac-counted for but a tiny fraction of the newmoney raised. Instead, the belligerents re-sorted principally to borrowing. Once theyhad exhausted every potential source ofloans, they relied on a technique almost asold as war itself: inflation. Unlike medievalkings, however, who accomplished thiseither by shaving pieces of gold and silver offthe outer edge of their coins—a practiceknown as clipping—or of issuing coinagemade of cheaper alloys—currency debase-ment—governments in the Great War turnedto their central banks, often relying on com-plex accounting ruses to disguise the pro-cess. Central banks in turn, abandoning theirlong-standing principle of only issuing

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currency backed by gold, simply printed themoney.

VERY, VERY RELUCTANTLY

Of all the European countries at war, Britain,in an effort to live up to its long history offiscal prudence, was the most responsible inits financial policies. In four years of fighting,the government spent a total of $43 billionon the war effort, including $11 billion inloans, which it funneled to its poorer Contin-ental allies, principally France and Russia.To pay for all this, it raised about $9 billion,or 20 percent, through additional taxes andalmost $27 billion by long-term borrowing,both domestically and in the United States.The remainder it borrowed from banks, in-cluding a large chunk from the Bank of Eng-land. As a result, the quantity of money in

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circulation within Britain doubled in fouryears, doubling prices with it.

Turning to the Bank of England for moneywas not as unprecedented a policy as Citybankers reared on nineteenth-century prin-ciples of finance liked to think. For the Bankhad been originally created, in fact, not toregulate the currency but to help pay for awar. In 1688, James II, the last Catholic kingof England and Scotland, was driven fromhis throne, having alienated much of hispeople by attempting to restore Roman Cath-olicism as the official religion of the country.In his place, Parliament invited his daughterMary and her husband, William of Orange,both Protestants, to assume the crown.James found sanctuary at the court of LouisXIV of France, who used the “Glorious Re-volution” as a pretext to launch against Eng-land what was to be grandly named the Warof the League of Augsburg.

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In 1694, after several years of fighting acountry many times its size, England founditself close to bankruptcy. A group of Citymerchants, all Protestants, many of themFrench Huguenots only very recently com-pelled to leave France by Louis XIV’s repudi-ation of tolerance for Protestants, ap-proached the chancellor of the exchequer,Charles Montagu, offering to lend the gov-ernment £1.2 million in perpetuity at an in-terest rate of 8 percent. In return, they wereto be granted the authority to set up a bankwith the right to issue £1.2 million in bank-notes—the first officially sanctioned papercurrency in England—and to be appointedsole banker to the government. Montagu,desperate for money, jumped at the idea. Be-fore the year was over the new bank openedits doors for business under the name TheGovernor and Company of the Bank ofEngland.

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For its first 150 years, it operated like anyother bank, albeit much larger than its com-petitors, and with certain special privileges,especially its lock on government business,which provided most of its income. Like allthe other banks in the country, it issuedbanknotes and took deposits, maintained itsreserves in gold, and discounted bills ofexchange—short-term loans to merchants forfinancing trade and goods in transit.

While the Bank certainly did not see its jobas managing the currency, over time, by vir-tue of its size and stability, it began to ac-quire a superior status among its fellowbanks and its notes became the country’sdominant form of paper money. Its smallercompetitors began to entrust it with their re-serves, and it gradually evolved into a sort ofbankers’ bank, the City’s guardian andnanny, in the process acquiring the affection-ate nickname of “The Old Lady of Thread-needle Street.” But its powers were never

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quite formalized and much ambiguity hungabout its precise role and responsibilities.

Like so many British institutions of thosedays, the Bank was run like a club. Controlwas vested in twenty-six directors of whatwas quaintly known as the Court of the Bankof England. Its membership was largelydrawn from a closed inner circle of Citybankers and merchants. They had all gone tothe same small selection of schools, prefer-ably Eton or Harrow. Some of them had evenattended Oxford or Cambridge. They lived inKensington or Knightsbridge, belonged tothe same clubs, typically White’s or Boodle’s,and socialized with one another at their gra-cious but not grand country houses in theareas around London known as the HomeCounties. Their daughters occasionally mar-ried into the landed aristocracy, but for themost part, they married among themselves.Few societies in the world were as comfort-able, confident, and civilized.

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Represented on the Court were all the ma-jor banking families of the City. There wasalways a Baring, a Grenfell, and a Goschen.Generally, there was also a partner of BrownShipley and of Anthony Gibbs. Although thegroup included the usual smattering of bar-onets and even the occasional peer, none ofthe great landed families of Britain were rep-resented—they went into politics. Only oncehad there been a Jew on the Court of theBank of England, and that was, of course, Al-fred de Rothschild, who had been elected in1868 and resigned in 1889.

Directors were generally invited to join intheir late thirties and were appointed for life,or at least until the onset of senility; manywere in their seventies or eighties, and somehad been on the Court for over half a cen-tury. It was part-time work and not too oner-ous. They met once a week. In addition, eachdirector had to take his turn on the Commit-tee of Daily Waiting, which required that

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each day three of the twenty-six directors bephysically present at the Bank, responsiblefor the keys to the vaults, auditing the secur-ities held there, and dining with the com-mander of the Bank piquet, the Brigade ofGuards detachment that marched nightlyfrom its barracks in Knightsbridge to protectthe Bank. For these duties, a director re-ceived an annual honorarium of the equival-ent of $2,500, equivalent to the annual payof a colonel in the Guards or the stipend of acanon of Westminster.

Among the Court’s offices, only the gov-ernorship and the deputy governorship werefull-time positions. Those who filled thoseposts were required to take a temporaryleave of absence from their own businesses.Each member of the Court was given achance—indeed was expected—to becomedeputy governor for two years, and then gov-ernor for two years more. To be the governorof the Bank of England in the nineteenth and

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early twentieth century was therefore not amark of any particular merit, but merely asign of the right pedigree, patience, longev-ity, and the luxury of having a sufficientlyprofitable business with partners willing tolet one take four years’ leave. It was the prin-ciple of Buggin’s turn. At the end of histerm—terms were very rarely extended andthen only for one year—a retiring governorsimply went back to being an ordinary mem-ber of the Court until he died or became em-barrassingly incoherent.

As Walter Bagehot, the great nineteenth-century editor of the Economist who reveledin the quaint paradoxes of English life, de-scribed them, members of the Court weregenerally “quiet serious men . . . (who) havea good deal of leisure.” Indeed, he felt it anominous sign for a private banker to be fullyemployed. “If such a man is very busy, it is asign of something wrong. Either he is work-ing at detail, which subordinates would do

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better and which he had better leave alone orhe is engaged in too many speculations . . .and so may be ruined.”

These arrangements, according to Bage-hot, put the financial stability of Londonand, as a consequence, the world in thehands of “a shifting executive; a board of dir-ectors chosen too young for it to be knownwhether they are able; a committee of man-agement in which seniority is the necessaryqualification, and old age the common res-ult.” It was a strange, even eccentric way ofdoing things—for the most important finan-cial institution in Britain, in fact in theworld, to be in the hands of a group of ama-teurs, men who generally would have pre-ferred to be doing something else but whoviewed the years they devoted to steering the

Bank as a form of civic duty.10

Though the directors of the Bank werecharged with governing the supply of credit

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in Britain, and by extension around theglobe, they did not pretend to know verymuch about economics, central banking, ormonetary policy. An economist of the 1920sonce described them as resembling ship cap-tains who not only refused to learn the prin-ciples of navigation but believed that thesewere unnecessary.

To the extent that they did espouse a sys-tematic doctrine of monetary policy, it wasthe “real bills” theory of credit, that we nowconsider clearly fallacious. This held thatprovided banks, including the Bank of Eng-land, only made loans to finance inventoriesof goods—such as bales of cotton, or rolls ofpaper, truckloads of copper wire or steelgirders—rather than for financial speculationin stocks and bonds or for long-term invest-ments then no inflation could result. It issimple to see why this is nonsense. In peri-ods of inflation, as the price of goods in in-ventory keeps rising, this doctrine would call

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for banks to keep on expanding credit, thusadding further fuel to the inflationary fire.That this doctrine did not lead to monetarydisaster was due to the gold standard, whichby keeping prices roughly stable, ensuredthat the “real bills’ doctrine was never givena chance to be applied in an environment ofrising prices.

The demands of war finance transformedthe Bank. Forced to issue more and morecurrency notes without gold backing, it be-came increasingly subordinate to the needsof the UK Treasury. Despite its status as anational institution, the respectable Cityburghers who ran the Bank had been verycareful, over the years, to keep a wary dis-tance from any government. They were clearin their minds that the Bank was not an or-gan of the state nor did they remotely wish tomake it one. An apocryphal story, much cir-culated in the City before the war, best cap-tures that attitude. A governor was asked by

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the chancellor of the exchequer to testify be-fore a royal commission. When questionedabout the Bank’s reserves, he was only will-ing to say that they were “very, very consid-erable.” When pressed to give even an ap-proximate figure, he was supposed to havereplied that he would be “very, very reluctantto add to what he said.”

As the stresses of raising money for thewar mounted, tensions between the Bankand the government escalated, finally com-ing to a head in 1917. The governor was thenWalter Cunliffe, a tall barrel-chested, JohnBull sort of character who sported an impos-ing walrus mustache, was a renowned biggame hunter, and looked more like a gentle-man farmer than a City grandee. Over theyears, he had become increasingly autocraticand erratic in his judgments and had de-veloped an exaggerated sense of his own im-portance as governor to the point of insistingthat his status required him to deal with the

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government through the prime ministeralone, not even through the chancellor of theexchequer.

In 1917, Cunliffe became infuriated bywhat he believed was the cavalier way he wasbeing treated by officials at the Treasury,among whom the chief culprit was none oth-er than that brilliantly impertinent youngupstart Maynard Keynes. Cunliffe was wellknown in the City as a man of few words andeven more limited intelligence, a bully whoacted first and thought later. In a fit of tem-per, without consulting any of his fellow dir-ectors, he dispatched a telegram to the Cana-dian government, then the North Americancustodian of Britain’s gold reserves, forbid-ding it to accept any further instructionsfrom the Treasury in London. The Britishgovernment came close to the extremely em-barrassing position at the height of theWorld War of not being able to settle thebills from its American suppliers.

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Lloyd George, by now prime minister, andjustly furious, summoned Cunliffe to 10Downing Street, and berated the governor,threatening to “take over the Bank.” Aftersome delicate behind-the-scenes negoti-ations over protocol, the shaken Cunliffewrote the chancellor of the exchequer ascringing a letter as form would allow, askinghim “to accept my unreserved apology foranything I have done to offend you.” Cun-liffe, who, because of the war and contrary toall tradition, had been appointed for asecond two-year term, was not reappointedagain.

DURING THE WAR, as the Bank kept ex-panding its role as chief underwriter andpromoter of government debt, its few seniorexecutives found themselves overwhelmedwith work and responsibility. In 1915, the

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deputy governor, Brian Cockayne, invitedMontagu Norman to become his adviser.Though this was to be an informal and un-paid position, Norman, then at a loose endafter leaving Brown Shipley, jumped at it. Hehad originally joined the Court of the Bank in1907, at the age of thirty-six, but had done solargely for tradition’s sake—it was customaryfor a partner at Brown Shipley to be on theCourt. Indeed for the first few years, herarely went into the place and showed littleinterest in its workings. His associationswith the institution, however, went far back.He came from two of the most prominentbanking families in the City, that special aris-tocracy from which the Court of the Bankwas drawn, and both of his grandfathers hadbeen long-standing directors of some reputein their time.

His paternal grandfather, George WardeNorman, though not a full-time banker—hisown inherited fortune derived from timber

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and real estate—had acquired a large stake inMartins Bank through marriage and waselected a director in 1821. In 1830, at the ageof thirty-seven, George Norman retired fromfull-time business in order to devote himselfto his estate in Kent, indulging his love forliterature and history; promoting cricket, afamily obsession; and enjoying his brood ofseven sons. Nevertheless, he remained a du-tiful member of the Court for more than fiftyyears, although in contrast to the typicalmember, he developed a great interest andsome expertise in monetary economics. Likeso many Victorian gentlemen of leisure, hepublished pamphlets—in his case on monet-ary theory—and became a leader of the moveto codify gold standard rules, which wereembodied in the Bank Act of 1844. He fur-ther broke with tradition at the Bank by cat-egorically refusing to take his turn as deputygovernor and governor. Unable to see anyreason why he should tear himself away from

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the many enjoyments of life to inflict uponhimself the unnecessary responsibilities andburdens of office, he claimed that his nervescould not cope with the tensions, a curioushint of the troubles that his grandson wouldface.

Norman’s maternal grandfather, Sir MarkCollet, was very different. A self-made man,he had begun his career as a clerk in a mer-chant house and moved to New York in 1849.On his return to England two years later, hejoined the firm of Brown Shipley, the Britisharm of the merchant banking house ofBrown Brothers of New York and Baltimore,and eventually became senior partner inLondon. Elected to the Court of the Bank ofEngland in 1866, he dutifully served his turnas governor and was knighted for hisservices.

Few people were surprised that with thissort of pedigree, Montagu Norman shouldend up at the Bank. Nevertheless, when he

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joined in 1915, he had had only a short andnot particularly illustrious career as a mer-chant banker and was not very well known inthe City. In his first few weeks, Lord Cunliffe,then governor, was heard to remark, “Theregoes that queer-looking fish with the gingerbeard again. Do you know who he is? I keepseeing him creep about this place like a lostsoul with nothing better to do.” Few peoplecould then have predicted that the “fish”would accomplish an extraordinary upwardswim through the institution. Nothing in hisbackground suggested that he would be wellsuited to the work of a central banker. With-in three years, however, he was electeddeputy governor, and two years later becamegovernor, a post he would eventually hold foran unprecedented twenty-four years.

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IN GOVERNMENT HANDS

If Britain was the most responsible of thebelligerents, its ally France balanced it out bychoosing to be the most feckless. The Frenchgovernment spent a total of $30 billion on itswar effort. Few nations resisted paying theirtaxes more vigorously than the people ofFrance—they seemed to view even the slight-est official inquiry as to their financial cir-cumstances as an unjustified intrusion by thestate “into the most holy recesses of privatelife” and an infringement of their funda-mental rights as citizens. As a result, at leastfor the first two years of the war, the govern-ment balked at raising taxes, not reversing it-self until 1916 when it seemed on the verge offinancial collapse. In total, France paid forless than 5 percent of its war expendituresout of higher taxation.

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The republic was saved from completeeconomic disaster only by its government’sability to tap two sources: first, the notori-ously thrifty French middle classes, whichbought $15 billion worth of governmentbonds; and second, foreign governments,specifically those of Britain and America,which, seeing France bear the brunt of thehuman cost of the war, lent a total of $10 bil-lion. This still left a substantial gap, whichwas filled by printing money. While currencyin circulation doubled in Britain, in France ittripled.

Drawing on the central bank for moneywas a much easier process in France than inBritain—in part because the governor of theBanque de France was by tradition not abanker but a high civil servant appointed bythe state. Indeed, as far back as 1911 the min-ister of finance, thinking ahead, had pre-arranged a line of credit from the Banque tobe drawn upon in the event of war. There

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was a certain irony in this. The Banque deFrance, like the Bank of England, had beenfounded in the middle of a war, but unlike itsolder cousin it had been set up not so muchto raise money but to bring order to a chaoticmonetary situation.

France in 1799 faced a pressing shortage ofcurrency. Ten years of Revolutionary turmoilhad taken their toll. Silver and gold had fledthe country, and the failed experiment of theRevolutionary government with the assig-nats had destroyed any residual confidencein paper money not backed by gold. Two fin-anciers, the Swiss banker Jean-Frédéric Per-regaux and the sonorously sounding Jean-Barthélémy Le Couteulx de Canteleu, a richmerchant from Rouen, received the blessingsof the first consul of the republic, NapoléonBonaparte, to create a new bank that wouldissue currency backed by gold and have acapital of 30 million francs, equivalent to $6

million.11

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The Banque opened its doors on January18, 1800, or according to the calendar of theRevolution then in force, on the 28th day ofNivose, the month of snow, in the year VIII.The bulk of its capital was raised from mer-chant and banking families, many of themProtestants of Swiss origin. But the glitteringarriviste circles surrounding the first consulwere also keen to buy into a venture thatpromised much profit. Napoléon himselftook thirty shares, each valued at 1,000francs; Louis-Antoine Fauvelet de Bourri-enne, his secretary, who would later be dis-missed for corruption and betray Napoléonby rallying to Louis XVIII, took five; JoachimMurat, Napoleon’s brother-in-law and a fu-ture king of Naples, nine; Hortense de Beau-harnais, Napoleon’s stepdaughter, his sister-in-law-to-be, and a future queen of Holland,five; Napoléon’s older brother Joseph, a fu-ture king of Spain, just one. To encourage in-vestors, the Banque was made as

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independent of the government as the Bankof England and, in 1803, was granted amonopoly over note issuance in Paris.

In 1805, immediately following the navaldisaster at Trafalgar and just as Napoléonwas launching his latest campaign againstthe Austro-Russian alliance, a panic amongthe merchants of Paris precipitated a run onthe still infant Banque and almost forced itinto liquidation. It was saved when news ar-rived in the capital of Napoléon’s brilliantvictory at Austerlitz. While confidence wasquickly reestablished in the new Banque,lubricated by large indemnity from the Aus-trians, Napoléon remained enraged by thefeeble-heartedness of his bankers.

On his return from Austria, he summonedhis council of ministers and, in one of his im-perial tantrums, fired his minister of finance.To the Banque’s three-man managementcommittee he offered the choice betweenprison or a fine of 87 million francs. They

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chose the fine. Determined never again to beheld hostage by moneymen, Napoleonchanged the Banque’s statutes so that hence-forth the governor and the two deputy gov-ernors would be appointed directly by thegovernment, which at that time meant Na-poléon himself. He declared at the time, “TheBanque does not belong only to its share-holders, but also to the state. . . . I want theBanque to be sufficiently in governmenthands without being too much so.”

For Émile MOREAU the war meant a con-tinuation of his exile at the head of theBanque d’Algérie. In 1914, after HenrietteCaillaux’s acquittal, he must have secretlyharbored some hope of returning to the Min-istry of Finance on his mentor Caillaux’scoattails. But this was quickly squashed withthe outbreak of war, for Caillaux, always

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viewed as soft on Germany, was not invitedinto the war government.

Indeed, Caillaux made things even worsefor himself during the war. With his charac-teristic bad judgment, he became embroiledin 1916 with a shady bunch of characters whowere trying to negotiate a back-channel set-tlement with Germany. One of these, PaulBolo-Pasha, a confidence trickster in thejoint service of the Egyptian khedive andGerman intelligence, was arrested in 1917,tried, and shot for espionage. In the ensuingspy mania that seethed through France, Cail-laux himself was accused of treason. De-prived of his parliamentary immunity, hewas jailed in early 1918. He would finally bebrought to trial before the Senate, sitting as ahigh court of justice, in 1920. Though acquit-ted of treason, a capital offense, he would befound guilty of “imprudent conversations”with the enemy and condemned to threeyears imprisonment; five years deprivation

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of civil rights; and a peculiarly French pun-ishment, interdiction de séjour—banishmentfrom Paris, a somewhat archaic penalty usu-ally reserved for drug addicts, white slavers,and thugs.

Watching the tragic, almost comical, anticsof his old leader, there must have been timeswhen Moreau felt that he had been cursed inhis choice of mentors. Though the Banqued’Algérie was called upon to play a modestrole in financing the war effort—it suppliedsome $200 million in loans to the govern-ment—this was small compared to the $4billion provided by its larger and more pres-tigious sibling, the Banque de France. By1919, Moreau had almost reconciled himselfto serving out his time until retirement in thebackwaters of the Banque d’Algérie.

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OBEDIENCE ANDSUBORDINATION

Germany’s strategy for paying for its militaryeffort was dominated by the absolute convic-tion of the men around the kaiser that thewar would be short, that the Reich wouldprevail, and that it would then present thebill to the vanquished. The German govern-ment raised barely 10 percent of the $47 bil-lion it spent on the war from taxes. And be-cause Germany lacked Britain’s sophisticatedfinancial market, France’s great reserve armyof middle-class savers, or a rich ally acrossthe ocean willing to lend it vast amounts ofmoney, it had to resort to an unusually highdegree of inflationary finance. Whereas dur-ing the war, money in circulation doubled inBritain and tripled in France, in Germany itwent up fourfold.

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The architects of this disastrous policywere paradoxically two of the most compet-ent financial officials in all Europe: KarlHelfferich, the secretary of the Reich Treas-ury Office, the imperial German equivalentof minister of finance, and Rudolph vonHavenstein, the aristocratic head of theReichsbank. Helfferich, the most famouseconomist in Germany, was a professor whobefore the war had written one of the bestworks anywhere on monetary economics,Das Geld, which had been through six edi-tions and had been translated into numerouslanguages, including Japanese.

Von Havenstein, a lawyer by training, didnot have the same background but was uni-versally acknowledged to be one of the mostdedicated, upstanding, and loyal officials inthe entire Reich. With his piercing eyes, longand luxuriant, well-waxed whiskers, andpointed beard, he looked like the impresarioof a Victorian music hall. In fact, like his two

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predecessors as president of the Reichsbank,he was a typical product of the higherreaches of the imperial civil service. Born in-to the Prussian gentry in 1857, of a landown-ing family from Brandenburg, he studied lawand became a county court judge. In 1890,he joined the Prussian Finance Ministry andwas appointed president of the Reichsbankin 1908.

Service to the kaiser was the cornerstoneof Wilhelmine Germany and both men al-lowed themselves to be blinded by their loy-alty to the emperor, all the easier in Hell-ferich’s case because he was an extremeright-wing nationalist and a fervent believerin the glorious destiny of the German peopleand the historic mission of their leader.

Von Havenstein was a civil servant of theold school and believed strongly in the para-mount virtue of duty. As one banker wrote,“Obedience and subordination [were] part ofhis flesh and blood.” While the Reichsbank

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was legally owned by private shareholders,Von Havenstein and all his top officials wereresponsible to a board comprised of politi-cians: the imperial chancellor and four mem-bers representing the federal German states.The structure had been put in place by thefounder of the Reichsbank, Count Otto vonBismarck, a man who above all understoodpower. Aside from the accumulation of anenormous personal fortune, Bismarckshowed little interest in economics.However, when the Reichsbank was beingformed in 1871, his own private banker andconfidant, Gershon Bleichröder, warned himthat there would be occasions when politicalconsiderations would have to override purelyeconomic judgments and at such times tooindependent a central bank would be anuisance.

Thus, even though the German moneysupply ballooned during the war, and pricesmore than quadrupled—the inflation rate

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exceeded 40 percent a year—Von Havensteinbecame something of a national hero. Hewas showered with honors and decorations,immensely popular with the public, and thekaiser even affectionately nicknamed himwith the engaging pun der Geld Marschall,the “Money General.”

DESPITE His belief that the war had been amistake, Hjalmar Schacht threw himself intothe war effort as energetically as most cit-izens of imperial Germany. He was severelyshortsighted and thus exempted from milit-ary service. Convinced like everyone else thatGerman victory was assured, only threeweeks after the outbreak he was busy devel-oping a plan for extracting reparations fromFrance. It was a sign of how far off the markeven the most astute observers were to beabout the costs of the war that Schacht came

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up with a working figure of $10 billion.Though ten times the amount France hadpaid after the Franco-Prussian war of 1870,this would turn out to be only a fifth of theeventual total costs of Germany’s warbudget.

In October 1914, as the Western Frontsank into stalemate, Schacht was offered ajob on the staff of the Banking Commissionoverseeing the finances of occupied Belgium,which was run by the military administra-tion. He soon discovered that he was tem-peramentally ill suited to the army. He foundthe rigid hierarchy, the narrowness of themilitary mind, and the self-importance of theprofessional officer caste oppressive.

He also seemed to have had an unusualtalent for making enemies. Within a shortperiod, he managed to antagonize his superi-or, Major Karl von Lumm, the banking com-missioner, in civilian life a member of theReichsbank directorate. Schacht, always

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acutely sensitive when it came to matters ofstatus, asked to join the officers’ club thenhoused in the Brussels casino. Von Lumm,an old bachelor who had been part of theBavarian reserve before the war and was veryproud of his military credentials and uni-form, refused, citing Schacht’s status as a ci-vilian. Schacht disastrously went over VonLumm’s head to General von der Goltz, thegovernor general of Occupied Belgium,whom he had known before the war. He wasadmitted to the club all right, but at the priceof Major von Lumm’s enduring enmity.

As part of his duties, Schacht organized asystem by which the German army, ratherthan simply commandeering whatever goodsit needed, paid for its requisitions with a spe-cial occupation currency of “Belgian” francs,which, by design, Germans could buy at ahighly favorable exchange rate.

Demand for the Belgian francs was ex-tremely strong, and in February 1915 Schacht

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allowed the Dresdner Bank, his employer incivilian life, to purchase a large quantity. VonLumm promptly accused him of having viol-ated the civil service code of ethics andbrought Schacht up before an investigatingcommittee. It concluded that while he haddone nothing illegal or unethical, Schachthad attempted to cover up his involvementand had come close to perjury by giving “in-sincere replies to the questions put to him;and when the insincerity was pointed out . . .he attempted to justify himself by a far-fetched explanation of his statements.” Thematter eventually went up as far as the officeof the secretary of state for the interior;Schacht was officially reprimanded andresigned from the Banking Commissionrather than risk dismissal.

Von Lumm had undoubtedly made amountain out of a molehill. But even Schachtwas to admit in private years later that whilehe had not lied during the inquiry, he had

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been highly evasive. The incident, clouded inmystery, would dog his reputation for manyyears. Rumors circulated that he had em-bezzled large amounts of money or had per-sonally profited from his access to statesecrets.

After war service that had lasted barelynine months, Schacht returned to his bank-ing career. Once again, his overweening am-bition got the better of him. Back at theDresdner Bank, he pressed too hard for pro-motion to the board, was rebuffed, and hadno option but to resign. He moved on to be-come a director of the Nationalbank, a well-regarded, if sleepy, second-tier firm based inBerlin.

As for so many Germans, the war was agrim time for the Schacht family. He lost twoof his brothers—Oluf, from disease, and Wil-liam, the youngest, at the Battle of theSomme. Food was scarce—they had to growtheir own vegetables and acquired a goat,

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which they learned to milk—and times werehard.

A SCOUTING TRIP

For the United States the war was a windfall.European demand for American materialsand supplies soared, setting off an enormousboom. Though these purchases were partlyfinanced by Britain’s and France’s borrowingsome $2 billion a year within the UnitedStates, the net effect led to massive influx ofgold into America, swelling its bullion re-serves from under $2 billion to $4 billion.Because of the operation of the gold stand-ard, the influx of gold created an unusual ex-pansion of credit and the U.S. money supplydoubled.

During those first few years of its exist-ence, the Federal Reserve System found itself

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overwhelmed. It was trying to build up itsstaff; it had no experience as an institution inmonetary affairs, and being the product ofcountless political compromises, its charterwas riddled with contradictions. BenjaminStrong, governor of the Federal ReserveBank of New York, was quick to exploit theuncertainty about who was in charge. Whilethe New York Fed, as it would come to becalled, was on paper merely one among thetwelve regional Federal Reserve Banks andtheoretically under the supervision of theFederal Reserve Board in Washington, abody made up of political appointees, it wasby a long way the largest of the reservebanks, and Strong, not a man to wait uponorders, made himself the chief pilot of thewhole system. By virtue of his connectionsamong New York bankers, his background asone of the original architects of the system,and most important, his personality, he

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came to dominate discussions of monetaryand financial policy.

As more and more gold accumulated in thevarious Federal Reserve banks, Strong hadtwo big fears. One was that at the end of thewar, this gold would all pour back to Europe,radically destabilizing the U.S banking sys-tem. The other was that the gold would stay,potentially causing a shortage of reserves inEurope and threatening even greater infla-tion at home. In either case, he recognizedthat the Fed would be unable to handle thedisruptions on its own and would have to co-ordinate its response with the Europeancentral banks. And so in February 1916, hedecided to make a “scouting trip” to Europe.

As he arrived, the war, which had been go-ing on for eighteen months, was about toenter its bloodiest year. The actual fightingin Western Europe was restricted to a nar-row corridor through Belgium and easternFrance, and life in London or Paris, while

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austere, was not especially dangerous. Sincethe Lusitania had been torpedoed and sunkoff the coast of Ireland the year before,drowning almost 1,200 people, 124 of themAmericans, the State Department had beenwarning its citizens not to travel to Europe.

Strong went first to Paris to meet his coun-terparts at the Banque de France and then toLondon. It was during this visit to the Bankof England that he first met Norman. Com-ing from the same generation, they immedi-ately struck up a friendship. Unlike many ofhis colleagues in the City, Norman, havinglived in the United States for two years, likedand admired Americans and he invitedStrong to Thorpe Lodge one evening for aquiet dinner. Though Strong was the gov-ernor of the New York Fed and Norman amere adviser to the deputy governor, on hisreturn to the United States in April, Strongstarted to correspond with Norman. Initiallyboth saw it just as a way to exchange

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information and views on the narrower as-pects of credit policy. But over the months,their letters gradually become less formaland more personal, particularly when Nor-man took great pains to look after Strong’seldest son, Benjamin, a sophomore at Prin-ceton, who had gone to Europe as a volun-teer with the American Ambulance Service inMay 1917, after the United States entered thewar on the Allied side.

Meanwhile, after Strong returned to theUnited States from Europe in the summer of1916, he was buffeted by a series of personaltragedies. His wife, Katharine, still onlytwenty-eight, left him, taking their twoyoung daughters with her. She moved acrossthe country to Santa Barbara. Their marriagehad been on the rocks for a while. They weretemperamentally unsuited to each other—hewas gregarious and social, she shy and retir-ing—and their age difference too great. Hisfather-in-law, Edmund Converse, had been

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against his taking the Fed job from the verybeginning, dismissing it as a quasi-govern-ment position with no future, and relationsbetween the two men had steadily deterior-ated. Katharine for her part had found it dif-ficult to adjust to their diminished financialcircumstances. Strong hoped for many yearsthat they might be reconciled and was deeplyhurt when in 1921 she filed for divorcewithout even consulting him. After the sum-mer of 1916, they were never to meet again.

That same summer, as his marriage wasfalling apart, he also fell ill, developing anagging cough that became progressivelyworse. He was soon bringing up blood andexperiencing terrible chest pains. That Junehe was diagnosed with tuberculosis. Thencommonly known as consumption, thehighly contagious disease, caused by air-borne bacteria that attack the membranes ofthe lungs, was then the most common causeof civilian deaths in both Europe and

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America, affecting people of all classes, oftenin the prime of life. Though the incidence ofthe disease had markedly declined before thewar as the poorly ventilated tenements of in-dustrial cities were replaced by better hous-ing, the war had seen a minor resurgence ofit in Europe. Strong is likely to have pickedup the infection on his visit there.

While the cause of the disease had beenisolated in the late nineteenth century, therewas still no effective therapy. Half of thosewho contracted it were dead within fiveyears. At the time, it was thought that thethin dry air in high altitudes helped to con-tain the infection—with some grounds be-cause its virulence declines in low-oxygen at-mospheres. It was also believed—erro-neously, it turned out—that total inactivityand complete rest allowed the lungs to re-build themselves. Luxury sanatoria cateringto the rich and the middle class, cut off fromthe rest of the world, had sprung up in

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mountain resorts across Europe andAmerica.

Strong’s doctors insisted that he take anextended leave of absence from the Fed. InJuly 1916, he moved to Colorado, where al-most a third of the population was thenmade up of “consumptives” seeking to becured. He initially checked into a sanatoriumin Estes Park, in the heart of the northernColorado Rockies, but frustrated by this her-metically sealed world where patients spenthours doing nothing but sitting outdoors tak-ing in the mountain air, he moved to Denverthat October and set up a small office that al-lowed him to keep in touch with New York.

Strong was still convalescing in Coloradowhen the United States entered the war inApril 1917. Within six weeks, he was back inNew York. For the next eighteen months hethrew himself into the task of raising themoney to pay for the war. Every other object-ive of the Fed was now subordinated to this

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goal. The United States spent in total some$30 billion on the war, a little over $20 bil-lion on its own actual expenditures and an-other $10 billion in the form of loans to keep

other countries going.12 Determined to avoidthe mistakes that had been made in finan-cing the Civil War, the secretary of the treas-ury, William McAdoo, who also happened tobe the president’s son-in-law, launched anaggressive program to induce the Americanpublic to purchase war debt. The Fed, asbanker to the government, was responsiblefor selling these so-called Liberty Bonds,which eventually brought in close to $20 bil-lion, about half of this raised by the NewYork Fed.

Taking the lead in organizing the high-pressure campaigns in New York to stir pub-lic enthusiasm for the bonds, Strong sud-denly found himself thrust into the limelight.Acting as the master of ceremonies for con-certs at Carnegie Hall or at the Metropolitan

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Opera House, leading great patrioticmarches down Fifth Avenue, speaking at ral-lies featuring such Hollywood celebrities asMary Pickford and Douglas Fairbanks, hebecame something of a minor celebrity him-self. Publicity stunts were a signature ofthese campaigns. On one occasion Strongand the other organizers had trenches dug inthe Sheep Meadow in Central Park—much tothe outrage of conservationists—to show howsoldiers were living on the Western Front. Tokick off another campaign, they arranged forevery air-raid siren, police alarm, tugboatwhistle, fire engine bell, and ship fog-hornacross the city to be turned on for fiveminutes.

By the time the war drew to a close, theFed was a transformed institution. While itwas not completely immune from the pres-sures of war finance, unlike so manyEuropean central banks, it had resisted pur-chasing government bonds directly and only

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indirectly helped to fuel the expansion inmoney supply. It had therefore secured somecredibility. More important, the war had ir-revocably changed the economic and finan-cial position of the United States in relationto the rest of the world. The Fed, whichbarely existed in 1914, now sat on the largestreservoir of gold bullion in the world, mak-ing it potentially the dominant player if andwhen the international gold standard wasrestored.

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PART TWO

AFTER THE DELUGE

1919 -23

7. DEMENTEDINSPIRATIONS

German REPARATIONS

Lenin was certainly right. There isno subtler, no surer means of over-turning the existing basis of societythan to debauch the currency.

—JOHN MAYNARD KEYNES, The Economic Con-sequences of the Peace

ON November 11, 1918, the Great War cameto an end as it had begun, as a total surprise.In June 1918, the German army broke

through the Allied lines, and came withinfifty miles of Paris. The German public, givena distorted picture by its government, fullyanticipated victory. A month later, the Alliescounterattacked and suddenly the entireGerman war machine seemed to disinteg-rate. The German forces, exhausted by thatlast offensive, withered away; support for thewar at home crumbled; civilian morale col-lapsed; soldiers deserted in droves; the navy,blockaded at Kiel, mutinied; and Germany’sallies began to sue secretly for peace. ByOctober, the military, desperate to salvagewhat it could, turned over power to the civil-ians. On November 9, the kaiser was forcedinto exile by his generals, boarding a trainfor Holland. Early on November 11, in a rail-way carriage in the forest of Compiègne fortymiles outside Paris, an armistice was signed.

Across Europe some 11 million men laydead, including 2 million Germans, 1.4 mil-lion Frenchmen, and 900,000 British.

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Another 21 million had been wounded, verymany maimed for life. Nine million civilianshad perished, mostly of hunger, cold, orlowered resistance to the monstrous epidem-ics. But for all the horrendous humancarnage, the actual material destruction ofthe war was limited to a long but narrowstrip of northern France and Belgium. Thecosts of rebuilding the mines, farms, andfactories destroyed on the Western Frontamounted to only $7 billion.

Most European economies had contrac-ted—Germany’s and France’s by 30 percent,Britain by less than 5 percent—as men andcapital were siphoned off, as factories diver-ted to producing arms, and livestockslaughtered. The war had been a boon for theUnited States. Entering late, it had sufferedfewer casualties, while the massive expan-sion in exports of foodstuffs, raw materials,and war supplies to its allies had provided agigantic boost to its economy. Before the

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war, its GDP of $40 billion per annum wasroughly the equivalent of that of Britain,France, and Germany combined. By 1919, itwas more than 50 percent larger.

The most pernicious and insidious eco-nomic legacy of the war was the mountain ofdebt in Europe. In four years of constant andobsessive battle, the governments of Europehad spent some $200 billion, consuming al-most half of their nations’ GDP in mutual de-struction. To pay for this, they had raisedtaxes, borrowed gigantic amounts of moneyboth from their own citizens and from theAmericans, and simply printed more andmore currency. By the end of the war,Europe was awash with the stuff—the moneysupply in Britain doubled, in France ittripled, and in Germany, the worst culprit, itquadrupled. Though the U.S. money supplyalso doubled, this was less because of infla-tionary war finance, which it relied upon to amuch smaller extent than the Europeans,

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and more because of the massive influx ofgold. This set the pattern of the next decade:Europe struggling with the legacies and bur-dens of the past, the United States wrestlingwith the excess bonuses of its good fortune.

. . .

ON THE DAY the kaiser fled Germany,Schacht was in Berlin. That morning, al-though the kaiser had not actually abdic-ated—and would only formally do so twoweeks later from his sanctuary in Hol-land—the chancellor, Prince Max of Baden, adistant cousin of the kaiser’s, announcedpreemptively that the emperor had gone. Thecity was like an armed camp, with barbed-wire entanglements and overturned vehiclesblocking the streets. Revolution was in theair. A general strike had been declared, andthousands of workers and soldiers paraded

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through the center of town demanding arepublic.

Coming out of the Hotel Esplanade nearthe Potsdammerplatz at about noon, Schachtwas confronted by a convoy of Red soldierspacked in the back of trucks driving acrossthe square. At the station, a machine-guncompany was positioned for action. No oneseemed to be in charge. To find out what wasgoing on, and to avoid being caught in themob, Schacht and his companion headednorth toward the Reichstag, which theyfound deserted. A little while before, PhilippScheidemann, a leader of the Social Demo-crats, had given history a push by coming outonto the balcony and proclaiming a republicto the crowds below, although no such meas-ure had been passed by the Reichstag. Thuswas born the new Republic of Germany. Themobs had then headed off to the emperor’sabandoned palace, the Berliner Schloss.

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Schacht would remark later that there wasa certain distinctively German order amid allthe chaos of that dramatic day. The imperialdynasty might have fallen and the politicalsystem of Germany overturned, but ordinarypeople went about their everyday business,trying to ignore the demonstrations. Thetrams did not stop running; electricity, wa-ter, and gas supplies were not interrupted;and almost no one was killed—the casualtiesthat day amounted to fewer than fifteendead. Even when shots were randomly firednear the palace, the fleeing crowds remainedso instinctively law abiding that they obeyedthe signs to keep off the grass.

Across the country, workers’ and soldiers’councils sprang up and took over the func-tions of the local authorities. On November10, Schacht was elected, much to his amuse-ment, to his local community council. Afterissuing a proclamation welcoming the re-volution, it met precisely once more.

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The next few weeks were a time of terribleturmoil. Although the November revolutionwas largely peaceful, by the first weeks ofJanuary, violence had broken out and Berlinwas wracked by strikes, demonstrations, andfierce street fighting between the Spartacistrevolutionaries and the army. It seemed toSchacht then, as to very many others, thatGermany was the front line in a grand battleacross Europe against the forces of Bolshev-ism. Going home through the darkened city,he could hear the rattle of machine guns. Onone occasion, he was stuck in the HotelKaiserhof as a gang of Spartacist demon-strators clashed with a group of governmentsupporters outside. A hand grenade burstamong the crowd, scattering it in all direc-tions and leaving one man dead in the streetbelow. The “fate of Germany hung by athread,” he recalled many years later.

It was also, however, a time of opportunityfor middle-class men of talent like Schacht.

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The collapse of empire and an army in defeatshattered the old order. Within forty-eighthours of the kaiser’s flight, twenty-five dyn-asties had abdicated within Germany. TheJunkers who had dominated the countrywere discredited, their power swept away.

Initially Schacht thought he might find hisopportunity in politics. Before the war, hehad been a member of the Young Liberal As-sociation, an arm of the National Liberals, anationalistic though not very liberal party,which had enthusiastically supported thekaiser’s expansionist policies. In 1901, hehad even declined an offer from the party tostand for election to the Reichstag, knowingthat power in the Kaiserreich was reservedfor the nobility, especially the Prussian no-bility, and that a man of his backgroundcould not aspire to political office of any con-sequence. But with the new president of therepublic himself a former saddler and thenew chancellor a former journalist, it seemed

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that the old caste system had nowdisintegrated.

On November 10, the republic only a dayold, Schacht was invited to a meeting andasked to help found a new moderate party,the Deutsche Demokratische Partei (DDP),which would oppose alike the socialism ofthe left and the nationalism of the right. TheDDP itself would briefly do very well, becom-ing a party of academics, journalists, andbusinessmen, many of them Jewish, and at-tracting such luminaries as Max Weber andAlbert Einstein. In the 1919 election, it vaul-ted into third place in the Reichstag, after theSocialists and the Catholic Centrum Party.

But Schacht’s brief flirtation with demo-cratic politics was not destined to be verysuccessful. With his financial and businessconnections, he played an important role inraising funds for the DDP, and helped writethe party platform. But lacking the commontouch that appealed to voters and too proud

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to forge the necessary personal alliances, hewas never able to persuade a constituency toselect him as a candidate. He was alsoviewed with some suspicion within the lead-ership, whose leading light, Theodor Woolf,editor of the Berliner Tageblatt, regardedhim as just one more opportunist trying tohitch a ride on the cause of democracy, withlittle commitment to the new republic.

For his part, Schacht would become stead-ily disillusioned with the party, formallybreaking with it in 1925, when it voted tosupport the elimination of privy purses tothe deposed ruling families. In the late1920s, the DDP, like all German centristparties, would shrink into insignificance,squeezed from both ends of the politicalspectrum, particularly from the right. Bythen, though, Schacht had moved on to big-ger things.

It was perhaps not surprising that he hadsuch little success in electoral politics. He

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was simply a hard man to like. People foundhim cold and unemotional, overly calculatingand shrewd. By his own admission, he cameacross as “hard . . . callous . . . and buttoneddown.” It was partly his appearance. One ac-quaintance remarked, “He managed to looklike a compound of a Prussian reserve officerand a budding Prussian judge who is tryingto copy the officer.” His physically distinctivecharacteristics—the crew cut, the rigid bear-ing, the stiffly upright posture, the perpetualaggressive scowl—would, after he had be-come famous, make him a popular target for

cartoonists.13 But more than his appearance,it was his character traits—his extreme van-ity, his tendency to talk about himself andhis achievements, his inflexibility, his causticwit laced with cynicism—that put people off.

He displayed an astounding self-confid-ence. This was not a façade, but a reflectionof his astonishing sense of innate superiority.He was in many ways a classic lower-middle-

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class overachiever. Having grown up poor, ina society where class and family backgroundwere still overwhelming factors, he hadlearned the hard way that in a hostile worldhe could rely only on himself. Whatever suc-cess he had achieved, he owed to himselfalone—his own formidable intelligence andimpressive capacity for hard work. “Nothingseems sacred to him except his belief in him-self, and this is so overwhelming as no longerto seem personal. He makes the most exag-geratedly egotistical statements without hishearer being aware of any personal boast-ing,” wrote one observer. And unlike somemen on the make, who cloak their cynicismbehind a veneer of charm, he displayed noparticular desire to be liked. Much later,when his true colors had been revealed, onepolitician would write, “He was a man apart,unique, solitary, without followers or any co-terie of partisans. He had no friends, only

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enemies.” But no one could dispute his self-discipline, energy, and unrelenting drive.

THE problem of German reparations—thatis, how much of the cost of the war the vic-tors, particularly Britain and France, coulddemand from Germany—was to haunt thefinancial landscape of Europe for the nexttwenty years. The war may have ended, butthe conflicts did not stop. At the Paris PeaceConference, which opened in January 1919,no other issue “caused more trouble, conten-tion, hard feeling, and delay,” recalled Tho-mas Lamont, one of the Americannegotiators.

Everyone arrived in Paris expectingFrance, which had suffered the worst civiliandamage and heaviest casualties, to be thestrongest advocate of punitive reparationsagainst Germany. Instead, it turned out to be

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Britain. A strong liberal contingent withinthe British Treasury had developed peaceplans based on a moderate settlement. But inthe months leading up to the Peace Confer-ence, the press, led by the Times and theDaily Mail, launched a cheap jingoistic cam-paign in favor of a harsh settlement and,during the December 1918 election cam-paign, the slogan that the Allies should

“squeeze Germany until the pips squeak”14

struck a chord with the electorate.

The British prime minister, David LloydGeorge, pandering to public opinion, appoin-ted to the British delegation to the Repara-tions Commission in Paris three of the mosthard-line advocates of a punitive settlement:William Hughes, the doggedly aggressiveprime minister of Australia; Lord Sumner, alaw lord with a reputation for being “stony-hearted”; and Lord Cunliffe, the boorish andirascible former governor of the Bank ofEngland.

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Cunliffe was supposed to be the financialbrains of this trio. Although he had been asuccessful banker and even governor of theBank of England, he retained his ignoranceof the most basic rudiments of economics. Inthe weeks before departing for Paris, he re-commended that Germany be required topay $100 billion in reparations. It was anastounding figure. Germany’s annual GDPbefore the war had been around $12 billion.To burden it with a debt eight times its annu-al income would have been the height ofmadness. The interest on that debt alonewould have consumed 40 percent of its GDP.Though Cunliffe was willing to admit that thebasis for the calculation was “little more thana shot in the dark,” which he had beenpressed to arrive at “between a Saturday anda Monday,” he speculated that perhaps hehad even underestimated Germany’s capa-city to pay, and that if anyone argued that

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Germany could pay $200 billion, he “wouldnot disbelieve him.”

France’s desire for reparations arose fromits own sense of vulnerability. Twice invadedby Germany in the last fifty years, Francewas consumed by the fear of a German reviv-al. Germany was more aggressive, more suc-cessful, younger, richer, and more dynamic.It was also 50 percent larger—sixty millionGermans versus forty million Frenchmen.Though the French prime minister, GeorgeClemenceau, never actually made the state-ment attributed to him by German propa-ganda, that the fundamental problem wasthat there were twenty million too many Ger-mans, it was clearly in his mind. France wastherefore determined to weaken Germany byevery means possible—by disarmament, byslicing off as many parts of its neighbor as itcould, and by extracting reparations.

During the negotiations in Paris, it becameapparent that to the French, money was

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subsidiary to security. While the French fin-ance minister, Lucien Klotz, kept pushing forhigh reparations, Clemenceau, the head ofthe French delegation, treated him with con-tempt, calling him “the only Jew who knowsnothing about money” and marginalizinghim along with all the other French cabinet

members in the negotiations.15 Clemenceautried to be flexible on reparations as a bar-gaining chip with the Americans in return forsecurity guarantees along their border withGermany. Only when the guarantees provedto be inadequate did he revert to demandinghigh reparations.

It fell to the American delegation, whichincluded the famous stock market speculatorBernard Baruch; Thomas Lamont of J. P.Morgan and Co.; and a young aide, thethirty-one-year-old John Foster Dulles, toact as the advocates for moderation. Theyadopted the position that a large reparationsbill was incompatible with the initial terms

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of the armistice agreement under which Ger-many had laid down its arms. Moreover, theyargued that punitive reparations would actas a millstone, not simply around Germany’sneck but around that of all Europe.

The negotiations over reparations draggedon for ten weeks. By the end of March, theywere still at an impasse. The British delega-tion on the Reparations Commission, led byLord Cunliffe and Lord Sumner, who were bythen nicknamed “The Heavenly Twins” be-cause they were always together and insistedon such outrageously high figures, would notagree to a settlement of less than $55 billion.

The Americans preferred a settlement inthe region of $10 to $12 billion and would gono higher than $24 billion. Although Presid-ent Wilson was, for the most part, outnegoti-ated and outfoxed by the other leaders inParis, on this point the American delegationstuck to their guns and refused to agree toreparations that exceeded these limits.

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Several attempts were made to break thedeadlock. Lloyd George himself applied hisconsiderable political skills, but Cunliffe andSumner refused to budge. Lloyd George’smaxim was never to enter into “costly frontalattacks, either in war or politics, if there wasa way round” and he had originally appoin-ted them in the hopes of bamboozling theminto endorsing a moderate settlement. Nowhe found himself captive to their in-transigence. His solution was to do an endrun around them by proposing, at the lastminute, that the Peace Conference defer theassessing of reparations to a later date, del-egating it to a specially appointed body,which would be required to make its recom-mendation no later than May 31, 1921. Hehoped that by that time, passions would havecooled, the political climate in Britain wouldhave changed, and a more reasonable settle-ment could be arranged.

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IN THE FIRST few months of 1919, as thePeace Conference was getting under way,Schacht, lulled like many other Germans bythe high-minded pronouncements of Woo-drow Wilson, still expected a generous peace.He believed that the real problem would bethe overhang of debt after the war, whichwould lead to a general European bank-ruptcy. He talked naively of a grand plan forreconstruction. The great natural resourcesof Russia would be opened up for exploita-tion by a unique partnership between GreatBritain and Germany, Britain providing theleadership and capital, Germany the man-power and engineering skills.

In May 1919, when the terms of the peacetreaty were finally unveiled to Germany, thewhole country exploded in shock and anger.It was to lose one-eighth of its territory.Alsace and Lorraine were to revert to France;

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the Saar coal mines were also ceded toFrance; North Schleswig was to be subject toa plebiscite as to whether it wished to be-come part of Denmark; Upper Silesia, Posen,and West Prussia went to Poland. Bothbanks of the Rhine were to be permanentlydemilitarized; the army was to be cut to nomore than one hundred thousand men, thenavy was to be dismantled, and the merchantmarine distributed to the Allies. Though theAllies had delayed fixing the size of repara-tions, it was widely known that the amountsbeing mooted were gigantic. In the interim,Germany was required to pay an initial $5billion before May 1, 1921. A new Repara-tions Commission, to be based in Paris, wascreated specifically to determine Germany’sliability and to supervise its collection. Theworst humiliation was Article 231, the “art-icle of shame,” which branded Germany assolely responsible for the war.

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The reaction within Germany to the peacetreaty reached a pitch of hysteria. All formsof public entertainment were suspended fora week as a sign of protest. Flags across thecountry were lowered to half-mast. Thechancellor, Philipp Scheidemann, character-ized the terms as “unbearable, unrealizable,and unacceptable,” and proclaimed that itwould make the Germans “slaves and helots .. . doing forced labor behind barbed wire andprison bars.” The Germans were given adeadline of five days to agree to the terms orface a resumption of hostilities.Scheidemann resigned rather than put hissignature on the document, of which he said,“What hand would not wither which placedthis chain upon itself and upon us?” On theday that Germany accepted the terms, itsProtestant churches declared a day of na-tional mourning.

Behind all the divisions that were to wrackGermany for the next few years, the one

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single factor that united every class andevery political party—democrats and royal-ists, liberals and Socialists, Catholics andProtestants, northerners and southerners,Prussians, Bavarians, Saxons, and Hessi-ans—was the injustice of the peace treaty, oras it was called the Diktat. And of all thevarious penalties heaped on Germany by thetreaty—disarmament, dismemberment, oc-cupation, and reparations—it was repara-tions that would become the single most con-suming obsession of German foreign policy.Germany had meekly agreed to reduce itsmilitary machine to a shadow of its formerpower, thus leaving it impotent to do any-thing about the loss of territory or of itscolonies. Only on reparations did Germanyseem able to fight back. It discovered whatevery large debtor at some point discovers:that when one owes a large amount ofmoney, threatening to default can give onethe upper hand.

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Schacht’s first introduction to the issue ofreparations came in the fall of 1919. He wasasked to join a group of industrialists andbusinessmen sent to The Hague to negotiatewith the Allied commission on the delivery ofgoods in kind as part of the interim settle-ment. The German delegation was subjectedto a litany of petty humiliations: they wereforced to stay at the worst hotel, given badfood, their movements restricted, and theywere openly followed. Finally, during the ne-gotiations themselves, they were not evenprovided with chairs but were required tostand. When Schacht complained, he wastold, “You seem to forget that your countrylost the war.” It was Schacht’s first encounterwith what he was to call the “medieval arrog-ance” of the victors.

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IRONICALLY, IT WAS not a German but anEnglishman who launched the most devast-ating attack on reparations. In November1919, John Maynard Keynes, the young Cam-bridge don, published The Economic Con-sequences of the Peace. In the book Keynesargued that in order for Germany to earn themoney to pay the Allies, it would have to sellmore goods than it bought, and its tradepartners would have to be willing to absorbthis large influx of goods, with potentiallycrippling consequences for their own indus-tries. It was therefore in the Allies’ own self-interest to moderate their demands. As heput it, “If Germany is to be milked, she mustnot first of all be ruined.” He concluded thatthe most Germany could afford to pay,without causing a massive disruption ofworld trade, was around $6 billion.

The book became an immediate bestseller; over one hundred thousand copieswere bought worldwide in its first six months

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alone. It was serialized in the United Statesin the New Republic and in France by LaNouvelle Revue Française and translated in-to French, German, Dutch, Flemish, Danish,Swedish, Italian, Spanish, Romanian, Russi-an, Japanese, and Chinese. At the age ofthirty-six, Keynes’s brilliant pen had carriedhim to fame, not merely in Britain but acrossthe world.

From an early age, people had remarkedon young Maynard’s intellect, which hadbeen carefully nurtured from his childhood.Born in 1883, in Cambridge, England, hespent most of his life in and around Cam-bridge University. His father, John NevilleKeynes, was a don, a philosopher, and logi-cian of great early promise but little ambi-tion who had drifted into university adminis-tration. Maynard spent four years at Eton,where he was one of those golden boysknown both for their extraordinary academicachievement and their social popularity, and

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in 1902 he entered King’s College, Cam-bridge, to read mathematics. He was soonelected to that elite intellectual society nick-named “the Apostles,” which already in-cluded G. E. Moore, Bertrand Russell, andLytton Strachey. He spent his years at Cam-bridge absorbed in a hothouse combinationof high-minded philosophical debate and ho-moerotic entanglements with his fellowApostles. Even Bertrand Russell, rarely im-pressed by other people’s brainpower, wrotethat Keynes’ intellect was “the sharpest andclearest that I have ever known.”

After graduating in 1904, Keynes brieflytried to escape the university by joining theIndia Office as a “clerk”—he had only comesecond in the civil service exams and missedbeing selected for the Treasury, though hewould characteristically insist that it was be-cause “I evidently knew more about econom-ics than my examiners.” Within a year of go-ing to the India Office, he resigned. Even

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though the hours were not at all taxing—heworked from 11:00 a.m to 5:00 p.m. onweekdays, 11:00 a.m. to 1:00 p.m. onSaturdays, and had eight weeks’ vacation ayear plus Derby Day—he had found that hedid not have enough to do. His assignmentsincluded organizing the shipment of tenAyrshire bulls to Bombay and preparing anannual report to Parliament, “The Moral andMaterial Progress of India.” Amused by theVictorian pomposity of the whole exercise,he joked to Lytton Strachey that he plannedto include “an illustrated appendix onSodomy.” Bored with the work and finding itdifficult to restrain his natural irreverencetoward authority, he returned to Cambridge.

While he almost immediately gained a lec-tureship in economics at the university, hisfirst love had always been philosophy. In1909, he began work on a book on the philo-sophical foundations of probability, which hehoped would change the way philosophers

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thought about uncertainty. The themes ofthe book—that nothing can be known withcertainty, that it is hard to define what is arational course of action when the future isso indeterminate, that intuition rather thananalysis provides the ultimate basis for ac-tion in these circumstances—were to colormuch of his later economic thinking and hisalmost equally remarkable ability to makemoney from speculating.

But for all his passion for abstract ideasand philosophical discussions, Keynes alsohad wider and worldlier ambitions. In addi-tion to his teaching duties and the book onprobability, he spent the years before the waras a member of the Royal Commission on In-dian Currency and Finance, even publishinga book on the subject; he took over the in-vestment portfolio of his college; wrote occa-sional pieces on financial matters for theMorning Post and the Economist; and be-came the editor of the Economic Journal, to

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which he also contributed articles and re-views. Then there were his hobbies—themagnificent collections of old books andmodern paintings, his golf, his passion forthe ballet—and his many remarkable andvaried friends. Indeed, there were timeswhen he almost seemed to have too manyinterests.

To accommodate all these activities, hewould spend a couple of days every week inLondon, where he shared a house at 38Brunswick Square with some of his Blooms-bury friends—among them Adrian Stephenand Adrian’s sister Virginia and her husbandLeonard Woolf—many of whom he had metas an undergraduate at Cambridge. But whilehis bohemian comrades viewed the world ofmoney and power as somehow tainted, hevery much wanted to be part of it.

His chance to return to government camewith the war. On Sunday, August 2, he was inCambridge when he received a letter from an

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old colleague at the UK Treasury, BasilBlackett. “I tried to get hold of you yesterdaybut found that you were not in town. Iwanted to pick your brains for your country’sbenefit and thought you might enjoy the pro-cess. If by chance you could spare time to seeme on Monday, I should be grateful, but Ifear the decisions will all have been taken bythen.” Such an invitation from a man he re-spected, offering access to the center ofworld affairs, was irresistible. Unwilling towait for the next train up to London, he per-

suaded his brother-in-law, A. V. Hill,16 totake him up to London in the sidecar of hismotorcycle. By the end of the day, Keyneswas ensconced in the Treasury Building inWhitehall, busy drafting a note for the chan-cellor on whether Britain should follow therest of Europe into abandoning the goldstandard. Within a few months, he had a jobas a junior economic adviser within theTreasury.

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He quickly rose within its rank. In early1917, he became chief of the external financedivision responsible for securing enough dol-lars on reasonable terms to pay for the wareffort and keep the UK economy afloat. Itwas perhaps the most critical economic issueconfronting Britain during the war, and putKeynes at the heart of economic policymaking.

He became completely absorbed in theheady atmosphere of life as an establishmentmandarin, thrown into the highest social andpolitical circles. He was invited for countryweekends by the prime minister and his wife,played bridge at No. 10 Downing Street,spent the weekend at the home of the chan-cellor of the exchequer, dined with the Dukeof Connaught and the Princess of Monaco.He was, in the words of the society hostessOttoline Morrell, “greedy for work, fame, in-fluence, domination, admiration.”

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That combination of success and clev-erness could at times make him insufferable.His Bloomsbury friends, who inhabited ararified world of art and literature and ideas,were able to tease him about his newfoundconnections in high places. They were evenwilling to tolerate his irritating cocksureness.He was redeemed in their eyes by the sub-versive pleasure he took in challenging au-thority. No one was immune from his wittyand biting ripostes. Within just a few monthsof joining the Treasury, he told no less thanLloyd George, the chancellor of the ex-chequer, during a meeting, “With the utmostrespect, I must, if asked my opinion, tell youthat I regard your account as rubbish.” But tothe many other people to whom he was rudeor insulting, he was simply an arrogantyoung man with an overblown sense of hisown intellectual superiority.

One would not have guessed at all of thisby looking at him. He looked so very

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ordinary—receding chin, thinning hair,feeble military mustache—and he dressed soconventionally—dark three-piece suits and ahomburg, or sometimes a bowler. At firstglance he might have been a modestly suc-cessful City drone—an insurance brokermaybe—or possibly a minor civil servant.

Beneath that superior façade he actuallyharbored some profound insecurities—espe-cially about his looks. “I have always sufferedand I suppose always will from a most unal-terable obsession that I am so physically re-pulsive that I’ve no business to hurl my bodyon anyone else’s,” he once confessed to hisfriend Lytton Strachey. But most of thosewho were close to him agreed that he couldbe the most attractive and charming of com-panions, his conversation sparkling, bril-liant, and witty. He was “gay and whimsicaland civilized” with “that gift of amusing andsurprising, with which very clever people,and only very clever people, can by

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conversation give a peculiar relish to life,” re-membered the art critic Clive Bell.

Most of Keynes’s Bloomsbury crowd wereconscientious objectors. As the war draggedon, he himself became increasingly disillu-sioned with its terrible waste, the relentlessloss of lives, the refusal of the politicians tocontemplate a negotiated settlement, and thesteady erosion of Britain’s financial standing.In 1917, he wrote to his mother that the con-tinuation of the war “probably means thedisappearance of the social order we haveknown hitherto. With some regrets I think Iam not on the whole sorry. The abolition ofthe rich will be rather a comfort and servethem right anyhow. What frightens me is theprospect of general impoverishment. . . . I re-flect with a good deal of satisfaction that be-cause our rulers are as incompetent as theyare mad and wicked, one particular era of aparticular kind of civilization is very nearlyover.”

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When the war ended, Keynes was appoin-ted the principal Treasury representative atthe Paris Peace Conference. Though his offi-cial titles included deputy to the chancellorof the exchequer on the Supreme EconomicCouncil, chairman of the Inter-Allied Finan-cial Delegates in the Armistice negotiations,and representative of the British Empire onthe Financial Committee, he soon foundhimself completely excluded from the mostimportant economic negotiations at Paris,those on reparations. He had to watch im-potently from the sidelines as the“nightmare” of the Peace Conference wasplayed out. As he later wrote, “a sense of im-pending catastrophe overhung the frivolousscene.” When the terms of the treaty were fi-nally announced in the middle of May, ex-hausted and disgusted, he felt he had no al-ternative but to resign. He wrote to LloydGeorge, “The battle is lost. I leave the Twins

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[Sumner and Cunliffe] to gloat over the dev-astation of Europe.”

THE ECONOMIC CONSEQUENCES of THEPEACE was a strange book to have sold sowell. Two-thirds of it comprised a detailed,often technical, polemic against reparations.At the time and even after, the whole debateover reparations was obfuscated by theenormous figures involved. They weresimply too large and abstract for mostpeople, including politicians and manybankers, to comprehend, particularly in anera when few people knew what the GDP ofGermany or Britain was or even what theterm meant. Keynes was able to piercethrough all of this confusion and translatethe tens of billions of dollars that were beingbandied about so readily into somethingmore tangible for the average man to grasp.

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A book replete with figures and tables onthe value of the housing stock of France andBelgium, the composition of German exportsand imports in 1914, and estimates of thesize of the German railway rolling stock mayhave been unlikely material for a best seller.But the sheer physicality of the technical de-tails served as a chilling reminder that be-hind all of the abstract figures, this was anargument about the concrete things neces-sary to sustain standards of living.

Its success was partly due to the artfullymordant portraits he drew of the Big Threeat Paris: Clemenceau, “dry in soul and emptyof hope, very old and tired”; Wilson, “histhought and his temperament . . . essentiallytheological not intellectual”; “his mind . . .slow and unadaptable”; and Lloyd George,“with six or seven senses not available to or-dinary men, judging character, motive andsubconscious impulse, perceiving what eachwas thinking and even what each was going

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to say next.” Keynes was persuaded by sever-al people, including his mother, to omit someof the best but most inflammatory descrip-tions—especially the portrait of Lloyd Ge-orge, “rooted in nothing; he is void andwithout content . . . one catches in his com-pany the flavor of final purposelessness, in-ner irresponsibility, existence outside oraway from our Saxon good and evil, mixedwith cunning, remorselessness, love ofpower.”

What seemed to have captured the publicimagination was the outline of the world eco-nomy that Keynes was able to draw. In boldbroad strokes, he described the workings ofthe prewar Edwardian world, the fragilefoundations on which it had been built, andthe mutilation to its financial fabric left bythe war. He gave a foreboding picture of thefuture as the forces that had sustained theold economic order began to come asunder.Sounding at times like an Old Testament

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jeremiad, the book spoke of “civilization un-der threat,” of “men driven by starvation tothe nervous instability of hysteria and maddespair.” The tone of impending doom mayseem overwrought to our ears, but to a gen-eration that had just emerged from the mosthorrendous and apparently pointless apoca-lypse, it rang true.

THE ECONOMIC CONSEQUENCES had anenormous impact on thinking about repara-tions throughout the world. The biggestchange occurred in Britain. Even before thePeace Conference had adjourned in June1919, Lloyd George had already begun tohave second thoughts about the treaty. At theeleventh hour, he even tried to convince theother two leaders that perhaps they shouldsoften the terms, but Wilson had adamantlyrefused, saying that the prime minister

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“ought to have been rational to begin with,and then would not have needed to havefunked at the end.” It was not simply LloydGeorge’s guilty conscience that led to theBritish change of heart. Britain, that nationof shopkeepers keen to get back to business,rediscovered the economic centrality of Ger-many. As foreign minister, Lord Curzon an-nounced to the cabinet, Germany “is to usthe most important country in Europe.”France, however, clung resolutely to its im-placable hostility to its ancient enemy, andwith the United States out of the Europeanpicture and Britain increasingly sympatheticto Germany, it found itself isolated.

In the four years after the Peace Confer-ence, from early 1919 until the end of 1922,Europe was treated to the spectacle of oneinternational gathering after another de-voted to reparations. With governments inboth France and Germany constantly fall-ing—during those four years France went

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through five and Germany six—the one con-stant fixture at all these gatherings was theBritish prime minister, Lloyd George. As iftrying to make up for his failure in Paris, hethrew himself into the process. By one calcu-lation, he attended thirty-three different in-ternational conferences in those few years.So many of them were held in the gamblingresorts and spas of Europe—at San Remo inApril 1920, in Boulogne in June, at Wies-baden in October 1921, at Cannes in January1922, and the final “circus” at Genoa in April1922—that the French prime minister, Ray-mond Poincaré, dismissed them as “la poli-tique des casinos.”

For all the magnificent and luxurious set-tings, these gatherings were painful affairs,not least because the French were so unclearin their own minds what they wanted. AsPoincaré said in June 1922, “As far as I amconcerned it would pain me if Germany wereto pay; then we should have to evacuate the

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Rhineland. Which do you regard as better,obtaining cash or acquiring new territory? Ifor my part prefer occupation and conquestto the money of reparations.” Or as LloydGeorge more pithily put it, “France could notdecide whether it wanted to make beef-stewor milk the German cow.”

All the age-old animosities between theBritish and the French, buried for a decadeunder the common purpose of confrontingGermany, resurfaced. The old stereotypes ofthe French—those “vainglorious, quarrel-some, restless and over-sensitive”people—on which previous generations ofEnglishmen had been reared, were revived.Foreign Minister Curzon complained of theFrench proclivity for “the gratification ofprivate, generally monetary, and often sordidinterests or ambitions, only too frequentlypursued with a disregard of ordinary rules ofstraightforward and loyal dealing which isrepugnant and offensive to normal British

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instincts.” At one point, in 1922, he becameso frustrated in a confrontation with FrenchPrime Minister Poincaré that he collapsed intears, crying, “I can’t bear him.”

Dealing with Germany was no easier. Be-fore the war, an American journalist had re-marked on that “uneasy vanity, that touchi-ness that has made Germany the despair ofall the diplomats all over the world.” The ini-tial outrage over the Versailles Diktat hadnow curdled into frustration, bitterness, andresentment, which only made the defeatednation more difficult to deal with. From thatfirst moment in May 1919, when the Germanforeign minister, Count Ulrich Graf vonBrockdorff-Rantzau had insulted the Alliedstatesmen at Versailles by refusing to standwhile addressing them, the Germans causedoffense by their arrogant demeanor.

It was not simply their bad manners. Theycalculated, very correctly, that the longerthey could string out the bargaining over

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reparations, the less they would end up pay-ing. Their whole strategy was therefore to ne-gotiate in bad faith. In the first two yearsafter signing the treaty, Germany desperatelyscraped together what it could, and paid $2billion out of the $5 billion of interim pay-ments due.

Meanwhile, the Reparations Commission,established in Paris in mid- 1920, finally puta figure of $33 billion on the table as its es-timate of the amount Germany should pay.The Germans responded by subjecting thisfigure to a series of adjustments to take intoaccount what they had already paid—sotransparently bogus as to embarrass even itsown representatives in Paris—and concludedthis meant they now owed the Allies just $7.5billion, provoking Lloyd George to say that ifthe discussions continued any further in thisvein, Germany would soon be claiming re-parations from the Allies.

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In May 1921, British Treasury officials de-veloped a proposal that they believed to beso reasonable that Germany would find itdifficult to turn down. The reparations billwas to be set at the equivalent of $12.5 bil-lion, roughly 100 percent of the German pre-war GDP. To meet the annual interest andprincipal repayments on this new debt, Ger-many was required to pay between $600million and $800 million, a little over 5 per-cent of its annual GDP.

In May 1921, the British proposal was ac-cepted at a conference in London. It seemedas if agreement had finally been reached. TheGerman delegation, led by Foreign MinisterWalter Rathenau, made much of the new de-parture in policy. Henceforth Germanywould abandon its resistance to the terms ofthe treaty, and instead would adopt a policyof “fulfillment.”

The problem was that the Germans neverreally believed that they could meet even this

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commitment. Despite the fact that the newreparations bill was now closer to theamounts originally proposed by liberal com-mentators such as Keynes, German officialsremained convinced that even $12.5 billionof reparations would prove an intolerableburden. As a consequence, they made no realeffort to meet the terms of the Londonschedule. They paid on schedule just once.Within six months of the London settlement,they were in arrears and back before the Re-parations Commission, pleading for amoratorium. Of the $1.2 billion that Ger-many owed during the first eighteen monthsof the schedule, it paid little more than half.

WHILE GERMANY WAS grimly trying tonegotiate relief from the burden of repara-tions, its domestic economic policy, bad as ithad been during the war, became worse. The

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country was in perpetual turmoil, constantlyon the brink of revolution, run by a series ofweak coalition governments, and was quiteunable to control its finances. In addition tolarge residual expenses from the war—pen-sions to veterans and war widows, compens-ation for those who had lost private propertyin the territories forfeited under the Treatyof Versailles—the governments took onenormous new social obligations: an eight-hour day for workers, insurance for the un-employed, health and welfare payments forthe sick and the poor. Germany’s financialproblems were mostly self-inflicted. Never-theless, reparation payments made what wasalready a difficult fiscal situation impossible.To finance the gap, the various governmentsof Germany resorted to the Reichsbank toprint the money.

In 1914, the mark stood at 4.2 to the dol-lar, meaning that a mark was worth a littleunder 24 cents. By the beginning of 1920,

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after the full effects of the inflationary warfinance had worked through the system,there were 65 marks to the dollar—the markwas now worth only 1.5 cents—and the pricelevel stood at nine times its 1914 level. Overthe next eighteen months, despite an enorm-ous budget deficit and a 50 percent increasein the amount of currency outstanding, infla-tion actually slowed down and the mark evenstabilized. Foreign private speculators, bet-ting that the mark had fallen too far, movedsome $2 billion into the country. After all,this was Germany, not unjustly viewed be-fore the war as the epitome of discipline, or-derliness, and organization. It seemed incon-ceivable that it would allow itself to sink intoan orgy of monetary self-abasement and giveup on restoring order.

“Nothing like this has been known in thehistory of speculation,” wrote MaynardKeynes. “Bankers and servant girls havebeen equally involved. Everyone in Europe

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and America has bought mark notes. Theyhave been hawked . . . in the streets of thecapitals and handled by barbers’ assistants inthe remotest townships of Spain and SouthAmerica.”

A series of events, however, in the middleof 1921—French inflexibility over repara-tions, a campaign of political murder byright-wing death squads—broke the public’sconfidence that Germany’s problems weresoluble. It abandoned the mark indroves.The foreign speculators who hadbought marks the previous two years alsobailed out, losing most of the $2 billion theyhad pumped in. A visitor in the late 1920s tothe game rooms of Milwaukee or Chicagowould find the walls papered with Germancurrency and bonds that had becomeworthless.

As the mark plummeted, Germany becamecaught in an ever-deepening downward spir-al. On June 24, 1922, the architect of

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fulfillment, Foreign Minister Walter Ra-thenau, one of the most attractive politicalfigures in Germany—cultured, rich, scion ofa great industrial family—was gunned downin his car by yet another group of crazed re-actionaries. Panic set in. Prices rose fortyfoldduring 1922 and the mark correspondinglyfell from 190 to 7,600 to the dollar.

In early 1923, when Germany was late inmeeting a reparations payment for thatyear—the precipitating incident was the fail-ure to deliver one hundred thousand tele-phone poles to France—forty thousandFrench and Belgian troops invaded Germanyand occupied the Ruhr valley, its industrialheartland. The chancellor, Wilhelm Cuno,powerless in every other way, launched acampaign of passive resistance. The budgetdeficit almost doubled, to around $1.5 bil-lion. To finance this shortfall required theprinting of ever-increasing amounts of evermore worthless paper marks. In 1922,

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around 1 trillion marks of additional cur-rency was issued; in the first six months of1923 it was 17 trillion marks.

Wrote one observer: “In the whole courseof history, no dog has run after its own tailwith the speed of the Reichsbank. The dis-credit the Germans throw on their own notesincreases even faster than the volumes ofnotes in circulation. The effect is greaterthan the cause. The tail goes faster than thedog.”

The task of keeping Germany adequatelysupplied with currency notes became a majorlogistical operation involving “133 printingworks with 1783 machines . . . and more than30 paper mills.” By 1923, the inflation hadacquired a momentum of its own, creatingan ever-accelerating appetite for currencythat the Reichsbank, even after conscriptingprivate printers, could not meet. In a countryalready flooded with paper, there were evencomplaints of a shortage of money in

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municipalities, so towns and private com-panies began to print their own notes.

Over the next few months, Germany ex-perienced the single greatest destruction ofmonetary value in human history. By August1923, a dollar was worth 620,000 marks and

by early November 1923, 630 billion.17

Basic necessities were now priced in thebillions—a kilo of butter cost 250 billion; akilo of bacon 180 billion; a simple ride on aBerlin street car, which had cost 1 mark be-fore the war, was now set at 15 billion. Eventhough currency notes were available in de-nominations of up to 100 billion marks, ittook whole sheaves to pay for anything. Thecountry was awash with currency notes, car-ried around in bags, in wheelbarrows, inlaundry baskets and hampers, even in babycarriages.

It was not simply the extraordinary num-bers involved; it was the dizzying speed at

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which prices were now soaring. In the lastthree weeks of October, they rose ten thou-sandfold, doubling every couple of days. Inthe time that it took to drink a cup of coffeein one of Berlin’s many cafés the price mighthave doubled. Money received at the begin-ning of the week lost nine-tenths of its buy-ing power by the end of the week.

It became meaningless to talk about theprice of anything, because the numberschanged so fast. Economic existence becamea race. Workers, once paid weekly, were nowpaid daily with large stacks of notes. Everymorning big trucks loaded with laundry bas-kets full of notes rolled out of the Reichsbankprinting offices and drove from factory tofactory, where someone would clamberaboard to pitch great bundles to the sullencrowds of workers, who would then be givenhalf an hour off to rush out and buysomething before the money became worth-less. They grabbed almost anything in the

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shop to barter later on for necessities in theflea markets, which had sprung up aroundthe city.

Having to calculate and recalculate pricesin the billions and trillions made any sort ofreasonable commercial calculations almostimpossible. German physicians even dia-gnosed a strange malady that swept thecountry, which they named “cipher stroke.”Those afflicted were apparently normal inevery respect except, according to the NewYork Times, “for a desire to write endlessrows of ciphers and engage in computationsmore involved than the most difficult prob-lems in logarithms.” Perfectly sensiblepeople would say they were ten billion yearsold or had forty trillion children. Apparentlycashiers, bookkeepers, and bankers wereparticularly prone to this bizarre disease.Most people simply turned to barter or to us-ing foreign currency. Every middle-classhousewife knew up to the latest hour the

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exchange rate for the mark against the dol-lar. At every street corner, in shops and to-bacconists’, even in apartment blocks,minute bureaux de change sprang up, withblackboards outside, advertising the latestexchange rates.

With the mark falling faster than domesticprices were rising, foreigners were able tolive grotesquely well. Berlin apartmentsworth $10,000 before the war could bebought for as little as $500. Malcolm Cowley,an American literary critic then living in Par-is, in Berlin to visit his friend the journalistMatthew Josephson, wrote, “For a salary of ahundred dollars a month, Josephson lived ina duplex apartment with two maids, ridinglessons for his wife, dinners only in the mostexpensive restaurants, tips to the orchestra,pictures collected, charities to strugglingGerman writers—it was an insane life for for-eigners in Berlin and nobody could be happythere.” For one hundred dollars, a Texan

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hired the full Berlin Philharmonic for anevening. The contrast between the extravag-ance of foreigners, many of them French orBritish, but also Poles, Czechs, and Swiss,and the daily struggles of the average Ger-man to make a living only fed the resentmentagainst the Versailles settlement further.

Inflation transformed the class structureof Germany far more than any revolutionmight have done. The rich industrialists didwell. Their large holdings of real as-sets—factories, land, stocks of goods—soaredin value while inflation wiped away theirdebts. Workers, particularly the unionized,also did surprisingly well. Until 1922, theirwages kept up with inflation and jobs wereplentiful. It was only in the last stages, fromthe end of 1922 into 1923, when the implo-sion of confidence caused the monetary sys-tem to seize up and the economy reverted tobarter, that men were thrown out of work.

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Those who made up the backbone of Ger-many—the civil servants, doctors, teachers,and professors—were hit the worst. Their in-vestments in government bonds and bankdeposits, carefully accumulated after a life-time of prudence and discipline, were sud-denly worthless. Forced to scrape by on mea-ger pensions and salaries, which were decim-ated by inflation, they had to abandon theirlast vestiges of dignity. Imperial officers tookjobs as bank clerks, middle-class familiestook in lodgers, professors begged on thestreets, and young ladies from respectablefamilies became prostitutes.

The people who truly raked it in were thespeculators. By buying up assets—houses,jewelry, paintings, furniture—at throwawayprices from middle-class families desperatefor cash, by cornering the market in goodsthat were in scarce supply, profiteering inimported commodities and gambling on afurther collapse in the currency, they

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enriched themselves beyond their wildestdreams.

As German society was overturned, thetraditional values that had made it so conser-vative and ordered a community were jet-tisoned. Stefan Zweig, the writer, tried tocapture the mood of that time in his autobio-graphy: “How wild, anarchic, and unrealwere those years, years in which, with thedwindling value of money, all other values inAustria and Germany began to slip. It was anepoch of high ecstasy and ugly scheming, asingular mixture of unrest and fanaticism.Every extravagant idea . . . reaped a goldharvest.”

THE OFFICIAL MOST responsible for thereckless policy of inflation was none otherthan Rudolf von Havenstein, the sober anddedicated president of the Reichsbank who

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had so disastrously overseen Germany’s war-time finances. When the war ended in dis-aster, Von Havenstein fully expected to losehis job. A Prussian official closely identifiedwith the imperial administration, he did notconceal his lack of sympathy for the new gov-ernment led by the Social Democrats. Never-theless, during the revolution of 1918, hewent out of his way to cooperate with it, evenallowing one of the new workers’ and sol-diers’ councils to form within the Reichs-bank. During those days of violence and tur-moil, he also used a squad of revolutionarysailors to guard the Reichsbank’s gold re-serves to convey the message that it was the“people” who controlled the nation’s treas-ure, though the word was that he hadsecretly booby-trapped the safes with poisongas just in case the sailors’ loyalty wore thin.

Having successfully maneuvered to keephis job, Von Havenstein found himself in theclassic dilemma of the dutiful civil servant.

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He was now working for a government forwhich he had little liking, one that was pur-suing a social agenda he did not believe inand thought Germany could ill afford. Worstof all, the government had decided to makeits best efforts to pay the Allies’ de-mands—the so-called policy of fulfillment.Nevertheless, despite these fundamental dis-agreements, Von Havenstein acceded to thegovernment’s requests and allowed theReichsbank to print money to finance thebudget gap.

Why did Von Havenstein submit withoutany apparent effort to resist? Two very con-flicting pictures have been drawn of hismotives: that he deliberately engineered thewhole monetary explosion as a way of des-troying the financial fabric of Germany, acollective self-immolation designed to proveto the Allies that reparations were uncollect-ible, or alternatively, that his conduct reflectsnothing subtler than sheer economic

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ignorance. Trained as a lawyer, he hadlearned the banking business during the goldstandard era, when the rules of monetarypolicy were dictated by the requirement thatthe Reichsmark be kept convertible at a fixedgold equivalent, and was completely at sea ina world not hitched to gold.

The truth seems to be more complex thaneither explanation. Von Havenstein faced avery real dilemma. Were he to refuse to printthe money necessary to finance the deficit,he risked causing a sharp rise in interestrates as the government scrambled to bor-row from every source. The mass unemploy-ment that would ensue, he believed, wouldbring on a domestic economic and politicalcrisis, which in Germany’s current fragilestate might precipitate a real political con-vulsion. As the prominent Hamburg bankerMax Warburg, a member of the Reichsbank’sboard of directors, put it, the dilemma was“whether one wished to stop the inflation

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and trigger the revolution” or continue toprint money. Loyal servant of the state thathe was, Von Havenstein had no wish to des-troy the last vestiges of the old order.

Alternatively, if by standing firm againstthe government he forced it to raise taxes orcut domestic expenditures, he would be ac-cused, particularly by his nationalist friendson the right, of being a tool of the blood-sucking Allies, who all along had been insist-ing that Germany could pay reparations if itwould only cut its domestic expenditures andraise taxes. In effect, Von Havenstein wouldbe in the position of doing the Allies’ dirtywork—he just could not bring himself to actas the collection agent for his country’senemies.

Faced with these confusing and competingconsiderations, Von Havenstein decided toplay for time, supplying the government withwhatever money it needed. Contrary to pop-ular myth, he was perfectly aware that

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printing money to finance the deficit wouldbring on inflation. But he hoped that itwould be modest, and that in the meantime,something would turn up to induce the Alliesto lower their demands or at least agree to amoratorium on actual payments, giving Ger-many some breathing space.

It was a total miscalculation. Von Haven-stein failed to recognize that experimentingwith the currency was like walking a knife-edge. A moderate degree of inflation doesnot remain moderate for long. At some pointthe public loses confidence in the authority’spower to maintain the value of money, anddeserts the currency in panic. Germanypassed this tipping point in the middle of1921.

Instead of admitting that he had made aterrible mistake, Von Havenstein, with hisdogged Prussian sense of duty, dug in hisheels, refusing to change any of his policiesand continuing to print as much money as

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the government “needed.” The inflation hadinitially been beneficial to private businessbecause it had the effect of wiping out theirdebts. By 1923, however, the crisis hadmoved to a new stage, and without a func-tioning currency, commerce became im-possible. Unemployment, which had hoveredaround 3 percent suddenly shot up to 20percent in the fall of 1923. In order to main-tain some illusion of solvency, Von Haven-stein began to pump Reichsbank money dir-ectly to private businesses. He hid behindthe claim that, but for reparations, therewould be no inflation in Germany and there-fore put the blame for the inflation on the ra-pacious demands of foreigners. He began ar-guing that the inflation had nothing to dowith him, that he was a passive bystander tothe whole process, that his task was simplyto make enough money available to greasethe wheels of commerce, and if business re-quired a trillion more marks, then it was his

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job to make sure they were run off thepresses and efficiently distributed aroundthe country.

On August 17, 1923, he delivered his annu-al report on economic conditions before theCouncil of State:

The Reichsbank today issues 20,000milliard marks of new money daily, ofwhich 5,000 milliards are in large de-nominations. In the next week thebank will have increased this to46,000 milliards daily, of which18,000 milliards will be in large de-nominations. The total issue atpresent amounts to 63,000 milliards.In a few days we shall therefore beable to issue in one day two-thirds ofthe total circulation.

Here was the president of the Reichsbank,whose principal obligation was supposed bethe preservation of the value of the currency,

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proudly proclaiming to a group of parlia-mentarians that he now had the capacity toexpand the money supply by over 60 percentin a single day and flood the country witheven more paper. For many people, it wasjust one more sign that German finance hadentered an Alice-in-Wonderlandphantasmagoria.

“No-one could anticipate such an ingeni-ous revelation of extreme folly to which ig-norance and false theory could lead . . . TheReichbank’s own demented inspirations givestabilization no chance,” wrote the Britishambassador, Lord d’Abernon, an expert onstate bankruptcies who had thought that hesurely had to have witnessed the worst finan-cial excesses in the lunacies of the Egyptiankhedives and the Ottoman Turks, only tofind them almost Swiss in their rectitudecompared to the Germany of 1923. “It ap-pears almost impossible to hope for the re-covery of a country where such things are

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possible. It is certainly vain to hope for it un-less power is taken entirely from the lunaticspresently in charge.”

WHEN THE WAR ENDED, Hjalmar Schachtwas just a modestly successful banker, notyet especially distinguished or rich. It wasthe opportunities thrown up by inflation thatwould make him powerful and wealthy. Hecertainly did not make money by speculatinghimself—having grown up poor, he was veryconservative and took few risks with his ownsavings. He was, however, lucky.

In 1918, he recruited a thirty-six-year-oldstockbroker, Jacob Goldschmidt, to join theNationalbank. Goldschmidt was talented,cultivated, and charming, very different fromthe traditional conservative bankers of Ber-lin, a self-made millionaire who had built asuccessful stock exchange trading firm. Once

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at the Nationalbank, Goldschmidt beganplaying the market with large amounts of thebank’s capital, and by engineering a series ofastute mergers, he transformed the bank,now named the Danatbank, into the thirdlargest banking conglomerate in Germany.By 1923, Schacht had suddenly been vaultedinto the upper reaches of the Berlin bankingestablishment.

In the summer of 1923, he stood at his of-fice window contemplating the scene below.While most of the other large Berlin bankswere housed along the Behrenstrasse insomber gray buildings with great rusticatedstone walls and massive pillars and pilasters,the Danatbank had chosen for its headquar-ters a charming red sandstone building over-looking a quiet square on the banks of theSpree. His own office commanded a perfectview of the square below, in the center ofwhich stood a small bronze statue of KarlFriedrich Schinkel, the architect who had

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designed so much of Berlin—a strangelytranquil scene, he reflected, far removedfrom the fever gripping the rest of the city.

A constant reminder of what hadhappened to Germany loomed eastwardacross the canal: the Berliner Schloss, for al-most five centuries the home of the Hohen-zollern kings. The vast imperial palace ofover 1,200 rooms, its grand dome dominat-ing the landscape for miles, now stoodempty, its contents looted and ransacked, itsbeautiful balconies splintered and shattered,its Baroque façade disfigured by large pallidpatches where artillery shells had struck dur-ing the 1918 revolution.

Schacht had become increasingly ambival-ent about the new republican Germany. Inno way nostalgic about the past, he felt no re-gret at the passing of empire, with its “oldstyle Prussian militarism” that sought to im-pose a “permanent order of society.” Butproud and nationalistic as he was, he did

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look back to the times before the war whenGermany had been a nation of order and dis-cipline, the economic powerhouse of Europe.The country was, in his view, now destroyingitself pointlessly. The republic had betrayedthe professional middle classes, which hadonce made Germany so strong. The Father-land had become a “hell’s kitchen.”

Though he now had the money and posi-tion he had so long scrambled to acquire,Schacht felt frustrated. At the Danatbank, hehad been sidelined by the more successfulGoldschmidt. By writing articles in the Ber-liner Tageblatt and the Vossische Zeitung,he had developed something of a reputationas an expert on reparations, arguing thatGermany could and should pay no more than$200 million a year, equivalent to a total re-parations settlement of $4 billion, a third ofwhat had been agreed to in London in 1921.It was an amount that at the time would havebeen completely unacceptable to France. He

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tried to have it both ways. At the same timehe was taking a hard line on the level of re-parations that Germany could pay, he wouldurge the government to be more pragmatic,to open negotiations with the French, aban-don the failed policy of passive resistance inthe Ruhr, and cease printing money.

Had he been honest with himself, hewould have had to admit that he was luckynot to have been involved. Over the last threeyears, as the country had sunk into economicchaos, reparations had been a no-win issuefor any German politician or official.

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8. UNCLE SHYLOCK

War Debts

Neither a borrower, nor a lender be;for loan oft loses both itself andfriend.—WILLIAM SHAKESPEARE, Hamlet

THE problem of collecting reparations fromGermany was made infinitely more complexby that of war debts owed to the UnitedStates. Britain had gone to war as “theworld’s banker,” controlling over $20 billionin foreign investments. No other financial

center—neither Berlin nor Paris, certainlynot New York—came close to matching Lon-don’s standing as the hub of internationalfinance. Through it passed two-thirds of thetrade credit that kept goods flowing aroundthe globe and half the world’s long-term in-vestments—over $500 million a year. Mean-while, France, though never so dominant afinancial power, had its own overseas portfo-lio of $9 billion, of which an astounding $5billion was invested in Russia.

To pay for the four long, destructive yearsjust past, every country in Europe had triedto borrow as much as it could from whereverit could. The effect was to create a seismicshift in the flow of capital around the world.Both Britain and France were forced to li-quidate a huge proportion of their holdingsabroad to pay for essential imports of rawmaterials, and both eventually resorted tolarge-scale borrowing from the UnitedStates. By the end of the war, the European

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allied powers—sixteen countries in all—owedthe United States about $12 billion, of whicha little under $5 billion was due from Britainand $4 billion from France. In its own turn,Britain was owed some $11 billion by seven-teen countries, $3 billion of it by France and$2.5 billion by Russia, a debt essentially un-collectible after the Bolshevik revolution.

At an early stage of the Paris Peace Confer-ence, both the British and the French tried tolink reparations to their war debts, indicat-ing that they might be prepared to moderatetheir demands for reparations if the UnitedStates would forgive some of what they owedAmerica. The United States reacted strongly,insisting that the two issues were separate.Its delegates, many of them lawyers, includ-ing the secretary of state, Robert Lansing,made a clear moral and legal distinctionbetween reparations, which resembled a fineand were intended to be punitive, and wardebts, which were contractual liabilities

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voluntarily entered into by the European Al-lies. The Europeans, less wedded to legalmodes of thought, failed to see either themoral or the practical distinction betweentheir obligations to the United States andGermany’s obligations to them. Both wouldbe burdensome and both would require ma-terial sacrifice for several generations.

As the Peace Conference was winding toits end, Maynard Keynes, distressed at howthe negotiations were going, decided on hisown initiative to put together a comprehens-ive plan for the financial reconstruction ofEurope. Reparations should be fixed at $5billion, to be paid by Germany in the form oflong-term bonds issued to the Allies, whichthey would in turn assign to pay their wardebts to the U.S government. All other oblig-ations were to be forgiven. It was a cleverscheme. The U.S. government would befunctionally lending Germany money, whichin turn would go to pay reparations to the

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Allies, who in turn would use those proceedsto settle their loans. The money would startin a United States flush with gold, and even-tually return there full circle.

Keynes passed the plan on to the chancel-lor of the exchequer, Austen Chamberlain,who in turn recommended it to Lloyd Ge-orge. The prime minister received Keynes’splan just as he was beginning to realize theextent of his tactical errors over reparationsand, in a short burst of enthusiasm, submit-ted it to President Wilson. It was rejected outof hand by the American delegates, who con-tinued to insist that war debts must not belinked to reparations and that the formercould not be forgiven on such a scale. Andthus the problem of reparations and wardebts would be allowed to fester over themaimed economic body of Europe.

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TEN DAYS AFTER the armistice of Novem-ber 11, 1918, Benjamin Strong wrote toMontagu Norman, “The principal dangernow ahead of us . . . is not social and politicalunrest” but that the coming peace negoti-ations would “develop along lines of econom-ic strife” that would lead to “a period of eco-nomic barbarism which will menace ourprosperity.” “There is no doubt,” he contin-ued, “that much of the world’s happiness inthe future will depend upon the relationsnow being established between your countryand ours.” Over the next decade that com-pact between Britain and the UnitedStates—or rather between the Bank of Eng-land and the Federal Reserve—built upon thefriendship between Norman and Strong,would be one of the fixed points of theworld’s financial architecture.

The two of them came to that compactfrom very different directions. For Norman,it was a matter of simple necessity. The war

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had devastated Britain economically; and, hebelieved, only by acting in conjunction withthe Americans could Britain hope to regainits old financial influence. For Strong, thecalculation was a little more complicated. Asa banker from the Morgan fold, he was nat-urally an internationalist. The war hadbrought a new recognition among U.S. finan-ciers that the fate of their country was inex-tricably linked to that of Europe. Now, withthe arrival of peace, he believed that it was inits own interest for the United States to usesome of its huge resources to “help to rebuilda devastated Europe.”

There was also a moral imperative toStrong’s internationalism. He was part ofthat generation of Americans who, havingbegun their careers under TheodoreRoosevelt and having reached maturity un-der Woodrow Wilson, viewed themselvesand their country as now uniquely qualifiedand positioned, by virtue of money and

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ideas, to transform the conduct of interna-tional affairs. He was, of course, not so naivethat he did not recognize that manyEuropeans remained cynical about U.S.motives—accusing it, for example, of havingdeliberately waited until Europe had comeclose to bankruptcy before entering the war.He, however, was one of those who believedthat now that the war was over, his nationhad a unique opportunity to show that it wastruly, in his own words, an unusually “un-selfish, generous people.”

He was especially influenced in his senseof high purpose about America’s world mis-sion by a group of young men with whom hehad become friends who went by the myster-ious name “The Family.” Based in Washing-ton, The Family was an exclusive privateclub, which he had been invited to join be-fore the war. It had no official name, was in-deed not really a club at all—no officers, nocharter, no formal membership roll. It had

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come into being in 1902 when three youngarmy officers, captains Frank McCoy, Sher-wood Cheney, and James Logan, all in theirearly thirties, attracted to Washington byTheodore Roosevelt’s “call to youth,” decidedto rent a house together at 1718 H Street.This soon became a gathering spot for ambi-tious young diplomats and service officers,all similarly inspired by Roosevelt’s vision ofa muscular U.S. foreign policy. In the ab-sence of a formal name, it came to be known

as the 1718 Club or The Family.18

The membership progressively widened toinclude a more eclectic circle, includingjournalists, such as Arthur Page, editor of thepopular monthly The World ’s Work; politi-cians, like Congressman Andrew Peters, whowould become mayor of Boston; andbankers, such as Strong. Over the years,though, The Family had remained anextraordinarily tight-knit group who kept inclose touch with one another, particularly

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during the war. When the fighting finallystopped, many members found themselvesthrown into the peace negotiations.

No one was more emblematic of the ethosof The Family than Willard Straight, a flam-boyant charmer whose life reads likesomething out of a boy’s adventure novel.Early orphaned, Straight had graduated fromCornell, gone out to China, where he learnedMandarin, served as a reporter during theRusso-Japanese war of 1904, become secret-ary to the American legation in Korea, beenappointed consul general in Manchuria, andjoined a Morgan-led bank in China, all by theage of thirty. Thereafter he had married anheiress, Dorothy Whitney; helped found theNew Republic; seen army service in France;and with the armistice, joined the advanceteam in Paris to prepare for the forthcomingPeace Conference. Tragically, he contractedinfluenza during the 1918 pandemic and died

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suddenly in December 1918, at the age ofthirty-eight.

Another member, Joseph Grew, had beenin Germany as the number two in the em-bassy during the first years of the war, hadgone on to become the State Department’sdesk officer for Germany, and was now lead-ing the advance team in Paris. William Phil-lips, who came from a rich family and hadrejected a “pallid career” in business to be-come a career foreign service officer, becamea Far Eastern specialist after assignment toPeking. Subsequently posted to London, hewas now an assistant secretary of state.Another foreign service hand, Basil Miles, aparticularly close friend of Strong’s, hadtaken his degree at Oxford, been posted toPetrograd in 1914, and was now State’sprime expert on Russia.

James Logan, one of the founders of thisdedicated brotherhood, had stayed in thearmy, rising to the rank of lieutenant colonel,

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and had been posted to France in 1914 aschief of the American observer military mis-sion. An overweight bon viveur, he had be-come a fixture in Paris. Once the UnitedStates joined the war, he was given a highstaff position in the American ExpeditionaryForce and was now working for HerbertHoover in the Relief Administration.

With so many fellow members of TheFamily in Paris in the war’s immediate after-math, Strong decided that he should see forhimself what needed to be done in Europe.But as happened so often over the next fewyears, his body gave out on him. Worn out bythe demands of war finance, he suffered aminor recurrence of tuberculosis and wasforced to take another leave of absence dur-ing the first few months of 1919.

By the summer, he was back on his feetand ready to go to Europe. The Peace Con-ference had just finished, and as he left theUnited States the country was still in the full

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flush of jubilation and optimism over thesigning of the peace treaty. Strong arrived inEngland on July 21, aboard R.M.S. Baltic, asBritain’s official peace celebrations werewinding down. There had been parades andceremonies across the country from the tini-est villages to the biggest cities. In London amillion people had come out to watch a hugeparade, including American and French con-tingents led by General John Joseph “BlackJack” Pershing and Marshal Ferdinand Foch,march past the king and queen and membersof the government. The capital was stilldecked out with flags, and the troops whohad taken part were still camped out inKensington Gardens as Strong’s train rolledinto the city.

Although the statesmen in Paris had failedto come up with some grand initiative to re-construct Europe, he arrived full of great ex-pectations, still convinced, for all the failuresof the treaty, that the United States would

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eventually adopt a “constructive policy to-wards the restoration of Europe,” by post-poning the repayment of war debts andproviding direct aid for reconstruction.

For all the celebrations, he found the city’smood ominously changed. In contrast toAmerica, Britain was only slowly readjustingto peace. Tobacco restrictions had been re-moved in January and most food rationing inMay. But bread was still obtainable only withration coupons, as was sugar. The initial op-timism, which had gripped Britain and allthe European victors immediately after thewar, was now wearing off as the grim realit-ies of Britain’s underlying position were be-coming steadily more apparent. The war hadchanged the balance of financial power, andStrong kept encountering a festering resent-ment against the United States, especiallyover war debts.

Few people in those days thought in termsof a “special relationship” between Britain

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and the United States—indeed, the phrasewas only coined in 1945 by WinstonChurchill. Before the war, most Londonbankers viewed their counterparts in the Un-ited States with that superciliousness re-served for unsophisticated kinsmen, too richfor their own good. Within the United States,certain circles—the House of Morgan, thepartners at Brown Brothers—were naturalAnglophiles. Elsewhere, Britain was gener-ally regarded with suspicion and cynicism.But during the war and after, British arrog-ance had given way to resentment. Londonbankers worried that the United States, withits newly acquired financial muscle, was get-ting ready to elbow its way into the role ofbanker to the world. During Strong’s visit toLondon in March 1916, he attended a speechmade by Sir Edward Holden, chairman of theLondon City and Midland Bank, “in which[Sir Edward] referred to efforts of Americanbankers to undermine Lombard Street’s

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supremacy and . . . was so overcome by themere thought that the old man broke downand wept.”

Strong now found British bankers andpoliticians fervently convinced “that the Al-lies have made the greatest and most vitalsacrifice in the war” while the U.S. sacrificeshad “been slight, and our profits immenseand that existence of this great debt is asword of Damocles hanging over theirheads.” There was considerable bitterness athow long the United States had sat out thewar, many of Strong’s English acquaintancesbelieving that America had deliberatelywaited for Europe to wear itself out beforestepping in to pick up the pieces. Now thosesame people argued that the U.S. govern-ment was morally obliged to forgive part oftheir European Allies’ war debts. This wasespecially true in Britain, which had bor-rowed some $5 billion from the UnitedStates but had itself lent $11 billion to

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France, Russia, and other countries—in ef-fect, simply acting as a conduit for the loans.And though his friend Norman tried to reas-sure him that people were allowing “theirhearts to rule their heads,” that Britain’scredit was still strong, and that it was stillgood for its debts, Strong was undoubtedlyshaken by the pessimism that hung over theCity of London.

Not only had Britain’s place in the worldchanged, but British society had also beentransformed by the war. The aristocracy thathad ruled Britain for much of the previouscentury had been badly damaged—as onecontemporary author wrote, albeit with someexaggeration, “In the useless slaughter of theGuards on the Somme, or of the Rifle Bri-gade in Hooge Wood, half the great families,heirs of large estates and wealth, perishedwithout a cry.” After enduring savage lossesin the fighting—the casualty rate had beenthree times heavier among junior officers,

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many of them aristocrats, than among enlis-ted men—the old elite had also been hurt bythe wartime inflation and was now beingdecimated by postwar economic dislocations.Land prices had collapsed and many largeestates been put up for auction. In place ofthe old and confident ruling class, a wholenew breed—“hard-faced men who hadlooked as if they had done well out of thewar,” as one eminent politician described hisnew colleagues in the House of Com-mons—had come to power.

At the end of July, Strong went on to Parisand, for the next few weeks, used the RitzHotel on the Place Vendome as his basewhile traveling around Europe. He visitedBrussels—liberated only a few months be-fore—Antwerp, and Amsterdam, establishingconnections with the heads of Europeancentral banks but also taking a melancholymotoring trip through the giant cemeteriesof the Western Front.

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The view from Paris was even more fore-boding than from London. The city was darkby 10:00 p.m. for want of coal to generateelectricity. The Peace Conference was still of-ficially in session, limping through the finalnegotiations with the smaller Central Powersand successor states: Austria, Hungary, Bul-garia, and Turkey. But the big delegationshad all departed and with them the accom-panying train of ten thousand other assortedpeople: the advisers, the wives, the mis-tresses, the cooks, drivers, messengers, sec-retaries, and journalists. The hotels had re-verted to their normal business—at the endof July, the Majestic, headquarters of theBritish delegation during the conference, andthe Crillon, that of the American delegation,both reopened for commercial business. Theradical journalist Lincoln Steffens, who hadcome to Paris with the American delegationand stayed on after the conference, best cap-tured the city’s bitter mood of

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disillusionment during those months, “Theconsequences of the peace were visible fromParis. There were wars, revolutions, distresseverywhere.”

Over the summer, the political threats toEurope had actually begun to recede. Thoughcivil war still ravaged Russia, the risk ofBolshevik revolution in Germany had dimin-ished. A Communist uprising in Berlin andan attempted revolution in Bavaria had bothbeen crushed. From Strong’s point of view,the main danger was now economic. The twolargest countries, France and Germany, bothurgently needed food from abroad. Contin-ental Europe was desperately short of capitalto rebuild itself. Most disturbingly, he founda complete “lack of leadership” in Europe,with “people in authority . . . exhausted.”

While Strong was in Paris, it became ap-parent that the United States was beginningits retreat from European affairs. The peacetreaty had run into trouble in the Senate and

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seemed headed for defeat. Though the pres-ident had announced his intention to appealdirectly to the people, the mood of the coun-try was clearly turning isolationist.

Strong could not hide his disgust at thisbetrayal. At the end of August he warnedRussell Leffingwell, undersecretary of thetreasury and soon to be a Morgan partner,that if the United States were to “desertEurope and leave these new governments totheir fate,” this could only result in “pro-longed disorder and suffering. It would be anact of cowardice for which we would be des-pised.” He returned to the United States inlate September. A few days before, onSeptember 25, the president had collapsedwith a stroke on his western campaign todrum up support for the treaty, and for thenext year was to lie incapacitated in theWhite House. On November 19 the Senaterejected the treaty by a vote of 55 to 39.

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As so often seemed to happen when he gotback from Europe, Strong suffered yet an-other relapse of his tuberculosis. The doctorsagain insisted that he take a leave of absence,and the directors of the New York Fed re-leased him for a year. Initially he went out toArizona for the elevation and dry climate andby the following spring seemed well on theway to recovery. In March he set off onhorseback across the Arizona desert accom-panied by an unusual troop of companions: amule skinner cum cook; a Pima Indian guidecum horse wrangler whose name was eitherFrank, Francisco, Pancho, or Juan—no onewas quite sure which—a Russian wolfhoundnamed Peter; and Strong’s old friend fromThe Family, Basil Miles. As this entouragetrekked across the wilderness, breathing “themost wonderful air,” seeing “the most gor-geous sunsets,” and sleeping under the stars,the problems of European reconstruction

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and currency chaos must have seemed faraway.

After Arizona, Strong decided to take ad-vantage of his year off by traveling aroundthe world. Accompanied by his eldest son,Ben, and his friend Miles, he left San Fran-cisco in early April for Japan. They went onto China, the Philippines, Java, Sumatra,Ceylon, India, finally arriving at Marseilles inwinter 1920. There Strong found a letterfrom Montagu Norman awaiting him.“Whenever you do come to London, let meremind you of your hotel, of which the ad-dress is ‘Thorpe Lodge, Campden Hill, W.8.’The Booking Clerk tells me that an hour’snotice will be enough to get your room ready,or, if you are in a hurry, this can be doneafter you have arrived.” While Strong hadbeen traveling, Norman had been elevated tothe governorship of the Bank of England. Itwas the beginning of a true partnership.

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If REPARATIONS POISONED the relationsamong European countries, war debts didthe same to the relations between the UnitedStates and its erstwhile associates, Britainand France. However hard the Americanstried to separate war debts from reparations,in the minds of most Europeans they re-mained inextricably linked. Indeed, in themiddle of 1922, the British governmentmade the connection explicit in a note draf-ted by Arthur Balfour, then acting foreignsecretary, that Britain would collect no moreon its loans to its Continental allies and onits share of reparations from Germany thanthe United States collected from it as pay-ments on its own war debts.

The Balfour Note provoked an outcry inthe United States. Balfour, an aristocrat andphilosopher of some repute—in 1895 he had

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published a work of great subtlety entitledThe Foundations of Belief—was the elderstatesman of British politics, having beenprime minister before the war and foreignsecretary under Lloyd George. Many werecharmed by his urbane gracious mannersand his air of bemused detachment—at thePeace Conference a British diplomat re-marked that he “makes the whole of Parisseem vulgar.” In the United States, however,he was viewed as a “top-hatted frock-coatedpersonification of British decadence,” andthe tone of condescension and moral superi-ority adopted in the Note infuriated theAmericans. “Lord Balfour seems to thinkthat he can call us sheep thieves in languageso elegant that we shall not understand it,”wrote one American. According to the Phil-adelphia Inquirer, “In the Balfour Note JohnBull is depicted as the liberal, magnanimousand sympathetic creditor whose heart bleedsfor his debtors’ sufferings, and who is willing

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and anxious to relieve them of a burdenwhich he perceives is beyond their ability tobear; Uncle Sam is portrayed as a ruthless,relentless, hard-hearted Shylock, who ismaking it impossible for John Bull to followhis altruistic and benevolent instincts bystubbornly insisting upon the letter of hisbond.”

To make matters even worse, Congresshad decided to get into the act. In March1922, Congress created the five-man WorldWar Foreign Debt Commission, which waschaired by the secretary of the treasury,Andrew Mellon, and included the secretaryof state, Charles Evans Hughes; the secretaryof commerce, Herbert Hoover; Senator ReedSmoot of Utah; and RepresentativeTheodore Burton of Ohio. The commissionwas to negotiate the terms on which Americ-an loans were to be repaid. Concerned thatthe administration might be too lenient onthe debtors, Congress imposed a floor on any

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settlement—the commission would not bepermitted to accept anything less than 90cents on the dollar.

The congressional stipulations on wardebts provided the Europeans their turn toexpress outrage. “Has America which butyesterday we acclaimed for her generosityand her idealism fallen to the role of aShylock?” exclaimed a French senator inL’Éclair. Throughout Europe, newspapersbegan referring to Uncle Sam openly as“Uncle Shylock.” Even the Economist, by nostretch a populist newspaper, printed a lettersigned “Portia” that accused the UnitedStates of attempting to “lay a tribute uponthose who saved Kansas and Kentucky fromthe German peril.”

In October 1922, Lloyd George’s govern-ment precipitously fell and a new Conservat-ive government under Andrew Bonar Lawtook office in Britain. The incoming chancel-lor of the exchequer, Stanley Baldwin, was a

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practical and sensible businessman who be-lieved strongly in settling one’s debts—hewas so firm an advocate of this principle thatin 1919 he had anonymously donated$700,000 of his own money, a fifth of his networth, to the government as his contributionto paying off the national debt after the

war.19

With the rhetoric on both sides of the At-lantic becoming increasingly overheated,Baldwin decided to open negotiations for asettlement with the Americans, telling themhe wanted “to approach the discussion asbusiness men seeking a business solution ofwhat fundamentally is a business problem.”

A British delegation, led by Baldwin him-self and including as its principal adviser, thegovernor of the Bank of England, MontaguNorman, set sail for the United States onDecember 30 aboard the Majestic. Normanwas convinced that it was essential to settle

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with the Americans if Britain was to reestab-lish its credit, and reclaim London’s positionas the world’s premier financial center. Hehad visited the United States in August 1921and May 1922 to make the rounds of senioradministration officials in Washington withStrong, including a secret meeting with thepresident, Warren Harding, to convincethem that the United States should remainengaged in European finance. As a result ofthis groundwork, of all the British financialofficials, Norman had the best firsthandknowledge of U.S. politics and the situationin Washington.

On the stormy Atlantic crossing, whichtook twice as long as normal because ofrough seas, gale-force winds, and fog, Bald-win and Norman became fast friends. Nor-man was usually suspicious of politicians,claiming somewhat disingenuously to haveno political views himself—he bragged thathe had never voted. The stolid uncharismatic

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Baldwin was the quintessential nonpoliti-cian. They would remain lifelong friends,sharing a common taste for the pleasures ofsilence, of country walks and string quartets.Sir Percy Grigg, a high Treasury official whoknew both well, described how “they seemedto understand each other and to communic-ate without having to exchange more than afew monosyllables.”

The American negotiating team was led bySecretary Andrew Mellon. Then in his latesixties, Mellon had been born into a wealthyPittsburgh family and by the age of forty hadindependently amassed a fortune of some$500 million, making him the third richestman in America, after John D. Rockefellerand Henry Ford. Taciturn, cold, and reclus-ive—his son Paul would compare him to themoney-obsessed Soames Forsythe of JohnGalsworthy’s Forsyte Saga—Mellon’s richeshad brought him little happiness. In hisforties, he had married a frivolous young

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English girl of nineteen, who within a fewyears left him for a social-climbing con artist,dragging him through a scandalous divorcein the process. He now lived in an opulentlyfurnished six-bedroom apartment at 1785Massachusetts Avenue, a block east ofDupont Circle, where his daughter Ailsa, aself-involved and sickly young lady prone toall sorts of psychosomatic ailments, acted ashostess.

The discussions were conducted in greatsecrecy, some sessions even taking place inMellon’s apartment, surrounded by old mas-ters. There were lunches and dinners—to onesuch event Vice President Calvin Coolidge,“Silent Cal,” was invited and did not utter aword to either of his neighbors during theentire meal. He would later famously dismissthe problem of war debts by exclaiming,“They hired the money, didn’t they?” DespiteProhibition, the British delegation was

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surprised to find an abundance of liquor inprivate homes.

Before leaving London, they had been giv-en to believe by the American ambassadorthat they should be able to reach an adjust-ment of 60 cents on the dollar and the cabin-et had not given them the authority to go anyhigher. Arriving in Washington, they dis-covered that while the U.S. administrationwas keen to settle, it was limited by whatCongress would accept. After two weeks ofnegotiations, the best that the Americanscould offer was 80 cents on the dollar.

While Baldwin was frustrated by America’slack of generosity—at one point saying thathe would like to ship them replicas of thegolden calf—Norman pressed him to agree tothe terms. In his view, the willingness of theDebt Commission to go beyond the limits setby Congress reflected “a newly found desireon the part of Americans to come intoEurope again,” and even a stiff settlement

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was a small price to pay for getting the Un-ited States back into European affairs.

On the way home, the British team passedthrough New York. Strong and the Morganpartners advised them that they would notget a better deal by waiting and urged themto settle. Arriving in Southampton on Janu-ary 27, 1923, Baldwin made the foolish mis-take of revealing the terms to the press, evenbefore he had had a chance to present themto the cabinet, and in the belief that his re-marks were off the record, declared that hewas for acceptance. He then dug himself indeeper by telling the gathered reporters thatany deal would have to satisfy Congress,many of whose representatives came fromthe West, where they “merely sell wheat andother products and take no further interestin the international debt or internationaltrade.” The headlines the next day an-nounced that the British chancellor of the

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exchequer considered the average senator “ahick from way back.”

The prime minister was furious. Havinglost two of his sons in the war, Bonar Lawhad been all along deeply offended by theAmerican view of war debts as just anothercommercial transaction. “I should be themost cursed Prime Minister that ever heldoffice in England if I accepted those terms,”he told Baldwin. On January 30, Baldwinmade a strong plea in the cabinet for accept-ing the deal. He admitted that the Americanscould have been more generous, that theyhad made great fortunes out of the war, thatthey worshipped the “God Almighty Dollar”but this was best that Britain was going toget.

Bonar Law spoke for rejecting the Americ-an offer. He had consulted Maynard Keynes,who counseled him to hold out, arguing thatBritain should refuse the American offer “inorder to give them [the Americans] time to

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discover that they are just as completely atour mercy as we are at France’s and Franceat Germany’s. It is the debtor who has thelast word in these cases.”

But Bonar Law was cornered—to disavowhis chancellor who had so publicly endorsedthe deal would create a crisis in the govern-ment. Outvoted in the cabinet, he accepteddefeat, but did take the opportunity to let offsteam in the traditional British manner—bywriting an anonymous letter to the corres-pondence columns of the Times in which hevigorously attacked his own government’sdecision to accede to the American terms.

Watching Britain strike such a poor bar-gain for itself, France chose to wait it out. Itwould eventually settle its war debts in 1926,when it reluctantly conceded to pay 40 centson the dollar—even then the arrangementwas not ratified by the National Assemblyuntil 1929. Italy did even better. When itsettled, also in 1926, it would only agree to

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pay 24 cents on the dollar. As usual Keyneshad been right—holding out would have giv-en Britain a better deal.

As the decade went on, and the Americansinsisted on extracting these payments, theywere shocked to discover how intensely dis-liked they were in Europe. Journalists senthome articles dissecting the various sourcesof American unpopularity under such titlesas “Europe Scowls at Rich America” or “DoesEurope Hate the U.S. and Why?” or even“Uncle Shylock in Europe.” One informalpoll revealed that 60 percent of the Frenchregarded the United States as their least fa-vorite nation. The New York Times corres-pondent in Paris reported that “ninety out ofa hundred regard Uncle Sam as selfish, asheartless, as grasping.” Visiting Britain, theveteran American foreign correspondentFrank Simonds discovered that “the greatmajority of the British people have made up

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their minds that American policy is selfish,sordid and contemptible.”

But the really pernicious effect of wardebts was that they made it hard, if not im-possible, for Britain to forgo collecting itsown debts from France and Germany, madeFrance all the more obstinate in its efforts tocollect reparations from Germany, and ledEurope into a self-defeating vicious cycle offinancial claims and counterclaims.

IN December 1922, as Norman set out forWashington, the Times of London profiledhim: “Mr. Montagu Collet Norman, D.S.O.,the Governor of the Bank of England . . . cer-tainly one of the most interesting, as well asone of the most able men who have occupiedthe Chair for a generation or more.”

“In appearance he recalls the early Victori-an statesmen,” it went on, “Aristocratic in

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manner and temperament . . . hisShakespearian type of head sets well uponhis tall, silent and dignified figure. A lover ofmusic, poetry and books, Mr. Norman alsopossesses a collection of rare and beautifulwoods. Many of those who come into contactwith him feel that there is an indefinabletouch of mystery about him. He has the keensensitiveness of an ‘intellectual.’ ”

It was remarkable how enormous was thechange that had come over Norman sinceAugust 1914. Then he had been a patheticfigure, unsure of himself and uncertainabout his future, wracked by neuroses, hisless than illustrious career cut short by men-tal illness. Now he was generally recognizedas the most prominent and powerful bankerin all Europe, if not the world.

From the very start of his tenure at theBank, Norman had made a point of breakingthe mold. Whereas his predecessors hadbeen driven to work, resplendent in top hat

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and frock coat, he turned up in a businesssuit by way of the Underground—the CentralLine from Notting Hill—with the ticketjauntily protruding from his hatband. Hiswhole persona seemed to have been trans-formed. Almost everyone remarked on hisgraciousness, his courtly old-world manners,and most of all, the charm with which he was“singularly gifted.” As one of his fellow dir-ectors put it, “He never made jokes or any-thing of that kind. He was just amusing. Acontinual bubble of wit.”

In those five years, he had also acquiredsomething of a mystique in the public mind.Before Norman, the governor of the Bankhad generally been a figure of relative ob-scurity, known to only a few insiders withinthe Square Mile. But Norman’s personalityseemed to exert a powerful fascination onthe press, which lauded him as a financialgenius of great originality. All those traits,once viewed as the harmless eccentricities of

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a “strange old man”—his flamboyant way ofdressing, his slouch hats, his artistic in-terests, his knowledge of Eastern philo-sophy—were now invested with great signi-ficance as signs of unusual creativity. His un-orthodox appearance, his air of aloof amusedamiability, perhaps above all his apparentlack of interest in money, for all his place atthe very center of its mysteries, all contrib-uted to the image of austere power, half pa-trician, half priestly.

This aura was reinforced by his policy ofavoiding public appearances. He was rarelyseen at the social events of the City, nevermade any speeches apart from the annualMansion House toast required by tradition ofthe governor, and never submitted to news-paper interviews on the record.

It was during those early years that Nor-man got into the habit of traveling underpseudonyms, which became so much a partof his myth and mystique. It was the high

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point in the era of the transatlantic liner. TheTimes of London and the New York Timesregularly ran features listing the most not-able passengers on the ocean liners sched-uled to leave each week—generally exten-sions of the social pages heavily populated byambassadors, film stars, and Europeannobility.

News that the governor of the Bank ofEngland was traveling to the United Statesinevitably gave rise to rumors: a settlementof war debts was imminent! Or Britain mightreturn to the gold standard that week! Toavoid all this unfounded speculation, Nor-man’s secretary, Edward Skinner, beganbooking Norman’s passage under his ownsurname.

At some point in Norman’s travels acrossthe Atlantic, plain old Skinner became Pro-fessor Clarence Skinner. The story goes—oneamong many—that during one such trip, aProfessor Clarence Skinner, professor of

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applied christianity at Tufts College in Med-ford, Massachusetts, and a well-knownUniversalist who had actively campaigned torepeal the statutes prohibiting blasphemy,happened to be traveling on the same liner.The reporters, hovering at the West Sidepiers of Manhattan for a dockside interview,mistook Norman, with his professorial de-meanor, for Professor Clarence Skinner.Norman did nothing to disabuse them oftheir misconception. Nor did the real pro-fessor, who, it seems, was quite amused. Thewhole incident so appealed to Norman’scharacteristically quirky sense of the absurdthat, thereafter, he always traveled under thepseudonym, Professor Clarence Skinner.Over time, his alias was unmasked by thepress. Nevertheless, he continued the prac-tice, and talk of Professor Skinner and histravels became something of an in-jokeamong the cognoscenti.

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Norman’s dislike of any sort of press cov-erage and his attempts to conceal his activit-ies from reporters only further fed their curi-osity. Even the most ordinary incidents of hisdaily life were magnified and nourishedspeculation. The results could be comic andat times absurd.

Take a typical incident in March 1923, onlydays after France had occupied the Ruhr:Norman had left for his annual month’s va-cation in the south of France, where he gen-erally stayed either with his half uncle atCostabelle, near Hyères, or at the HermitageHotel in Nice. On this occasion, he decidedto stop off in Paris for a few days of meetingswith his counterparts at the Banque deFrance. Making no attempt to keep his trip asecret, he stayed at the prominent and well-known Hôtel Crillon, on the Place de La Con-corde. Nevertheless, because the Crillon hadmistakenly registered him under the nameNorman Montagu, the papers claimed that

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he was attempting to visit Paris incognito.When his valet was seen buying train ticketsfrom a source other than the hotel’s bureau,and was rumored to have been overheardasking the concierge about trains to Berlin, awire report speculated that Norman was pre-paring to travel to Germany, and further-more was attempting single-handedly to ne-gotiate a settlement to the problem of repar-ations. The story ran in half the Londonpress, and was picked up by many Americanpapers, including the New York Times, theWashington Post, and the Chicago Tribune.In fact, after a few days in Paris, he left forNice as usual.

Winston Churchill, who would come toknow Norman all too well for his liking overthe next few years, would later portray himin the Sunday Pictorial: “Mr. Norman’s dis-like of publicity in any form has enshroudedhim with an air of mystery, which has led toordinary and casual incidents of his daily life

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being scrutinized and magnified by themoney markets of the world. . . . The more heseeks privacy, the more significant his actsbecome. He travels under an assumed name,and is instantly identified. He remains in se-clusion in his country home, and the UnitedStates is searched to make sure that he is notthere. Indeed the very process of self-efface-ment has proved—to his added disgust—themost subtle and effective form of advertise-ment. . . . It may well be that a little moreplain speech . . . would have served his realpurpose better than so much silence andprecaution.”

Not everyone was taken by his charm orhis personality. Hating arguments or directconfrontations, he got his way by goingaround opponents and consequently de-veloped a reputation for subterfuge. Somepeople retained a suspicion that Norman’sattempts to cloak himself in mystery weresimply a more subtle and sophisticated form

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of showmanship. Lord Vansitartt, head ofthe British diplomatic service between thewars, dismissed him as a “poseur.”

And while Norman’s public persona mayhave changed dramatically, he still carriedwithin him many of the same private demonsthat had beset him before the war. He was bynature a pessimist, prone to bouts of despair,unfortunate traits in a central banker con-fronted with the task of nursing a crippledeconomy back to health. During that firstgrim year in office, as he struggled with aweak pound and the depths of a recession, hewrote of his “sensation of being as it weretossed about on a sea in which I can hardlyswim.”

Francis Williams, then city editor of theleft-wing Daily Herald, considered thatthough Norman was able to exert a strangefascination over the City, he was “secretive,egotistic, suspicious of intellectual ability,and almost incapable of normal human

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relationships.” Lord Cunliffe may have gotthe best measure of him when he confidedthat he thought Norman, “a brilliant neuroticpersonality [who] is certain to cause trouble.. . .” He added, “He’s not an ordinary person-ality. . . . He needs the power just to keep go-ing and he won’t give it up until it’s too late.”

DURING THE EARLY 1920s, Norman wouldoften talk of creating a league of centralbankers to take responsibility for stabilizingEuropean finances and promoting world eco-nomic recovery. No government seemed cap-able of doing it and he thought—a little gran-diosely—that his guild could somehow fill thevacuum left by politicians. He liked to envis-age himself and the other members of hissmall brotherhood as elite tribunes, standingabove the fray of politics, national resent-ments, and amateur nostrums. Though Nor-man “delighted in appearing

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unconventional,” his views about societywere very much “those of an old Etonian.”Still an Edwardian, he clung to the belief inaristocratic government.

In March 1922, he wrote to Strong in thatelliptical way of his, “Only lately have thecountries of the world started to clear upafter the war, two years having been wastedin building castles in the air and pullingthem down again. Such is the way of demo-cracies it seems, though a ‘few aristocrats’ inall countries realized from the start whatmust be the inevitable result of hastily con-ceived remedies for such serious ills.” He ob-viously thought that the “few aristocrats”were bankers like himself.

At this stage, though, he was the onebuilding castles in the air. His notion that theworld’s central bankers would not be subjectto the same nationalistic pressures to whichpoliticians were also responding was curi-ously naive. His vision of a league of the

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lords of world finance was at this stagelargely a pipe dream. He could not even getStrong to support him fully. After the GenoaEconomic Conference of 1922, he floated theidea of a grand conclave of central bankers.But Strong resisted the idea, fearing that theUnited States, as the world’s major creditor,would be ambushed by a concert of itsEuropean debtors, all clamoring for Americawith its vast gold reserves to refloat them. Ashe wrote to Norman, “Anything in the natureof a league or alliance, with world conditionsas they are, is necessarily filled with peril.” Itwould, he feared, be like “handing a blankcheck to some of the impoverished nations ofthe world, or to their banks of issue, and es-pecially to those whose finances are in com-plete disorder and quite beyond control.”

By 1923, Norman’s club consisted essen-tially of himself and Strong, commiseratingwith each other over their respective healthproblems and the economic anarchy that

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seemed to surround them. Their friendship,however, had blossomed.

After Norman’s three trips to the UnitedStates in 1921 and 1922, they did not seeeach other again for almost eighteen months.Falling ill once more, Strong had to take aleave of absence for most of 1923. Thereafter,they agreed to meet at least twice a year, al-ternating generally between Europe in thesummer and New York in the winter. Theywrote to each other every few weeks—a com-bination of financial gossip and views abouteconomic policy. Despite their closeness,they usually addressed each other, in thequaintly formal style of the day, as “DearStrong” or “Dear Norman,” although lettingtheir hair down on occasion with “DearStrongy,” “Dear Old Man,” or “Dear old [sic]Monty.” They furnished each other with ad-vice, often revealing confidential details towhich even their own colleagues were notprivy. Occasionally they scolded each other.

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When Norman operated too much on hisown and failed to consult his own directors,Strong admonished him, “You are a dearqueer old duck and one of my duties seemsto be to lecture you now and then.”

It was not all about work. They oftenribbed each other affectionately. On one oc-casion, Norman, who had just returned froma visit to Strong in New York and discoveredthat he had packed one of Strong’s jackets bymistake, wrote:

Dear Ben,

Since I wrote on the steamer, a fur-ther crime has been discovered. Thesecond evening I was home, as usual Ichanged clothes in the evening and ongoing downstairs discovered myself inthe disguise of a gentleman, if not adude! This was due to velvet jacket ofgood style, fit and finish: In otherwords, Ben, I can only look

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respectable with the help of yourwardrobe!

At times, they sounded like a couple ofharmless old bachelors who took great pleas-ure in joshing each other—whether over anoil portrait of Strong upon which Normanhad stumbled in the pages of Town andCountry , or Norman’s irritability whenThorpe Lodge was under repair, or his en-gagement with the philosophy of Spinoza.

Norman, by nature the more emotional,could be gushing and sentimental and fussedover his friend’s health. “Let me beg you tocare for yourself more than you seem to bedoing. You belong to others quite as much asto yourself,” he wrote after a 1921 visit toNew York. He lectured Strong aboutsmoking too many Camels and insisted ondetails about “what is happening to yourpulse & sleep & pins & breathing . . . not aword have I heard for 4 weeks.” The morealoof Strong, with a large family of his own,

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had less need to confide. But each was theother’s closest friend. In 1927 after a visitfrom Norman while he was down with pneu-monia, Strong too would write, “To have asympathetic person to talk over matters ishelpful anyway, but when it is a best friend,it is more than that.”

By 1923, they were seriously fearing forthe future. The first few years of peace, be-gun so hopefully, had turned out to be a timeof great frustration and disappointment forboth. The United States had washed itshands of European affairs and retreated intoisolation. Currencies in Europe remained un-stable. Neither of them could do much aboutthe failures of economic policy in Germanyor France, both paralyzed by reparations:Germany refusing to do anything to stabilizeits economy until a fairer settlement was es-tablished, France in its turn insisting that itcould make no concessions until a deal was

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reached on its war debts to Britain andAmerica.

Norman saw “the Civilization of Europe”at stake. But all he could do was watchgloomily from the sidelines as matters con-tinued to deteriorate. He becameincreasingly pro-German and anti-French.French obstinacy during the reparations dis-pute only served to reinforce his private pre-judices, particularly against the French polit-ical class, which in his view was uniformlyvenal, underhanded, corrupt, and dishonor-able. “The black spot of Europe and theworld continues to be on the Rhine,” hewrote to Strong after the occupation of theRuhr. “There you have all the conditions ofwar except that one side is unarmed. Howlong can Germany continue thus?”

For Strong the frustrations were more per-sonal. Though he remained financially com-fortable, over the years he had to adjust hislifestyle drastically. The contrast between his

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relatively modest way of living and those ofhis old colleagues in the private sector couldnot have been more apparent. Following hisseparation and divorce, he lived in a series ofsmall apartments, initially in a suite at thePlaza Hotel, and from mid-1922, in a smalltwo-bedroom apartment in midtown Man-hattan. Harry Davison had the benefit of amansion on Park Avenue, a sixty-acre estateon the North Shore of Long Island, and aplantation estate in Georgia, until he diedsuddenly of a brain tumor in May 1922.Meanwhile Thomas Lamont, the embodi-ment to Strong of the road not taken, lived ina large town house at Seventieth Street andPark Avenue, continued to use his propertyin Englewood during the spring, andsummered on his estate in North Haven,Maine.

Strong continued to be plagued by illness.In February 1923, the tuberculosis spread tohis larynx, forcing him to take yet another

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extended leave of absence in Colorado—hisfourth in seven years—from which he re-turned to work in October, and then onlypart time. Since he had first contracted thedisease in 1916, he had spent almost half thetime away from his desk. Even when he wasnominally at work, he was often incapacit-ated, “afflicted by the generous use ofmorphine,” to control the terrible pain. Hehad aged enormously. Compelled to give uptennis and other vigorous exercise, he hadput on weight and was losing his hair. Helooked haggard and overworked, almost un-recognizable from the tall, slim, confident,good-looking young man of ten years earlier.

In those days, even after his first wife’sdeath, he had always been very social andclubby. Now he rarely went out at night andwas never seen at the theater or the opera.His job was his anodyne, his evenings de-voted to quiet working dinners with otherbankers and officials.

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In early 1924, with both his sons talking ofgetting married, he wrote to Norman: “Thetemptation is constantly before me to windup my work and quit, do some traveling, alittle writing, and take things easy.” Neitherof them foresaw that after four years of frus-tration they were on the verge of achievingtheir goals.

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Maynard Keynes’s Wedding, 1925

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9. A BARBAROUS RELIC

THE GOLD Standard

Time will run back and fetch the ageof gold.

—JOHN MILTON, On the Morning of Christ’s Nativity

AFTER THE WAR, there was a universalconsensus among bankers that the worldmust return to the gold standard as quicklyas possible. The almost theological belief ingold as the foundation for money was so em-bedded in their thinking, so much a part oftheir mental equipment for framing the

world, that few could see any other way toorganize the international monetary system.Leading that quest were Montagu Normanand Benjamin Strong.

The biggest obstacle to such a return wasthe mountain of paper currency issued by thecentral banks of the belligerent powers dur-ing the war. Take Britain, for example. In1913, the total amount of money circulatingin the country—gold and silver coins; notesissued by the Bank of England and by thelarge commercial banks; and the largest cat-egory, bank deposits—amounted to the equi-valent of $5 billion. This supply of money, inall its various forms, was backed in aggregateby the country’s $800 million of gold, sur-prisingly only $150 million of which was heldin the vaults of the Bank of England, the re-mainder consisting of gold coins in circula-tion or bullion held by the commercialbanks, such as Barclays or Midland. By 1920,the Bank of England had lent so much

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money to the government to help pay for thewar effort that the total money supply hadballooned to the equivalent of $12 billion,which in turn had driven prices up by twoand a half times. Britain’s gold reservesmeanwhile remained roughly the same.Thus, whereas in 1913, there had been 15cents worth of gold within the country forevery $1 dollar in money, in 1920 each $1 ofmoney was backed by less than 7 cents. TheBank of England made every effort to eco-nomize on gold, for example, by replacinggold coins with paper currency, and by con-centrating the bullion originally held by com-mercial banks into its own holdings. Never-theless, at war’s end it was clear that thecountry’s reserves would not provide enoughof a monetary cushion for Britain to contem-plate returning to gold at the old 1914 ex-change rate.

Every nation involved in the war, even theUnited States, faced the same dilemma. For

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all had resorted to inflationary finance to agreater or lesser degree. There were essen-tially only two ways to restore the past bal-ance between the value of gold reserves andthe total money supply. One was to put thewhole process of inflation into reverse anddeflate the monetary bubble by actually con-tracting the amount of currency in circula-tion. This was the path of redemption. But itwas painful. For it inescapably involved aperiod of dramatically tight credit and highinterest rates, a move that was almost boundto lead to recession and unemployment, atleast until prices were forced down.

The alternative was to accept that pastmistakes were now irreversible, and reestab-lish monetary balance with a sweep of thepen by reducing the value of the domesticcurrency in terms of gold—in other words,formally devalue the currency. This soundspainless. But to a generation reared on thecertainties of the gold standard, devaluation

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was viewed as a disguised form of expropri-ation, a way of cheating investors and credit-ors out of the true value of their sav-ings—which to some degree it was.Moreover, it was not completely costless.Central banks that resorted to devaluation asa way of cleaning up a past monetary messwere viewed as the financial equivalent of re-formed alcoholics—it was hard to clear thestain on their reputations for financial dis-cipline, and as a consequence, they generallyhad to pay up to borrow.

A simple analogy of the choice between de-flation and devaluation might be that of theman who has put on weight and is having ahard time fitting into his clothes. He caneither choose to lose the weight—that is, de-flate—or alternatively accept that his largerwaistline is now irreversible and have hisclothes altered—that is, devalue. Whether todeflate or devalue became the central eco-nomic decision for every country after the

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war. The burden of deflation fell on workers,businesses, and borrowers, that of devalu-ation on savers. The fate of the world eco-nomy would hinge over the next two decadeson which path each country took. The UnitedStates and Britain took the route of deflation,Germany and France that of devaluation.

Of all the belligerents, the United States,having come late to the war and having spentthe least of any of the major powers, was inthe best financial shape. Though it, too, hadallowed its currency to expand by 250 per-cent during the war, and prices to double, italso had seen its gold reserves more thandouble as the enormous European purchasesof war materials and the massive flight ofEuropean capital seeking safety across theAtlantic, carried over $2 billion worth of goldinto the United States. By 1920, the countryheld close to $4 billion in gold. Even allow-ing for war inflation, therefore, it still had acomfortable reserve of bullion to back its

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expanded currency base, and was able to re-turn to the gold standard almost immedi-ately after hostilities ceased.

Even in the United States, the return togold and monetary stability was not com-pletely painless. In 1919 and 1920, after theyears of wartime austerity, consumers let ripand went on a buying binge; inflation beganto accelerate and for a brief moment, seemedabout to spin out of control. Strong reactedforcefully, leading a move by the Fed totighten credit policy dramatically by raisinginterest rates to 7 percent and keeping themthere for a full year. This constriction was ac-companied by a similar move by the federalgovernment to bring its budget into balance.The economy plunged into recession. Overtwo and a half million men lost their jobs.Bankruptcies soared. But by the end of 1921,with prices down by almost a third, the eco-nomy once again began to recover. Duringthe next seven years, the U.S. economy, led

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by new technologies such as automobiles andcommunications, would experience an un-precedented period of strong growth and lowinflation.

At the opposite end of the spectrum fromthe United States was Germany, which hadtaken the path of least resistance during thewar and expanded its money supply by 400percent. By the end of 1920, German pricesstood at ten times their 1913 level. Germanyhad issued so much currency that it had nohope of being able to reverse the process,and when the war ended, seemed clearlyheaded for a massive devaluation. In retro-spect, that would have been a blessing. Butinstead of trying to rebuild its finances, theGerman government adopted a policy of sys-tematic inflation, in part to meet reparations,and thus launched itself on that voyage offantasy into the outer realms of the monetaryuniverse.

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FIGURE 1

Britain and France lay somewhere inbetween. During the war, France had expan-ded its currency by 350 percent, pushing upprices equivalently. After the war, theBanque de France avoided German-stylehyperinflation and currency collapse by put-ting a lid on the issue of new currency.However, France continued to flirt with dis-aster by running budget deficits of $500

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million and was saved once again only by theremarkable thriftiness of its people. Whilethere was a group within the Banque whoharbored the fantasy of reversing the morethan threefold price increase and returningthe franc to gold at its prewar parity, mostrational observers agreed that when Francereturned to the gold standard, it would haveto be at a radically lower exchange rate—andeven that still seemed many years away.

Britain was therefore the only major coun-try that truly faced the choice between de-valuation and deflation. To a modern observ-er, less wedded to the principle that currencyrates are sacrosanct, some measure of de-valuation would have made sense. After all,Britain was finding it harder to compete inthe postwar world economy and, having li-quidated vast amounts of its holdingsabroad, could only draw upon a much re-duced foreign income to cushion the blow.Its exchange rate should have been allowed

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to fall as a means of making its goods cheap-er on world markets.

However, Norman and his generationlived in a different mental world. They sawdevaluation not as an adjustment to a newreality but as something more, a symptom offinancial indiscipline that might precipitate acollective loss of confidence in all currencies.When people talked of the City of London asbanker to the world, this was no mere figureof speech—the City operated literally like agigantic bank, taking deposits from one partof the world and lending to another. Whilegold was the international currency par ex-cellence, the pound sterling was viewed as itsclosest substitute, and most trading na-tions—the United States, Russia, Japan, In-dia, Argentina—even kept part of their cashreserves in sterling deposits in London. Thepound had a special status in the gold stand-ard constellation and its devaluation wouldhave rocked the financial world.

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In the last months of the war, the Britishgovernment set up a commission, chaired bythe ubiquitous Lord Cunliffe, only recentlydeparted from the Bank of England, and in-cluding Sir John Bradbury of the UK Treas-ury; A. C. Pigou, professor of political eco-nomy at Cambridge; and ten bankers fromthe City, to review postwar currencyarrangements. Twenty-three parties gaveevidence before the commission, every oneof them, with not single note of dissent, in fa-vor of a return to gold at the prewar rate. Toa man, they believed the restoration of thetraditional parity was essential if Britain wasto retain its position at the hub of the world’sbanking system.

The model they had in mind, which wasespecially seared into the collective memoryof the Bank of England, was Britain’s experi-ence a century earlier after the NapoleonicWars. In 1797, four years into the Revolu-tionary war with France, there was a run on

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the Bank of England, provoked by rumorsthat a French army had landed in Wales. TheBank, which had begun the war with gold re-serves of £9 million, saw them shrink to £1million, and was forced, as it would be in1914, to abandon the gold standard. Underthe pressures of war finance, Bank of Eng-land notes, which formed the basis for papermoney in the country, increased over thenext fifteen years from £10 million to over£22 million, doubling prices.

In 1810, a parliamentary inquiry known asthe Bullion Committee was formed to exam-ine the whole issue. The committee includedHenry Thornton, a banker, parliamentarian,brother to a director of the Bank of England,and the most creative monetary economist ofthe nineteenth century, whose insightswould unfortunately be lost by succeedinggenerations in charge at the Bank. The com-mittee recommended that the Bank resumegold payments as soon as possible, and in

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order to achieve this goal, begin to contractits credits to banks and merchants andshrink the supply of paper money by with-drawing its notes from circulation. The Bankwisely waited until 1815, when a defeatedNapoléon was safely in exile on St. Helena,before taking this advice. Over the next sixyears, it almost halved the supply of papermoney in Britain, driving down prices by 50percent. And though those years from 1815to 1821 had been years of riots and agricul-tural distress, Britain went back on gold in1821. Over the subsequent half century, ittransformed itself into the world’s largesteconomic power. Many believed that the “re-sumption” of 1821 had been the single mostimportant defining decision in its financialhistory. That the Bank had been willing to in-flict the pain of a 50 percent fall in prices inorder to restore the gold value of the poundhad set sterling apart from every other

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currency in Europe, and made it the world’spremier store of value.

Inspired by this example—and in completecontrast to every other European country—in1920, the Bank of England chose the path ofdeflation, matching the Fed and raising in-terest rates to 7 percent. The budget was bal-anced. The economy plunged into sharp re-cession, two million men were thrown out ofwork. Nevertheless, by the end of 1922, theBank had succeeded in bringing prices downby 50 percent, and the pound, which hadfallen as low as $3.20 in the foreign ex-change market on the fear that Britain washeaded for devaluation, climbed back towithin 10 percent of its prewar parity of$4.86.

But whereas the U.S. economy, more dy-namic and unhampered by a large internaldebt, was quickly able to bounce back fromthe recession, Britain remained stuck. Thenumber of unemployed would not fall below

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one million for the next twenty years. It soonbecame apparent that Britain had sustainedterrible damage as an economic power dur-ing the war. Industries such as cotton, coal,and shipbuilding, in which it had once ledthe world, had failed to modernize and thetraditional markets had been lost to compet-itors. Labor costs had risen as unions negoti-ated shorter working hours.

Norman now faced the uneasy prospectthat the only way to follow the example setby his forerunners—his grandfather joinedthe Court the year of “resumption”—was bykeeping unemployment high. But while be-fore the war it might have been politically ac-ceptable to create unemployment deliber-ately in order to support the currency, in thecharged climate after the war—with LloydGeorge promising the electorate “a land fitfor heroes”—Norman would find himselfconstantly under pressure to find analternative.

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THE problem of resurrecting the gold stand-ard went much deeper than selecting new ex-change rates for the key currencies, for thewar had brought about such a tectonic shiftin the distribution of gold reserves that itseemed to threaten the very viability of amonetary system resting on gold.

Before the war, the four largest econom-ies—the United States, Britain, Germany,and France—had operated their monetarysystems with about $5 billion worth of goldamong them. The amount of new gold minedduring the war was small, and by 1923, mon-etary gold had increased only to $6 billion.Meanwhile, prices in the United States andthe UK, even after the postwar deflation,were still 50 percent higher than before thewar, which meant that in effect the real pur-chasing power of gold reserves had contrac-ted by almost 25 percent.

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FIGURE 2

In 1922, Norman worked with officials atthe British Treasury to develop a planwhereby some of the European central bankswould, as did many countries in the BritishEmpire, hold pounds rather than gold astheir reserve asset—in much the same way

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that many central banks hold dollarsnowadays. He argued that substitutingpounds for gold would allow the world toeconomize on the precious metal and thusreduce the risk of worldwide shortage. Fewpeople failed to notice that by creating a cap-tive source of demand for sterling, the planwould add to its privileged position in theconstellation of currencies and greatly easehis job of returning the pound to gold. Theplan never really did take off, except in a fewminor Central European countries.

The bigger concern among bankers afterthe war was not so much that the world wasshort of gold, but that too much of the goldwas concentrated in the United States. Be-fore the war, there had been some parityamong the major economic powers betweenthe amount of gold in each banking systemand the size of its economy. For example, theUnited States, with a GDP of $40 billion, ac-counted for about half the output of the four

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great economic powers and held about $2billion in gold, a little less than half of thetotal gold of these four countries. The bal-ance was only rough and ready—France heldproportionately more and Britain less—butthe system worked with remarkablesmoothness.

By 1923, the United States had accumu-lated close to $4.5 billion of the $6 billion ingold reserves of the four major economicpowers, far in excess of what it needed tosustain its economy. About $400 million cir-culated in the form of coins; the remainderconsisted of ingots, small bars the size of aquart of milk, each weighing about twenty-five pounds, stored in the vaults of theFederal Reserve Banks and the Treasury. Thelargest hoard lay under lower Manhattan,about $1.5 billion in the Treasury repositoryat the legendary intersection of Broad andWall Streets, and at the New York Fed. Theremainder was scattered among the eleven

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other Federal Reserve Banks across the

country.20 By one estimate, excess gold re-serves in the United States amounted toabout a third of its holdings, roughly $1.5billion.

While the U.S. monetary system wasswamped by this enormous surplus, Europe,particularly Britain and Germany, suffered achronic shortage. The three big Europeaneconomies, which had operated before thewar on $3 billion worth of gold, were leftwith barely half that. Faced with constant de-mands to pay out gold, European centralbanks had resorted to a complex of meas-ures, the most important being to withdrawgold coins from circulation. All those solidtalismans of turn-of-the-century middle-class prosperity had gradually disappearedfrom Europe’s pockets, to be replaced byshabby pieces of paper. By the mid-1920s,the United States was the only large countrywhere one could still find gold coins.

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The concentration of the world’s key pre-cious metal in the United States had left therest of the world with insufficient reserves togrease the machinery of trade. The world ofthe international gold standard had becomelike a poker table at which one player has ac-cumulated all the chips, and the game simplycannot get back into play.

ONE MAN WHO had no difficulty liberatinghimself from the strictures of the gold stand-ard was John Maynard Keynes. After thePeace Conference, he had gone back toteaching at Cambridge. But following the re-sounding success of The Economic Con-sequences of the Peace, he reduced his in-volvement with the university and becameincreasingly caught up on the grander stageof world affairs. He joined the board of an in-surance company and became chairman of

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the weekly British magazine the Nation, forwhich he wrote regular pieces, as he did forthe Manchester Guardian, articles that weresyndicated around the world, including inthe U.S. weekly the New Republic. And hebegan making his fortune as a currencyspeculator.

In 1919, it was a novel way of makingmoney. Before 1914, currencies had beenfixed, and opportunities to profit from theinstability of exchange rates had been almostnonexistent. In the aftermath of the war, asexchange rates of the major currencieslurched up and down, it became possible tomake large returns—and also lose equallylarge amounts—by betting on the direction ofsuch moves. In the latter half of 1919, con-vinced that the inflationary consequences ofthe war would undermine the currencies ofthe main belligerents, Keynes went short onthe French franc, the German Reichsmark,and the Italian lira, buying the currencies of

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countries that had sat out most of the war:the Norwegian and the Danish kroner, theU.S. dollar, and interestingly enough, the In-dian rupee. He made $30,000 in the firstfew months. In early 1920, he set up a syn-dicate, with his brother, some of the Blooms-bury circle, and a financier friend from theCity of London. By the end of April 1920,they had made a further $80,000. Then sud-denly, in the space of four weeks, a spasm ofoptimism about Germany briefly drove thedeclining European currencies back up, wip-ing out their entire capital. Keynes foundhimself on the verge of bankruptcy and hadto be bailed out by his tolerant father. Never-theless, propped up by his indulgent familyand by a loan from the coolly acute financierSir Ernest Cassel, he persevered in his specu-lations—built for the most part around theview that the German and Central Europeancurrencies were headed for disaster. By the

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end of 1922, he had amassed a modest nestegg of close to $120,000.

But by far the most important develop-ment in his life was that he had fallen inlove—this time with a woman, Lydia Lo-pokova, a married Russian émigrée baller-ina, no less. The daughter of a Russian fath-er, an usher at the Imperial AlexandrinskyTheater, and a Scottish-German mother, Ly-dia came from a family of dancers—her twobrothers and a sister had also gone to theImperial Ballet School in St. Petersburg.When Maynard met her in 1918, she wastraveling with the Diaghilev Ballet, havingspent seven years in the United States as acabaret artist, model, and vaudeville per-former, and was married to the businessmanager of the company, Randolfo Barrochi.After her marriage broke down, she disap-peared into Russia, then in the thick of civilwar, with a mysterious White Russian

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general, but reappeared in Keynes’s life atthe end of 1921.

Though they would not get married until1925 when her divorce finally came through,they began living together in 1923. Theymade an unlikely couple—he a brilliant andall too cerebral intellectual with a genius forexposition, she an unpredictable artist with arisqué past, a flighty and vivacious chatter-box with an equal skill for stumbling into themost memorable malapropisms. She oncecomplained that she “disliked being in thecountry in August, because my legs get sobitten by barristers.” On another occasion,after visiting an aviary, she remarked on herhostess’s “ovary.” And though the rest ofBloomsbury looked down on her, Keynes wasto remain completely enchanted with her forthe rest of his life.

In December 1923, Keynes published ashort monograph, A Tract on Monetary Re-form, much of which had already appeared

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as a series of articles in the ManchesterGuardian during 1922 and early 1923—hisfirst systematic attempt to unravel thesources and consequences of the chronicmonetary instability that plagued the post-war world. Like his earlier book, A Tract wasa strange hybrid, this time a half-theoreticaltreatise—with sections on “The Theory ofPurchasing Power Parity” and “The ForwardMarket in Exchanges” and half pamphlet forthe laity. It was, however, very different intone from The Economic Consequences. Thathad been an angry, passionate work, writtenin the heat of debate and controversy. Thisone had a lighter touch, a “tentative almostdiffident tone,” as if the author himself weresearching for the answer to the quest formonetary stability.

Before the war, however much he had en-joyed challenging conventional nostrumsabout morality, conduct, and society, in eco-nomics Keynes had fully embraced the

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liberal orthodoxy that dominated his stillnascent profession. He believed in free trade,in the unfettered mobility of capital, and inthe virtues of the gold standard.

There were times when, like so many othereconomists, he might speculate whether goldwas the right foundation for money. Butthose had been largely theoretical rumina-tions; and ultimately, when it came down toit, there seemed no other practical basis sotried and tested upon which to organize theworld’s currencies. Asked at the height of the1914 crisis to brief the chancellor of the ex-chequer as to whether the pound should re-main tied to gold, he had come down verystrongly in favor of maintaining the link:“London’s position as a monetary center de-pends very directly on complete confidencein London’s unwavering readiness” to meetits obligations in gold and would be severelydamaged if “at the first sign of emergency”that commitment was suspended.

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Even during the first years after the war,he was still advocating a return to gold. Butthe shift in the world’s economic landscapewas beginning to give him doubts. He stillbelieved that the prime goal of central bankpolicy should be to keep prices broadlystable. But whereas before the war he hadthought that the best way to achieve this wasto ensure that currencies such as the poundbe fully convertible to gold at a fixed value,he had now come to believe that there wasno reason why linking money supply andcredit to gold should necessarily result instable prices.

The gold standard had only worked in thelate nineteenth century because new miningdiscoveries had fortuitously kept pace witheconomic growth. There was no guaranteethat this accident of history would continue.Moreover, while the original rationale for agold standard—the commitment that papermoney could be converted into something

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unequivocally tangible—might have been ne-cessary to instill confidence at some point inhistory, this was no longer the case. Attitudestoward paper money had evolved and it wasnot necessary to allow the supply of preciousmetals to regulate the creation of credit in asophisticated modern economy. Centralbanks were perfectly capable of managingtheir countries’ monetary affairs rationallyand responsibly, he argued, without anyneed to shackle themselves to this “barbar-ous relic.”

Though the Tract was a technical mono-graph, the Cambridge undergraduate inKeynes could not resist lacing the book withthe playful sarcasms that had made The Eco-nomic Consequences such a success. He flip-pantly dedicated the book, “humbly andwithout permission, to the Governors andthe Court of the Bank of England,” knowingvery well that the members of that augustbody would disagree with almost everything

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he had to say. He poked fun at the self-im-portance of those “conservative bankers”who “regard it as more consonant with theircloth, and also as economizing on thought, toshift public discussion of financial topics offthe logical on to an alleged moral plane,which means a realm of thought where ves-ted interest can be triumphant over the com-mon good without further debate.” And hepeppered it with the sort of bons mots—themost famous being “in the long run we areall dead”—that made him so scintillating aconversationalist.

But more than anything else it wasKeynes’s ability to strip away the surface ofmonetary phenomena and reveal some of itsdeeper realities and its connections to the so-ciety at large that has made the Tract suchan enduring classic. For example, by tracingthrough the consequences of rising prices ondifferent classes in a stylized picture of theeconomy—what economists today might call

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a model—he showed that inflation was muchmore than simply prices going up, but also asubtle mechanism for transferring wealthbetween social groups—from savers, credit-ors, and wage earners to the government,debtors, and businessmen. He thus high-lighted the fact that the postwar inflation incountries such as France and Germany wasnot just the result of an error in monetarypolicy. Rather, it was a symptom of the fun-damental disagreement that had wrackedEuropean society since the war about how toshare the accumulated financial burden ofthat terrible conflict.

In contrast to The Economic Con-sequences, the new book had almost no prac-tical impact. At a time when the currencies ofCentral Europe had completely collapsedand the franc was perilously close to theedge, few people could be convinced to en-trust the management of national moneysand currency values to the discretion of

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treasury mandarins, politicians, or centralbankers. There were too many examples topoint to—Germany, Austria, Hungary, ad-mittedly some of them pathologically ex-treme—of what could happen when the dis-cipline of gold was removed. But the experi-ence of the next decade would, in the wordsof one of Keynes’s biographers, win for theTract “the allegiance of half the world.”

NORMAN’S RESPONSE To the Tract waspredictably to dismiss it as the froth of aclever dilettante. As he wrote to Strong, “Forthe moment Mr. Keynes seems to haverather outdone himself, a fact that perhapscomes from his trying to combine the posi-tion of financial mentor to this and othercountries with that of a high-classspeculator.”

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What separated Norman from Keynes hadless to do with economics and more to dowith philosophy and worldview. For Nor-man, the gold standard was not simply aconvenient mechanism for regulating themoney supply, the efficiency of which was anempirical question. He thought about it inmuch more existential terms. It was one ofthe pillars of a free society, like propertyrights or habeas corpus, which had evolvedin the Western liberal world to limit thepower of government—in this case its powerto debase money. Without such a disciplineto protect them, central banks would inevit-ably come under constant pressure to helpfinance their governments in much the sameway that they had done during the war withall the inflationary consequences that werestill all too apparent. The link with gold wasthe only sure defense against such a down-ward spiral in the value of money.

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His reaction to the Tract was colored byhis personal dealings with Keynes. After thewar, Norman, agreeing with much ofKeynes’s argument on reparations, had con-sulted him at the height of the Germanhyperinflation. But Keynes’s vocal oppositionto the war-debt settlement with the UnitedStates, which Norman had been responsiblefor engineering, created a rift. Norman,acutely sensitive to public criticism, har-bored grudges for a long time—“the mostvindictive man I have ever known,” accord-ing to one close friend. Thereafter, thoughtheir social circles overlapped somewhat andthough Keynes, for all his youthful icono-clasm, was already widely recognized as themost brilliant monetary economist of hisgeneration, Norman studiously ignored himprofessionally, and refused ever to invite himto advise the Bank.

Strong’s reactions were on the surface sim-ilar to Norman’s. He had never met Keynes,

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but given his puritan background, he wouldhave vehemently disapproved of the Blooms-bury irreverence and mockery of authority.When The Economic Consequences cameout, he had written of Keynes, “He is a bril-liant but, I fear, somewhat erratic chap, withgreat power for good and, unfortunately . . .some capacity for harm.” Many in his circlehad taken offense at Keynes’s merciless lam-pooning of Woodrow Wilson at the PeaceConference. He echoed this again in his reac-tion to the Tract. “Keynes’ little book arrivedsafely and I am just now reading it,” he wroteto Norman on January 4, 1924, from the Ari-zona desert. “I have a great respect for hisability and the freshness and versatility of hismind, but I am much afraid of some of hismore erratic ideas, which impressed me asbeing the product of a vivid imaginationwithout very much practical experience.”

The hidden irony was that every one ofKeynes’s main recommendations—that the

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link between gold balances and the creationof credit be severed, that the automaticmechanism of the gold standard be replacedwith a system of managed money, that creditpolicy be geared toward domestic price sta-bility—corresponded precisely to the policiesStrong had instituted in the United States.

During the war, the flow of gold into theUnited States had pushed up prices by 60percent. When the fighting ended, but tur-moil in Europe continued and the gold stillkept arriving, Strong decided that it was timeto abandon the conventional rules of the goldstandard and insulate the U.S. economyfrom the flood of bullion. The system was be-ing swamped by so much excess gold that tohave followed the traditional dictates of thegold standard would have led to a massiveexpansion of domestic credit, which inevit-ably would have led to very high rates of in-flation—Strong calculated that it would causeprices to double. It made no sense to him for

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the United States to import, in effect, the in-flationary policies of Europe and destabilizeits own monetary system just because theOld World had been hit by political and fin-ancial disaster. The Fed therefore began toshort-circuit the effects of additional gold onthe money supply by contracting the amountof credit that it supplied to banks, thus off-setting any liquidity from gold inflows.

Having jettisoned the simple operatingprocedures of the gold standard, whichlinked credit creation solely to gold reserves,Strong began to improvise an alternative setof principles to guide monetary policy. TheFed’s primary goal should be, he believed, totry to stabilize domestic prices. But hethought that it should also respond to fluctu-ations in business activity—in other words,the Fed should try to fine-tune the economyby opening the spigot of credit when com-mercial conditions were weakening and clos-ing it as the economy strengthened.

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This new set of principles, somewhatcobbled together on the fly, represented aquiet, indeed carefully unheralded, revolu-tion in monetary policy. Until then centralbankers had seen their primary task as pro-tecting the currency and confined their re-sponsibilities to ensuring that the goldstandard was given free rein, only steppingin at times of crisis or panic. The creditpolicy of every industrial country had beendriven by one factor alone: gold reserves.The United States was, however, now soflush with gold that the solidity of its cur-rency was assured. Led by Strong, the Fedhad undertaken a totally new responsibil-ity—that of promoting internal economicstability.

It was Strong more than anyone else whoinvented the modern central banker. Whenwe watch Ben Bernanke or, before him, AlanGreenspan or Jean-Claude Trichet orMervyn King describe how they are seeking

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to strike the right balance between economicgrowth and price stability, it is the ghost ofBenjamin Strong who hovers above him. Itall sounds quite prosaically obvious now, butin 1922 it was a radical departure from morethan two hundred years of central bankinghistory.

Strong’s policy of offsetting the impact ofgold inflows on domestic credit conditionsmeant that as bullion came into the UnitedStates, it was, in effect, withdrawn from cir-culation. It was as if all this treasure that hadbeen so painfully mined from the depths ofthe earth was being reburied.

Strong’s policy contained a fundamentalcontradiction. On the one hand, he advoc-ated a worldwide return to the internationalgold standard. On the other, he was doingthings that not only undermined the doctrinehe claimed most to believe in, but also, bypreventing the gold from being recycled toEurope, he was making it all the more

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difficult for Europe to contemplate rejoiningAmerica on the gold standard. It was a di-lemma he was never able to resolve.

European bankers argued that the massivebullion imbalance between their countriesand the United States was a fundamentalproblem for the world and pressed for somemechanism to recycle some of this gold. “I donot intend another quarter to pass,” wroteNorman to Strong in January 1924, “withoutseeing you face to face, and asking you howin the name of heaven the Federal ReserveSystem and the United States Treasury aregoing to use their gold reserves.”

KEYNES WAS THE first to recognize and ar-ticulate that, for all the public rhetoric aboutreinstating the gold standard, the new ar-rangements were in fact very different fromthe hallowed and automatic prewar

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mechanism. As he put it in the Tract, “A dol-lar standard was set up on the pedestal of theGolden Calf. For the past two years, the UShas pretended to maintain a gold standard.In fact it has established a dollar standard.”

It meant, in effect, that the FederalReserve was so flush with gold that it hadgone from being the central bank of the Un-ited States to being the central bank of theentire industrial world. Keynes’s main con-cern was that Britain and other majorEuropean countries would find themselvesbeing dictated to by a Fed that focusedprimarily on the needs of the domestic U.S.economy, yoking the gold-starved Europeansto U.S. credit policy. Strong was in the pro-cess of constructing a one-legged gold stand-ard, whose European limb would be firmlytied to classical rules while the Americanlimb would be run by the Fed according to itsown set of goals and constraints.

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Keynes would have been even more horri-fied had he probed further into how the Fedoperated and the character of the men whoran it. The Federal Reserve Act of 1913 hadbeen a political compromise. Decisions aboutthe level of interest rates and credit condi-tions were vested in the hands of the twelvebanker-dominated regional reserve banks.This network was overseen by an eight-member central Board of Governors, allpresidential appointees based in Washing-ton. Broadly speaking, only the reservebanks could initiate policies, but thesepolicies had to be approved by the Board.

It was not surprising that there shouldhave been a certain amount of jockeying forcontrol within the system. The precise locusof authority was ambiguous, and too manybig egos—twelve governors of the reservebanks; the six political appointees on theFederal Reserve Board; the secretary of thetreasury and the comptroller of the currency,

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both ex-officio members of the Board—werejostling for power.

From the start, the Board in Washingtonwas an organization of unclear purpose andmandate. When it was created in 1913,Wilson conceived of it as a regulatory agencystanding as a watchdog over the various re-gional reserve banks. He believed, therefore,that it should be comprised of individualsfrom outside banking. But he was unwillingto give it much stature. When the first gov-ernors of the Board complained to the pres-ident that the State Department expert onprotocol had decided that as the most re-cently created of the government agencies,they should come last in social precedence,Wilson had replied that as far as he was con-cerned, “they might come right after the firedepartment.”

The Board did not even have its own quar-ters but operated from a dark and drearysuite of offices on the top floor of the

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Treasury Building, from which its long andnarrow boardroom overlooked the grimy in-terior court. Members salaries were typicalof the civil service, considerably lower thanprivate sector compensation and even muchless than the pay of the governors of the re-gional Federal Reserve banks. Not surpris-ingly, the Board found it hard to attract goodpeople—on one occasion six different can-didates turned down an offer of a positionbefore someone could be induced to accept.

As a result, the Board was, in J. K. Gal-braith’s description, “a body of startling in-competence.” In 1923, the chairman wasDaniel Crissinger. Born in a log cabin inMarion, Ohio, he was a local eminence, alawyer and banker who had risen to the posi-tion of general counsel of the Marion SteamShovel Company and had twice run for Con-gress, albeit unsuccessfully. He also had thefortune to have been one of Warren Hard-ing’s boyhood chums and, though by all

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accounts “utterly devoid of global or eco-nomic banking sense,” was appointed comp-troller of the currency in 1922 after his oldfriend had become president. The followingyear the president elevated him to the chairof the Board.

Besides its chairman and its two ex-officiomembers, the Board comprised five othergovernors, carefully selected not for their ex-pertise but to ensure due representation forthe different regions of the country. FromMemphis, Tennessee, came George RoosaJames, a dry goods merchant, a man of greatenergy, something of a diamond in therough. His economic ideas, however, ran onthe eccentric side. Firmly rooted in the past,he held that the basic foundation of the eco-nomy lay with the horse, the mule, and hay,and that the decay of the nation had begunwith the advent of the automobile.

From Iowa came Edward Cunningham,who had started life as a dirt farmer and

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gone on to become Speaker of the Iowa legis-lature; from Poughkeepsie, New York, cameEdmund Platt, a local newspaper publisher,who had entered politics as a member of thetown’s board of water commissioners andgone on to serve as its three-term Republicancongressman. Boston furnished GeorgeHamlin, longest serving of the governors,having been appointed chairman by Woo-drow Wilson in 1914. By profession a lawyer,he had run unsuccessfully for governor ofMassachusetts in 1902 and 1910—a failedpolitical career, it seems, was not an impedi-ment, indeed was almost a qualification, forBoard membership.

One member, however, who could legitim-ately claim some relevant expertise was Dr.Adolph Miller. Having studied economics atHarvard, he had been a professor at theUniversity of California at Berkeley fortwenty-five years. A deeply insecure man, heresented that his qualifications were not fully

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appreciated by his colleagues—they in turntended to dismiss him as an ivory-tower the-oretician with no practical experience. Heliked to argue, and when his colleagues grewweary of the interminable wrangling, wouldbegin to argue with himself. Not surpris-ingly, he was often confused and indecisive,with a tendency to adopt extremely dogmaticbut contradictory positions on many topics.He had also developed a particular animusagainst Strong, resenting the younger man’sinfluence and authority.

It did not help that Miller had learned hiseconomics at a time when monetary eco-nomics, as a discipline, was very much in itsinfancy, thus leading him to espouse a seriesof outmoded beliefs about the way monetarypolicy was supposed to work. Among thesewas the now defunct doctrine of “real bills,”that as long as the Federal Reserve and com-mercial banks restricted themselves to

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providing only short-term credit to financeinventories, nothing much could go wrong.

Faced with overseers such as this, it wasnot surprising that Strong was able to stepinto the vacuum of leadership and dominatethe institution. Unlike his nominal superiors,he made a concerted attempt—particularlyduring those many trips to Europe—to edu-cate himself about central banking. It was he,for example, who was most responsible forintroducing the biggest innovation in theway the Fed operated—so-called open mar-ket operations. When the Fed was conceived,it was assumed that it would primarily influ-ence credit conditions by changes in its dis-count rate, the interest rate it charged onloans to member banks. By the early 1920s,this technique was proving to be too passive,depending, as it did, for its impact on howmuch or how little bankers were willing toborrow at the discount window. Strong re-cognized that by buying or selling

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government securities from its portfolio, theFed could directly and immediately alter thequantity of money flowing through the bank-ing system.

It was inevitable that control of open mar-ket operations should become the object ofan intense power struggle. The purchase andsale of securities out of their portfolios hadinitially been left to the reserve banks; but in1923, the Board, recognizing the potency ofthe new tool, tried to take charge by requir-ing the committee that made these decisionsto operate under its umbrella. Strong wasaway in Colorado at the time, recuperatingfrom his bout of tuberculosis of the throat.He was furious. “I’ll see them damned beforeI’d be dismissed by that timid bunch!” hewrote to one of his fellow governors. Eventu-ally, though, he did acquiesce in giving theBoard oversight over such operations. But asthe most knowledgeable official on the new

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open market committee, he was easily able tocall the shots on virtually all decisions.

In the process he stepped on a lot of toes,not concealing his impatience with the mem-bers of the Board. Some complained that hehad an overblown sense of his own abilities,that he was too confrontational, that helacked judgment, particularly about people.But as the intellectual leader of the FederalReserve, he had acquired a large followingwithin the organization and was “wor-shipped” by the younger men.

If there was one problem with this wholeprocess of making monetary policy, it wasthat it all depended too heavily onStrong—on his judgment, his skill, and hisinsight. He was too autocratic, operated onhis own too much, and did not spend thetime to build a consensus through the wholesystem. As a result, the rationale for many ofhis decisions was misinterpreted and hismotives were constantly questioned. His

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failure to institutionalize policies and thethinking behind them meant that once hewas no longer around, the Fed would becomeparalyzed by internal conflicts.

Keynes once compared the role of theBank of England under the prewar system tothat of the “conductor of an orchestra.” Eventhough the Bank had then been administeredby a club of old and established City patri-cians, the gold standard had been managedwell, in part because circumstances were sofavorable, in part because the directors of theBank, however dull and unimaginative, weresolid. After the war, as the world struggled toemerge from economic chaos, with curren-cies still in turmoil and gold in short supplyeverywhere outside America, it did not bodewell that the new “conductor of the orches-tra,” the Federal Reserve, was a deeply di-vided organization that did not fully realizethe role that had been thrust upon it and, butfor Strong, would have been in the hands of a

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motley crew of small-town businessmen andminor-league political hacks with little ex-pertise in finance or central banking.

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PART THREE

SOWING A NEW WIND

1923-28

10. A BRIDGE BETWEENCHAOS AND HOPE

Germany: 1923

Let me issue and control a nation’smoney and I care not who writes thelaws.

—MAYER AMSCHEL ROTHSCHILD (1744-1812),founder of the House of Rothschild

AT 10:00 p.m. on November 8, 1923, twomen could have been seen arriving at theHotel Continental in Berlin for an intimatedinner in one of its private dining rooms.

Each was in his own way a caricature of atype of German and could almost have comefrom central casting. The tall, thin figurewith the clipped military mustache, hair cutshort and parted very precisely in the center,was Hjalmar Schacht, now one of the mostprominent bankers in Berlin, a director andboard member of the Danatbank, thirdlargest in Germany.

The other was short and fat, with anenormous head, his bloated face pasty fromoverindulgence and lack of exercise. With hiseasy smile and gregarious manner, he lookedlike a classic lower-class Berliner, crude,brash, but good-hearted. This was GustavStresemann, who just three months beforehad become chancellor of Germany. He wasindeed what he appeared to be: a Berlinerfrom the lower middle classes, son of aninnkeeper and beer distributor, though hehad himself received a doctorate in econom-ics from the University of Berlin, and had

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been a professional politician and corporatelobbyist since the age of twenty-two.

November 9, the next day, was the fifthanniversary of the flight of the kaiser. Thenight before, the Soviet embassy had hosteda grand party to celebrate the joint an-niversaries of its own revolution and that ofGermany, but Stresemann had excused him-self on the grounds of state business. For thelast two days, he had been locked in confer-ence with members of his cabinet trying tofind a way of averting the country’s immin-ent bankruptcy.

On November 5, the price of a two-kiloloaf of bread had soared from 20 billionmarks to 140 billion, sparking off nationwideriots. In Berlin, thousands of men and wo-men had paraded the streets, shouting“Bread and work!” Over a thousandshops—bakeries, butchers, and even clothingstores—had been looted. Even in the city’schic west end, cars had been held up and the

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occupants robbed. In the heavily Jewishareas to the east around the Alexanderplatz,anyone who was known to be Jewish or“looked Jewish” had been attacked by gangsof young hoodlums. The worst violence wasdirected at Galician Jews, many of whomhad their distinctive beards scissored off ortheir clothes ripped away. The Börse, thestock exchange, had come under siege by amob shouting, “Kill the Börse Jews.”

But by the evening of November 8, thestreets were at last quiet, the mobs dispersedat bayonet point by military police. Heavilyarmed Prussian State Police in green uni-forms now patrolled the city. After an abnor-mally hot Indian summer, the weather hadturned extremely cold. That night, it had be-gun to rain, making life even more difficultfor those innumerable Berliners forced toqueue up outside the municipal food kit-chens and public feeding stations spreadacross the city.

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The Hotel Continental was located in thecenter of Berlin, just off the tree-linedboulevard of Unter den Linden. Though notone of the major hotels, it was convenientlyclose to the Reichstag and sufficiently dis-creet and unobtrusive for Schacht and Stre-semann to meet without drawing too muchattention to themselves. Neither would havewished to be seen at one of the great fashion-able meeting places, the Adlon on Pariser-platz or the Bristol on Unter den Linden,among all the nouveaux riches—the so-calledRaffkes and Schiebers, fat, coarse men whohad made their money from profiteeringduring those last few feverish years and whocould always be found in the big hotels,drinking champagne and gorging on oystersand caviar.

Despite the riots and the rain, the infam-ously louche and tawdry nightlife of Ber-lin—that new “Babylon of the world”—con-tinued unabated. On the Friedrichstrasse

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and along Kurfürstendamm, the bars anddance halls were, as always, full. As on everynight, hordes of prostitutes of bothsexes—there were said to be a hundred thou-sand of them in Berlin alone—paraded out-side in the strangest and most exotic cos-tumes. “A kind of madness” had taken holdof the city, unhinging the whole society. For-tunes were made overnight and as quicklylost or dissipated. Those with money, des-perate to be rid of it before it became worth-less, indulged in giddy frenzies of spending,while those without sold what few posses-sions remained to them, including their bod-ies, in the struggle to survive. A quarter ofthe city’s schoolchildren suffered frommalnutrition.

Berlin had never been an elegant city. Be-fore the war, people thought that it was tooclose a reflection of the personality of its em-peror—brash, self-important, and vul-gar—the “German Chicago,” Mark Twain had

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called it. But it had rightly prided itself onbeing the cleanest and most modern metro-polis in Europe. Now it was shabby and go-ing 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 veteransriding the sidewalks on rolling planks” andby stunted, bowlegged children bent out ofshape by rickets.

STRESEMANN HAD BEEN called upon toform a government that August, when theprevious coalition had collapsed, the sixth tofall in five years. He was thought to be theone man politically skillful enough to be ableto bring together all the democraticparties—the Socialists, the Catholics, the lib-erals of the center—into a “Great Coalition”

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that could try to come to grips with a Ger-many on the verge of disintegration.

He had had not one but two improbablepolitical careers. Before the war, despite hislower-middle-class background—whichtwice led the kaiser to snub him conspicu-ously by publicly refusing to shakehands—he had been an ardent monarchist, afervent militarist and, as head of the Nation-al Liberal Party in the Reichstag, a blind sup-porter of the military during the war. Knownas “Ludendorff’s young man” because of hisloyalty to the Imperial High Command, hehad been an advocate of the whole national-ist agenda—annexation, German expansion,and the campaign of unrestricted submarinewarfare that had so angered the Americans.When the military broke down at the end ofthe war, Stresemann had been left, like somany other politicians of the imperial era,humiliated and discredited. Though he wasstill only forty years old, his political career

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seemed to be over. But in the five years sincethe revolution, he had steadily rebuilt hispolitical image, transforming himself from ajingoistic warmonger to a trusted pillar ofthe new democracy, though many believedthat his conversion was a sham.

Stresemann took over a country in deepcrisis. The year 1923 had seen an oppress-ively hot summer of riots and strikes across aGermany genuinely close to breaking apart.In Saxony, the Communists had threatenedto secede as an independent state, while inthe south, the Bavarian government was be-ing assailed from the right.

Despite his genial and sentimental exteri-or, Stresemann was a realist who had cometo power determined to end the nightmare.In his first few weeks in office, he had theReichstag approve an act empowering him togovern by decree; suspended the campaignof passive resistance in the Ruhr, which wascosting the government $10 million a day;

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and declared a state of emergency that gavethe army the necessary authority to actagainst secessionist states.

Recognizing that the political breakdownhad its roots in the dislocations and chaos oframpant hyperinflation, Stresemann thenturned his attention to the monetary ques-tions. Tax revenues at the time accounted forless than 10 percent of government expendit-ures, and the gap was being filled by printingmoney.

Stresemann had invited Schacht to dinnerthat night to try to persuade him to acceptthe position of currency commissioner, anew post with responsibility for reformingthe whole German currency. It would makeSchacht the financial czar of Germany, withmore power than even the minister offinance.

The two had known each other for morethan twenty years. They socialized in the

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same circles and were both members of theBerliner Mittwochgesellschaft, the Wednes-day Society, a select discussion club restric-ted to eighty-five members and founded in1915. Stresemann, who thought highly ofSchacht, had been trying to find a positionfor him in the new administration for someweeks. The previous month, during his firstcabinet reshuffle, he had even tried to ap-point Schacht minister of finance; but thenight before he was to submit his new list ofministers to President Friedrich Ebert, hehad received a letter from a high official inthe ministry expressing grave doubts aboutSchacht’s suitability for the position, raisingthe old questions about Schacht’s wartimerecord and hinting at ethical improprietiesand corruption. At the last minute, Strese-mann had been compelled to drop Schacht’sname from his proposed cabinet.

For Schacht, the new opportunity couldnot have come at a better time. Now

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independently wealthy, he was eager to enterpublic life. Though he owed much of his for-tune to Jacob Goldschmidt, he viewed hisyoung 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 summeras “living on the edge of a volcano.” Thebiggest danger in his view was a Bolshevikrevolution. But as the political crisis began toreach a crescendo, he remained convincedthat some great opportunity would presentitself 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 thesafety of Switzerland. He had been hopingthat the new government would offer him aposition and he wanted to be able to take de-cisions without, as he put it, being “hinderedby personal considerations were I to be

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drawn into the whirlpool.” He knew thatLuise, a fervent nationalist and right-wingradical with a “narrow Prussian outlook,”was unlikely to be particularly welcoming tothe left-wingers and democrats with whomhe would have to associate.

At 11:30 p.m., as the two men were finish-ing dinner and Schacht, a chain-smoker, hadlit up, one of Stresemann’s aides burst in.For weeks there had been rumors that theright-wing groups in Bavaria, one led by thelocal army and police commander, the otherby a thirty-four-year-old ex-corporal namedAdolf Hitler, were planning to seize power.They had now struck. Hitler, apparentlyworking with the fallen general ErichLudendorff, had taken over a Munich beerhall, drafted local political leaders to backhim, and proclaiming the Berlin governmentdeposed, was preparing to march on “thatsink of iniquity.” Reports were even filteringin that some army units in Munich had gone

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over to the rebels. Cutting short the dinner,Stresemann raced back to an emergency cab-inet meeting at the Chancellery.

THE FOLLOWING MONDAY, November 12,Schacht received a call at his office on theSchinkelplatz from Hans Luther, minister offinance, summoning him to the ministry,located in one of those grim official buildingson the Wilhelmstrasse. Hitler’s attempt toseize power—the Beer Hall Putsch, as it wasalready being called—had collapsed withintwenty-four hours, and the Stresemann gov-ernment was getting back to business.

Short, fat, and completely bald, Luther hadbecome a national hero when as mayor of thecity of Essen in the Ruhr valley, he had de-fied occupying French and Belgian troops.But for all his exploits as a doughty little bur-gomaster, Luther was a cold, colorless,

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straitlaced figure, suspicious of Schacht’sreputation for sailing too close to the wind.He had initially opposed Schacht’s nomina-tion, but when the two other bankers whomhe first approached turned him down, he felthe had little choice.

That morning Luther formally offeredSchacht the position of currency commis-sioner. Though Schacht pretended that heneeded time to think the matter over, whenLuther demanded an immediate reply, he ac-cepted with, as one historian describes it, “anenthusiasm suitable to the as-yet-to-be re-vealed dimensions of his ambition.”

Schacht came to the job with an array ofqualifications. He was well known and ad-mired in foreign banking circles, an attributethat would become very important whenGermany had to go through its next cycle ofwrangling over reparations. He was suppor-ted by the center and the left. In addition, itwas rumored that Jacob Goldschmidt,

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powerful in Democratic Party circles andkeen to oust Schacht from the Danatbank,was actively lobbying to kick him upstairs.

The post he assumed carried with it unpre-cedented powers. He was given cabinet rank;was to be invited to all its meetings; andmost important, had the right of veto overany measures that had implications for thecurrency, a veto that could only be overrid-den by a majority of the cabinet.

Less grandly, for his office he wasprovided with a room in the back of the Fin-ance Ministry that had once been a broomcloset. It was dark, confined, and bare exceptfor a writing table and a telephone. Heagreed to take no salary, insisting that his$100 a month go to supplement the meagerofficial $50 a month of his secretary,Fräulein Steffeck, whom he had brought overfrom the Danatbank and who was his singledirect employee.

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The plan was to introduce a totally newcurrency, the Rentenmark, to be backed notby gold but by land. The bank issuing thenew currency was granted a “mortgage” onall agricultural and industrial property, onwhich it could impose an annual levy of 5percent—in effect, a tax on commercial realestate.

Despite his new position, Schacht was asskeptical about the new plan’s chances ofsuccess as almost everyone else in Germany.From the very first, he had scoffed at the ideaof a land-based currency as a pure confid-ence trick; currencies had to be backed by ahighly liquid, easily transferable, interna-tionally acceptable asset, such as gold. Hefound it hard to believe that someone beingpaid in the new currency would derive anycomfort from the theoretical promise thatthose currency notes were ultimately con-vertible into some slab of inaccessibleThuringian woodland or Bavarian pasture or

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perhaps of a Communist-riddled Saarfactory.

During the debate on the various currencyreform plans, Schacht had forthrightly ar-gued for gold as the foundation for a newcurrency. While no one could challenge thetheoretical basis of his logic, the fatal diffi-culty had been that Germany simply did nothave enough gold for the job. Before the war,the country had had a circulating currency of$1.5 billion, backed by just under $1 billionin gold. After five years of reparations andcurrency collapse, less than $150 million ingold remained. Moreover, the modestamount Germany did possess was in thehands of the Reichsbank, whose president,Rudolf von Havenstein, had been adamantthat he would not part with an ounce to sup-port something over which he had no con-trol. While Schacht, usually a realist, hadsuggested that Germany try to build up itsgold reserves by borrowing abroad, few

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people believed that a country that had de-faulted on reparations the previous year andwas now partly occupied by foreign troopswould get even a hearing from internationalbankers.

The most important, perhaps the defining,characteristic of the new currency was notthat it theoretically rested on land, but thatthe amount to be issued was to be rigidlyfixed at 2.4 billion Rentenmarks, equivalentto around $600 million. Grasping that thekey to its credibility was to keep it suffi-ciently scarce, Schacht was determined toensure that the amount in circulation did notexceed its statutory ceiling under any cir-cumstances. And though he encounteredconsiderable political pressure to relent, in-cluding from his cabinet colleagues, he stuckto his position. He was obstinate, almostbrutal, about turning down loan requestsfrom everyone—government agencies, muni-cipalities, banks, or big industrialists.

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Fräulein Steffeck has left a vivid picture ofSchacht in those first few days:

He sat on his chair and smoked in hislittle dark room at the Ministry of Fin-ance, which still smelled of old floorcloths. Did he read letters? No, heread no letters. Did he write letters?No, he wrote no letters. But he tele-phoned a great deal—he telephoned inevery direction and to every Germanand international place that had any-thing to with money and foreign ex-change. And he smoked. We did noteat much during that time. We usuallywent home late, often by the last sub-urban train, traveling third class.Apart from that he did nothing.

He took great pride in this portrait, whichhe never tired of repeating. He relished theimage it evoked of the maverick financialgenius operating masterfully on his ownwhere established bankers had failed.

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For VON HAVENSTEIN, the news ofSchacht’s appointment was the final humili-ation. Though for the last five years he hadpresided over the single greatest debasementof a currency in history, he still refused to ac-cept responsibility for the debacle. He keptinsisting that it was not his fault but the res-ult of government mismanagement and theAllies’ extortionary demands.

When Stresemann came to power inAugust 1923, he tried to persuade VonHavenstein to go of his own accord, arguingthat the public had lost all confidence in thecurrency, and that to reverse this requirednot just a new medium of exchange but anew president of the Reichsbank. VonHavenstein had categorically refused. ByNovember, the chorus of demands that heresign had spread all the way across the

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political spectrum—everyone except thefurthest-right nationalists. Only a few daysearlier the leading industrialists had brandedhim the “father of the inflation.” But theReichsbank Autonomy Law of July1922—ironically enacted at the insistence ofthe British, who hoped, by making theReichsbank independent of the government,to curb inflation—had given the chief archi-tect of inflation tenure for life.

No one could understand why Von Haven-stein, who prided himself on his sense of ser-vice, clung so desperately and so humiliat-ingly to office in the face of such clamor. Buthe kept repeating that if he went, thingswould only get worse—how, very few peoplecould see. In many ways it was precisely hispride as a public official that prevented himfrom resigning and thus acknowledging re-sponsibility for the destruction of the markand, with it, the savings of so many God-fearing Germans like himself. The most he

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would concede was that he might resign aftera decent interval of several months so as to“preserve his honor.”

Saddled with Von Havenstein, Stresemannhad simply bypassed him by creating the in-dependent Currency Commissionership out-side of the Reichsbank. And so, when thenew currency was introduced on November15, 1923, Germany found itself in the curiousposition of having two official curren-cies—the old Reichsmark and the new Rent-enmark—circulating side by side, issued bytwo uniquely parallel central banks. At oneend of town was Schacht, operating from hisconverted broom closet; at the other, VonHavenstein, holed up and increasingly isol-ated and irrelevant in the Reichsbank’s im-posing red sandstone building on Jager-strasse. Although the Reichsbank had nowstopped providing money to the government,its printing presses still continued to roll out

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trillions of Reichsmarks to privatebusinesses.

Neither Schacht nor Von Havenstein madeany attempt to communicate with the other.The contrast between the two could not havebeen greater—Von Havenstein, a true gentle-man of the old school, kind, courteous, butcompletely out of his depth; and Schacht, thearrogant upstart, quite prepared to confrontthe financial establishment, and not caringon whose toes he trod.

The whole justification for the new cur-rency was to provide a stable alternative tothe collapsed Reichsmark. The question im-mediately arose: At what rate could peopleconvert their Reichsmarks into Renten-marks? On November 12, the Reichsmarkwas trading at 630 billion to the dollar. Someargued that the rate of conversion should befixed at that point, but Schacht decided towait. The black market price was still falling,and he wished to allow the selling to exhaust

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itself before he committed to a rate of con-version. Every day the Reichsmark plungedfurther, and every day he insisted on holdingback. On November 14, when it fell to 1.3trillion, he did nothing. A day later, it was at2.5 trillion and still he sat on his hands. Fin-ally, on November 20, when the Reichsmarkstood, if that is the word, at 4.2 trillion to thedollar, he fixed the conversion rate at 1 tril-lion Reichsmarks to a Rentenmark.

The decision to wait those extra days, al-lowing the old currency to sink by another80 percent, was a brilliant tactical move. TheReichsmark became so worthless that thegovernment was able to buy back its manytrillions of debt, valued at $30 billion whenfirst issued, for only 190 million Renten-

marks, equivalent to about $45 million.22

For the next few days, marks, both newand old, continued to fall on the black mar-ket. On November 26, the Reichsmark was

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trading at 11 trillion to the dollar in Cologne.Then the strangest thing began to happen.The exchange rate began to reverse itself. ByDecember 10, it was back at 4.2 trillion to thedollar. Within a few days prices stabilized.

When prices were so insanely rising, theaverage German had done everything hecould to get rid of any cash he received asfast as possible. Now this spiral reversed it-self. As prices began to hold and then fall, itbecame profitable to hang on to cash. Farm-ers, their confidence in money restored,began bringing produce to market, food re-appeared in the shops, and those intermin-able queues began to melt away. Lordd’Abernon, the British ambassador, wrote ofthe “astonishing appeasement and reliefbrought about by a touch of the magicalwand of “Currency Stability. . . . The eco-nomic détente has brought in its train polit-ical pacification—dictatorships and putschesare no longer discussed, and even the

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extreme parties have ceased, for the mo-ment, from troubling. ”

Not all of this was Schacht’s doing. Strese-mann and his cabinet colleagues backed theRentenmark with a series of budgetarymeasures, suspending all subsidy paymentsto workers in the Ruhr, firing a quarter of thegovernment workforce, and indexing alltaxes to inflation, thus eliminating the in-centive for taxpayers to delay payment. ByJanuary 1924, the budget was balanced. Butit was Schacht who received the prime credit,feted in the press as “The Wizard” or the“Miracle Man.”

MAX WARBURG ONCE remarked that hesupported Schacht because “he always hadgood luck.” That good fortune once moremanifested itself. In early November, VonHavenstein took a few days’ leave of absence,

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in order to get out of Berlin during the humi-liation of Schacht’s appointment; but he wasalso known to be seriously ill. In mid-November, he returned to his official apart-ment on the top floor of the Reichsbank. OnNovember 20, the day that Schacht fixed theconversion value of the new currency, VonHavenstein after a late evening meeting withhis board, suddenly collapsed and died of aheart attack at 3:30 a.m. He was sixty-six.

There was something terribly tragic aboutthis deeply well-intentioned man. Not simplya dutiful bureaucrat, he was by all accounts awonderful human being, to Max Warburg“an extraordinarily sympathetic personality,with an unbending sense of duty and honor-able character.” He was universally admired,kind, principled, and considerate, always liv-ing up to the highest virtues of his class. Dur-ing the war, while most households supple-mented their rations by buying under thecounter, Von Havenstein not only refused to

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use the black market, but even donated someof his own paltry bread and meat rationstamps to the poor. In the last year, however,he seemed to have lost his grip on real-ity—some said that the pressure he was un-der had made him prematurely senile—andfew mourned his passing.

While Schacht was Von Havenstein’s logic-al successor, his unusual gift for making en-emies continued to dog him. The strongestopposition came from within the Reichsbankboard, which considered him an unprin-cipled interloper. The whole Belgian episoderesurfaced all over again. The only rival can-didate, however, was Karl Helfferich, who aswartime secretary of the treasury had beenresponsible for the disastrous policies thathad left Germany so buried under debt. Helf-ferich’s political views, allied to a taste forpolemics, had propelled him into the van-guard of the right-wing nationalists. Becauseof his vicious ad hominem attacks on

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democratic politicians, he was blamed for in-stigating the wave of assassinations by para-military vigilantes. Whatever reservationspoliticians of the center and left who formedthe backbone of the government might haveheld about Schacht, he was infinitely betterthan Helfferich. On December 20, Schachtwas appointed president of the Reichsbank.

But despite the early success of the cur-rency reform, Schacht was acutely aware thatGermany’s problems would not be solved byits efforts alone. Monetary stability was sus-tainable only while Germany could stall pay-ing reparations. Ultimately, it would have tostrike a deal with the Allies and resume somepayments; and at that point, the mark wouldbegin to plummet again.

Schacht believed, moreover, that the Rent-enmark, based as it was on the fictional se-curity of land, could only offer a temporarysolution, “a bridge between chaos and hope,”as he called it. Ultimately any stable German

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currency would have to be backed by gold.Since the Reichsbank held less than $100million of the metal, wholly insufficient asthe basis for an economy the size of Ger-many’s, he would have to find some way ofborrowing from abroad to bring the goldbacking to an adequate level.

The United States was the obvious place togo—of all the powers after the war, it was theonly one with surplus capital. But for thepast three years it had withdrawn fromEuropean affairs, though there were somesigns that it was waking up to the need toreengage. During his first few days in office,Schacht received some encouraging signalsthrough many intermediaries, such as Ger-ard Vissering, the governor of the Neder-landische Bank, that Montagu Norman at theBank of England was keen to find some wayof bringing Germany back into the worldeconomy. Norman had to be one of the keysto reestablishing Germany’s credit abroad.

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No major bank, in either London or NewYork, would think of lending money to Ger-many without a nod from him. Schacht’s firstaction after taking over at the Reichsbankwas to bring his family back from Switzer-land; the second was to arrange a meetingwith Norman in London.

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11. THE DAWES OPENING

Germany: 1924

Be extremely subtle, even to thepoint of formlessness.Be extremely mysterious, even to thepoint of soundlessness.Thereby you can be director of theopponent’s fate.

—SUN Tzu, The Art of War

SCHACHT ARRIVED at Liverpool StreetStation in London on the boat train fromBerlin at 10:00 p.m. on New Year’s Eve,1923. London café society was back in full

swing after the war, the streets crowded withrevelers. Schacht had arranged to be met bythe economic counselor at the German em-bassy, Albert Dufour-Feronce. As he steppedoff the train, he also found waiting “a tallman with a pointed grayish beard andshrewd discerning eyes” who, much toSchacht’s surprise, introduced himself asMontagu Norman. “I do hope we shall befriends,” Norman said confidingly in his softvoice as he led Schacht to a cab. Before theyparted, Norman insisted that they meet atThreadneedle Street the following morning,even though it was a holiday and the wholeCity would be shut.

Schacht was taken aback by the warmth ofhis welcome and was even more bemusedwhen he learned from Dufour-Feronce howkeen the governor had seemed to establish apersonal bond with his German counterpart,insisting, “I want to get on well with him.”

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Schacht was more than flattered that Nor-man would turn out to welcome him on acold and foggy December evening when mostpeople were celebrating. After all, he was thesupplicant come to enlist help with the Ger-man economic crisis. He was also touched bythe graciousness of the gesture. After thewar, loathing of things German had run highacross Europe, and Schacht had become ac-customed to slights and petty insults by Al-lied officials when he traveled abroad.

The next day Norman collected Schachtfrom the Carlton Hotel in Mayfair and theymade their way to the Bank through theempty streets. Covering a full block at thecorner of Threadneedle and Princess streetsin the heart of the City, the Bank, surroun-ded by a forty-foot windowless wall toppedby balustrades, looked like some medievalcitadel. One entered this fortress throughtwo great bronze doors, behind which, hid-den from public view, lay a labyrinth of

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colonnaded courtyards and domed bankinghalls. By the entrance rose a giant rotundamodeled on the Pantheon in Rome, and nextto it was a beautiful private garden with afountain and a lime tree, planted in thespring with hundreds of flower bulbs. It wasa most unusual setting for the headquartersof a central bank and very unlike the sternofficial-looking building from which Schachtnow operated.

After the enormous wartime expansion ofthe Bank’s activities, the halls and courtyardswould normally have been as bustling andovercrowded as a bazaar with young clerks,bill brokers, and top-hatted bankers from thediscount houses scurrying between the Bankand the investment firms located in thenearby streets and lanes. But that day thewarren was silent and deserted, like somevast disused stage set. The governor’s roomwas on the ground floor, overlooking aprivate courtyard. Norman, with his

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unbankerly taste for solitude and no familyto hold him at home, could often be foundhere on weekends and holidays. Decorated ina neoclassical style, with paneled walls and amagnificent fireplace, the room was domin-ated by a large square mahogany table in thecenter. Instead of using a desk, the governorworked from this table, which was clear—nopapers, just two phones. As the two mensettled down for the day, they might havebeen sitting in the master’s study of somehistoric Oxford college.

After spending much of the morning dis-cussing the German situation, Schacht finallygot to his main object in coming to London.Though the Rentenmark was for the momentstable, it was not yet acceptable to foreigners,and hence could not provide the basis forloans to import goods from abroad. True re-covery depended on getting internationalcommerce moving again. Schacht proposedthat the Bank of England lend a certain

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amount of capital to a new subsidiary of theReichsbank to build up its sterling reservesand funds. He was asking for a mere $25million, which, supplemented by a further$25 million that he hoped to raise from cap-ital held abroad by German banks, would beenough to give the new subsidiary access tothe London market and provide the nucleusfor as much as $200 million in loans.

This was a typically bold Schacht propos-al—given the circumstances, almost out-rageous. Germany was essentially bankrupt.It had destroyed its own currency, owed theAllies over $12 billion in reparations—andhad defaulted on these—was partially occu-pied by French and Belgian troops and nowon the verge of disintegration. Schacht him-self had barely been in office for two weeks;had been appointed in the teeth of fierce op-position, especially from within his own in-stitution; and had yet to put his stamp on theplace. For the Bank to lend money to

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Germany and a deeply divided Reichsbank inthe current circumstances would be almostfoolhardy. Norman could not help being im-pressed with the audacity of his newacquaintance.

Both men knew that a loan at this momentfrom an institution with the authority andprestige of the Bank of England would rep-resent a dramatic gesture of support for Ger-many, and for Schacht personally. Therecould be no better seal of approval anywherein the banking world, one that might in itselfset in train a self-reinforcing migration ofmoney back into the country.

Norman had been trying over the years tofind a way to help Germany. He had beenshocked by the extent of the collapse of theGerman currency. In 1922, Von Havensteinhad come to see him for help. Though he hadfound his visitor to be “quiet, modest, con-vincing, and [a] very attractive man: but sosad. . . (with) an attitude of almost

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hopelessness,” he had declined to get in-volved, believing that the old president wasnot up to the task.

One element in Schacht’s plan was spe-cifically designed to appeal to Norman: theproposal to base the new bank on the poundsterling. Not only was its capital to be de-nominated in sterling, it would make loansin sterling, and perhaps issue bank notes inpounds to circulate in Germany. Normanhad been working to strengthen the poundby having other European central banks holdsome of their reserves in sterling rather thangold. He had so far had some modest successwith the idea. Austria and Hungary, like Ger-many ravaged by postwar inflation, had bothpegged their currencies to the pound. Butthey were small nations of little economicsignificance. To bring a country such as Ger-many, despite its troubles still the largesteconomy within Europe, into the ambit of

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the pound would enormously bolster ster-ling’s faltering position.

Schacht’s grasp of the multiple dimensionsof the situation, his virtuosity in matters offinances, and his determination clearly im-pressed Norman, who agreed to the Germanplan after a single night’s reflection. Duringthe next few days he shepherded Schachtaround the City to introduce him to the dir-ectors of the Bank. Few took to Schacht,finding him to be a pompous blowhard. Butfor these two polar opposites—the Germanparvenu, with a direct and aggressive style,and his English guide, with his old-fashionedmanners and elliptical ways of thinking andtalking—it was the beginning of a genuineand enduring friendship.

For four years, Norman had stood on thesidelines and watched powerlessly as thesituation in Germany had progressively de-teriorated. With Schacht’s arrival on thescene, however, he had found reason for

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hope. On January 7, three days after Schachtleft London, he wrote to Strong, “You know,of course, how precarious the position ofGermany has been. . . . None the less we aredisposed to believe that there is now achance, and probably the last chance, of pre-venting a complete collapse. The new Presid-ent of the Reichsbank has been here for sev-eral days. He seems to know the situationfrom A to Z and to have, temporarily, morecontrol of it than I should have believed pos-sible: he is acting more resolutely than hispredecessor, Havenstein.”

WHILE SCHACHT AND Norman were con-cocting their scheme, a team of American“experts,” with even greater ambitions to re-solve the problems of German finances, wasin mid-Atlantic steaming toward Europe onboard a liner. Over the years, Germany had

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had no shortage of foreign “experts” willingto tell it how to stabilize its currency. TheBritish ambassador, Viscount d’Abernon,himself a currency expert, remarked that onarriving in Berlin, these advisers would beinvited to “entertainments after dinner—likeactresses with doubtful pasts,” thereaftergenerally to meet a “sad fate. During life,they empty every room in which they holdforth, and death finds them in madhouses.”The monetary technicians had universallyfailed because it was not intellectual but fin-ancial help that Germany needed. This time,however, the “experts” were Americans,coming with the blessing of the U.S. govern-ment and the promise, so everyone hoped, ofAmerican money.

Though the United States, frustrated byEurope and its quarrels, had withdrawn fromactive involvement in world affairs, there re-mained a faction within the administration,led by Herbert Hoover, the secretary of

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commerce, and Charles Evans Hughes, thesecretary of state, who had continued topush for some degree of engagement in thebelief that European recovery was essentialto American prosperity. In October 1923,Hughes took advantage of a Europe-widemood of exhaustion with the issue of repara-tions to propose the creation of a new com-mittee of experts. It was to include someprominent Americans, although in deferenceto the country’s isolationist state of mind,they were not to have any official standingbut were to act as concerned private citizens.

Even Raymond Poincaré, the Frenchprime minister, recognized that by invadingthe Ruhr, he had overplayed his hand andthat France was for the present a spent forcewithin Europe. He consented to the proposalsubject to one firm condition: under no cir-cumstances was the committee to reconsiderthe total amount of reparations agreed to byall parties. The word reparations was not

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even to appear in the committee’s remit. Itwas only to be asked to consider “the meansof balancing the budget and the measures tobe taken to stabilize the currency,” though noone could quite fathom how it was to accom-plish these tasks without addressing the un-mentionable issue.

On November 30, 1923, the ReparationsCommission announced the appointment oftwo international committees of experts—thefirst to consider how to balance the Germanbudget and stabilize the currency, the secondto investigate how much German capital hadbeen exported. The first and more importantwas to be composed of ten men, two eachfrom the United States, Britain, France, Bel-gium, and Italy. All Europe now awaited thearrival of the Americans.

The leader of that delegation was CharlesGates Dawes, a Chicago banker, who had ris-en to the rank of brigadier general whileserving in France with the American

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Expeditionary Force and had gone on to be-come the director of the budget in the Hard-ing administration. He was a straight-talkingmidwesterner with a long basset hound facewho smoked an underslung SherlockHolmes-style pipe and peppered his conver-

sation with picturesque swearwords.23 Askedby reporters, as he was preparing to embark,whether he was hopeful that reparationswould ever be paid, he replied, “None of yourdamned business. It’s no use you fellows get-ting brain fag by thinking up conundrums toput to me before the ship sails, because I donot intend to answer them. I can tell you thatI am paying my own fare to France, and amnot receiving any pay for my services on thecommittee.” When the reporters kept press-ing him, he roared back, “Hell and Maria, goaway from me, I am about to lose mytemper.”

His fellow expert was Owen D. Young, afarm boy from upstate New York who at the

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age of forty had become president and chair-man of the board of the General ElectricCompany, the tenth largest company inAmerica, and was now also the president ofthe Radio Corporation of America, thedarling of Wall Street. Young, tall, and lanky,with thinning black hair and the “hollowdeep-set eyes of an ascetic,” was a contrast tothe garrulous Dawes, a man of few but well-chosen words. Both he and Dawes werewealthy men who not only refused to acceptany compensation for the assignment butalso insisted on paying their own expenses.

Though the American party was eagerlyawaited in Europe, few people gave the com-mittees much chance of success. The gapbetween the Germans and the Frenchseemed unbridgeable. The Germans arguedthat the collapse of the mark was proofenough of their bankruptcy and that forthem to pay reparations was impossible. TheFrench, by contrast, saw the collapse of the

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mark as evidence of capital flight from Ger-many. How could it claim to be bankruptwhen so many rich Germans seemed to bewandering around Europe? Every newspaperwas filled with stories of German nouveauxriches flaunting their newly acquired wealthin foreign watering holes, calling attention tothemselves by their bad manners and flag-rantly conspicuous consumption. The Britishwere caught in the middle. Since the occupa-tion of the Ruhr, public opinion had shifteddecisively in favor of Germany, which theFrench were seen to be trying to dismember,using reparations as an excuse. The Britishgovernment argued that reparations had tobe scaled back.

It was hard to see how a committee oftechnical experts, even if it did include someprominent Americans, could get the variousparties to agree. After all, the premiers ofGermany, France, Britain, Belgium, and Italyhad met at least a dozen times—at Spa, at

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San Remo, at Cannes, and several times atconferences in Paris and London—withoutbeing able to find common ground, leaving atrail of failed negotiations, torn-up agree-ments, and bitter ill feeling.

Moreover, with the passage of time, the is-sue had become hopelessly entangled andcomplicated. The commission itself had heldsome four hundred sessions since its cre-ation in 1919. The two Americans were ama-teurs who knew very little about the technic-al details, but each represented that new anddistinctively American breed, thebusinessman-turned-political-troubleshoot-er who was much like his cousin, the WallStreet-lawyer-turned-diplomat. They weredown-to-earth practical men who, thoughthey might know little about the preciseproblem at hand, prided themselves on theirability to cut through rhetoric and obfusca-tion, and come up with a solution by

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applying simple old-fashioned Americancommon sense.

On the transatlantic voyage, the Americanteam—General Dawes; his brother Rufus,who was to be the committee’s chief of staff;Owen Young; and various aides secondedfrom government departments in Washing-ton—debated their strategy. Some arguedthat the committee should cut through theconfusion and go directly to the heart of thematter—explicitly recognize that Germanysimply could not pay what was demanded ofit, estimate what it could come up with, andrecommend that figure as what it should pay.

Young took the position that the simpleand direct approach would not work. Thetotal figure for reparations, $12.5 billion, wastoo politically charged a number, particularlyin France. Tampering with it would inevit-ably lead to confrontation. To challenge theFrench at this stage of the negotiationswould bog them down in the sort of

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wrangling that had produced no results forthe last three years. Instead, Young proposedthat the committee focus on the very limitedbut achievable goal of reducing the amountGermany would have to pay in the immedi-ate future to a more manageable level.

The committee should jettison the wholeconcept of “capacity to pay,” he argued. Itwas impossible to know what this numberwas. Too many imponderables entered intothe calculation, involving such questions as:How much could taxes be raised withouttriggering mass protest? How tightly couldimports be squeezed without precipitating acollapse in production? How far could wagesbe reduced without provoking labor unrest?No one could agree on the answers to suchcosmic questions. What was needed was acompletely new approach to the problem.

In its place, he proposed an alternative cri-terion: the German public should be re-quired to shoulder the same tax burden as

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British and French taxpayers. Britain andFrance had to tap their tax revenues to payinterest on their own internal debts. Ger-many had inflated away its internal publicdebt—the Germans, therefore, had a naturalsurplus from which they could afford to payreparations. Here was a principle that waseasily quantifiable, would be viewed as fair inthe court of world public opinion, and wouldbe hard for Germany to argue against. It in-jected “both the element of novelty and a de-fensible moral principle” into the wholediscussion.

Landing at Le Havre on January 7, theAmericans traveled by train to Paris, wherethey checked into the Ritz. On January 14,the ten-man expert committee held its firstmeeting at the offices of the ReparationsCommission, housed in the Hotel Astoria, aBelle Époque hotel de luxe situated at the topof the Champs-Élysées by the Arc de Tri-omphe. Before the war, the hotel had been

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popular with rich visiting shoppers. But itsconveniently central location and wonderfulview of the Arc doomed it to spend the nextthirty years under constant requisition bywhichever government happened to be inpower. The German invasion plans of 1914had it earmarked for the kaiser’s Parisheadquarters. In August 1914, it had beenshut down by the French authorities becausethe owner was suspected of being a Germanspy. In 1919, it had provided one of thehomes of the two-hundred-strong Britishdelegation to the Peace Conference. In 1921,while all the other great hotels were profitingfrom the enormous influx of tourists drawnto Paris by the cheap franc, the Astoria was

taken over by the reparations commission.24

Though the Europeans were the mostknowledgeable on the technical details aboutreparations, the Americans came to domin-ate the proceedings. Dawes neither pos-sessed, nor pretended to, the financial

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expertise to unravel the tangle of claims andcounterclaims. He was the cheerleader of thecommittee, its public face, who used an ex-tensive network of friends within France ac-cumulated during the war to smooth rela-tions with the prickly French. The pressloved him. With his quaint pipe and his pic-turesque language—he called the Germannationalists “those foul and carrion-lovingvultures” and derided economic experts fortheir “impenetrable and colossal fog-bank”of opinion—he made great copy.

Young was the brains of the operation. Heand Dawes were joined by a third American,Colonel James Logan, Strong’s fraternitymate from The Family, who had first come toParis in 1914 and stayed on after the war andwas now the U.S. observer to the Repara-tions Commission. Through a combinationof charm and force of personality, he had be-come a figure of some renown in Parisian so-cial and diplomatic circles, entertaining so

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frequently at Voisins, the famous three-starrestaurant on the Rue Saint Honoré that itwas nicknamed “Logies” by visiting Americ-an diplomats. Though only an observer,without any official status, Logan had donemore than almost anyone else to keep theUnited States engaged in Continental affairsand was viewed as the unofficial U.S. ambas-sador to Europe.

As the committee began its deliberations,it found itself facing two tasks. The first wasto persuade the French to accede to a lowerpayment schedule, at least temporarily, towhich they would only agree if stringent for-eign controls were imposed on the manage-ment of German finances. The French sawGerman hyperinflation as part of a deliberatecampaign by its officials to wreck their owneconomy and thus prevent reparations frombeing paid. Some mechanism for preventingany future sabotage of Germany’s financeshad to be put in place. The second task was

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therefore to persuade the Germans to acceptsuch an imposition.

The first task became much easier whenwithin a week of the delegation’s arrival,France was plunged into its own financialcrisis. French finances since the war hadbeen a cross between those of Germany andof Britain. The war had cost it dearly—inblood and money. In the immediate after-math it was forced to spend $4 billion on re-constructing the liberated territories. Stillunreconciled to its enormous sacrifices, theFrench government refused to raise taxes topay for this, stubbornly clinging to the illu-sion that the costs would eventually be re-couped from Germany. “Les Bochespaieront” “The Krauts will pay”—was the re-frain. Like Germany, therefore, France hadbeen slow to bring its deficits under control;five years after the war, the government wasstill borrowing $1 billion a year.

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The French financial situation was exacer-bated by a hopelessly primitive system ofpublic accounts. Despite its much vauntedcorps of inspecteurs des finances, there werehuge gaps in its books and no one seemed toknow precisely how much had been spentduring the war, on what and by whom. It waseven hard to reckon the total amount of bor-rowings—in 1922, an audit discovered thatthe volume of National Defense Bonds issuedhad been overestimated by the equivalent of$500 million. Controls over money flowingin and out of the treasury were so rudiment-ary that during the coming crisis, in aswindle that was never to be solved, $150million of National Defense Bonds that weregenerally issued in bearer form and thereforeuntraceable, disappeared mysteriously fromthe treasury—in relative terms the equivalenttoday would be a fraud of $30 billion.

But unlike its German counterpart, theBanque de France was determined to

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reassert its independence after the war andrefused to float the government any longer.Though the French government was able toborrow in the open market because of thehigh savings rate of its citizens, most of thedebt was short term, had to be constantlyrolled over, and the government was forcedto live a sort of hand-to-mouth existence, al-ways nervous that suddenly its creditorswould get fed up and go on a lending strike.

Before the war, there had been just over 5French francs to the dollar. By the early1920s, following the wartime trebling ofFrench prices, the franc had stabilized atabout a third of its prewar level, about 15 tothe dollar. During the latter half of 1923, itbecame apparent that the invasion of theRuhr had been a failure and the likelihood ofFrance being able to cover its budget deficitfrom reparations was increasingly remote.By the beginning of 1924, the exchange ratehad fallen to 20 francs to the dollar.

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On January 14, the day the Dawes Com-mittee, as it was now being called, began itsdeliberations, the exchange value of the francplunged by around 10 percent in a singleday. Though it appeared to steady during thenext few weeks, it began falling again aftermid-February and in two days, March 6 and7, lost another 10 percent, reaching 27 francsto the dollar on March 8. There were scenesof pandemonium in the Salle des Banquiersat the Bourse as a wildly gesticulating crowdof currency brokers and bankers’ agentsfrantically tried to unload their francs.

The authorities were adamant that foreignspeculators, orchestrated in a grand conspir-acy by the German government, were toblame. Convinced that finance had becomewar by other means, officials resorted to mil-itary analogies. Prime Minister Poincaré de-clared in the National Assembly that he hadin his possession a secret document out-lining a “plan for an offensive against the

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franc,” which Stresemann was supposed tohave circulated to a conclave of Germanbankers at the Hotel Adlon. The “attack” wasto be “launched” from Amsterdam, whereGerman business houses had allegedly accu-mulated a reserve fund of 13 billion francs. Itwas reported in a U.S. newspaper that theLutheran pastors of America had received aletter suggesting that they urge their flock todump francs in order to “assist in bringingFrance to her knees.” The French were then,and would remain for many decades, ob-sessed with the specter of foreign speculat-ors. Keynes described their attitude in thepreface specially written for the French edi-tion the Tract on Monetary Reform: “Eachtime the franc loses value, the Minister ofFinance is convinced that the fact arises fromeverything but economic causes. He attrib-utes it to the presence of a foreigner in theneighborhood of the Bourse or to the myster-ious and malignant influences of speculation.

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This is not far removed intellectually from anAfrican witch doctor’s ascription of cattledisease to the ‘evil eye’ of a bystander and ofbad weather to the unsatisfied appetites ofan idol.”

On March 13, the French government an-nounced that J. P. Morgan & Co. had lent it$100 million on the security of its gold re-serves. The conditions attached were madepublic, including the usual clauses about thegovernment taking steps to balance itsbudget, reduce expenditures, and float nonew loans. But it was also rumored that Mor-gans, normally considered one of the mostpro-French of all American investmenthouses, had also secretly insisted that theFrench government bind itself to acceptingwhatever plan the Dawes Committee mightissue. Just the announcement of the loan wasenough to turn things around and the francrebounded from 29 to 18 to the dollar, an

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appreciation of more than 60 percent in twoweeks.

As for Germany, the Dawes Committeequickly recognized that much had changed inthe month since it had been appointed. Theeconomic situation had been transformed:the currency was stabilized and the budgetwas swinging back into balance. Meanwhile,everyone was acclaiming Schacht “the mir-acle worker.”

In the middle of January 1924, Schacht, bynow back in Berlin, received an invita-tion—he called it a “summons”—to appearbefore the committee in Paris. Arriving onSaturday, January 19, he made the first of hismany presentations to the experts at theHotel Astoria that same afternoon. As he saton a “stool of repentance” in the middle ofthe room, like a prisoner in the dock, withthe experts ranked before him like hangingjudges, it was hard for him to hide his re-sentment at his country’s future being

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determined in a converted hotel dining roomin Paris.

On Monday, January 21, he appearedagain for three hours, and testified the nextday as well. Although he grumbled that allthese presentations were taking him awayfrom the important business of getting theGerman currency into shape, he clearly rel-ished the spotlight. Speaking without notes,he described the situation in Germany in1919, “drained dry by the war”: the impact ofreparations and inflation, the currency re-form, the workings of the new Rentenmark,and the plans for the new gold discount bankhe was putting together. As he responded influent French or English to the committee’squestions, he found it hard to keep that inev-itable note of self-congratulation out of hisreplies. “His pride is equaled only by his abil-ity and desire for domination,” wrote Dawesin his journal that evening. Nevertheless, the

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committee could not help being impressedby his grasp of the situation.

Alerted from the start to the size ofSchacht’s ego—Dawes noting that the most“remarkable revelation of character” camewhen Schacht baldly told the commission,“As long he was President [of the Reichs-bank], he was the Bank”—the committeewent out of its way to court him and involvehim at every stage in their deliberations.

It decided that it was essential to getSchacht on board in any scheme of foreignsupervision of German monetary policy. Itdared not risk a confrontation that might un-dermine or derail his very successful effortsto stabilize the currency, thus provoking aflight of capital that would only compoundits difficulties; but it also feared that if it al-lowed him to get too far ahead of it in hisown plans, it might later prove difficult torein him in.

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In the space of only two months, Schachthad gone from being a relatively obscurebanker to becoming the key German officialto deal with, the man who could deliver. Al-exandre Millerand, the president of the re-public, invited him to the Élysée. It was evenstrongly suggested that he call on thegermanophobe Poincaré, instigator of theRuhr invasion. When Schacht declared thathe was open to such an invitation, he wastold that protocol required that he take theinitiative by requesting an audience. He dulycomplied, presenting himself punctually at5:00 p.m. one evening at Poincaré’s officeson the Quai d’Orsay; but when the primeminister kept him waiting for thirty minutes,Schacht, prickly as ever, stormed out andhad to be coaxed back by a group of alarmedfunctionaries.

On January 31, the committee of expertstraveled to Berlin by special train, the firsttrain to go directly from Paris to Berlin since

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the war, to see for itself the hardshipswrought thus far by reparations. German of-ficials, keen to ensure that the visitors obtainenough of an impression of their people’sprivations, arranged for the electricity in thehotels housing the commission to be deliber-ately shut off early.

In dealing with the committee, Schachtfaced a real dilemma. On the one hand, hewas enough of a realist to recognize thatwhile it needed him, he could not afford toalienate it. He could only go so far on hisown. Only a group of foreign experts wouldhave the stature to negotiate lower repara-tions or make it possible to mobilize a for-eign loan. Typically, though, one of hisbiggest concerns seems to have been that theforeigners might try to take the credit for hisachievements.

On the other hand, he remained convincedthat Germany could not afford to pay any-where close to the reparations envisaged by

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the London schedule. He believed that theDawes approach of not tampering with thetotal amount of obligations was fundament-ally flawed. For the moment, however, heheld his peace. Over the next few weeks,Schacht became the critical German inter-locutor for the committee when it came tofinancial reform and the Reichsbank. Al-though mutual interest kept both partiesscrupulously polite to each other, there nev-ertheless remained an undercurrent of ten-sion in their dealings.

On April 9, the committee issued its plan.As Young had insisted, it very deliberatelyavoided pronouncing either on the totalamount of reparations that Germany shouldowe or the period over which they should bepaid, but focused purely on what should bepaid over the next few years. It proposed thatGermany begin at $250 million in the firstyear, and progressively increase the amountto $600 million a year by the end of the

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decade. By one calculation, using someplausible assumptions about the total periodover which Germany might remain oblig-ated, the practical effect of the Dawes Planwas to reduce Germany’s debt from $12.5billion to around $8 to $10 billion.

But the plan’s most novel feature was toput in place an ingenious mechanism to en-sure that reparations could not underminethe mark as they had in 1922-23. The moneyto pay reparations was to be raised initiallyin marks by the German government andpaid into a special escrow account in theReichsbank, where it would fall under thecontrol of an agent-general for reparationswho would be responsible for decidingwhether these funds could be safely trans-ferred abroad without disrupting the value ofthe mark. The power was vested in this newoffice to decide how these funds should beput to use—whether to be paid out abroad,used to buy German goods, or even to

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provide credit to local businesses. The agent-general would be in a remarkably strong pos-ition, a sort of economic proconsul or vice-roy. To make his impartiality completelytransparent, the committee recommendedthat he be an American.

A second and ultimately the central fea-ture of the Dawes Plan was that a loan of$200 million be raised abroad to help paythe first year of reparations, to recapitalizethe Reichsbank and build up enough gold re-serves to jump-start the domestic economy.

Although the French pressed to move theReichsbank totally out of Germany, possiblyto Amsterdam, the rest of the committee re-cognized that this would be the ultimate hu-miliation, putting Germany on the samefooting as the indigent nations of Egypt andTurkey—in the words of one participant, itwould “turkify” the German economy. In-stead, the committee managed to persuadeall parties, even the French and the

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Germans, that the Reichsbank should bekept in Berlin but placed under the control ofa fourteen-member board, seven foreignersand seven Germans, one of whom would ofcourse be Schacht.

IN July 1924, the allies convened a confer-ence in London on how to implement theDawes Plan. It was the greatest gathering ofstatesmen since the Paris Peace Conferenceof 1919. Ramsay MacDonald, the first Social-ist prime minister of Britain, who doubled ashis own foreign secretary, presided. Amonghis guests were Édouard Herriot, the newRadical prime minister of France, the primeministers of Belgium and of Italy, and theambassador of Japan. The United States hadinitially planned not to attend, for fear of be-ing tainted by too close an association withreparations, then viewed as a horrible

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European disease. However, when the Brit-ish government allowed its official invitationto the United States to be leaked, theCoolidge administration, which had playedsuch an important part in getting the DawesPlan started, felt that it could not refusewithout undermining its own efforts, and de-cided on a public show of support. FrankKellogg, the white-haired U.S. ambassador toGreat Britain, was assigned to lead the U.S.delegation.

Such was the interest within the adminis-tration in the outcome of the Dawes Plan,that several cabinet members contrived tofind excuses to be in London. Charles EvansHughes, the secretary of state, arrived os-tensibly to attend the annual meeting of theAmerican Bar Association, while AndrewMellon, the secretary of the treasury, decidedthat this was an opportune moment to passthrough London for some grouse shootingand possibly to see his Savile Row tailor.

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Despite all these political luminaries, thecentral figures in the negotiations were to betwo bankers: Montagu Norman and ThomasLamont of J. P. Morgan & Co. Norman hadbeen at first skeptical of the Dawes Commit-tee. Asked by the prime minister to be one ofthe British delegates, he had begged off withthe excuse that he was too busy at the Bank.If past experience was anything to go by, anycommittee appointed by the ReparationsCommission was bound to get bogged downin political wrangling and would end updeadlocked. As he wrote to Strong, “It looksto me as if that Committee will be findingthemselves in great difficulties . . . it is clearthat there are as many angles of vision asthere are members on that committee.”

But during February and March, as thenature of the Dawes Committee’s recom-mendations gradually filtered out, he had be-gun to change his mind. The heart of theplan, and the reparations settlement it

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envisaged, was the international loan, overwhose terms, Norman realized, he was in aposition to exert enormous leverage.

The business of lending to foreign govern-ments was historically one of the more glam-orous aspects of banking. Before the war,lending had been firmly in the hands of twoBritish banks with long and storied histor-ies—Baring Brothers and Rothschilds.

Barings was the oldest merchant bank inLondon—the male descendants of all five ofthe sons of the original founder, ThomasBaring, now sat in the House of Lords. In1802, it had helped the U.S. government fin-ance the purchase of the Louisiana Territoryfrom a Napoléon desperate for cash. So greatwas its authority at one time, that the Duc deRichelieu in 1817 spoke of the “six mainpowers in Europe; Britain, France, Austria-Hungary, Russia, Prussia and BaringBrothers.”

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Rothschilds had had an even more event-ful history. The family had made its fortuneduring the Napoleonic Wars. With fivebranches of the family spread acrossEurope—in London, Paris, Frankfurt, Vi-enna, and Naples—it had the most extensivenetwork of contacts of any bank, and itssources of information were legendary. Onestory was that the family had learned, byhoming pigeon, of Napoléon’s defeat atWaterloo a day before the rest of London, in-cluding before the government itself, andhad made an enormous fortune by buying upgovernment bonds. The story was, in fact,seriously wrong—although Rothschilds didlearn of the victory before anyone else inLondon, it actually lost money from bettingthat the war would still go on for a while byhaving large amounts of gold bullion instock—but the myth remained. So great wasthe Rothschild mystique that the economistJ. A. Hobson, echoing a widely shared

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opinion, wrote in 1902 that no great warcould be “undertaken by any European state. . . if the house of Rothschild and its connec-tions set their face against it.”

But after the war, with London itself shortof capital, the Bank of England had had toimpose an unofficial embargo on foreignloans by British houses, and both banks wereshadows of their former selves. The mantleof “Banker to the World” shifted from Britainto the United States, though Americanmoney, unused to the vagaries of interna-tional politics, flowed in fits and starts. Thethree American firms that had come to dom-inate the sovereign loan market were the Na-tional City Bank, Kuhn Loeb, and—not thelargest but the most prestigious—J. P. Mor-gan & Co.

The House of Morgan had been powerfulbefore the war, helping to finance and re-structure the steel, railway, and shipping in-dustries; it had even bailed out the U.S.

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government in 1895 and saved the bankingsystem in 1907. But its business had beenlargely domestic. Pierpont Morgan himselfhad indeed been a well-known figure inEurope, and his father, Junius Morgan, hadhelped the French government raise moneyto pay the indemnity after the Franco-Prussi-an war of 1870; but in international ranking,J. P. Morgan & Co. had been a second-tierhouse.

The war had transformed its position.Chosen as the sole purchasing agent of boththe British and the French governments in1914, it had become a power unto itself. Itsfourteen partners, who sat together in a largegloomy common office where they couldoverhear one another’s conversations, nowsupposedly earned an average of $2 million ayear. When the war ended, Morgans becamethe natural conduit of American money intoEurope. Its status as one of the great powersto be reckoned with was confirmed in July

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1920, when a group of anarchists, instead oftargeting a head of state or government as itmight have done before the war, chose toplace a bomb outside the offices of J. P. Mor-

gan & Co. at 23 Wall Street.25 The partnerswere unscathed, but thirty-eight bystanderswere killed and another four hundredinjured.

No one exemplified the new role ofbanker-statesman better than Thomas La-mont, by 1924 the most senior partner afterJack Morgan. The urbane and ever-charmingLamont seemed to have been born under alucky star. The son of an austere Methodistminister, young Thomas had spent his youthgrowing up in New England village parson-ages, brought up to believe that dancing,playing cards, and even leisurely Sundaystrolls were sinful. He attended PhillipsExeter Academy and Harvard on scholar-ship, and became a financial reporter for theNew York Tribune, but finding it hard to

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raise a family on a journalist’s salary, heentered the food distribution business. LikeBenjamin Strong, a resident of Englewood,New Jersey, he had been plucked from ob-scurity by Henry Davison, whom he en-countered one evening on the commutertrain from New York and who is supposed tohave recruited him then and there assecretary-treasurer at Bankers Trust.

In 1911, following in Davison’s footsteps,Lamont was offered a partnershipby Pier-pont Morgan—then the most prestigious andlucrative job on Wall Street. Lamont initiallydeclined, saying that he wished to have thefreedom to travel for three months a year.But Mr. Morgan insisted and Lamont unsur-prisingly gave way.

His involvement, as a Morgan partner, inthe wartime finances of Britain and Francebrought him a place on the U.S. reparationsteam at the Peace Conference. After the war,though a Republican, he broke with the

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isolationist wing of his party and became acommitted internationalist. In those earlypostwar years, he was the financial emissarypar excellence. In 1920, he was in China andJapan; in 1921, in Mexico City as chairman ofthe International Committee of Bankers forMexico; in early 1923, in Europe planning aloan to Austria and advising the Italian gov-ernment. Everywhere he went he was re-ceived with the pomp and the deference dueto a head of state. In May 1922, when Davis-on suddenly died of cancer, Lamont steppedinto his shoes.

His outside activities not only reinforcedthe impression that here was a man of thenew aristocracy, they also added to his auraof effortless grace. He acquired AlexanderHamilton’s old newspaper the New YorkEvening Post and helped start and financethe Saturday Review of Literature. He hadfriends who were writers—at his dinner table

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one might find H. G. Wells or André Mauroisor John Masefield.

Just before the conference was to open,Lamont was dispatched to London with awatching brief for the House of Morgan dur-ing the negotiations. He quickly fell underthe spell of Norman, who seemed to have anuncanny ability to take visiting Americanbankers under his wing and fashion them tohis own ends. Though Norman suddenly col-lapsed from “nervous exhaustion” just as theconference was about to open and laybedridden for a week, by July 15, he was backin the thick of the action.

At the invitation of Prime MinisterMacDonald, the two bankers set forth themain conditions that investors would de-mand before lending money under theDawes Plan. Recognizing that those whowould provide the capital had enormousleverage, Norman insisted that neither Brit-ish nor American bankers touch the loan

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“until the French are out of the Ruhr bag andbaggage”; and to preclude any further suchpreemptive and unilateral military actions byFrance, the right to declare Germany in de-fault of its payments was to be vested, not inthe Reparations Commission, dominated asit was by the French, but in an independentagency to be run by a neutral American.

For the next four weeks the negotiationscentered on these two points. Every time thepoliticians seemed about to stitch together acompromise, and to paper over their differ-ences, the two bankers—led largely by Nor-man, although Lamont was the spokes-man—would return insistently to these coreproposals, which, they kept reiterating, werenot political dictates set by some hiddenmoney power but simply the most element-ary conditions that any investors would re-quire as security before committing capitalto Germany.

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Prime Minister MacDonald, a Socialist anderstwhile pacifist, with a jaundiced view ofbankers and their motives, tried to bully thepair with denunciations of their meddling inpolitics. Owen Young tried to browbeat theminto softening their conditions, threateningto go around Morgans and arrange a loanthough Dillon Read. All to no avail.

The leader of the French delegation, PrimeMinister Herriot, by background a historianmore at home in the Left Bank literary salonsof Paris than laboring over financial minuti-ae in a conference room, came to the negoti-ating table radically unprepared and foundhimself outfoxed at every turn. A passionateand emotional intellectual, he injected a cer-tain operatic quality into the proceedings bymore than once publicly bursting into tearsof frustration. He was constantly at oddswith his forty-man team, a motley crew ofcabinet colleagues, Socialist deputies, andprovincial Radical committee presidents, a

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“swarming, gesticulating, vociferous horde”of amateur diplomats, who turned the lobbyof the French embassy in London into “apublic meeting hall without a chairman toarbitrate disputes and without police tothrow out the disorderly.” At one point, Her-riot and his minister of war, General CharlesNollet, got into such a long altercation at anevening meeting at 10 Downing Street thatMacDonald declared an adjournment andwent to bed. Even then, the two Frenchmencontinued to harangue each other as they leftthe building, and stood screaming insults ateach other in the middle of Downing Street.

Herriot called upon Lamont at his resid-ence in Audley Square to plead with him, re-minding him of the historic ties betweenFrance and the House of Morgan, but La-mont refused to make any concessions. In-stead, over the next few weeks, Lamonttightened the screws by making it clear thatunless the French became more amenable,

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Morgans might find it extremely difficult toroll over the loan it had raised for them earli-er in the year.

The humiliating spectacle of Anglo-Saxonbankers dictating to their politicians infuri-ated French public opinion. The Parisian pa-per Le Petit Bleu declared that “Europe shallnot become a vast field of exploitation withits only government a vast bankers’ com-bine.” Edwin James of the New York Timesreported that many Frenchmen were con-vinced that “America’s only purpose is tomake some more money out of Europe’s mis-fortunes, and that instead of helping Franceget reparations, the Americans are workingon Shylock lines for the preliminary loan.” Inthe United States, as highly respected anewspaper as the Springfield Republicancommented, “In the lean years that follow anexhausting war, financiers outrank generals.. . . No loan, no Dawes plan. No Dawes plan,

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no settlement. No settlement, no peace inEurope. . . .”

By the beginning of August the bankershad won. The only concession the Frenchwere able to extract was to delay their with-drawal from the Ruhr by a year. Germanywas invited to send a delegation to finalizethe arrangements. On August 3, the Germandelegation, led by Chancellor Marx and in-cluding Gustav Stresemann, now foreignminister; Finance Minister Hans Luther;Secretary of State Schubert; and Schacht, ar-rived at the London Ritz. The first plenarysession took place on August 5—the firstformal meeting between the respective headsof the German and French governmentssince the Franco-Prussian war of 1870. Forthe next ten days, as the interminablewrangling began, the conference staggeredfrom one crisis to another, constantly ver-ging on the edge of collapse.

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The procedure for declaring a default spe-cified that sanctions could be imposed onlyin the event of a “flagrant” failure on the partof Germany to fulfill its obligations. The Ger-mans demanded a definition of flagrant.That bickering consumed a day. The Frenchhad agreed to withdraw from the Ruhr aftera year. The Germans wanted to know whenthe year would begin, and further demandedthat the evacuation be completed within ayear.

Finally, on August 14, the definitive termswere submitted to the German delegation,who were granted the night to accept or re-ject them. The Germans gathered in one ofthe rooms at the Ritz for an all-night session.Each of them spoke his mind. As dawn ar-rived, the chancellor went around the roomwith a last poll. All voted for acceptance, ex-cept for Schacht, who said, in his harsh Frisi-an accent, “We cannot accept the terms—wecan never fulfill them.” He insisted that the

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Dawes Plan’s failure to reduce the total levelof reparations was its fatal flaw. But it wasStresemann who had the final word. “Wemust get the French out of the Ruhr. Wemust free the Rhineland. We must accept.”

ON THE SURFACE, the Dawes Plan ap-peared to be the turning point for Europe.The wrangling over reparations, which hadconsumed the energy of officials for the lastfive years, seemed to be over. In September,the loan that formed the basis of the planwas successfully floated in New York andLondon. It started a boom in lending to Ger-many by American banks that was to fuel arecovery in its economy for the next severalyears and bring stability to the new currency.

Young, the true architect of the plan, hadbelieved that in the climate of bitterness andrecrimination prevailing in 1924, Europe

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would be able to improvise its way toward aneventual solution only by avoiding confront-ing its problems head-on. The plan hadtherefore very deliberately swept a wholeseries of issues under the carpet. The totalbill for reparations remained unspecified. Asa result, resentment within Germany contin-ued to fester just below the surface.Moreover, the new German prosperity de-pended on what Keynes described as “ agreat circular flow of paper” across the At-lantic: “The United States lends money toGermany, Germany transfers its equivalentto the Allies, the Allies pay it back to the Un-ited States government. Nothing realpasses—no one is a penny the worse. The en-gravers’ dies, the printers’ forms are busier.But no one eats less, no one works more.” Noone was willing to predict what would hap-pen once the music stopped.

Nevertheless, the initial fanfare associatedwith the plan did catapult Charles Dawes,

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hitherto a relatively obscure financier, tofame and fortune. In the summer of 1924,Coolidge selected him to be his runningmate; Dawes was elected vice president ofthe United States that autumn. For havingbought time for Europe and at least createdthe illusion that the Continent’s battles overmoney were finally over, he was awarded the1925 Nobel Prize for peace.

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12. THE GOLDENCHANCELLOR

Britain: 1925

“I never knew a man who had bettermotives for all the trouble hecaused.”

—GRAHAM GREENE, The Quiet American

By 1924, London had shaken off the grimausterity of the war years and was baskinghappily and prosperously, as Robert Gravesput it, “in the full sunshine of Peace.” Theshops were crowded, the theaters and

cinemas filled to capacity, the streetsjammed with traffic. Regent Street had beenmade over and transformed into a broadthoroughfare, its refurbished buildingsgleaming.

Whereas in Germany, a demobilized armyofficer might find his calling in a right-wingdeath squad, his counterpart in Britain hadplunged into commercial life—it was saidthat most of the fleets of motor buses thatjammed the streets of London were ownedand operated by syndicates of former armyofficers. There was a new freedom in the air.At night, in the West End, the bright youngthings who set the pace for London societyhad discovered dancing: the jog-trot, thevampire, the camel-walk, the shimmy, andmost infamous of all, the Charleston. That,and a modest relaxation in the wartimeliquor-licensing laws, had fueled an explo-sion in the number of nightclubs. On BondStreet was the Embassy Club, a favorite

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haunt of the Prince of Wales and the smartset. In the Haymarket was the fashionableKit-Kat Club, which boasted a dance floor forfour hundred and was where Edwina andDickie Mountbatten could be found mostevenings. At 43 Gerard Street was the moreraffish and bohemian “43” Club, frequentedby, among others, the crown prince ofSweden, Prince Nicholas of Romania, Tallu-lah Bankhead, Augustus John, and JosephConrad. In April 1924, in a scandal thatshook all London society, it was raided bythe police and one its members, the well-known London restaurateur “Brilliant”Chang, was arrested for running a cocainering.

But while London and the Southeast werecelebrating the return of peace and prosper-ity, not more than a hundred miles north ofthe capital was another country. The indus-trial heartland of Britain—the Midlands andthe North—was struggling while London

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danced. The great traditional industries—thecotton mills of Lancashire, the coal mines ofNottinghamshire and South Wales, and theshipbuilding yards along the Tyne—once theengines of the Victorian boom, but nowpriced out of world markets, had fallen into asevere slump. Textile exports were half ofwhat they had been in 1913, and it was thesame with coal. Over a million and a quartermen were unemployed and another millionwere on part-time work. In some places—thedreary colliery districts of Yorkshire or theblighted ship-building town of Jarrow—oneman out of every two was on the dole.

The irony was that Britain’s economictroubles were not the result of ineptitude orthe wages of financial sin but the unfortu-nate side effect of a high degree of financialpiety and rectitude. The decision to deflatethe economy in 1920 and 1921 to reversewartime inflation had partially succeeded.Prices came down by 50 percent from their

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postwar peak and the weakness in the cur-rency was reversed—the pound, which hadtouched $3.20, had rebounded fitfully anderratically to $4.30. But the price of financialorthodoxy had been stiff. While Britain hadrecovered from the recession of 1921, the re-bound had been muted. The City of London,finding it difficult to compete with New Yorkfor funds, had been forced to impose a re-gime of high interest rates, and unemploy-ment remained stubbornly stuck above 10percent.

The comparison between Britain andFrance was striking. Solid conservative Bri-tain had pursued the most orthodox andprudent financial policies of any Europeanpower, refusing to inflate its way out of debtor to allow its currency to collapse, and hadbeen rewarded with the highest unemploy-ment rate in Europe and a limping economy.By contrast, France had been invaded duringthe war, suffered the highest ratio of

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casualties of any country other than Serbia,and seen large tracts of its most productiveland leveled and destroyed. After the war,the French had resorted to inflation to light-en the burden of debt and to a weak franc tosteal a march on the British by cheapeningtheir goods. Though the government hadcontinuously staggered on the edge of insolv-ency since the war, the overall economy haddone well; exports had boomed. The numberof unemployed in France was a fraction ofthat in Britain. As one contemporary journ-alist summarized it, “While England is finan-cially sound and economically sick, France iseconomically sound and financially sick.”

All of this self-inflicted pain might havebeen worthwhile if in the process Britain hadbeen able to achieve its overriding postwareconomic objective: the restoration of thepound to its prewar pedestal. But even herethe rewards of virtue proved to be elusive

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By the fall of 1924, the pound was stuck.Having floated at around $4.35 for twoyears, it seemed unable to rise any further.Despite mass unemployment and high in-terest rates, prices in Britain still remainedstubbornly elevated compared to the UnitedStates. Even if by most calculations the dis-crepancy was only 10 percent, that last 10percent was proving to be the hardest.

Facing an economy in poor shape, pricesthat were too high, and a currency appar-ently stuck some 15 percent below its prewarparity, one school of economists argued thatthe authorities should abandon their doggedattempt to depress prices further and with itthe goal of restoring the prewar exchangerate. Any attempt in the current circum-stances to return to gold at the old paritywould just throw hundreds of thousandsmore people out of work. They argued that anew level for the pound should be selectedthat reflected the realities of postwar Britain:

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the changed international environment, thenew competition, Britain’s higher cost struc-ture, and the transformation in its interna-tional balance sheet brought about by war.

FIGURE 3

To Norman and the purists within theBank of England, this was unacceptable.They continued to press for a return to theold gold rate of $4.86, seeing it as a moralcommitment on the part of the British nation

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to those around the world who had placedtheir assets, their confidence, and their trustin Britain and its currency.

Even the most orthodox among them—likeNorman, who in 1918 had wanted to returnto gold the moment the guns stopped fir-ing—conceded that the time was not right.The Cunliffe committee of 1918 had origin-ally estimated that it might take as much as adecade for Britain to return to the goldstandard. In 1924, another committee, underthe chairmanship of Austen Chamberlain,also recommended a delay of some years.Britain’s economy was still not in shape towithstand the harsh medicine of a rise in itscurrency and the strictures of the goldstandard.

The success of the Dawes Plan had beenseen as a giant step in restoring financial or-der to continental Europe. The spotlight nowshifted to Britain and the pound. With themark stabilized and now fixed against gold,

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the universal question was: When wouldsterling follow? It was an uncomfortable pos-ition for Norman. He hated the prospect ofhaving to operate under the white light ofpublicity. As he complained to Strong, “Youknow how controversial a subject it is—andhow it is everybody’s business.”

He did worry that Britain was being leftbehind. Germany, Sweden, Poland, Austria,and Hungary had already returned to gold,while the Netherlands, Canada, Australia,New Zealand, and South Africa were all mak-ing plans to do so in the near future. Once allthese currencies were stabilized, it would behard to retain the pound’s financial and trad-ing preeminence. Merchants and investorswould soon begin looking for an alternative.His fears that the newly stabilized markmight become the strongest on the Continentand supplant the pound were echoed by oth-ers in the City who warned that further delaywould “hand over to Germany the financial

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scepter in Europe.” Even Strong began kid-ding him that sterling was “rather far behindin the procession.”

In November 1924, the political situationchanged suddenly and dramatically. Sincethe war, Britain had faced an unusual seriesof fragile coalition and minority govern-ments. The immediate postwar coalition ofConservatives and Lloyd George Liberals wasfollowed in 1922 by a Conservative govern-ment, initially led by the dying Bonar Law,and six months later by Stanley Baldwin. InJanuary 1924, a minority Labor governmentunder Ramsay MacDonald took over, butthat November, a wave of anti-communistsentiment, fueled by the publication of afraudulent letter linking the Labor Party tothe Soviet Union, led to a Conservative land-slide. Norman’s close friend Stanley Baldwinresumed the reins of power.

To everyone’s surprise, Winston Churchillwas appointed chancellor of the exchequer,

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the second most powerful position ingovernment.

No ONE WAS more taken aback by the ap-pointment than Churchill himself. He wasthen a few days shy of fifty. After a spectacu-lar early career—home secretary at the age ofthirty-five and first lord of the admiralty in1911—he had fallen on hard times. The de-bacle at Gallipoli in 1915 had been a turningpoint. Politically damaged, he had gone off tofight on the Western Front, continued to de-liver his brilliant speeches, and had becomea follower of Lloyd George; when the “WelshWizard” was ousted in 1922, Churchill hadlost his seat in Parliament and spent the nexttwo years trying to rehabilitate himself.

It was a daunting task. Within politicalcircles, he was almost universally distrustedas a man who had changed parties not justonce, but twice. In 1903, after the Tories had

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split over free trade and their political for-tunes seemed bleak, he had crossed the floorto join the Liberals, becoming a junior minis-ter in barely two years. Now again, in 1924,as the Liberals were being shunted into thepolitical wilderness, he had abandonedthem—although for the sake of form he didnot formally join the Conservatives for sever-al more years. Many people thought thatvaulting ambition and poor judgment werehereditary traits of the Churchills, echoingGladstone’s verdict, “There never was aChurchill, from John Marlborough down,that had either morals or principles.”

When Baldwin first offered him the chan-cellorship, Churchill himself was caught somuch by surprise that, for a moment, hethought he was being offered the position ofchancellor of the Duchy of Lancaster, a sine-cure office that served (and still serves) as ageneral utility post for junior ministers. Sokeen was he to return to power that he even

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toyed with the idea of accepting this position,which he had held a decade earlier in the af-termath of the Gallipoli disaster and hadresigned in despair. When his appointmentas chancellor was finally announced, therewas outrage in the Conservative ranks, oneminister complaining that he could not un-derstand “how anybody can put their faith ina man who changes sides, just when hethinks it is to his own personal advantage todo so,” and lamenting that the “turbulentpushing busybody Winston will split theparty.” But Baldwin was willing to weatherthe reaction of his many diehards, because, itwas said, he wanted Churchill inside the gov-ernment where he could keep an eye on himrather than outside, where he could onlycause mischief.

Though everyone acknowledged his tal-ents—formidable energy, exuberance, andrestless imagination—many, particularly themore reactionary Tories, viewed Churchill as

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a pushy, self-promoting, ambitious politicaladventurer. The louche circle of friends withwhich he surrounded himself during thoseyears only intensified doubts about his judg-ment. His three great cronies were MaxAitken, Lord Beaverbrook, the charming andmanipulative press lord and a master ofpolitical intrigue; F. E. Smith, Lord Birken-head, a dazzlingly clever lawyer, witty andarticulate, who might have become the lead-er of the Conservative Party had he not beenan alcoholic with a proclivity for seducingteenage girls; and Brendan Bracken, MP, anAustralian-Irish rogue who fed the rumorthat he was Churchill’s illegitimate son.

Despite Norman’s natural conservatismand his friendship with Baldwin, he did notparticularly welcome the new Conservativegovernment, fearing that it would allow itseconomic policies to fall into the hands of“traders and manufacturers, who, while theyprofess a remote affection for gold and a real

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affection for stability, always want a tot ofbrandy (in the shape of inflation).” And henaturally distrusted flamboyant characterslike Churchill. The previous chancellor in theminority Labor government had been PhilipSnowden, an intensely moralistic teetotaler,crippled by tuberculosis of the spine, whocould only get around supported by twowalking sticks. With his thin lips, icy eyesand bloodless skeletal face, his black suit andblack Turkish cigarettes, he looked like anundertaker in a horror movie. But despiteSnowden’s fervent belief that capitalism wasdoomed and his suspicion of bankers, he hadespoused the cause of orthodox finance andthe gold standard with all the fervor of theold puritan radical stock from which hesprang and had developed an exceptionallyclose relationship with Norman.

Churchill and Norman could not havebeen more different. Churchill avidly soughtpublicity and had a terrible reputation for

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grandstanding. Norman chose to wrap him-self in enigma, and shunned the limelight.Churchill courted the press lords. Normanconsidered them part of the vanguard of anew barbarism that preyed on the emotionsof the expanded electorate. Churchill wasnaturally gregarious, loved company, andhated to be alone. Norman rarely socialized,buried himself in his work, and claimed thatthe Bank of England was “his only mistress.”Churchill liked to argue and debate. Normanwas reserved and uncommunicative, oddlyinarticulate in public, and when confrontedby opposition, he retreated into a shell ofsullenness.

Their personal habits were also polesapart. Churchill was addicted to high living.He had a Rolls-Royce and a chauffeur and byhis own admission had never been on a bus

or on the Underground.26 He kept an enorm-ous retinue of twenty-four servants, andpampered himself with the finer things of

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life—silk underwear, champagne at everymeal, Havana cigars, strings of polo ponies,and bouts at the gaming tables of MonteCarlo and Biarritz—and was predictably inperpetual debt. Norman, despite his inher-ited wealth and his grand house in HollandPark, lived an existence of almost monkishsimplicity, sleeping on a plain iron bed in abare room with paintings propped up againstthe wall and taking the Underground to workevery day, with the ticket jauntily protrudingfrom his hatband.

About the only things the two men sharedwas a common disdain for the parochial“Little Englanders,” who would see Britainretreat from its role in the world, and a par-ticular sympathy for the United States, anunusual trait among upper-class Englishmenwho had reached maturity in the high noonof Edwardian England.

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IN THE LAST few months of 1924, thepound began to rise, buoyed by speculatorsbetting that the new Conservative govern-ment would return to gold. But the funda-mental discrepancy between British pricesand American prices remained, and Normanwas still unsure whether to press for an earlyreturn to gold. Nothing was more symbolicof the change in Britain’s financial positionthan that before he could even think aboutdoing so, he first had to go to New York toconsult with Strong.

He arrived in New York aboard the S.S.Carania on December 28, having managedto slip out of Britain “undetected, like ashadow in the dead of night,” as onemagazine put it. But he was quickly un-masked by reporters, provoking the usualspeculation. One story had it that he wasthere to renegotiate the war debt; another

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hinted that he was on a secret but unspe-cified mission for the British government.One rumor even had him preparing U.S.bankers for the imminent return of sterlingto gold. When pushed by the press for astatement, the bank’s official spokesman ex-pressed complete astonishment at his chief’sappearance in New York, but glossed over itwith the observation that because Normanwas in the habit of taking a vacation at thistime of year, his absence had gone“unremarked.”

The embassy in Washington was more in-ventive. Two months earlier, the New YorkFed had moved into new headquarters onLiberty Street, which boasted not only a gi-ant vault for the bank’s very considerablegold reserves, carved out of the solid bedrockof Manhattan and protected by doors ten feetthick and weighing 230 tons each, but alsonew mechanized coin-handling machinesthat sorted the twenty tons of nickels, dimes,

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quarters, and half dollars that clinked inevery day. Because the Bank of England wasitself about to embark on a construction pro-ject to expand its venerable Londonheadquarters, Norman had obviously cometo the United States to pick up points.

Norman had not been in the United Statesfor two years. Buoyed by new industries suchas automobiles, radios, household appli-ances, electrical machinery, and plastics, theU.S. economy was just embarking on thespectacular boom of the 1920s. The physicaltransformation of the city was remarkable.Most noticeable was the number of cars onthe road, which had doubled since he waslast there—there were now as many on thestreets of New York City alone as there werein the whole German republic. Despite theintroduction of traffic signals in Manhattanearlier that year, there were still constantjams and everyone complained about thecongestion. It was not only the automobile.

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There had been a dizzying revolution in thetypes of goods available—household appli-ances such as washing machines and vacuumcleaners, new materials such as rayon andcellophane, radios and talking movies—thatwere changing the whole texture of life. Thecontrast between the gaudy prosperity of theUnited States, where a typical worker wasearning close to $6 a day, with the dingypoverty of postwar Europe, where workersearned less than $2 a day, was another re-minder of the terrible price exacted by thewar.

Strong was waiting enthusiastically at thepier. He was the U.S. official with the deep-est understanding of international financialissues, the widest network of friends andcontacts in European banking circles, andthe strongest commitment to European re-construction. Nevertheless, a combination ofhis ill health and the administration’s officialhands-off toward European financial affairs

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had left him relegated to the sidelines. In1922, he had tried to involve himself in craft-ing a solution to German hyperinflation buthad been expressly warned off by the secret-ary of state. For much of 1923 he had beenill. Then, earlier in 1924, he had again beenexcluded from the Dawes Plan negotiationsby administration officials, except for a fewinformal discussions on a brief spring visit toLondon and Paris. He had fallen ill again onhis return and had to spend part of the fallonce more recuperating in Colorado.

But he remained convinced that given theimportance of the pound to world trade, aglobal return to the gold standard would onlybe possible if Britain took the lead: “Thegreat problem is sterling, the others willcome along easily if sterling could be dealtwith,” he kept telling his colleagues.

Strong, who had just moved into a morespacious residence in the Maguery, an eleg-ant apartment hotel located at Forty-eighth

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and Park Avenue, insisted that Norman staywith him. Over the next two weeks, duringthe day and in the evenings, Norman wassubjected to an intense campaign by theAmericans, especially by Strong and theMorgan bankers, to get the pound back ongold as soon as possible.

Strong did not have to persuade Normanof the consequences should Britain not re-turn to gold. They agreed that this could onlylead to “a long period of unsettled conditionstoo serious to contemplate. It would meanviolent fluctuations in the exchanges, withprobably progressive deterioration in the val-ues of foreign currencies vis-a vis-the dollar;it would prove an incentive to all those whowere advancing novel ideas for nostrums andexpedients other than the gold standard tosell their wares; and incentives to govern-ments at times to undertake various types ofpaper money expedients and inflation; itmight indeed result in the United States

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draining the world of gold.” It could but end,they believed, “with a terrible period of“hardship, and suffering, and . . . social andpolitical disorder,” culminating in some kindof “monetary crisis.”

Strong stressed that the British had only afew weeks, at best months, to act. The poundwas for the moment supported by the posit-ive political developments at home; Americ-an capital was currently very optimisticabout Europe in the wake of the Dawes Plan,and the Fed had been able to help Britain outby easing U.S. credit conditions in mid-1924.He warned that this narrow window wouldsoon close, as Britain commenced war-debtpayments, an outflow that was certain toweaken sterling. The Fed’s easing of creditduring 1924 had suited America’s own do-mestic needs—the U.S. economy havingsuffered a mild and short-lived recession inthe summer. But the time was fast approach-ing when the Fed would be forced to tighten

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credit for domestic reasons, making it diffi-cult and more expensive for Britain to attractcapital to support its currency. There werealready murmurs within the corridors of theFed that Strong was too greatly influenced byhis friends in London.

He was acutely aware that British priceswere still 10 percent too high, and that fur-ther deflation to cut them would bring fur-ther hardship. But he had become increas-ingly convinced that the British needed to bepushed into making the big decision—forcemajeur, he called it. The shock therapy offorcing Britain to compete in world markets,while painful, would bring about the neces-sary realignment in prices more efficientlythan a long drawn-out policy of protractedtight credit.

The Americans recognized that if Britaindid go back to gold, it was imperative thatthe link not snap at the first signs of trouble.Otherwise, the credibility of the whole

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system might be called into question, throw-ing all the world’s currencies into turmoil.The government of the United States was inno position to lend money to any country—ithad had enough of government-to-govern-ment lending during the war and was nowsaddled with renegotiating the terms of thoseloans. To ensure that Britain had adequatereserves to draw upon, Strong promised$200 million from the New York Fed. Fromthe partners of J. P. Morgan came a furthertentative commitment of $300 million.

Strong did impose one important condi-tion: not, as might be supposed, a restrictionon the economic policy of the Bank of Eng-land—how much credit it could provide orthe level of interest rates it could set. Thesole condition was that this loan would beavailable only while Norman remainedgovernor.

As Norman set off homeward, perhaps be-cause of the half-billion-dollar commitment

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that he metaphorically carried in his coatpocket, perhaps because of the powerful voteof confidence that he personally had receivedfrom the Americans, he was in an unusuallysentimental mood. From on board the S.S.France he scribbled Strong a note:

My dear Ben,

You won’t be expecting me to writeyou a letter. This beast of a ship rollsso much that I can hardly sit on achair—much less write at a table. Butwhatever this year may bring forth forus, I am glad to have begun it withyou: it is always true to say that wedon’t meet often enough. . . . Weought indeed to get together once aquarter if we are to keep together allthe year; that much we shall hardlymanage; I guess once in 6 months ismore probable. At least we have madegood beginning for 1925. . . . And youknow, Ben, I am grateful for all your

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welcome and hospitality: and for allyou do for me and are to me. Godbless you.

NORMAN GOT BACK to London in themiddle of January to find resistance buildingagainst any early return to gold. Even someof his closest allies at the Bank were begin-ning to resent the American pressure tactics,fearing that Britain might be borrowing toomuch money for an uncertain payoff.

The most articulate critic of resumptioncontinued to be Maynard Keynes, who railedat those in charge at Threadneedle Street foracting like “the Louis XVI of the monetaryrevolution,” and for “attacking the problemsof the post-war world with unmodified pre-war views and ideas.” But his own proposalsfor a managed currency, outlined in theTract, had been largely ignored or dis-paraged. Recognizing that no one was takinghis idea of managed money seriously, he beata tactical retreat and began urging instead

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that any return to the gold standard be atleast delayed until the discrepancy betweenBritish and American costs had narrowed.

His main point was that under current ar-rangements, given that U.S. gold reserveswere so dominant, to tie the pound to gold ineffect meant tying it to the dollar and theBritish economy to that of the UnitedStates—and by implication, to Wall Street.He did not attempt to conceal his distaste forwhat he, and all Bloomsbury with him, con-sidered the crass materialism of the UnitedStates or for the prospect of having Britain’seconomic future determined by the needs ofan America, imprisoned in its own insularity.“We should run the risk of having to curtail .. . credit to our industries,” he wrote in onearticle, “merely because an investment boomin Wall Street had gone too far, or because ofa sudden change in fashion amongst Americ-ans towards foreign bond issues, or becausebanks in the Middle West had got tied up

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with their farmers or because of the horridfact that every American had ten motor-carsand a wireless set in every room of everyhouse had become known to manufacturersof these articles.”

In article after article he returned to thesame theme—that Britain, suffering from aslow rate of growth, exhausted finances, and“faults in her economic structure,” wassimply too weak to tether itself to a UnitedStates that seemed to “live in a vast and un-ceasing crescendo.” The United States, withall its strength and dynamism, could “sufferindustrial and financial tempests in the yearsto come, and they will scarcely matter to her;but England if she shares them, may almostdrown.” Few people, however, paid much at-tention to such gloomy prognostications.

Much more significant than Keynes’s po-lemics was the opposition of Lord Beaver-brook. This elflike man with a larger-than-life personality was at the time the most

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dominant and successful newspaper propri-etor in England. A Scots-Canadian by birthand a minister’s son, though one might nothave guessed it, he was a self-made million-aire many times over by the age of thirty-one, when he moved to England, in 1910.Seeing in the power of the press his path tothe top, he acquired the Daily Express, asmall loss-making newspaper with a circula-tion of some 200,000. By giving the publicwhat it wanted—a bold and simply writtenpaper full of gossip, sports, women’s fea-tures, and articles about spiritualism andother social trends—he won it the largest cir-culation in the country with close to 1.5 mil-lion subscribers. Beaverbrook was an out-sider to Britain, and like his paper, which ap-pealed to all classes, he transcended the Brit-ish class system. But as a Canadian, he re-tained a certain suspicion of the UnitedStates, and believed that a British return togold would represent surrender to the

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Americans, who, according to him, were“pressing the return to the gold standard inorder to mobilize the useless gold hordes[sic] of the United States.” His view of thegold standard was incisive in its simplicity:“It is an absurd and silly notion that interna-tional credit must be limited to the quantityof gold dug up out of the ground. Was thereever such mumbo-jumbo among sensibleand reasonable men?”

Beaverbrook and Churchill were both ad-venturers who, though the best of friends,

rarely agreed.27 On January 28, 1925, Bea-verbrook came to see Churchill and his ad-visers, only to have his arguments casuallydismissed by the Treasury officials. The fol-lowing day he launched a front-page cam-paign against the gold standard in the DailyExpress.

In reaction, Churchill decided one eveningto compose a memorandum titled “The

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Return to Gold.” He had found that one ofthe best ways for him to get his arms arounda subject was to debate his own way throughthe issues. The chancellorship had been amixed blessing. By his own admission,Churchill never had much interest in financeor economics and knew little about the sub-jects. He cheerfully liked to recount how hisfather, Lord Randolph Churchill, chancellorfor six months in 1886, when confrontedwith a report full of figures with decimalpoints, declared he “never could make outwhat those damned dots mean.” Winstonhimself, once chancellor, complained aboutthe mandarins at the Treasury, “If they weresoldiers or generals, I would understandwhat they were talking about. As it is they alltalk Persian.”

His memorandum, patronizingly nick-named “Mr. Churchill’s Exercise” within theTreasury, was a brilliant testament to his tal-ent for self-education that should have put to

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rest the accusation that he was out of hisdepth when it came to finance. Circulatedamong senior Treasury officials and to Nor-man, it argued that the use of gold as theprime reserve was a “survival of a rudiment-ary and transitional stage in the evolution offinance and credit.” Though the UnitedStates seemed “singularly anxious to help”the British return to the gold standard, thesource of this “generosity is not perhaps re-markable when we consider her own posi-tion. She has by her hard treatment of herAllies, accumulated . . . probably nearly threequarters of the public gold in the world. Sheis now suffering from that glut of Gold,” alarge part of which was “lying idle in Americ-an vaults, playing no part whatever in theeconomic life of the United States.” Natur-ally, the Americans, so laden with the metal,had an incentive to ensure that it continuedto play “as powerful and dominant a part” inworld finance as possible. Churchill,

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however, questioned whether this was also toBritain’s advantage and worried that whilethe return to gold was in the interest of Cityfinanciers, it might not be equally in the in-terest of the rest of Britain: “the merchant,the manufacturer, the workman, and theconsumer.” It was a document that could al-most have been written by Maynard Keynes.

Norman tended to treat Churchill as one ofthose clever but erratic forces of nature whohas to be carefully managed. Teddy Grenfell,the head of Morgan Grenfell, the House ofMorgan’s London arm, and a director of theBank of England, summed it up the best:“We, and especially Norman, feel that thenew Chancellor’s cleverness, his almost un-canny brilliance, is a danger. At present he isa willing pupil but the moment he thinks hecan stand on his own legs and believes thathe understands economic questions he may,by some indiscretion, land us in trouble.”

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Norman’s response to the memorandumwas characteristic—a point-by-point analysisof the pros and cons of a policy was just nothis style. Instead, he wrote to Churchill, “TheGold Standard is the best ‘Governor’ that canbe devised for a world that is still humanrather than divine.” He warned the chancel-lor that if he were to choose to return to goldhe might be “abused by the ignorant, thegamblers and the antiquated Industrialists,”but if he were to choose against it, he “will beabused by the instructed and by posterity.”

But Churchill had endured too hard a ca-reer in politics to be so easily intimidated byslogans. Over the next few days he zeroed inon the key social and political issue: that forall its benefits, gold, if restored, would endup exacting a heavy cost for those thrown outof work in British industries priced out ofworld markets. “The Governor of the Bank ofEngland shows himself perfectly happy withthe spectacle of Britain possessing the finest

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credit in the world simultaneously with amillion and a quarter unemployed,” hegrowled to his advisers.

Norman had never believed much in thebenefits of economic policy analysis—hewould later famously instruct the Bank ofEngland’s chief economist, “You are not hereto tell us what to do, but to explain to us whywe have done it”—and was now beginning tofind the protracted debate irritating. Feeling“so weary and done up” that he “had to go tobed for 8 days,” Norman chose this criticalmoment to take two weeks off in the south ofFrance. Sometimes his behavior could befrustrating to even his closest friends. AsTeddy Grenfell wrote, “Norman elaborateshis own schemes by himself and does nottake anyone into his counsel unless he is ob-liged to do so in order to combat opposition.. . . Monty works in his own peculiar way. Heis masterful and very secretive.”

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Meanwhile, Churchill, who, if anything,could usually be counted on to act too hast-ily, was uncharacteristically having troublereaching a decision. Both sides in the debatehad marshaled a bewildering accumulationof data and arguments. “None of the witchdoctors can see eye to eye and Winston can-not make up his mind from day-to day,”wrote Otto Niemeyer, his principal adviser.The advice he was getting from within theTreasury and the Bank of England was,however, all one way. He must have beenaware that opposing the return to gold wouldput him in direct confrontation with Nor-man, whose close friendship with StanleyBaldwin was no secret—Norman oftenstopped by 10 Downing Street at the end ofthe day for a quiet chat and was a frequentweekend visitor to Chequers, the prime min-ister’s new official country residence. For themoment, Baldwin had kept out of the golddebate, but Churchill feared that Norman

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might go around him directly to the primeminister, whom he neither wanted nor wasin a position to take on. Nevertheless, thecriticisms raised by Beaverbrook and Keyneshad a certain unsettling resonance.

Finally, on March 17, Churchill decided toconvene a sort of brain trust. His wife, Cle-mentine, was away in the south of France,and so, because he did his best thinking lateat night over port, brandy, and cigars, he or-ganized an intimate dinner at his official res-idence, 11 Downing Street. Norman, justback from the Riviera, was not invited. Hewas known to dislike these debates andwould have just sat there silent and chilling.To represent orthodoxy, Churchill invited histwo principal advisers at the Treasury, OttoNiemeyer and John Bradbury, both men wellestablished in the Norman camp. The caseagainst gold was to be represented by Regin-ald McKenna, himself a former Liberal

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chancellor of the exchequer, now chairmanof the Midland Bank, and Maynard Keynes.

Dinner began at 8:30 p.m. The smallgroup seated around the table in the intimateoak-paneled dining room on the first floor of11 Downing Street were all old acquaintanceswith a long association with one another.When Keynes had been a young Treasury of-ficial during the war, McKenna had beenchancellor of the exchequer in the first coali-tion government, with Bradbury as his per-manent secretary. Niemeyer, at the age offorty-two, was the controller of the Treasury,its second most powerful official, and thechancellor’s chief adviser on matters of do-mestic and international finance. Behind hisdisheveled exterior lay a formidable intelli-gence. Of German Jewish extraction, he hadearned a double first at Balliol College, Ox-ford, and had taken the civil service entranceexams in 1906, the same year as MaynardKeynes, whom he had beaten into second

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place. As a result, he had joined the Treasurywhile Keynes had had to settle for the IndiaOffice.

As the evening wore on and the alcoholflowed—Churchill was known for his abilityto consume prodigious amounts without anyapparent impairment of his faculties—thediscussion went round and round. The sameold arguments echoed off the vaulted ceilingsand across the room. Keynes was not on hisbest form or at his most persuasive. He andMcKenna kept returning to the argumentthat with prices in Britain still 10 percent toohigh, a return to gold would inevitably in-volve a great deal of pain, unemployment,and industrial unrest. Sir John Bradburykept pressing the point that the virtue of thegold standard was that it was “knave-proof.It could not be rigged for political . . . reas-ons.” Returning to the gold standard wouldprevent Britain from “living in a fool’s para-dise of false prosperity.”

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No one changed his mind that night. Therewas considerable agreement about the facts.All accepted that British prices were too highand that to bring them down would involvesome pain, although they disagreed about itsextent. All acknowledged that tying Britainto the gold standard would mean tethering itto the United States, with all the risks thatentailed. But whereas the “gold bugs” be-lieved that the costs were worth bearing inorder to reinstate the automatic mechanismof the gold standard, Keynes and McKennathought otherwise. There were too many im-ponderables for anyone to be sure of the an-swer. Both parties were making a leap offaith. In that sense, the debate that evening,though dressed up as a technical discussionamong experts, reflected, at bottom, a philo-sophical divide between those who believedthat governments could be trusted with dis-cretionary power to manage the economyand those who insisted that government was

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fallible and therefore had to be circum-scribed with strict rules.

Finally, as the dinner stretched into theearly hours of the morning, Churchill turnedto McKenna: “You have been a politician.Given the situation as it is, what decisionwould you make?”

To Keynes’s disgust, McKenna replied,“There is no escape. You will have to go back;but it will be hell.”

The gold bugs had won.

After a few more days of agonizing,Churchill decided for the gold standard.Orthodox economic opinion and the coun-try’s banking establishment were so stronglyin favor that for once in his life, he lacked thenecessary confidence in his own judgment torisk another policy. On his way to stay withthe prime minister at Chequers one week-end, Norman dropped in at Chartwell,Churchill’s country house in Kent, and tried

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to reassure him, “I will make you the goldenChancellor.”

BUDGET DAY WAS until recently somethingof an occasion in the British parliamentarycalendar. The event was traditionally sur-rounded with its own rituals—the buildup ofsuspense about the contents, the press spec-ulation, the picture on the actual day of thechancellor emerging from No. 11 DowningStreet, conspicuously brandishing thebattered red dispatch box, the grand and ex-cessively long speeches in Parliament about

the minutiae of taxation and spending.28 Itwas, in short, a perfect opportunity forChurchill to display his talent for playing tothe gallery.

On April 28, he rose before the Commonsat 4:00 p.m. to great applause. Everyone

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knew what he was about to say, but therewere nevertheless tremendous cheers when,in the first few minutes of his speech, he an-nounced the return to gold. Ever the show-man, at one point during his two-hourspeech, he paused, declaring, “It is imperat-ive that I should fortify the revenue, and Ishall now, with the permission of the Com-mons, proceed to do so,” and proceeded topour himself a glass of “an amber-colouredliquid,” that from the press gallery appearedto be stronger than water.

For all his ambivalence about the decisionto return to gold, Churchill put on a greatshow. He seems to have been most swayed inhis decision by the fear that not to returnnow would be seen as a very public admis-sion of Britain’s diminished position in worldaffairs. Almost every other country waseither now on gold—the United States, Ger-many, Sweden, Canada, Austria, and Hun-gary—or about to be—Holland, Australia,

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and South Africa—and “like ships in harborwhose gangways are joined together and whorise and fall together with the tide,” theywere all linked by a common standard ofvalue. As he would articulate a few days laterin committee, “If the English pound is not tobe the standard which everyone knows andtrusts, the business not only of the BritishEmpire but also of Europe as well mighthave to be transacted in dollars instead ofpounds sterling. I think that would be a greatmisfortune.”

While Churchill was speaking, Norman satin the distinguished strangers’ gallery of theHouse of Commons, savoring what all Lon-don saw as his personal triumph. AsChurchill himself would later put it, it wasNorman’s “greatest achievement . . . the finalstep without which all those efforts and suf-ferings [that is, the years since 1920] wouldhave gone for naught.”

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The decision was received with resoundingapplause both in the City and in the press,the Times commenting that it was “a signaltriumph for those who have controlled andshaped our monetary policy, notably theGovernor of the Bank.” The Economist de-scribed it as “the crowning achievement ofMr. Montagu Norman.” Only Beaverbrook’schain of papers dissented.

For a few months, McKenna’s ominousprediction proved to be wrong. The initialconsequences of the move were relatively be-nign. Britain, with its higher interest rates,attracted enough money that the creditsprovided by the Federal Reserve and J. P.Morgan were never needed. Britain’s gold re-serves actually increased during 1925.

For Keynes, borrowing hot money fromforeigners was only a way for Britain to buytime. In a three-part series of articles, ini-tially published in late July in Beaverbrook’sEvening Standard, and later issued as a

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pamphlet, The Economic Consequences ofMr. Churchill, Keynes reminded his readersthat Britain would have to “use the breathingspace to effect what are euphemisticallycalled the ‘fundamental adjustments’” in theeconomic life of the nation. At its new ex-change rate, the pound was overvalued bymore than 10 percent. To remedy this wouldrequire cuts in wages and prices across theeconomy that could be achieved “in no otherway than by the deliberate intensification ofunemployment” through a policy of tightcredit and higher interest rates. It seemedperverse to him to institute a regime of creditrestrictions at a time when unemploymentstood already above one million. “The properobject of dear money is to check an incipientboom. Woe to those whose faith leads themto use it to aggravate a depression!”

Though Keynes could not resist a typicallymalicious poke at Churchill—“because he hasno instinctive judgment to prevent him from

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making mistakes . . . [and] because, lackingthis instinctive judgment he was deafened bythe clamorous voices of conventional fin-ance”—the pamphlet was more an attack onthe Bank of England and the Treasury.

Certainly, Churchill seems to have seen itthat way. In 1927, he invited Keynes to be-come a member of The Other Club, a privateand highly exclusive dining society started byhim and Birkenhead in 1911. Its members,restricted to no more than fifty, had to beboth “estimable and entertaining.” It hadtwelve rules, which were read aloud at thebeginning of each meeting, held every altern-ate Thursday while Parliament was in ses-sion. Churchill and Birkenhead determinedwho was to be invited to join. Rule 12 read,“Nothing in the rules or intercourse of theClub shall interfere with the rancour or as-perity of party politics.” Its members readlike a Who’s Who of British history betweenthe wars and included all of Churchill’s

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pals—Birkenhead, Beaverbrook, and Brack-en—but also such diverse figures as Lord Jel-licoe, H. G. Wells, Arnold Bennett, P. G.Wodehouse, and Edwin Lutyens.

By the late summer, the rise in the ex-change rate began taking its toll on the stapleexport industries of coal, steel, and ship-building. Particularly hard hit was the weak-est of these, coal, much of which wasthreatened with bankruptcy after the re-sumption of production in the Ruhr and thesqueeze on prices from the rise in the ex-change rate. The owners demanded a cut inwages and an increase in hours from the coalminers. In The Economic Consequences ofMr. Churchill, Keynes had railed against thesocial injustice of a policy where miners werebeing asked to be “the victims of the eco-nomic Juggernaut.” They were representat-ives “in the flesh [of] the fundamental ad-justments engineered by the Treasury andthe Bank of England to satisfy impatience of

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the City fathers to bridge the moderate gapbetween $4.40 and $4.86.”

A national strike was averted only whenthe government at the last minute agreed togive the coal industry a massive subsidy ofover $100 million. But this could only be astopgap measure. By 1926, attempts to cutcosts led to a long and bitter strike in the coalindustry, and in May 1926, boiled over into acountrywide ten-day general strike. That thisdid not lead to a flight of capital from Britainand a crisis in the exchange market was onlybecause the underlying weakness of Britain’sinternational position was masked by contin-ued inflows of capital taking advantage ofhigh interest rates in the London market andescaping the escalating crisis in France.

The return to gold proved to be a costly er-ror. That the money attracted by the high in-terest rates was speculative—“hot”—and nota source of permanent investment left a con-stant threat hanging over the currency. Just

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to prevent it from flooding back out again,interest rates had to be kept significantlyhigher than that in other countries for thebalance of the decade. With prices falling ataround 5 percent per annum, the burden ofthese charges on borrowers was heavy.Meanwhile, British manufacturing, hobbledin world markets by its high prices, limpedpainfully along for the next few years whileelsewhere in the world industry boomed.

Though Churchill remained chancellor un-til 1929, by 1927 he had come to realize thatthe return to gold at the old prewar exchangerate had been a misjudgment. But by thenthere was little he could do about it exceptfulminate in private about the evil effects ofthe gold standard. In later life, he wouldclaim that it was “the biggest blunder in hislife.” He blamed it on the bad advice he hadreceived. In an unpublished draft of hismemoirs, he wrote that he had been “misledby the Governor of the Bank of England

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[and] by the experts of the Treasury. . . . Ihad no special comprehension of the cur-rency problem and therefore fell into thehands of the experts, as I never did laterwhere military matters were concerned.” Hereserved his greatest venom for Norman. Ittook only the slightest provocation for him tobegin to rant on about “that man Skinner,”as he disparagingly referred to the governor.In a cabinet meeting in June 1928, one of hiscolleagues remembered him “to everyone’ssurprise exploding on Montagu Norman anddeflation.”

In his speech before Parliament during thedebate on the Gold Standard Bill, Churchillhad claimed that the move would “shackleBritain to reality.” And a shackle it did proveto be, but not so much to reality as to an out-moded way of thinking and to a hopelesslyobsolete mechanism for controlling the in-ternational finances of the country. AsKeynes had written in May 1925:

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The gold standard party have had be-hind them much that is not only re-spectable but worthy of respect. Thestate of mind that likes to stick to thestraight old-fashioned course, ratherregardless of the pleasure or the pain .. . is not to be despised. . . . Like otherorthodoxies it stands for what is je-jeune and intellectually sterile; andsince it has prejudice on its side, it canuse claptrap with impunity.

The most damaging consequence was thatin a futile attempt to retain the primacy ofthe Bank of England and the City of London,Britain had now tied itself irretrievably to theUnited States. During Norman’s visit to NewYork in January 1925, Strong had warnedhim, “In a new country such as ours with anenthusiastic, energetic and optimistic popu-lation, where enterprise at times was highlystimulated and returns upon capital muchgreater than in other countries, there would

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be times when speculative tendencies wouldmake it necessary for the Federal ReserveBanks to exercise restraint by increased dis-count rates, and possibly rather high moneyrates in the market. Should such times arise,domestic considerations would likely out-weigh foreign sympathies.” Norman cannothave realized how prescient those wordswere and how cruelly one day they wouldcome back to haunt him.

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13. LA BATAILLE

FRANCE: 1926

Only peril can bring the French to-gether. One can’t impose unity out ofthe blue on a country that has 265different kinds of cheese.

—CHARLES De GAULLE

April 1925 might have been a good month forGovernor Norman and the Bank of England,but in Paris, Governor Georges Robineauand the Banque de France were being simul-taneously vilified and mocked in the press.Earlier that month, the French public had

learned that for the past year, senior officialsat the French central bank had conspiredwith their opposite numbers at the Frenchtreasury to cook the Banque’s books.

The deception had begun as far back asMarch 1924. The government, finding it dif-ficult to attract new buyers for its short-termdebt, was forced to ask the Banque for an ad-vance to cover some of its maturing bonds.But the amount of currency that the Banquecould issue was limited by law and, in theembattled climate of the time, the govern-ment did not wish to face the political em-barrassment of asking the NationalAssembly to raise the ceiling. Obliging offi-cials at the Banque had found a way of issu-ing extra currency but disguising the factwith an accounting ruse, at first a technical,almost trivial adjustment, which no doubtthose involved thought a temporary and jus-tifiable expedient. But the scope of the oper-ation had progressively grown and by April

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1925, the “fake balances”—les faux bilans—amounted to some 2 billion francs, equi-valent to 5 percent of the currency incirculation.

Strong, Strong’s daughter Katherine, andNorman at Biarritz, 1925

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The doctored accounts were first dis-covered in October 1924 by the Banque’sdeputy governor, who promptly informedGovernor Robineau; the minister of finance,Étienne Clémentel; and the prime minister,Édouard Herriot. Although the governorkept pressing the government to correct thesituation by repaying the Banque some ofwhat it owed, the ministers vacillated anddid nothing for six months, hoping againsthope that public finances might turn around.When news of the falsified statements finallyleaked out, the government was forced to goto the National Assembly to ask for an in-crease in the legal limit. Though the nation-alist press called for the prosecution ofGovernor Robineau, he managed to hang onto his job because at least he had resisted theensuing cover-up; but the humiliated gov-ernment fell to a vote of no confidence after adebate in the Senate that was unusually

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bitter even by the rancorous standards ofFrench political discourse of the time.

The drama hit the headlines at a particu-larly sensitive moment. France was finallybeginning to get its finances in order. The re-construction of the war-ravaged departmentsof northeastern France had cost a total of $4billion, but was now largely complete and thebudget deficit had been cut from the equival-ent of $1 billion in 1923, over 10 percent ofGDP, to under $50 million, less than 0.5 per-cent. After the Dawes Plan, the governmenthad also become much more realistic in itsbudgeting of how much it could truly hope torecover in reparations. And since the war,the Banque had been firm about restrictinggovernment borrowing from it. The currencyceiling of 41 billion francs established in1920, a powerful symbol of the Banque’s in-dependence, had been scrupulously respec-ted for four whole years.

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But French finances balanced on a knife-edge. A large part of the public debt wasshort-term in nature, which made its refin-ancing an annual ordeal for the franc asFrench savers underwent an agonizing re-appraisal of their government’s solvency.The fact that the Banque de France, of all in-stitutions, should now have fallen from graceand was implicated in this sordid scandal, al-beit one in which no individual seemed tohave profited financially, provoked a minorcrisis of confidence among French investors.

For MUCH of the nineteenth century, theBanque de France had been by far the mostconservative financial institution in allEurope, far more cautious, for example, thanits cousin the Bank of England. Although itwas not legally bound, as was the Englishcentral bank, to hold a minimum amount of

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gold, it had adopted the practice of retainingan unusually large gold reserve to back itscurrency notes—in 1914, the largest inEurope, totaling over $1 billion. On a num-ber of occasions it had even been asked tocome to the aid of the Bank of England—forexample, during the crises of 1825 and 1837;in 1890, when Barings Brothers faced bank-ruptcy over its ill-considered loans in SouthAmerica, and finally, during the panic of1907. In effect, the Banque played the role ofbackstop to the Bank of England.

While the Bank of England was a solidlybourgeois institution, egalitarian in the waythat an exclusive men’s club is democraticamong its members, the Banque de Francewas from its birth an aristocratic place, evenif the aristocracy was only a few years old.Among its first few governors were the comteJaubert, the comte de Gaudin, the duc deGaete, the comte Apollinaire d’Argout, andthe baron Davillier. Even after 1875, when

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the republic was brought into being for thethird and final time and the French aristo-cracy abandoned political life, the Banque deFrance continued to be a haven for thenobility.

The Banque itself remained a private insti-tution owned by shareholders. Though thegovernor and deputy governors by this timetended to be drawn from the ranks of thehigher civil service, they were still ultimatelyresponsible to the twelve-man Council of Re-gents. In addition, the governor, though ap-pointed by the government, was also re-quired to own one hundred shares, which inthe 1920s cost the franc equivalent of$100,000. Since few government officials,even the very highest, had that much freecapital, the purchase money was lent by theregents, making the average governor verymuch their agent.

In 1811, the Banque moved into the magni-ficently flamboyant Hôtel de la Vrillière, just

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north of the Louvre near the Palais Royal. Ithad once been the town palace of the comtede Toulouse, bastard son of Louis XIV andMadame de Maintenon. Every year at 12:30in the afternoon, on the last Thursday ofJanuary, the pinnacle of French societywould gather there for the Banque’s AnnualGeneral Assembly. Though it had more thanforty thousand shareholders, only the toptwo hundred were eligible to attend themeeting and choose the regents. The con-clave was held in the Galerie Dorée, the longrococo hall running down the center of thehotel. There, beneath the gorgeous paintingson the vaulted ceiling, the carved and sump-tuously gilded woodwork, the opulent wallmirrors, seated in alphabetical order wouldbe some of the oldest and most aristocraticfamilies in France: Clérel de Tocqueville, LaRochefoucauld, Noailles, Talleyrand-Périgord.

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To be invited to this gathering was one ofthe most highly coveted emblems of socialstanding in France. Noblemen, who mightotherwise care nothing about banking, treas-ured their family holdings in the Banque,valued typically at several hundred thousandfrancs, equivalent then to about a hundredthousand dollars, and held for generations asa prized part of their patrimony.

With an electorate of two hundred of therichest and grandest families in France, itwas not surprising that seats on the Councilof Regents came to be almost hereditary.Five out of the twelve elected regents weredescendants of the original founders and adisproportionately large number were Prot-estants of Swiss extraction. In 1926, thetwelve included Baron Ernest Mallet, BaronÉdouard de Rothschild, Baron Jean de Neu-flize, Baron Maurice Davillier, M. FelixVernes, and M. François de Wendel. TheMallet family, Protestant bankers originally

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from Geneva, proprietors of a concern bear-ing their name, had the distinction of havingsat on the council continuously for four gen-erations, since it was first convened in 1800.The Rothschilds, the only Jewish family onthe council, had sat there since 1855, whenBaron Alphonse de Rothschild, managingpartner of Rothschild Frères, the French armof the banking empire, had been chosen. Onhis death in 1905, his seat had been passedto his son Baron Édouard.

The Davilliers, like so many other regentfamilies elevated to the baronage under Na-poléon, were primarily industrialists, al-though they also operated an eponymousprivate bank. Baron Maurice Davillier wasthe fourth member of his family to serve onthe council. Although Baron Jean de Neuflizewas the first member of his clan to be elec-ted, the Neuflizes, who owned one moreeponymous bank, had been ennobled byLouis XV. Baron Jean, an avid sportsman

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who had represented France as an equestri-an at the 1900 Olympics, was president ofthe Society of Steeplechasers and the evenmore exclusive Casting Club of France; hisdaughter was married to the wonderfullynamed English grandee Vere Brabazon Pon-sonby, ninth Earl of Bessborough.

Over the 120 years since the Banque’sfoundation, France itself had experienced nofewer than three revolutions; transformed itspolitical system five times; had had seven-teen different heads of state, including oneemperor, three kings, twelve presidents, anda president who then made himself emperor;and had changed governments on the aver-age of at least once a year. Meanwhile, theBanque and the same few families that wiel-ded power within its council had remainedunmolested. So great was the institution’sauthority that it had continued to functionunhindered during the Paris Commune andhad met the currency needs of both

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sides—not only of the legitimate governmentat Versailles but of the Commune itself. “Thehardest thing to understand,” wroteFriedrich Engels, amazed at the deference ofthose first Communists, “is the holy awe withwhich they remained standing outside thegates of the Banque de France.” The mys-tique attached to the regents and the top twohundred shareholders would give rise in the1930s to the legend that France was con-trolled by a financial oligarchy of les deuxcents familles, a potent myth that would be-come a rallying cry for the left.

When war broke out in 1914 and the verysurvival of the nation was threatened, theBanque, like all the other European centralbanks, voluntarily subordinated itself to itsgovernment, and obligingly printed whatevermoney was needed to finance the colossal ef-fort. But unlike the Reichsbank, within a fewmonths of the end of the war, it reasserted itsindependence and refused to go on filling the

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gap between government spending and taxrevenues. In April 1919, the NationalAssembly fixed a limit on the its advances tothe state and in September 1920, imposed aceiling of 41 billion francs on the Banque’snote circulation. There things stood until thecrisis of 1925.

IN 1925, Émile Moreau, now fifty-seven, wasin his twentieth year at the Banque d’Algérieand his fourteenth as its director general. Hewas proud of his achievements: his role inproviding credit to the Moroccan economy,in stimulating the development of industryin Algeria after the war, and in launching acampaign against usury in Tunisia. For hisservices, he had accumulated a large array ofdecorations, including the czarist RussianOrder of Saint Anne, the Spanish Order ofIsabella the Catholic, and the Belgian Order

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of Leopold II, in addition to being a Com-mandeur de la Légion d’Honneur. But for allof these accolades, he had never been able toshake off the conviction that his assignmentremained a form of professional banishment.

For many years, he had harbored the fainthope of one day returning to the mainstreamof the civil service, maintaining, for example,his status as a member on leave of absence ofthe elite Inspectorat des Finances. But as theyears had gone by and no new assignmenthad come his way, he had finally reconciledhimself to his lot. In 1922, he had resignedfrom the higher civil service, though he con-tinued to hold his position as the head of theBanque d’Algérie.

He and his wife had no children, and hewas at an age when he could begin to lookforward to more time for his other in-terests—he had assembled an extensive col-lection of Islamic coins, was an avid biblio-phile, and also an active member of the

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Touring Club France, periodically taking offon long automobile trips through the coun-tryside. And after twenty-two years, he wasstill a very dedicated mayor of his tiny homecommune of Saint Léomer, only two hun-dred miles from Paris, which allowed him toget back to the old village as often as hewished.

Then suddenly in April 1925, when theHerriot government fell over the scandal atthe Banque de France, it seemed that Mor-

eau’s star was about to turn. Paul Painlevé29

formed a new left-wing coalition governmentand named as his finance minister a manwhose four previous tours in the office hadgained him a legendary reputation in thefield of public finance: Moreau’s old mentor,Joseph Caillaux.

In a country infamous for political in-stability, few men had had as stormy a careeras Caillaux. In 1920, he had been sentenced

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to three years imprisonment for damagingthe security of the state. But having alreadyspent two years at La Santé prison awaitingtrial, he had the remainder of his sentencecommuted. Legally banished from Paris,Caillaux and his wife, Henriette, retired tothe little town of Mamers in the Loire valley.For the next four years they lived quietly.Though he wrote an account of his years inprison that became a best seller, with theshadows of her trial for murder and his con-viction for treason hanging over them, theyfound themselves outcasts, not only shunnedin society, but dogged by petty humili-ations—turned out of hotels, refused servicein restaurants, insulted in cafés and on thestreets. Caillaux was even once attacked by agang armed with clubs and bricks.

But as France headed toward bankruptcy,more and more people could not help re-membering Caillaux’s warnings at the heightof the war that both victors and vanquished

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would be ruined and increasingly he came tobe seen as a victim of wartime hysteria. Whathad then been looked down upon as defeat-ism on his part now began to be viewed asprescience. In December 1924, his support-ers in the National Assembly voted to abrog-ate his sentence. His return to the Ministryof Finance with a reputation, according toone French senator, as “a kind of Treasurymagician, capable of turning dry leaves intobank notes,” was the final vindication for thisremarkable man.

Not everyone had forgiven or forgotten,however. As he strode into the Chamber ofDeputies on April 21, 1925, to take his placeon the government bench, his domed baldhead gleaming, a monocle fixed firmly in hisright eye, there was hissing and booing andshouts of “traitor” and “deserter.” One ar-dent Nationalist got up and cried, “Have wereached the point where we must chosebetween bankruptcy and M. Caillaux?

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Bankruptcy would be better.” An Americannewsmagazine reported that it was as if Be-nedict Arnold, instead of being executed, hadbeen barred from Philadelphia, exiled to thecountry, then pardoned, and appointed sec-retary of war.

Over the years, even during Caillaux’s longbanishment into the political wilderness,Moreau had assiduously maintained hisfriendship with the brilliant and erraticpolitician. For all of Caillaux’s manyfaults—the indiscretions, the abysmal judg-ment, the disreputable friends with whom hesurrounded himself, the terrible thirst forpower, his essential “frivolity”—Moreau hadnever wavered in his belief that Caillaux wasone of the best financial brains France hadproduced and that had he been minister offinance during the war, France would nothave been in its present shape.

The situation confronting the new ministerwas grave. The franc was the only major

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currency still “off gold” and fluctuating onthe exchanges, its ups and downs serving asa barometer of confidence in French finan-cial management. In the spring of 1924, dur-ing the Dawes negotiations, it had brieflysunk to 25 to the dollar. Thereafter it had re-covered somewhat, remaining reasonablystable for a year at about 18 to 19 to the dol-lar, 25 percent of its prewar level. But the af-fair of the faux bilans damaged that fragileequilibrium, and by the end of June, it waswavering at around 22 to the dollar.

Caillaux threw himself into the task of sav-ing France from insolvency with character-istic energy. Immediately upon assuming of-fice, he tried to fire Governor Robineau fromthe Banque de France and replace him withhis old friend Émile Moreau. A houseclean-ing at the Banque would have helped to rees-tablish its credibility abroad. But fearingsuch a move would irretrievably compromisethe Banque’s reputation, the president of the

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republic killed the idea. Moreau saw hishopes of redemption dashed yet again.

Caillaux succeeded on some fronts. Hemanaged to negotiate a budget deal that, forthe first time since 1913, promised to balancethe government’s accounts. At the sametime, he squashed the proposal for a capitallevy, a form of wealth tax much enamored bythe Socialists, the threat of which was pro-voking a flight of capital. In July, he went toLondon and struck a bargain with WinstonChurchill to restructure the French war debtto the British at 40 cents on the dollar, ef-fectively cutting it from $3 billion to $1.2billion.

But the combination of France’s financialproblems and its political logjam were toogreat even for a man of Caillaux’s abilities asfinancier and politician. He traveled toWashington to negotiate a similar write-down of the $4 billion debt owed to Americabut came back empty-handed. And while his

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appointment may have inspired confidence“in elegant social circles and the higherreaches of the Ministry of Finance,” he wasless successful in generating the same enthu-siasm among those average French investorswho held short-term government bonds. Hebecame embroiled in a confrontation withthe regents of the Banque de France, who,finding the government unable to meet all ofits short-term obligations, tried to push Cail-laux to impose some sort of debt moratori-um—in effect for the government to admitthat it was insolvent. So frustrated was Cail-laux by the Banque’s attitude that at onepoint he burst out how much he “regrettednot having thrown the management of theBanque out of the window the minute he hadassumed power.”

In November, Caillaux was ousted, onemore victim of the vendettas and personalintrigue that pervaded French political life.As he left, the franc touched 25 to the dollar.

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In his seven months in office, the cost of liv-ing had risen by 10 percent. During the fol-lowing eight months, France had five differ-ent finance ministers, each with his own petsolution—a wealth tax, a moratorium on cer-tain maturing debts, more vigorous collec-tion of taxes, an increase in the turnover tax.Each failed to stem the collapse in confid-ence. French investors continued to pulltheir money out of the country.

In April 1926, France and the UnitedStates finally negotiated a war-debt settle-ment at 40 cents on the dollar. The budgetwas at last fully balanced. Still the franc keptfalling. By May, the exchange rate stood atover 30 to the dollar.

With a currency in free fall, prices nowrising at 2 percent a month, over 25 percenta year, and the government apparently im-potent, everyone made the obvious compar-ison with the situation in Germany fouryears earlier. In fact, there was no real

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parallel. Germany in 1922 had lost all controlof its budget deficit and in that single yearexpanded the money supply tenfold. By con-trast, the French had largely solved theirfiscal problems and its money supply wasunder control.

The main trouble was the fear that thedeep divisions between the right and the lefthad made France ungovernable. The specterof chronic political chaos associated withrevolving-door governments and financeministers was exacerbated by the uncertaintyover the government’s ability to fund itself,given the overhang of more than $10 billionin short-term debt.

It was this psychology of fear—a general-ized loss of nerve—that seemed to havegripped French investors and was driving thedownward spiral of the franc. The risk wasthat international speculators, those tradi-tional bugaboos of the left, would create aself-fulfilling meltdown as they shorted the

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currency in the hope of repurchasing it laterat a lower price, thereby compounding thevery downward trend that they were tryingto exploit. It was the obverse of a bubble,where excessive optimism translates intorising prices, which then induces even morebuying. Now excessive pessimism was trans-lating into falling prices, which were indu-cing even more selling.

In the face of this all-embracing miasma ofgloom, neither the politicians nor the finan-cial establishment seemed to have any cluewhat to do. In early 1926, the budget minis-ter, Georges Bonnet, invited the regents ofthe Banque de France to his office to seektheir advice. He was struck by how extremelyold they seemed to be—one of them couldonly walk leaning on two canes; anotherentered on the arm of his valet, who had toassist him into his chair. During the meeting,the panel, which represented the collectivefinancial wisdom of France, seemed only to

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be able to offer one platitude after anotherabout the need to restore confidence. Whenasked how to achieve this, they fell back onthe usual military metaphors that were de ri-gueur at times of French financial crisis. Oneof the regents proclaimed vehemently that“we are the soldiers of the franc and we willdie in the trenches for the franc.” That winterand spring, there was much in the pressabout the “battle of the franc,” “monetaryMarnes,” and the “Verdun of the currency.”

At one point, the government decided ithad to do more than just rely on a lot ofmilitary-sounding talk. Marshal Joffre, the“Hero of the Marne,” was summoned out ofretirement and placed in charge of the “Savethe Franc Fund.” It managed to raise all of 19million francs, rather less than $1 million,including 1 million francs from Sir Basil Za-haroff, the noted European arms merchant,and 100,000 francs from the New York

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Herald, the precursor of today’s Internation-al Herald Tribune.

The authorities still had one weapon in re-serve to break the downward spiral—themore than $1 billion in gold holdings of theBanque de France, some $700 millionparked in its vaults on the Rue de la Vrillière,and a further $300 million held abroad withthe Bank of England.

For much of modern history, includingwell into the latter half of the twentieth cen-tury, gold has occupied a hallowed place inthe French psyche. So revered was it thatduring these years of financial turmoil, theregents could never quite bring themselvesto actually draw upon their reserves. At onepoint during the war, the British had tried topersuade the Banque de France to utilizesome of its gold for the war effort. What wasthe point, they asked, of building up a re-serve if not to use at times of crisis? But theBanque had insisted that its reserves had to

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be preserved so that when the troubles wereall over, and France was in a position to re-sume its rightful place in the economic or-der, the gold would be there to back its cur-rency. The French gold reserves were likefamily heirlooms or jewels, “which must nev-er be brought out and never be touched; tolie idle, as it were, under a glass case.”

In early 1926, the government, its financesnow restored but its currency still inexorablyand inexplicably falling, tried to persuade theBanque that now was the time to redeem itspledge by supporting the franc with foreigncurrencies borrowed against the security ofthe gold. The Banque refused. Its behaviorduring the whole crisis—its reluctance tohelp and its lack of cooperation with the gov-ernment—would later give rise to the accusa-tion that the plutocrats at the apex of theFrench banking system had been determinedfrom the very start to bring the left-wing co-alition to its knees. Le mur d’argent—the

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wall of money—it was called, joining les deuxcents familles as the twin rallying cries of theleft in France.

In May 1926, the government, spurned byits own central bank, sought frantically toobtain credit abroad. But the scandal of lesfaux bilans had confirmed the universal pre-judice among British and American bankersthat French institutions—government, politi-cians, press, and now even the centralbank—were decadent, corrupt, and dysfunc-tional. A French delegation came to see Ben-jamin Strong, then in London, to beg for a$100 million loan from the New York Fedand was firmly turned down—he could notlend to the French government by statuteand would not lend to the Banque de Franceuntil all the groups involved—government,opposition, the Banque itself, and the mostimportant French bankers—“[laid] downtheir squabbles” and agreed to cooperate. Ata further meeting in Paris later in May, when

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French officials again pressed for a loan,Strong told them that when, as he quite ex-pected, they would be unable to pay, theAmericans would have to physically take thepledged gold reserves from the vaults of theBanque, for which they would be “excoriatedfrom one end of France to another.” Rejectedby the Federal Reserve, the French ap-proached every investment house theycould—Morgans, Kuhn Loeb, and DillonRead. Every house demurred.

On June 15, the “Ballet of Ministries” camearound full circle, and Joseph Caillaux re-turned as minister of finance, his fifth timein that position. This time he finally suc-ceeded in firing Robineau, and Émile Mor-eau was invited to take over from him. Cail-laux was set on making a clean sweep of theBanque’s entire upper management, repla-cing it with men who were more pragmaticand less ideologically opposed to the govern-ment. The deputy governor, Ernest Picard,

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was packed off to the Banque d’Algérie, aconvenient and proven place of exile for un-wanted civil servants, and replaced byCharles Rist, a professor of law at the Sor-bonne, a well-known specialist in monetaryeconomics. Albert Aupetit, as secretary gen-eral of the Banque the primary architect ofles faux bilans, was also shunted aside.When a group of regents threatened to resignen masse in outrage at the government inter-ference in their internal affairs, Caillaux andMoreau called their bluff. All of them stayed.

On June 24, Moreau, fifty-eight years old,vindicated at last, assumed the governorship.That day, the currency stood at 35 francs tothe dollar, having bounced modestly from itslow of 37 to the dollar. A friend to whom heconfided of his elevation to the new positiontold him that he pitied him. In his diary thatevening, Moreau wrote, “Am I to become theliquidator of the national bankruptcy? This

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has to be feared or at least expected. . . . Mywife is very unhappy.”

COINCIDENTALLY, As THE financial crisisin France was reaching a sort of crescendo,Norman and Strong were enjoying their an-nual vacation together, this year on theFrench Riviera. They had developed thepractice of meeting twice a year, combiningbusiness and pleasure—in New York duringthe winter and in Europe during thesummer.

The previous summer, Strong had spent afull three months in Europe. After going toLondon, Strong, who was accompanied byhis eldest daughter, Katherine, had gone onto Berlin with Norman to meet with Schacht,then to Paris and then for a month to thePalace Hotel at Biarritz.

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Come 1926, Strong proposed that they goto the south of France. The Côte d’Azur wasone of Norman’s favorite vacation spots—hehad been a regular visitor since 1902, whenhe had spent several months in Hyères recu-perating after the Boer War. But like most ofthe other English people who frequented theRiviera in those years, he preferred to bethere in the winter and the early spring. “Mydoubt is only about the heat: I like to bewarm but not grilled,” he groused whenStrong first came up with the idea. But theinducement of being able to sit down withhis friend and “ooze out whatever questionsare in my head” persuaded him to go along.

They chose to stay at the Hôtel du CapEden-Roc. Before the war, the Hôtel du Cap,secluded in twenty-five acres of ornamentalgardens at the tip of Cap d’Antibes, had beena favorite watering hole of European royalty.Like most resort hotels on the Riviera, itused to shut between May and September.

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However, in 1923, a rich young American

couple, the Murphys, 30 persuaded the ownerto keep it open and took over the whole hotelfor the summer. Thus was born the summerseason in the south of France. In the threeyears since the Murphys had first command-eered the Hôtel du Cap, it had become themost fashionable summer resort hotel on theCôte d’Azur.

In the last week of June, Strong and Nor-man and the other guests found themselvesbesieged by newspapermen. It seemed toomuch of a coincidence that the world’s twomost important central bankers should hap-pen to be in France at the very moment itscurrency crisis was reaching some sort of de-nouement. Rumors were rife that a meetingof the world’s great financiers, to be held inAntibes, of all places, was in the offing; thatSchacht was on his way; that Andrew Mellon,the U.S. secretary of the treasury, would

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soon arrive; that Moreau was already in dailycontact.

The two bankers did manage to elude theescort of reporters one evening, but weresoon discovered dining at the Colombe d’Or,a small restaurant at St. Paul-de-Vence,twenty miles away. Another intrepid journal-ist managed to talk his way into the hotelgrounds and reported encountering Normanperched acrobatically on a sort of surfboardbeing dragged through the waves by a smallmotor dinghy. The hotel management be-came so irritated with the inconvenience toits other guests caused by the press barragethat its employees were given strict instruc-tions not to deliver messages to the two men.In fact, while Norman and Strong followedthe events in Paris avidly, they knew that atthis stage it was premature to enter into anysort of discussions with the Frenchauthorities.

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At the end of July, Norman returned toEngland. Strong went to Paris, arriving onJuly 20. Three days before, the latest Frenchgovernment, having lasted all of four weeks,collapsed. It was followed by another left-wing coalition that survived only seventy-twohours. There was talk of revolution or a coupd’état. The streets outside the NationalAssembly were daily thronged with protest-ers. Strong found his French banking corres-pondents so fearful that they had begunsending their families to safety in theprovinces, while the American officials heknew were preparing for violent anti-Amer-ican demonstrations.

Since the founding of their republic, Amer-icans had had a love affair with France andespecially with Paris. In the early twenties,with the franc at a quarter of its prewar level,that romance had suddenly become access-ible to any American with a couple of hun-dred dollars to spare. A tourist-class passage

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across the Atlantic could be had for as littleas $80 and the cost of living in France wasastoundingly cheap for anyone with dollars.By 1926, an estimated forty-five thousandAmericans were living in Paris and everysummer another two hundred thousandtourists arrived to enjoy the combination ofculture, gracious living, and a risqué nightlifethat made Paris, even then, the most visitedcity in the world.

Unfortunately, the affection of Americansfor all things French was increasingly unre-quited. The French press had for a while ex-pressed its indignation at the spectacle ofrich Americans taking advantage of the lowfranc to buy up the choicest French propertyon the Côte d’Azur and Côte Basque, alongthe Loire valley, and on the Champs de Marsin Paris. The newspaper Le Midi had takento referring to Americans as “destructivegrasshoppers.”

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One incident in particular had been alightning rod for bad feeling. In March 1924,at the height of the currency crisis, the U.S.ambassador, Myron Herrick, bought out ofhis own pocket a grand mansion at Two Av-enue d’Iéna to house the embassy. Built inthe late nineteenth century at a cost of 5 mil-lion francs, equivalent at the time to about $1million, the mansion was now selling for

5,400,000 francs.31 Herrick astutely chose toexchange his dollars for francs on March 11,1924, the very day that panic selling on theBourse drove the exchange rate down to 27francs to the dollar, which gave him thehouse for only $200,000. As ambassadorfrom 1912 to 1914 Herrick had won the affec-tion of the French for his decision to stay inthe city when it seemed about to fall to theGermans. The affection was great enoughthat he had been asked to return as ambas-sador in 1921. But when the newspapers dis-covered that the American ambassador

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himself had cut a sweet deal from the franc’scollapse, there was outrage.

The tough stance adopted by the U.S. gov-ernment, particularly Congress, over repay-ments of war debts had aroused much bitter-ness in France. Casualties of Frenchmen dur-ing the war had been twenty times that ofAmericans. Coolidge’s infamous re-mark—“They hired the money, didn’tthey?”—had displayed a remarkable indiffer-ence to the human sacrifice of Britain andFrance that all Europeans found chilling. Thedeal over the French war debts agreed to byVictor Henri Berenger and Andrew Mellon inApril 1926 did nothing to bridge that chasmbut only intensified the resentment further.Americans thought they had been ex-traordinarily generous by reducing theirclaim by 60 percent. The French, on the oth-er hand, viewed the American decision tocollect at all on a debt, the liquidation of

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which would take sixty-two years, as simplyrapacious.

On July 11, in a dramatic protest, twentythousand mutilés—maimed war veter-ans—the legless in wheelchairs, the blind ledby nurses, marched in silent protest up theChamps-Élysées to the Place d’Iéna over-looking the U.S. embassy, where they laid awreath at the foot of the equestrian statue ofGeorge Washington.

On July 19, the night before Strong arrivedin Paris, a bus carrying American touristswas attacked by a rabble in Montmartre. Twodays later a few hundred demonstrators sur-rounded some Paris-by-night tourist busesnear the Opéra and prevented them fromtaking sightseers through the more insalu-brious parts of the city. Several thousand loc-als soon gathered around and began jeeringand hurling epithets. A couple of days lateranother party of American tourists respon-ded by plastering the partitions of their

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railway compartment with French money,and conspicuously lighting cigars with fifty-and hundred-franc notes as a mark of theircontempt for the currency.

Relations between American visitors andtheir reluctant hosts had so deteriorated thatthe New York World felt compelled to prof-fer the following dos and don’ts to touristsplanning to visit France that summer:

Don’t boast in cafes that Americancurrency is the only real honest-to-God money in the world. It isn’t.Besides such bursts of financial patri-otism are annoying to people who didnot spend the years 1914 to 1916 accu-mulating world credit by selling muni-tions, cotton and wheat to other na-tions which were busy with a war. . . .

Don’t confide to your fellow passen-gers on railway trains that America isthe most generous of creditors

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because America has cancelled all thatpart of debts, which nobody can col-lect. Talk instead of our prowess intennis, golf or Prohibition. It comeswith better grace.

It was against this backdrop that Moreaucame to see Strong at his hotel in Versailles.They were to meet several times during thenext days—always at Strong’s hotel, becausehe did not wish to be seen visiting theBanque and even requested that the merefact of their meetings be kept a secret. Hewas facing severe political opposition athome to any Federal Reserve involvement inthe finances of France: “Xenophobic displaysin Paris,” he explained, “have produced theworst possible impression” on the Americanpublic.

The two men got on well. Moreau foundStrong “friendly but reserved.” Nevertheless,the latter was noncommittal about a loan.For one, it would require some signal that

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the French government would respect theBanque’s independence. For another, theNational Assembly would have to ratify theApril deal on war debts.

On the morning of July 29, it was Nor-man’s turn to meet with the Banque’s newleadership. He came to call on Moreau at hisoffice on the first floor of the Hôtel duToulouse. The governor’s suite at the Banquewas a marked contrast to the classical simpli-city of his own office on Threadneedle Street.The rooms had once been the private apart-ments of the princess de Lamballe,granddaughter-in-law of the comte deToulouse, a close confidante of Marie An-toinette who had often entertained the queen

there.32 The floor was covered by a floralSavonnerie carpet, the governor’s desk faceda painting by Boucher, the anteroom boasteda beautiful Fragonard park scene.

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The meeting of the two governors—Nor-man, tall, distinguished, and cosmopolitan,with his trimmed beard and his well-cut dan-dyish clothes; Moreau, short, squat, andbald, looking like a provincial notary out of anovel by Flaubert—immediately got off onthe wrong foot. For once, Norman’s infam-ous charm seemed to desert him. He wasgratuitously patronizing, and despite beingfluent in French, insisted on speaking toMoreau, who spoke no foreign languages, inEnglish throughout that first encounter.

“Mr. Norman arrived at eleveno’clock,” Moreau wrote in his diary.“At first sight he is very likeable. Heappears to have stepped out of a vanDyck painting, elongated figure, poin-ted beard, a big hat: he has the bear-ing of a companion of the Stuarts. It issaid that Israelite blood flows in hisveins. I know nothing of this, but Mr.Norman seemed, perhaps because of

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it, full of contempt for the Jews aboutwhom he spoke in very bad terms. Hedoes not like the French. He told meliterally: ‘I want very much to help theBank of France. But I detest yourGovernment and your Treasury. Forthem I will do nothing at all.’ On theother hand he seems to feel the deep-est sympathy for the Germans. He isvery close to Dr. Schacht. They seeother often and hatch secret plans. . . .Nevertheless Mr. Norman is above allprofoundly English and this makeshim very creditable. He is an imperi-alist seeking the domination of theworld for his country which he lovespassionately. . . . He adores the Bankof England. He told me: ‘The Bank ofEngland is my only mistress. I thinkonly of her and I have given her mylife.’ He is not a friend to us French.Very mysterious, extremely

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complicated, one never knows thedepths of his thoughts. Even so he isvery amiable when he wants to be. . . .Norman spares nothing in his effortsto flatter [Strong] or gain influenceover him. He went to spend severaldays at Antibes, only because Strongwas staying there.”

A Bank of England official accompanyingNorman wrote later that Moreau left the im-pression of being “stupid, obstinate, devoidof imagination and generally of understand-ing but a magnificent fighter for narrow andgreedy ends.”

Norman essentially reiterated the condi-tions that Strong had set down for assist-ance: a change in the statutes to give the gov-ernor of the Banque security of tenure andthe ratification of both the British andAmerican war-debt settlements. Moreau didtry to make both men see the political diffi-culties of each measure, particularly of trying

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to change the Banque’s statutes in such polit-ically fractured times. Many politicians werebitter at the Banque for sitting on its remain-ing gold reserves when the currency col-lapsed that year.

Moreau had received a quick lesson in theways of international capital markets—finan-cial assistance was “a commodity” that hisfellow central bankers were “only ready tosell . . . at a stiff price.” He would not forget.In his own mind, he blamed the sinistermachinations of Norman and his malice to-ward the French for the failure of centralbankers to come to France’s aid.

ON July 21, Raymond Poincaré was asked toform a ministry. He was then the most illus-trious and experienced politician in France,had been in politics for more than fortyyears—twice prime minister, from 1912-13

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and 1922-24, and president of the republicduring the fateful years of crisis and war,from 1913-20. Though not formally associ-ated with a party, he was a man of the centerwho in many ways stood above the politicalfray. And while he had been the architect ofthe disastrous and expensive decision in1923 to occupy the Ruhr, which had leftFrance isolated and weak, he had beenequally responsible for setting in motion theDawes Plan; and his anti-German stance hadmellowed considerably in the previous threeyears. Within two days, he announced a na-tional unity government that encompassedthe full spectrum of political opinion, exceptfor the Socialists, and included six formerprime ministers.

What happened over the next few days il-lustrates the overwhelming power that psy-chological factors had come to exercise overthe currency market. On the day that Poin-caré became prime minister, the franc

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touched 50 to the dollar. But even before hehad had a chance to outline his financial pro-gram or introduce any new tax measures, hispresence alone seemed to reassure investors.Within the space of two days, the franc hadrebounded to 43 to the dollar and by the fol-lowing week, it was back at 35, a rise of morethan 40 percent. This astonishing recoveryseems to confirm the thesis that in the laststages of its collapse, the currency had lostall connection to economic reality and wasbeing driven downward by speculators.

The franc found as much comfort in Poin-caré’s personality as in his political stature.The most uncharismatic politician in allFrance—cold, withdrawn, and antiso-

cial33—he made up for it by his prodigiousappetite for work, married to a photographicmemory, and a meticulous attention to de-tail. Most of all, in an era when French politi-cians seemed to have only the vaguest com-prehension of the boundary between public

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obligation and private gain, he was scrupu-lously honest. He had a well-publicized pro-vincial suspicion of all cosmopolitan Parisi-ans, particularly bankers. The averageFrench investor—the small shopkeeper fromPicardy; the thrifty farmer in the Auvergne;the eminently practical village doctor fromNormandy; and, of course, the glass manu-facturer of Poincaré’s native Lorraine—re-cognized themselves in him and took com-fort in his stewardship of their finances.

As the franc surged upward on in the ex-changes, the prices of imported goods andthe cost-of-living index began falling. Thatsummer the papers were full of the comingsand goings of American financiers in Europe.On July 24, Secretary of the TreasuryAndrew Mellon arrived in Paris. In the firstweek of August, Strong was discovered inThe Hague conferring with Schacht. OnAugust 20, Strong and Mellon surfaced inEvian with Parker Gilbert, the agent-general

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for German reparations. What could all theseprominent American moneymen be talkingabout if not the problem of the franc? In fact,while the mysterious peregrination ofbankers across Europe was wonderful fodderfor financial gossipmongers, it proved to belargely a sideshow. Mellon, it turned out, hadcome to Europe mainly to see his sick daugh-ter in Rome and take her to Evian for thewaters.

The capital that had fled France during thepast two years began to wash back irresist-ibly, largely obviating the need for Americanor British financial assistance. In any case,Poincaré, confronted by enormous resistanceto the war-debt agreements within the Na-tional Assembly, delayed submitting themfor ratification. Without these agreements,there could be no loans from abroad.

Moreau himself was initially unsure howto respond to rebound in the franc. His ini-tial inclination was to let it run. He was by

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training an old school civil servant; andthough he had considerable experience inbanking, his understanding of monetary eco-nomics was quite rudimentary and at timesconfused. The truth is that at that time, veryfew bankers could claim to understand fullythe situation of France in 1926, particularlythe complicated dynamics between the in-flow of money and its effect on the exchangerate and domestic prices and, in turn, theirimpact on the overall economy. Moreau waslucky enough in his two subordinates,Charles Rist and Pierre Quesnay, to havestumbled across two of the few men who did.

Rist, aged fifty-two, had been an academicall his life, and was best known for the classictome History of Economic Doctrines fromthe Physiocrats to the Present Age, coau-thored with his fellow professor CharlesGide, the uncle of the writer. According toMoreau, Rist was something of a “slave tothe books he has written and the lectures he

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has delivered.” In 1924, he had come to theattention of the finance bureaucracy with ashort but highly influential monograph De-flation in Practice, which argued, likeKeynes’s A Tract on Monetary Reform, thatattempts to force down prices would imposean excessive cost on the economy and soci-ety. He had been very reluctant to escape thecomforts of academia when first approachedabout coming to the Banque and had onlybeen persuaded when Caillaux, at their ini-tial interview, exclaimed, “You are not goingto remain a grammarian for the rest of yourlife!”

Pierre Quesnay was only thirty-one yearsold, a former student of Rist’s who, after be-ing demobilized in 1919, had joined the fin-ancial service of the League of Nations. Mor-eau brought him in as his chief of staff, ap-pointing him as the Banque’s director of eco-

nomic research a month later.34

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During the fall, the inflow of money turnedinto a flood, and as it carried the franc irres-istibly upward, breaching 30 to the dollar,Rist and Quesnay began to worry that Francemight repeat the British mistake: an ex-change rate that was too high, making ex-ports chronically overpriced and uncompet-itive. In mid-December, as the franc reached25 francs to the dollar, Moreau’s two col-leagues, determined to prevent the Frencheconomy from slipping into British-like stag-nation, began to agitate for the Banque to in-tervene to cap its rise. At one point, theyeven threatened to resign unless Moreaupersuaded the prime minister to go along.

While Quesnay and Rist provided theBanque’s intellectual horsepower, Moreauwas the political strategist. He recognizedthat the choice of the exchange rate ulti-mately determined how the financial burdenof the war was to be shared. It was MaynardKeynes who had first articulated the political

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dimension to exchange rate policy in theTract, back in 1923: “The level of the franc isgoing to be settled, not by speculation or thebalance of trade, or even the outcome of theRuhr adventure, but by the proportion of hisearned income which the French taxpayerwill permit to be taken from him to pay theclaims of the French rentier.” The higher theBanque de France let the franc rise, the high-er would be the value of the governmentdebt, the better for the French rentier andthe worse for the taxpayer. As Moreau put it,fixing the exchange rate was a matter of bal-ancing “the sacrifices demanded of the dif-ferent social classes in the population.”

Every country in Europe to emerge fromthe war had faced the same set of issues. Bri-tain had chosen one extreme: to imposemost of the burden on its taxpayers and toprotect its savers. Germany had chosen theopposite extreme: the way of pathological in-flation, which had wiped away its internal

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debts at the price of annihilating the savingsof its middle classes. Moreau was set on find-ing a middle way.

Poincaré’s natural inclination was to savorthe benefits to his reputation of the strength-ening currency and let the franc keep rising.He was understandably reluctant to go downin history as the man who had formally ac-ceded to an 80 percent reduction in the valueof his nation’s money. But he also recognizedthat by allowing it to rise too far, he riskeddriving the economy into recession. Likemany with a genius for detail, Poincaré wasby nature indecisive and vacillating, one dayin favor of capping the rise, the next dayagainst.

The principle of opposition to capping thefranc’s recovery did not come from the primeminister but from within Moreau’s very owninstitution. A faction within the Banque’sdirectorate, led by the two most powerful re-gents, Baron Édouard de Rothschild and

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François de Wendel, saw in the decline of thefranc the decline of France. True diehards,they considered it their moral obligation todefend the interests of all those who had in-vested in French bonds during the war.

No one better symbolized the power of lesdeux cents familles and le mur d’argent thanthese two men. Rothschild was the epitomeof the French aristocrat. Tall and slender, al-ways fastidiously dressed in his old-fash-ioned banker’s uniform of frock coat and tophat, he had become the senior partner atRothschild Frères at the age of thirty-seven.Beneath his haughty demeanor, he was shy,almost withdrawn; cautious and old-fash-ioned, he was a true conservative. The familybank matched his character, a place where,according to his son Guy, “The past clung toeverything and everyone” and whose mainpurpose was in “gently prolonging the nine-teenth century.”

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A familiar figure in the best Parisian clubs,Rothschild had been an intimate friend ofEdward VII’s, and was known as a great phil-anthropist, being especially generous to Jew-ish charities. To the public he was above allfamous for his racehorses; during the seasonhe was a fixture at Longchamps. More thanjust another wealthy breeder and owner ofthoroughbreds, he was a skilled equestrian inhis own right who had even representedFrance at polo at the 1900 Olympics.

In the world of banking the Rothschildname and the family’s great wealth evokedboth awe and resentment. There was muchanti-Semitic innuendo about their politicalinfluence. One exaggerated account has itthat between 1920 and 1940, “No cabinetwas formed without Édouard de Rothschildbeing consulted.” Édouard had been a youngman of twenty-five when the Dreyfus affairbroke in 1894. As Dreyfus was being publiclydegraded from his rank, an enraged mob had

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howled, “A Mort les Juifs!”—“Death to theJews!” He was determined thereafter thatthe Rothschilds should keep a low profile,keep out of the papers, and guard their pri-vacy—though justly enraged by an anti-Semitic slur, he did once challenge a man to

a duel.35

If Édouard de Rothschild was the glamor-ous face on the “wall of money,” Francois deWendel was, in the public mind, its moresinister visage. The Wendels were one of thegreat arms manufacturers of Europe, ar-morers from Lorraine for more than 250years, who had supplied weapons to, amongothers, Napoléon Bonaparte. Under the Se-cond Empire, they had diversified, buildingone of the largest steel empires in Europe sothat by 1914 the Wendel name in France hadbecome as synonymous with steel as that ofCarnegie was in the United States.

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In the French edition of Who’s Who,François de Wendel listed his professionsimply as “Maître de Forges”—ironmaster.He did not look the part. His receding chingave him the appearance of “a tall friendlyduck.” He lived discreetly in a mansion at 10Rue de Clichy, not the most elegant or fash-ionable quartier of the capital, and liked tospend his weekends at his private game re-serve just outside Paris, where he was said tobe an enthusiastic but not very talented shot.

Unusually for a regent of the Banque deFrance, Wendel was an elected member ofthe National Assembly, leaving his twobrothers to run the vast steel empire. In1918, he became president of the Comité desForges, the very powerful industry associ-ation of iron, steel, and armamentmanufacturers.

It required a certain obstinacy and tenacityof purpose for Moreau to take on the mostpowerful of his own regents. But over a

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thirty-year career in the higher civil service,he had acquired the remarkable skill in oper-ating within the machinery of government.He certainly did not rely on diplomatic skillsor charm—he had neither. Furthermore,after years on the periphery of power and ofavoiding the salons of Paris, he had a limitednetwork of political allies. His one greatmentor, Caillaux, who might have helpedhim through the labyrinth of the Frenchpower structure, was gone within a fewweeks of his appointment. It did not helpthat Poincaré was a long-standing enemy ofCaillaux’s, and from the very start viewedMoreau with some hostility and suspicion asa holdover.

But Moreau proved to be unusually adeptat bureaucratic infighting. In his diaries, hedisplays a natural talent for the give-and-take of policy formulation, knowing when toconcede and when to push, when to bluff,when to threaten and when to fold, and

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considerable insight into the motivationsand character of those he was up against.

On December 21, the Banque began topurchase foreign exchange and sell its owncurrency to prevent the franc from risingabove 25 to the dollar. For the next twoyears, with Poincaré’s blessing, Moreau pur-sued a policy of intervening in the currencymarket to keep it pegged there.

Meanwhile, Rothschild and Wendel wageda guerrilla campaign against Moreau withinthe halls of the Banque and the corridors ofpower of the finance ministry on the Rue deRivoli. Few institutions were more riddledwith byzantine intrigue than the Banque.Moreau had had his first taste of it soon afterjoining—in August 1926, to his great sur-prise, he discovered that all incoming andoutgoing calls including those from the gov-ernor’s office were being wiretapped. He hadthe taps dismantled.

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Unable to secure a majority within theCouncil of Regents, Rothschild and Wendelemployed every possible tactic to undermineMoreau. They lobbied the prime minister.They breached a long-standing tradition ofdiscretion among the regents by makingpublic pronouncements on currency policy,hoping thereby to lure such a flood of moneyinto the country that Moreau would beforced to remove the cap. At one point, Roth-schild ordered the Chemin de Fer du Nord,the largest railway company in France—ofwhich he was president—to buy francs in or-der to push the exchange rate higher, riskingthe accusation that a regent of the Banque deFrance was engaged in inside trading in thecurrency market.

By the middle of 1927, it was clear thatMoreau had won. Waves of French capitalthat had fled to London or New York hadwashed back home, allowing the Banque toaccumulate a foreign exchange war chest of

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$500 million dollars, most of it in pounds.Despite the pressure from the diehardsamong the Regents, Poincaré had been wonover. Moreau kept urging him not to look toFrance’s past but to its future. At 25 francs tothe dollar, French goods were among themost competitive in the world; exports werebooming, while prices were stable. It seemedas if, thanks to Moreau, France, of all theEuropean countries, had finally hit upon theright recipe for dealing with the financial leg-acy of the war, avoiding the two extremes ofGerman-style inflation and British-styledeflation.

Moreau’s mistake was to assume that thevalue of the currency of a major economicpower such as France, the fourth largest in-dustrial economy, was a matter for thatcountry alone. Exchange rates, by their verynature, involve more than one side and aretherefore a reflection of a multilateral sys-tem. Though it may have been very difficult

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in 1926 to know the exact ramifications ofthe franc’s exchange rate on surroundingcountries, Moreau seems to have deliberatelyclosed his eyes to the impact of his decisionon the wider system. Perhaps he was irrit-ated at an international regime that he felthad done so little to support France in itstime of trouble. Perhaps he resented that thestructure was dominated by an Anglo-Amer-ican combine led by Norman—or so he be-lieved. Whatever the reason, his decision tofix the franc at an undervalued rate wouldeventually help to undermine the stability ofthe very standard to which he had nowhitched his currency.

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14. THE FIRST SQUALLS

1926-27

Circumstances rule men; men do notrule circumstances.

—HERODOTUS, Histories

ORGY OF SPECULATION

No other issue would create more debate,disagreement, feuds, and confusion withinthe Federal Reserve System than what to do

about the stock market. Wall Street had al-ways loomed large in the American nationalpsyche. Charles Dickens, visiting the UnitedStates in 1842, had been struck by the localtaste for speculation and the desire “to makea fortune out of nothing.” After the 1884panic on the New York Stock Exchange, theLondon magazine The Spectator commen-ted, “The English, however speculative, fearpoverty. The Frenchman shoots himself toavoid it. The American with a million specu-lates to win ten, and if he takes losses takes aclerkship with equanimity. This freedomfrom sordidness is commendable, but itmakes a nation of the most degenerategamesters in the world.”

Surprisingly, despite this national procliv-ity for betting on stocks, the U.S. market hadnever been especially large. In 1913, the totalvalue of common stocks was some $15 bil-lion, roughly the same size as the Britishstock market, which rested upon an economy

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about a third the size of that of the UnitedStates. From the beginning of the centuryuntil the outbreak of war, the stock markethad essentially gone nowhere. The “merger”bull market from 1900 to 1902 had been cutshort by the “rich man’s panic” of 1903,which was followed by the “Roosevelt” bullmarket, then the “1907 panic,” and finallythe “recovery” bull market. As a con-sequence, the Dow had fluctuated for a dec-ade and a half in an irregular wavelike move-ment between 50 and 100 without breaking

in either direction.36

When war came, the U.S. economy experi-enced a boom and profits shot up dramatic-ally for a couple of years as America becamethe arms supplier and financier to the Allies.But few investors were convinced thatEuropean Armageddon could be good forstocks in the long run, and so despite theprofit surge, the market remained firmlyrange bound. Wisely so, for once the United

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States did enter the fray, labor shortagesemerged, the war effort consumed greatchunks of the national product, and profitssuffered. By the end of 1920, the Dow stoodat 72, almost at the midpoint of its range forthe last twenty years—though after takingwartime inflation into account, this repres-ented half the 1913 level in real terms.

But once the initial postwar adjustmentpains had died away, the market began totake off. From 1922 onward, the Fed, underthe leadership of Benjamin Strong, did a re-markable job in stabilizing prices. With infla-tion thus effectively at zero, it was able tokeep interest rates low. This allowed the eco-nomy, boosted by the dynamic new indus-tries of automobiles and radios, to surgeahead. While overall economic growth wasexceptionally strong, even stronger and moreexceptional was the rise in profits. Poweredby new forms of organization and by a surgein factory mechanization, productivity

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accelerated in the 1920s while hourly wagesgrew only modestly. Most of the benefits,therefore, of the “new era” flowed to the cor-poratebottom line—by 1925, earnings weredouble their level in 1913. As a result, theDow, after hitting a low of 67 in the summerof 1921, more than doubled to above 150 dur-ing the subsequent four years. By 1925, afterthe reelection of Calvin Coolidge as presid-ent, this last upward ride even acquired itsown moniker: the Coolidge bull market.

FIGURE 4

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No company better exemplified the boom-ing economy and provided a better windowinto the rising stock market than GeneralMotors. It had been founded in 1908 by Wil-liam Crapo Durant, grandson of H. H. Crapo,the Civil War governor of Michigan. YoungBilly Durant grew up in Flint, Michigan, andafter dropping out of high school, driftedthrough a series of nondescript jobs, includ-ing grocery boy, drugstore attendant,

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traveling medicine man, insurance pro-moter, and tobacco shop manager. Thebantam-sized Durant was a natural sales-man, charming, soft-spoken but determined,with a winning smile, an infectious attitudeof irrepressible optimism, and an unusualtalent for persuading people. After buildingone of the largest buggy businesses in thecountry, in 1903 he acquired the Buick Mo-tor Company, one of the several hundred carcompanies then in America, and during thenext eight years steadily acquired a wholeseries of small automobile firms—amongthem Oldsmobile, Cadillac, and Pon-tiac—whose names have become so familiarthat they are now almost part of thelanguage.

In 1910, after overexpanding and going toodeeply into debt, Durant lost control of Gen-eral Motors to his bankers. Instead of givingup, the indefatigable Durant went on to forma new car company with Louis Chevrolet, a

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racing driver, and was so successful that in1915, he was able to reacquire his old com-pany, General Motors, which had gone pub-lic, in a takeover raid. But in 1920, the post-war recession once again found him overex-tended and he lost control of the companyfor a second time, on this go-around to theDu Pont family.

When the Du Ponts acquired their stake inGeneral Motors, the company was producing250,000 cars a year, had just earned some$30 million in profit, and was valued at alittle over $200 million. Under its new pro-fessional management, General Motors wenton to become the most successful companyin the country and the darling of Wall Street.By 1925, it was making over 800,000 cars ayear, about 25 percent of all those sold in thecountry and generating over $110 million inprofit. Its stock price in those five yearsquadrupled in value, from around $25 toover $100 a share.

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Supported by growing companies such asGeneral Motors, the stock market balloonedinto something of a financial behemoth dur-ing the Coolidge bull market. By themid-1920s, about $1 billion was being raisedannually for new investments, the number ofcorporations listed had quintupled, and thetotal value of stocks had increased from $15billion in 1913 to over $30 billion in 1925.

Wall Street was not the only beneficiary ofthe growth in the economy. The buoyantstock market was accompanied by a real es-tate boom in Florida. Since the war, Floridahad been swamped by an enormous migra-tion of people attracted by the climate—infive years, the population of Miami had morethan doubled. All the money flooding intothe state had driven real estate prices into afrenzy. Lured by brochures, which promisedgraceful palm trees, golden beaches, sun-kissed skies, and whispering breezes, butsomehow omitted to mention the hurricanes

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and the mangrove swamps, the public beganbuying land indiscriminately. New develop-ments such as Coral Gables and Hollywood-by-the-Sea sprang up overnight. From PalmBeach to Miami and across to the cities of theGulf Coast, prices skyrocketed. A strip ofland on Palm Beach worth a quarter of a mil-lion dollars before the boom was priced, byearly 1925, at close to $5 million; vacant lotsthat had once gone for a few hundred dollarswere being sold for as much as $50,000.

Watching other people become rich is notmuch fun, especially if they do it overnightand without any effort. It was therefore inev-itable that all this frenetic activity—the thriv-ing stock market, the new issues, the bally-hoo about a new era, the buying and sellingof Florida real estate—provoked a chorus ofvoices demanding that the Fed do somethingto stop the “orgy of speculation,” a phrasethat would become so commonplace over thenext few years as to lose all meaning.

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Leading the charge was the ever disputa-tious Adolph Miller. His hostility to the risein the stock market rested, like so many ofhis arguments, upon several misconceptions.There was the erroneous notion that a risingstock market “absorbs” money from the restof the economy. This is sheer nonsense, be-cause for every buyer of stocks there is aseller and whatever money flows into thestock market flows immediately out.

In the fall of 1925, Miller had also becomeparticularly alarmed by the data on so-calledbrokers’ loans. These were loans provided bybanks to stock brokers who used the moneyto finance their own inventories of securitiesor to lend to their own customers to buyequities on margins. Typically such margininvestors only paid 20 to 25 percent of thevalue of stocks with their own money andborrowed the rest. The total volume of suchbrokers’ loans, which had averaged around$1 billion in the early years of the decade,

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had suddenly ballooned to $2.2 billion at theend of 1924 and looked likely to reach $3.5billion by the end of 1925. Miller saw theseloans as a symptom of speculation, and hewas firmly convinced that it was somehowmore “inflationary” for banks to financestock market purchases than for them to fin-ance other activities. Again, we now knowthis to be fallacious—the inflationary con-sequences of easy credit have much more todo with the total amount the public borrowsand very little to do with the purposes forwhich it does so.

Miller’s campaign was given an addedboost one quiet Sunday afternoon in Novem-ber 1925, when he was sitting in the study ofhis house on S Street in Washington, goingthrough one of the many Board reports hetook home with him, and the doorbell rang.“Before the butler could move,” Miller’sneighbor from two doors down pushed hisway into the house unannounced, “bounded

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up the stairs, taking them two at a time,” andbarged in, demanding, “Are you as worriedabout this speculation as I am?”

Miller’s unusually energetic neighbor wasnone other than the “boy wonder,” HerbertHoover, secretary of commerce. Hoover, aQuaker orphan from Iowa, was an engineerby profession who had graduated in the veryfirst class from Stanford and had made a for-tune in the first decade of the century as apromoter of mining ventures in every cornerof the globe—from China to the Transvaal,from Siberia to the Yukon, from the Malaypeninsula to Tierra del Fuego. He had cometo national prominence by accident as theman in charge of evacuating Americans fromEurope in 1914, then as the War Food Ad-ministrator in the Wilson administration andas the head of Belgian Relief, “the only manwho emerged from the ordeal of Paris withan enhanced reputation,” according toMaynard Keynes. Appointed to the cabinet

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by Harding, he had distinguished himselffrom his do-nothing colleagues by his superborganizational ability, his belief in himself,and the constant flurry of activity that alwayssurrounded him.

In the fall of 1925, Hoover, not shy aboutinterfering in his cabinet colleagues’ busi-ness—Parker Gilbert called him the “Secret-ary of Commerce and the Under-Secretary ofall other departments”—decided to launch acampaign against the pervasive atmosphereof speculation that he claimed was infectingthe country, from Florida real estate to thestock market.

For both Miller and Hoover, the culprit be-hind this speculative fever was BenjaminStrong. They believed that his policy of keep-ing interest rates artificially low to helpEuropean currencies was responsible forfueling the incipient bubble. Hoover hadonce been a prime supporter of American en-gagement in European affairs following the

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war, and had counted Strong a good friend.But he was now convinced that the policy ofpropping up Europe with artificially cheapcredit had been taken too far. In his words,Strong had become “a mental annex toEurope.”

Like every other financial official at thetime, Strong was taken aback by the surpris-ing strength of the stock market and washimself also worried about a potentialbubble. His letters to Norman are filled withmisgivings about the rise in prices on WallStreet. Though he had a somewhat jaundicedview of the stock market, dominated as itwas by its motley crew of outsiders—its plun-gers and pool operators, all of whom werevery much at the bottom of the Wall Streetsocial ladder—he was acutely aware of itspower to cause trouble. Stock market crashesand banking panics had always been closelylinked in the pre-Fed world and many of thecountry’s past financial crises had emerged

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from Wall Street: 1837, 1857, 1896, and1907. In his early days as a stockbroker, hehimself had been a witness firsthand to thecrash of 1896, and had been an active parti-cipant in restoring order after the panic of1907.

But as an experienced Wall Street hand, hewas quite aware of how difficult it was toidentify a market bubble—to distinguishbetween an advance in stock prices warran-ted by higher profits and a rise driven purelyby market psychology. Almost by definition,there were always people who believed thatthe market has gone too high—the stockmarket depended on a diversity of opinionand for every buyer dreaming of riches in1925, there was a seller who thought thewhole thing had gone too far. Strong recog-nized his own highly fallible judgment aboutstocks was a very thin reed on which to con-duct the country’s monetary policy. Eventhough his initial reaction was that the

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market might have gone too far, he askedhimself, “May it not be the case the world isnow entering upon a period where businessdevelopments will follow the recovery of con-fidence, so long lost as a result of the war?Nobody knows and I will not dare prophesy.”Given so much uncertainty, he was con-vinced that the Federal Reserve should nottry to make itself an arbiter of equity prices.

Moreover, even if he was sure that themarket had entered a speculative bubble, hewas conscious that the Fed had many otherobjectives to worry about apart from thelevel of the market. He feared that if he ad-ded yet another goal—preventing stock mar-ket bubbles—to the list he would overloadthe system. Drawing a rather stretched ana-logy between the Federal Reserve and itsvarious and conflicting objectives for theeconomy and a family burdened by manychildren, he ruminated, “Must we acceptparenthood for every economic development

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in the country? That is a hard thing for us todo. We would have a large family of children.Every time one of them misbehaved, wemight have to spank them all.” He wantedthe Fed to focus on stabilizing the overalleconomy and was reluctant to allow itspolicies to be dominated by the need to regu-late the “affairs of gamblers” who throngedthe tip of Manhattan.

In Strong’s view, something about theAmerican character—the exuberance, thedriving optimism, the naive embrace offads—lent itself to periods of speculative ex-cess. “It seems a shame that the best sort ofplans can be handicapped by a speculativeorgy,” he mused almost philosophically toNorman at the end of 1925, “and yet the tem-per of the people of this country is such thatthese situations cannot be avoided.”

Despite the agitation from Hoover andMiller in late 1925, Strong concluded thatwith absolutely no signs of domestic

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inflation, the pound having only just re-turned to gold and the European currencysituation still fragile, this was not the time totighten credit. For the moment he would justhave to ignore the stock market.

Even in combination there was little thatHoover and Miller were able to do to forcehis hand. As secretary of commerce, Hooverhad no remit to interfere in the deliberationsof an independent agency like the Fed. Millerwas in a minority on the Board. And whilethe two of them campaigned to change theFed’s policy by co-opting allies in Congress,senators and congressmen are rarely in-formed enough to be persuasive advocatesfor changes in monetary policy.

It helped Strong enormously that the Fed’scharter had an inherent bias toward inaction.Under the then law, only the reserve bankscould initiate changes in policy. While theBoard had the power to approve or disap-prove such changes, it could not force the

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reserve banks to act. It was a recipe for theworst sort of stalemate. Checks and balancesmay work well in politics, but they are a dis-aster for any organization—the military isone example; central banks are another—re-quired to act quickly and decisively. But in1925 and 1926, with Hoover and Millerpushing to tighten credit policy, Strong wasable to hide behind the Fed’s charter and donothing.

Nothing illustrates the dilemmas posed formonetary policy by the stock market than thepush to tighten 1925. It turned out thatHoover and Miller had raised a false alarm.There was no bubble. Stock prices took abreather in the spring of 1926, falling byabout 10 percent, and then resumed a steadybut not yet spectacular rise. By the middle of1927, the Dow stood at 168. Meanwhile,profits grew strongly and the price-earningsratio, one measure of market valuation, re-mained around 11, well below the danger

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level of 20 that is often considered a sign of

overvaluation.37 The Florida real estatebubble burst of its own weightlessness,helped by a devastating hurricane in 1926,and though there was much local disruption,its impact on the national economy wasminor. Meanwhile, consumer prices re-mained almost completely flat.

In retrospect, Strong made the right de-cision in resisting the pressure from Millerand Hoover to tighten credit in late 1925 and1926. In their enthusiasm to save the countryfrom overspeculation, they had fallen intothe first trap of financial officials dealingwith complex markets—an excessive level ofconfidence in their own judgments. Miller,the academic economist, and Hoover, the en-gineer, were both insulated from doubt bytheir ignorance of the way markets operate.In their zeal to burst a bubble that did notexist, they would have damaged the economywithout any tangible benefit.

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There is no better way to understand thestock market of those years than to return tothe story of General Motors. Between 1925and 1927 the profits of General Motors wentup almost two and a half times. With earn-ings of almost $250 million a year, it over-took U.S. Steel to become the most profitablecompany in America. Though its stock pricequadrupled in those two years, and by themiddle of 1927 the company was valued atclose to $2 billion, with a price-earnings ra-tio of less than 9, it was still considered to bereasonably priced.

What of Billy Durant? If General Motorswas the emblematic story of the 1920s boom,its founder came to symbolize the other faceof that frenetic decade. Although the com-pany he had started had gone on to becomethe most successful corporation in America,he refused to look back after losing control ofit for the second time in 1920. At his peak, hehad been worth $100 million. In 1920, the

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roughly $40 million he received for his stockin General Motors had largely gone to pay offhis personal loans, and he had emerged withbarely a couple of million dollars.

He was, however, obsessed with the stockmarket. He formed a consortium of multi-millionaires—many of whom were also fromDetroit and had made their money in theautomobile industry—to play the market.Within four years, he had rebuilt his fortune.By 1927, he was running a fund of over $1billion, and had indirect control of another$2 to $3 billion that friends would investalongside him. It was as if Bill Gates hadbeen forced out of Microsoft, only to re-appear on Wall Street as one of the largesthedge fund managers.

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THIS CHIMERA

Central bankers can be likened to the Greekmythological character Sisyphus. He wascondemned by the gods to roll a hugeboulder up a steep hill, only to watch it rolldown again and have to repeat the task forall eternity. The men in charge of centralbanks seem to face a similar unfortunatefate—although not for eternity—of watchingtheir successes dissolve in failure. Their goalis a strong economy and stable prices. Thisis, however, the very environment thatbreeds the sort of overoptimism and specula-tion that eventually ends up destabilizing theeconomy. In the United States during thesecond half of the 1920s, the destabilizingforce was to be the soaring stock market. InGermany it was to be foreign borrowing.

By the beginning of 1927, Germanyseemed to have fully recovered from the

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nightmare years of hyperinflation. Schachtwas in a position of unassailable power at theReichsbank. After the Dawes Plan, he hadbeen appointed to a four-year term duringwhich, by the new bank law, he enjoyed com-plete security of tenure and independence ofthe government. He had consolidated his po-sition within the Reichsbank by getting rid ofthe old guard from the Von Havenstein era,who had opposed his appointment, and put-ting his own people in charge. Moreover,though a General Council consisting of sixGerman bankers and seven foreigners wassupposed to oversee him, it met onlyquarterly, leaving him to operate un-hampered. As one senior German politicianof the time remembered, he employed the“tactic of consulting everyone and then doingexactly what he pleases.”

By virtue of position and personality, hedominated most discussions of economicpolicy within Germany. The liberal

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economist Moritz Bonn, an adviser to theReichsbank, wrote of Schacht in those years,“He looked upon the world as HjalmarSchacht’s particular oyster, and was verysensitive to public criticism. Having clashedwith many strong and ambitious personalit-ies in the German banking and businessworld, he was full of resentment against col-leagues who had at some time outdistancedhim. Once he arrived at the head of the cent-ral bank, he gloried in being their boss.”

To the public, Schacht remained “the Wiz-ard,” the savior of the mark. The visit byStrong and Norman in June 1925, his owntrip to the United States that fall, and his ac-ceptance as the third member of the centralbanking triumvirate running the world’s fin-ances had enormously enhanced his prestige.In the three years since their first meeting,he had developed a very strong personalbond with Norman—they met five times in1924, three times in 1925, and four times in

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1926. Norman admitted that Schacht couldbe difficult to work with, that among his pe-culiarities was a love of publicity and thehabit of making too many speeches. But itwas “a joy to talk finance” with Schacht, heused to say. His admiration for the Germanwas so great that Sir Robert Vansittart, laterhead of the British diplomatic service, com-plained that Norman was “infatuated by Dr.Schacht.”

Strong, however, had not taken to Schachtto the same degree. “He is undoubtedly anexceedingly vain man. This does not so muchtake the form of boastfulness as it does a cer-tain naïve self assurance,” wrote the Americ-an. Nevertheless, he was impressed by theway Schacht handled the Reichsbank. “Heruns his part of the show with an iron hand.He does it openly, frankly, and courageously,and seems to have the support of his Govern-ment but it certainly would not do in

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America. . . . He doesn’t gloss things over; heseems actually to relish the difficulties. . . .”

Power seemed to suit Schacht. The familyhad moved out of their villa in Zehlendorf in-to the official residence of the Reichsbankpresident on the top floor of its headquarterson Jägerstrasse. Financially he had little toworry about—his salary was the equivalent of$50,000 and he drew a further $75,000from the pension that he had wrung from theDanatbank. To show he had arrived, hebought a grand country house some fortymiles north of Berlin, which had been thehunting lodge and estate of Count FriedrichEulenberg.

When in town, the Schachts entertainedfrequently. With his “ugly clown mask of aface, curiously alive and attractive,” Schacht,always sporting a big cigar and accompaniedby his matronly wife, Luise, who kept a “vi-gilant watch” on him—he was said to have awandering eye—became something of a

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fixture on the social circuit. He had a pom-pous habit of wearing his culture conspicu-ously on his sleeve, which some found irritat-ing, while others ridiculed him behind hisback for his arriviste pretensions—one ac-quaintance remarked that “he dresses withthe taste of a socially ambitious clerk.”Nevertheless, he was a popular guest,something of a catch celebrated for his “cut-ting and devastating humor.” The Aga Khanremembered the Schacht of those years asone of the most charming of dinner compan-ions, who could hold “a whole table en-thralled” with his sparkling conversation.Priding himself as something of a poet, hewould compose amusing little pieces ofdoggerel to entertain his fellow guests.

Before the war, social life in Berlin hadbeen especially stultifying. Under the op-pressive hierarchy imposed by the Junkerelite around the court, there had been littleinteraction between the various circles in the

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city. However, the overthrow of the old Prus-sian nobility and the destruction of themiddle class by inflation had transformedBerlin into a rootless society of politiciansand profiteers, former aristocrats and for-eign diplomats. It would have been an aridsoulless sort of place but for its demi-mondeof artists. With its past swept away, the cityhad an unhinged nervous energy, an edge toit, that no other city in Europe could match,and it had attracted the best of the Europeanavant-garde: writers, painters, architects,musicians, and playwrights. William Shirer,the journalist who would chronicle the rise ofNazism, first came to Berlin during thoseyears and was captivated. “Life seemed morefree, more modern and more exciting than inany place I had ever seen.”

But for all its “jewel-like sparkle,” the citywas wrapped in an atmosphere of impendingdoom. Norman sensed it when visitingSchacht in late 1926: “You feel all the time

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that politically as well as economically Ger-many is still not far from a precipice.” Afterthe fiasco of the Beer Hall Putsch, mostpeople treated Hitler as a laughingstock.Nevertheless, there were ominous undercur-rents of the convulsions to come. On March21, 1927, a band of six hundred Nazi brown-shirt storm troopers of the Sturmabteilung ,the SA, beat up a group of Communists ineastern Berlin and marched into the centerof the city, attacking anyone on the Kurfür-stendamm who looked Jewish. The city au-thorities responded by banning Nazi activityfrom Berlin for a year.

But the economy was booming. Over thethree years since the mark had been stabil-ized, output rose close to 50 percent and ex-ports by over 75 percent. The GDP had sur-passed its prewar level by a good 20 percent,unemployment was now at a modest 6 per-cent, and prices were steady. The recoverywas reflected in the stock market. During the

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hyperinflation, few people had believed thatcapitalism would even survive in Germanyand equities had become dirt cheap, havingfallen to less than 15 percent of their 1913inflation-adjusted value—the whole of theDaimler-Benz motor company, for example,could have been bought for the price of 227of its cars. By 1927, however, the market hadquadrupled in value from its low point in1922.

The Dawes Plan had been an enormoussuccess. In fact it had worked almost toowell. American bankers, assured under theplan of being repaid first ahead of repara-tions owed to France and Britain, had fallenover one another in their enthusiasm to lendto Germany. In the two years since the plan,$1.5 billion flowed into the country, givingGermany the $500 million due for repara-tions and still leaving it an enormous surplusof foreign cash. Some of this money had goneto finance the reconstruction of industry; but

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a very large amount had been taken up bythe newly empowered states, cities, and mu-nicipalities of the budding democracy tobuild swimming pools, theaters, sports stadi-ums, and even opera houses. The zeal withwhich foreign bankers promoted their waresled to a great many imprudent investmentsand a lot of waste—one small town in Bav-aria, having decided to borrow $125,000,was persuaded by its investment banks to in-crease the amount to $3 million.

With so much foreign money coming in,imports ballooned and the pressure on thegovernment to lighten up on the austerity of1924 and 1925 became irresistible. By 1926,the national government itself was back torunning deficits. These were, however, mod-est—only $200 million, or less than 1.5 per-cent of GDP—compared to the giant short-falls of the hyperinflation years, and financedas they were by hard currency from abroad,did not lead to inflation.

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By every indication, Schacht, as one of thearchitects of this authentic economic mir-acle, should have been a happy man. Instead,he continued to be obsessed with repara-tions. Even at the time of the Dawes Plan, hehad never been fully convinced that Ger-many could or even should pay the amountsenvisaged. Nevertheless, he had grudginglysupported the plan and the foreign loans thatcame with it. He had hoped that as the cred-its from the United States built up and beganto rival reparations as a claim on Germany’sforeign exchange, they would create a power-ful lobby of American bankers, who wouldshare a common interest with the Germanauthorities in getting future payments to theAllies reduced.

But Germany was now borrowing toomuch abroad. Schacht worried that the for-eign debt buildup was becoming so large thatwhen the day came for it to be repaid, itwould precipitate a gigantic payments crisis

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and national bankruptcy. It made no sense tohim for Germany to be borrowing dollars tobuild wonderfully modern urban amenities,such as opera houses, which could nevergenerate the foreign currency to repay theloans. Moreover, Germany was so awashwith foreign capital, and was being driven byso conspicuous a boom, that it was gettingprogressively harder for him to argue thatthe republic could not afford to meet its re-parations obligations. The artificial boomwas giving everyone at home and abroad afalse sense of prosperity—a “chimera,” as hecalled it.

His problem was that there was very littlehe could do about the situation. If he tried totighten credit to curb the domestic boom, hewould simply end up encouraging borrowersto look abroad for cheaper loans and thus ex-acerbate the already excessive foreignborrowing.

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He was not a man to agonize too long overdilemmas. In many ways, for someone withthe reputation of being a calculating oppor-tunist, he was oddly impulsive. On Thursday,May 12, 1927, he made his move. The Reichs-bank instructed every bank in Germany tocut its loans for stock trading by 25 percentimmediately. The next day, nicknamed“Black Friday” by the Berlin press, stockprices fell by over 10 percent. Over the nextsix months, they would slide by another 20percent.

By going after the stock speculators,Schacht was hoping to crack the atmosphereof overconfidence and curb inflows of foreignmoney into Germany. This proved to be aserious miscalculation. Even though stockshad gone up a lot in the last five years, thisrepresented a recovery from the brink of dis-aster. The market was by no means over-priced—in early 1927, its total capitalizationwas only around $7 billion, less than 50

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percent of GDP, still only 60 percent of itsprewar level. More important, German mu-nicipalities, which were immune to stockmarket fluctuations, kept on borrowingabroad. All that Schacht had achieved withthis hasty maneuver was unnecessary dam-age to business confidence.

Having thus failed to dam the inflow offoreign loans with his broadside against thestock market, Schacht now began to talkabout doing something dramatic over repar-ations. A New York Fed official, Pierre Jay,passing through Berlin in June 1927, re-marked that Schacht did “not wish to havethings seem too good in Germany for fearthat it will help the execution of the [Dawes]Plan,” and speculated that he might takesome other action deliberately to undermineGermany’s fragile prosperity in order toprove that reparations were too burdensome.Parker Gilbert, the American agent-generalfor reparations, who was as close to Schacht

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as anyone, observed that he had begun“openly and actively working for a break-down” of the Dawes agreement, and de-scribed him during this period as “change-able and moody,” “temperamental andmercurial.”

No one was quite sure what he had inmind. Berlin was rife with rumors that hemight deliberately engineer a new crisis. Itwas the beginning of what one historian hasdescribed as Schacht’s descent into “irre-sponsibility and unpredictability.” His tend-ency to “extreme and erratic” behaviorseemed to be a deliberate ploy to keepfriends and enemies alike guessing. It cer-tainly unnerved his counterparts, Normanand Strong. They feared that consumed as hewas by reparations, he might try some reck-less and foolhardy gamble to sabotage theDawes settlement, which would not onlyplunge Germany into chaos and undermineits fragile new democracy, but might capsize

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the international monetary structure, whichthey had so painstakingly put together overthe last few years.

They had always worried about Schacht’stendency to embroil himself in highly visiblepolitical conflicts. Never much of a diplomat,he had always been very open in his criti-cisms of government budgetary policy, par-ticularly of the states and municipalities bor-rowing so much abroad. Back in 1925 duringthe central bankers’ visit to Berlin, Stronghad remarked on Schacht’s tendency to “getinto political matters which would be[better] left alone by the head of the Reichs-bank,” and Norman had gently tried to warnhim to be more discreet. But it alwaysseemed that Schacht had enough of an in-stinct for survival to avoid rocking the polit-ical boat too hard. Now, however, he becameincreasingly indiscreet and strident in hisremarks.

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One episode in particular brought his con-frontation with the government to a head. Ata cabinet meeting in June, Schacht launchedinto a vituperative attack, which left the min-isters speechless with outrage. It was typicalof the man that having insulted the cabinet,he was not content to leave ill enough alone.He was overhead bragging to the otherguests at a private dinner that evening abouthow he had taken on the politicians. He re-vealed confidential details of the whole cab-inet debate, made insulting comments aboutindividual ministers, dismissed the financeminister as incompetent, and called for hisresignation. Even his old supporter Strese-mann agreed that Schacht’s behavior was aproblem and that his constant and nakedself-aggrandizement was becoming intoler-able. It was but a small harbinger of things tocome.

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IMPERIALIST DREAMS

The miracle of the franc’s recovery may havebeen good for France but imposed its ownfinancial strains upon Europe. The moneydrawn back to the franc on Poincaré’s coat-tails continued to flow in throughout thespring and early summer of 1927, mostly outof sterling. The Banque de France, in an ef-fort to prevent this flood from pushing thefranc to uncompetitive levels, kept buyingforeign currencies, and by the end of May,had accumulated a foreign exchange warchest totaling $700 million, half of whichwas in pounds.

The rebound in the financial position ofthe Banque took Norman completely by sur-prise. He had never made a secret of his dis-dain for the French and their way of doingthings—the constant intrigue and infighting,the chronic instability of governments, the

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overweening role of the state. During 1924,and especially 1925 after Britain had goneback to the gold standard, he had indulged ina certain schadenfreude at France’s financialtravails. As the franc plunged, he confessedto Strong that the position of France, held upsince the war as an example of the advant-ages of unorthodox financial management,made him “smile.”

Moreau, for his part, reciprocated theenmity. From his very first few days in office,he had been irritated by the presumption ofAnglo-Saxon bankers that the French wouldbe unable to stabilize the franc without theirhelp. Much of his animosity was specificallydirected against Norman, a reflection of awider and more pervasive suspicion towardthe governor of the Bank of Englandthroughout Europe, except in Germany.Strong had picked up on it in the summer of1926, noting that Continental financial

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officials “seem to be afraid of him and some-what distrust him.”

With the Banque flush with hard currencyand the franc stable, Moreau was determinedto use his newfound independence to rees-tablish French financial prestige. He had notforgotten that before the war Paris had beenthe second most important money center inthe world.

His first opportunity to assert himself onthe international stage came in connectionwith a loan to Poland, which had regained itsindependence after the war and was historic-ally seen as a partner of France in containingGerman power. In late 1926, a consortium ofcentral banks, including the Federal Reserve,the Bank of England, the Reichsbank, andnow the Banque de France, put together afinancial package to help stabilize the Polishzloty. When Norman tried to grab the leadrole, the French objected strongly to whatthey saw as a British attempt to muscle in on

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France’s traditional sphere of influence inEastern Europe. For Moreau it was one moreexample of Norman’s “imperialist dreams.”

In February 1927, the Banque also tried torenegotiate terms on a loan from the Bank ofEngland dating back to 1916 and secured byFrench gold. As usual when it came to theFrench, Norman was unhelpful, putting nu-merous obstacles in the way. Frustrated byNorman’s obstructionism, the Banque sur-prised the Bank of England in May by an-nouncing that it would pay off the loan andtake back the $90 million of gold reservespledged as security. The next month, withouteven consulting the British, the Banque is-sued instructions that $100 million of itssterling balances be converted into gold. Theeffect would have been to drain almost $200million of gold out of the Bank of England’sreserves. Both actions came as a shock toNorman. Moreau’s demands were

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“capricious” and would “menace the goldstandard,” he complained to Strong.

Norman and Moreau met repeatedly dur-ing the first few months of 1927—in Paris inFebruary, in London in March, and at theTerminus Hotel in Calais in early April—totry to resolve some of these issues. Thoughthe tensions between them never quite brokeinto open conflict—they were careful tomaintain a frosty politeness in all their deal-ings—their mutual dislike and mistrust wereapparent. Moreau had clearly not forgottenhow unwilling Norman had been to come tothe aid of France at the height of the previ-ous year’s crisis, a sharp contrast to the waythe Englishman had bent over backward tohelp Schacht and the Germans in 1924.

The gold standard did offer a traditionalsafety valve for dealing with shifts in goldholdings. The shrinkage of reserves in thecountry losing bullion was supposed to leadto an automatic contraction in credit and a

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rise in interest rates, which would therebyshrink its buying power, while attractingmoney from abroad. Meanwhile, the countrygaining gold would find its credit expandingand its capacity to spend increasing. These“rules of the game,” as Keynes called them,were designed to set in train automatic gyro-scopic forces to balance out the shifting tidesof gold among countries.

But in early 1927, the Bank of England andthe Banque de France could not agree how toapply these rules. A conference was arrangedand on May 27, Norman revisited theBanque. It was a very different meeting fromthat first disastrous encounter a year earlier.Now it was Norman’s turn to plead for help.He claimed that it would be politically im-possible to tighten credit in Britain, that “hecould not do so without provoking a riot.”Arguing that most of the money flowing intoFrance came from speculators betting that

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the franc would have to appreciate, he

pressed Moreau to cut interest rates.38

Moreau, on the other hand, had justweathered a decade of high inflation, whichhe did not wish to risk repeating by easingcredit. He insisted that under the rules of thegold standard, he had the complete right toconvert his sterling holdings into bullion,and should this put Britain’s reserves underpressure, the Bank of England could alwaysraise rates.

Quite aware that too precipitate an actionby the Banque de France would threaten theBank’s ability to keep the pound on gold, hetried to reassure Norman that he had no in-tention of destabilizing the gold standard ortrying to undermine sterling, declaring melo-dramatically, “I do not want to trample onthe pound.” Both parties claimed to be com-mitted to the game, but each was adamant

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that it was the other who was not followingthe rules.

The British were not completely on the de-fensive. They did point out that while Franceheld some $350 million in sterling that itcould convert into gold, the British govern-ment held $3 billion of French war debts onwhich it could theoretically demand immedi-ate repayment. The meeting closed in an in-conclusive truce. In the following weeks,both sides somewhat halfheartedly backeddown, the Bank of England allowing rates inBritain to rise modestly and the Banque deFrance engineering a fall in its rates. For themoment, outright financial conflict had beenaverted.

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Schacht, Strong, Norman, and Rist on theTerrace at the New York Fed, July 1927

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15. UN PETIT COUP DEWHISKY

1927-28

Not every mistake is a foolish one.—CICERO

By THE END of 1926, this quartet of centralbankers had already begun to worry aboutthree of the factors—the U.S. stock marketbubble, excessive foreign borrowing by Ger-many, and an increasingly dysfunctionalgold standard—that would eventually lead to

the economic upheaval at the end of the dec-ade. None of them, however, yet anticipatedthe scale of the coming storm. HjalmarSchacht was locked in combat with his owngovernment; Montagu Norman and ÉmileMoreau were squabbling with each other;and Benjamin Strong was, as always, battlingon two fronts—with his health and with hiscolleagues within the Federal ReserveSystem.

In 1926, after almost two years without anattack of tuberculosis, Strong developedpneumonia on his return from his summerin Europe. While lying sick with the new dis-ease, at one point close to death, he wasagain scarred by personal tragedy, this onecarrying with it a hint of scandal.

Confined to the Cragmore Sanatorium atColorado Springs in 1923, he had struck up afriendship with another tubercular patient,Dorothy Smoller, a twenty-two-year-old act-ress from Tennessee. She had once been a

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dancer with Anna Pavlova’s ballet company,had had several parts on Broadway, and hadeven had a bit part in a movie. After a fewmonths in the sanatorium, her money hadrun out and Strong and some other rich pa-tients stepped in to support her. In Novem-ber 1926, she resurfaced in New York, to betreated by Dr. James Miller, a Park Avenuephysician and Strong’s personal doctor—likemost tuberculosis patients, she had not fullyshaken off the disease. She had just landed apart in another Broadway play when on themorning of December 9, after receiving amysterious letter that reportedly distressedher, she killed herself by drinking a bottle ofliquid shoe polish.

By her bedside were three letters, one forher mother in Long Beach, California, onefor a friend, and one for Strong. She left in-structions that the photograph of Strong inher possession be returned to him. No onecan know whether she and Strong were

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romantically involved. Perhaps she was justa lost and unhappy young woman, a victim ofthe Broadway version of the boulevard ofbroken dreams, who had developed a fixa-tion upon a distinguished and kindly manwho had helped her. Whatever the case, hersuicide, with its echoes of his wife’s deathtwenty years earlier, must have shaken himprofoundly.

In December, he again left New York to re-cuperate, for a few weeks at the BroadmoorHotel in Colorado Springs and thereafter inNorth Carolina. He returned to work sixmonths later, in May 1927, to find the strainsand stresses within Europe again building.The quarrel between Moreau and Normanwas threatening to derail the pound, and hadthe potential to undermine the stability ofthe entire structure of the worldwide goldstandard. Meanwhile, Schacht was beginningto clamor for some sort of international initi-ative to control the flow of foreign money

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into Germany, which, he feared, would neverbe able to repay all of its various accumulat-ing debts.

Strong had always hoped that once theother major countries were back on gold, thelopsided maldistribution, which had left somuch of the world’s gold stock in the UnitedStates, would correct itself. But that had nothappened. Sterling had returned to gold atan unrealistically high exchange rate, leavingBritish goods expensive and difficult to sellin the world market. France, on the otherhand, had done exactly the opposite. By peg-ging the franc at 25 to the dollar, the Banquede France had kept French goods very cheap.France was therefore in a position to steal acompetitive edge over its European tradingpartners, particularly Britain. While this dis-crepancy between British and French pricespersisted, the tensions could only fester.There was a natural tendency for money tomove from overpriced Britain to underpriced

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France. To correct the situation, either priceshad to fall further in Britain—which the au-thorities were trying to bring about withoutmuch success—or rise in France—which theBanque de France would not permit. Theonly alternative was to change the gold parityof sterling. But everyone feared that such adevaluation would so shock the bankingworld as to undermine any hope of order ininternational finances and even destroy thegold standard.

The Germans had avoided the British mis-take. At the exchange rate of 4.2 marks to thedollar set by Schacht back in late 1923, Ger-man goods were cheap. Germany had a dif-ferent problem. It had been denuded of goldduring the nightmare years of the early1920s and was now spending so much on re-construction and reparations that, despite itslarge foreign borrowing, it was unable tobuild up new reserves. Thus, of all the coun-tries in Europe, only France had enjoyed any

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success in attracting gold, although even thishad been done, not so much by drawing goldfrom America as by weakening the positionof Britain.

There was one way for the Fed to helpEurope out of these dilemmas, or at least buyit some time. It could lower its interest ratesfurther. In addition to giving Britain somebreathing room, there were good domesticreasons to justify such a cut. Prices aroundthe world were falling—not precipitously, butvery gradually and very steadily. Since 1925,U.S. wholesale prices had fallen 10 percent,and consumer prices 2 percent. The UnitedStates had also entered a mild recession inlate 1926, brought on in part by thechangeover at Ford from the Model T to theModel A. The two main domestic indicatorsthat Strong had come to rely on to guide hiscredit decisions—the trend in prices and thelevel of business activity—argued that the

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Fed should ease. But interest rates at 4 per-cent were already unusually low.

Ever since the early 1920s when he hadembarked on his policy of keeping interestrates low to help Europe, a faction within theFed, led by Miller, had argued that Strongwas too influenced by international consider-ations and especially by Norman. DuringBritain’s return to gold in 1925, he had beenaccused by some members of the Board ofhaving exceeded his authority in providingthe line of credit to the Bank of England. Butat the time, there had been so much supportwithin U.S. financial circles for Britain’s re-turn to gold, and when the British did noteven have to draw on the line of credit, thedissenting voices had died away. In 1926,while Strong was in France, he was again cri-ticized by Board members for freelancingand acting too much on his own initiative.He responded that unless they were willingto come to Europe as frequently as he did,

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and familiarize themselves with the peopleand the situation, they would just have totrust him. While he did not shy away fromconflict—quite the contrary, according to onecolleague he seemed to “thoroughly enjoygetting into a fight and coming out ontop”—the constant sniping over internationalpolicy became so wearing that he eventhreatened to resign.

The same faction that had opposed him onEurope had pressed him to tighten in 1925and 1926 to bring down equity prices. Whilethey had then sounded a false alarm on abubble in stocks, with the market stillstrong—the Dow was hovering close to170—he knew that were he now to loosenmonetary policy to bail out the pound, herisked severely splitting the Fed.

In the summer of 1927, still weak from hisrecent illness, Strong decided that ratherthan go to Europe as he usually did, hewould invite Norman, Schacht, and Moreau

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to the United States.39 Before the war, whenthe gold standard had worked automatically,the system had simply required all centralbanks, operating independently, to followthe rules of the game. Collaboration had notneeded to go beyond occasionally lendingone another gold.

Ever since the war, as the gold standardhad been rebuilt and evolved into a sort ofdollar standard with the Federal Reserve act-ing as the central bank of the industrialworld, Strong had found it useful to consultfrequently with his colleagues—he generallyused his summers in Europe as an occasionto meet all of his European counterparts.This had begun with his getting togetherwith Norman very informally and with min-imum publicity once or twice a year—meet-ings of two friends who agreed on most es-sentials. After the stabilization of the mark in1924, Schacht had joined the club, and thethree of them convened in Berlin in 1925 and

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at The Hague in 1926. He now proposed ameeting of all four central banks, includingthe French.

Moreau, who spoke no English and fearedbeing excluded from the most important dis-cussions, decided to send his deputy gov-ernor, Charles Rist, in his place. Norman andSchacht traveled across the Atlantic togetheron the Mauretania, arriving on June 30.They took the usual precautions—theirnames did not appear on the passenger listand even their baggage was unmarked. Butnews of the meeting had leaked well in ad-vance and the usual posse of reporters waswaiting for them at dockside. Norman,nervous that Rist had arrived two days earli-er and might have stolen a march on him, in-sisted on going straight from the ship to thedowntown offices of the New York Fed.

Over the years, each of the central bankshad acquired its distinctive architectural sig-nature, somehow expressive of the

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institution’s character. While the Bank ofEngland, for example, looked like a medievalcitadel, the Banque de France like an aristo-crat’s palace, the Reichsbank like a govern-ment ministry, for some reason—perhaps ina salute to those first international bankers,the merchant princes of RenaissanceItaly—the New York Federal Reserve hadchosen to dress itself up as a Florentinepalazzo. With its ground-floor arches, heavysandstone and limestone walls pierced withrows of small rectangular windows, and log-gia gracing the twelfth floor, it was an almostexact imitation, on a grander and more epicscale, of the Pitti or the Riccardi palaces inFlorence.

It was on the twelfth floor of this faux Itali-an palace that the four great banking powersof the world first convened. That weekend,however, desperate to get away from the pry-ing eyes of the press, they moved in greatsecrecy to an undisclosed location out of the

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city. Strong had chosen for their clandestinemeeting the summer home of Ogden L.Mills, undersecretary of the treasury. In anadministration whose secretary of the treas-ury, Andrew Mellon, was the third richestman in the United States, it was in keepingthat his deputy should be the heir to a robberbaron fortune. Ogden Mills was, however, bythe standards of third-generation wealth, aserious man with a law degree from Harvardwho had made a career with a respectablewhite-shoe New York law firm.

But he had not completely given up on the

privileges of inherited wealth.40 His estatelay on the North Shore of Long Island, nowburied under suburban sprawl and, topresent eyes, an unlikely setting for a secretconclave of central bankers. But in the1920s, this was the “Gold Coast,” a Gatsby-esque world, now long gone, of mansionswith gilded ceilings, of grand formal gardensand marble pavilions, of racing stables,

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foxhunts, and polo fields, boasting castleslarger than those of Scotland and châteausgrander than along the Loire. Among thosewho summered there were J. P. Morgan,Otto Hermann Kahn of Kuhn Loeb, andDaniel Guggenheim, the copper king.

Its mere twenty rooms made the Millshouse, a discreet and elegant neo-Georgianbrick mansion with vine-covered walls, loc-ated on the Jericho Turnpike in the town ofWoodbury, New York, a modest residence bythe standards of some of its neighbors. A fewhundred yards farther up the turnpike stoodWoodlands, a thirty-two-room estate thatAndrew Mellon had just bought for hisdaughter Ailsa as a wedding gift. Half a miledown the road stood Oheka, the secondlargest house in the United States, a mockchateau of 127 rooms owned by Kahn.

The four men remained in seclusion forfive days, No official record of the discus-sions was kept. Although they socialized and

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had meals together, they rarely gathered as agroup, relying instead upon bilateral meet-ings. Strong and Norman in particular spenthours “closeted together.” The discussionswere almost entirely devoted to the problemof strengthening Europe’s gold reserves andto finding ways to encourage the flow of goldfrom the United States to Europe.

Norman dominated the proceedings,seated at one end of the conference room in afan-backed oriental chair. In spite of thewarm weather, he insisted on wearing hisvelvet-collared cape, which only added to thepicturesque figure he evoked. He made itclear that his gold reserves were criticallylow. Any further erosion would force him toput up rates. The link between the poundand gold was seriously in peril. Moreover, heargued, the on-going worldwide decline inwholesale prices was a symptom of a mount-ing global shortage of gold as countries re-turning to the standard built up their

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reserves.41 And so it was imperative thatcountries with large reserves ease credit tospread the bullion around.

Rist, on the other hand, argued that thequestion of European gold was largely a Brit-ish problem. Having made the mistake of fix-ing sterling at too high an exchange rate, Bri-tain had no alternative but to continue itspolicy of deflation, however painful thatmight be.

Schacht proved to be more of an observerthan a key participant. His main goal was tocurb the flow of hot money into Germany,which the others saw as largely a side issue.He did warn that this was but one symptomof a wider problem—that Germany was get-ting too heavily into debt and that a break-down over reparations would soon occur,with damaging consequences for the wholeworld. While Strong and Norman had somesympathy for Schacht’s desire to renegotiate

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reparations once more, they warned him tobe patient, that nothing could be done tillafter the American, French, and British elec-tions in 1928. Nevertheless, Strong was suffi-ciently concerned by Schacht’s gloomy fore-cast that after the meeting, he asked Sey-mour Parker Gilbert, the agent-general forreparations, to begin work on a new deal onreparations.

Strong, though increasingly sympathetic tothe French point of view—much to Norman’sdiscomfort—had arrived at the conferencewith his mind already made up. The onlyway to reduce selling pressure on the poundin the short run would be to cut U.S. interestrates. It helped that the domestic indicatorshe relied upon—price trends and economicactivity—also justified a cut. And though herecognized that the stock market was a bigstumbling block—he ruefully predicted toCharles Rist as the meeting got under waythat a cut would give the market “un petit

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coup de whisky”—it was a risk he was willingto take.

Strong had very deliberately not invitedany members of the Federal Reserve Boardto the Mills house. After the meeting wasover, on July 7, the four did go down toWashington for a day, during which theypaid “courtesy calls” on members of theBoard and had a “social” lunch at the WillardHotel. They were all very careful to remainquite tight-lipped with officials in the capital.Before departing the United States, theEuropeans had a final meeting in New York,to which Chairman Crissinger was invited,but none of the other members were even in-formed. Strong, bitter at the constant ob-structionism he had met with over the years,was firmly set on keeping them out of theloop—a churlish decision that served no pur-pose but to irritate the Board and accumu-late more enemies against him.

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A few days after the European centralbankers left, the New York Fed and eight ofthe other reserve banks voted to cut interestrates by 0.5 percent to 3.5 percent. It was amove that split the system. Four reservebanks—Chicago, San Francisco, Minneapol-is, and Philadelphia—insisting that such amove would only fuel stock market specula-tion, refused to follow. Until then the Boardhad adopted the view that while it could vetoreserve banks’ decisions, it could not forcethem to change policy. Now, in a closely ar-gued decision that also split the Board downthe middle, it ruled that it did indeed possessthe statutory authority to compel Chicagoand the other intransigents to follow the ma-jority. In the recriminations that followed,Crissinger resigned.

The two most vocal of Strong’s criticshappened to be out of town when the Fed de-cided to cut rates. Miller had left in themiddle of July for two months’ vacation in

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California, although he tried to exert everyinfluence against the decision from afar.Hoover was in the South, managing reliefoperations to deal with the great Mississippiflood of that year. Returning in August, hesubmitted a stern memorandum to theBoard, arguing that “inflation of credit is notthe answer to European difficulties,” andthat “this speculation . . . can only land us onthe shores of depression.” He urged both thepresident and Secretary Mellon to act toforestall the Fed move. Coolidge, who had el-evated inaction into a philosophical prin-ciple, had become increasingly irritated byhis secretary of commerce’s constant insist-ence not only that something must be doneabout everything but that he, Hoover, knewexactly what was needed. Coolidge wouldlater complain, “That man has offered meunsolicited advice for six years, all of it bad!”Fobbing Hoover off with the excuse that the

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Fed was an independent agency, the presid-ent refused to intervene.

When Strong flippantly spoke to Rist ofgiving the stock market that petit coup dewhisky, in his wildest imagination he couldnot have foreseen the extent of the drunkenride that was to come. In 1925, he had keptmoney easy to help sterling, betting success-fully that the stock market would remain un-der control. He was now trying the samegamble a second time. This time he wasbadly wrong. In August, following the Fedcut in rates, the market immediately took off.By the end of the year, the Dow had risenover 20 percent, breaking 200. In January1928, the Fed revealed that the volume ofbroker loans had risen to a record $4.4 bil-lion from $3.3 billion the previous year.

By early 1928, the calls on the Fed to dosomething about the market had become aclamor. The United States had come out ofits brief recession, and for the first time since

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the war, gold was flowing into Europe. Eventhe pound seemed in better shape. In Febru-ary 1928, Strong, recognizing that the cutmight have been a mistake, bowed to pres-sure and agreed to reverse course. Over thenext three months, the Fed raised its ratesfrom 3.5 percent to 5 percent.

In 1931, Adolph Miller would testify beforethe Congress that the easing of credit in themiddle of 1927 was “the greatest and boldestoperation ever undertaken by the FederalReserve System, . . . [resulting] in one of themost costly errors committed by it or anyother banking system in the last years.”Some historians, echoing the views ofHoover and Miller, see the meeting on LongIsland as the pivotal moment, the turningpoint that set in train the fateful sequence ofevents that would eventually lead the worldinto depression. They argue that by artifi-cially depressing interest rates in the UnitedStates to prop up the pound, the Fed helped

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fuel the stock bubble that subsequently led tothe crash two years later.

It is hard to dismiss this view. Though thecut was small—only 0.5 percent off the levelof interest rates—and short lived—reversedwithin six months—the fact that the marketshould begin the dizzying phase of its rally inthe very same month, August 1927, that theeasing took place has to be more than merecoincidence. The Fed’s move was the sparkthat lit the forest fire.

As NORMAN TRAVELED back to England,he had every reason to be satisfied with theoutcome on Long Island. He had achievedhis primary goal of getting the FederalReserve to support the pound by easing cred-it. Nevertheless, he had an uneasy feeling. Itwas clear that Strong was increasingly sym-pathetic to the French. Sounding like a

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jealous suitor vying for the attentions of apopular girl, Norman lamented that Strong“takes great interest in the Banque de Franceand has much personal liking and sympathy”for Charles Rist, which put Norman himselfat “a disadvantage.” But it was not simplythat the Banque de France was beginning tosupplant the Bank of England in the affec-tions of the New York Fed. More importantin Norman’s mind was the central bankers’failure, as prices kept falling, to counter de-flationary forces around the world. They hadto find more permanent ways to keep “goldout of New York,” and redistribute reservesmore efficiently.

The summer of 1927 would prove to be thehigh point of Norman’s influence. The mod-est Fed easing in August brought a tempor-ary reprieve. Gold flowed into Britain. But hestill faced the same old problems withFrance. In February 1928, Norman and Mor-eau clashed yet again. Romania, one of the

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last Central European economies to get itshouse in order, approached the club of cent-ral bankers for a loan. Norman assumed thatthe Bank of England would take charge ofthe operation, much as it had in the case ofAustria and Hungary. But with French fin-ances now strong, Moreau could see no reas-on why France should not resume its old po-sition of authority in Central Europe. Afterall, before the war, Romania had been part ofthe traditional French sphere of influence.On February 6, 1928, as the power struggleover monetary leadership in Eastern Europereached its head, he wrote in his diary,

I had an important conversation withM. Poincaré over the issue of the Bankof England’s imperialism.

I explained to the Prime Ministerthat since England was the firstEuropean country to recover a stableand reliable currency after the war, ithad used this advantage to build the

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foundation for a veritable financialdomination of Europe. . . .

England has thus managed to in-stall itself completely in Austria, Hun-gary, Belgium, Norway and Italy. Itwill implant itself next in Greece andPortugal. It is attempting to get afoothold in Yugoslavia and it is fight-ing us on the sly in Rumania.

We now possess powerful means ofexerting pressure on the Bank of Eng-land. Would it not be in order to havea serious discussion with Mr. Normanand attempt to divide Europe into twospheres of financial influence as-signed respectively to France andEngland?

On February 21, Moreau, irritated by theBritish “intrigues to prevent France fromplaying the dominant role” in Romania, ar-rived in London, declaring that he was going

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to “ask Norman to choose between peace andwar.” Norman, who hated outright confront-ations, feigned illness at the last minute andbegged off the meeting, leaving his directorsto deal with the now doubly irritatedFrenchman.

The Romanian issue, exacerbated by petti-ness on both sides, threatened to escalate in-to a major diplomatic incident between thetwo great banks. Strong initially tried to actas a mediator but eventually came down onthe side of the Banque de France. He was es-pecially irritated by reports in Europeanbanking and political circles that his friendNorman was trying “to establish some sort ofdictatorship over the central banks ofEurope” and that Strong “was collaboratingwith him in such a program and supportinghim.” Norman had obviously taken advant-age of their friendship to give everyone theimpression that he had the Fed in his pocket.

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By now, he had begun to regret his supportfor the doctrine that central banks be en-couraged to hold pounds as a substitute forgold. The policy had allowed Britain to buoyits international position by using its statusas a pivotal currency to postpone some hardchoices. By avoiding an immediate crisis, thepolicy had set the stage for an even greatercrisis in the future. As money continued topour into France, the Banque had accumu-lated over a billion dollars worth of pounds,which at some point it would want to cash infor gold. Strong had some sympathy for itsdilemma. The gold standard demanded thata central bank should allow all comers toswitch their currency holdings freely intobullion. But unless Britain’s position was toimprove, such a move would completelydrain the Bank of England’s reserves andthreaten the very viability of the goldstandard.

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He also began to realize that his policy ofkeeping U.S. interest rates low to bolstersterling had failed to solve the fundamentalproblem of the British economy—that itsprices were too high and its currency over-valued. Furthermore, he had unintentionallyprovided the impetus for the growing bubbleon Wall Street. And it had exposed him toconstant criticism at home over his excessivefocus on international affairs. That summerthe Chicago Tribune denounced him for cre-ating “speculation on the stock market thatwas growing . . . like a snowball rolling downa hill” and called for his resignation.

He was by now exhausted and disillu-sioned, particularly with the quarrelsomeEuropeans. His doctors warned him that ifhe wished to live, he could not continue towork. His lungs were failing. He was hit by about of shingles that covered his face, tem-porarily blinding him in one eye and leavingonly partial sight in the other. The virus

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brought on a severe case of neuritis and themassive doses of morphine that cut back thepain sufficiently for him to work had des-troyed his digestive system. The tuberculosishad come back in his left lung and, oncemore, he developed bronchial pneumonia.

In May 1928, Strong sailed for Europe. Hehad already decided to submit his resigna-tion. Ironically, he seemed on the verge offinding some personal happiness. In 1926,his ex-wife Katharine had written to him, re-gretting her past mistakes and asking for re-conciliation. He wrote back to say that wouldnot be feasible, citing his illness as the reas-on. By 1928, however, he had begun a rela-tionship with a much younger woman, anopera singer whom he intended to marry.

Deliberately avoiding London, he arrivedat Cherbourg in the third week of May. Nor-man rushed over to see him. That last meet-ing was a difficult one. Losing his temper,Strong tried to make Norman see that he was

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his own worst enemy. He reminded hisfriend, in the “most vehement language” thatMoreau’s hoard of sterling was a “sword ofDamocles” over the Bank of England, mak-ing it “stupid beyond understanding” forNorman to pick a quarrel with the Frenchwhen he was so “completely dependent uponthe good will of the Bank of France.” Theyparted on bad terms. Though Strong didwrite a letter over the summer to make up,he still grumbled to friends about Norman’sobsessive scheming for power within Europe.

The strain of the quarrel with Strong andthe tensions with the French had begun totell on Norman’s nerves. As the stressesgrew, he withdrew more and more into him-self, refusing to take his colleagues into hisconfidence. At one point, several frustratedsenior directors of the Bank launched a cam-paign of noncooperation by pointedly refus-ing to speak at the weekly meetings of theCommittee of the Treasury, the Court’s

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policymaking group. Everyone remarked onthe increased volatility of the governor’smood swings. “One moment he would besunny and all smiles, the next, for no appar-ent reason his face would be like a thunder-cloud,” recalled one colleague. He threw tan-trums at the staff—in a fit of temper, he onceflung an ink pot at Sir Ernest Harvey, thecomptroller—and his bouts of “nervous ex-haustion” seemed to become more frequent.In mid-February 1928, he collapsed and wasbedridden for a few days. A week later, ithappened again. In the middle of March hewas forced to take three weeks off to recuper-ate in Madeira. A few weeks after that lastdifficult meeting at Cherbourg, he left for athree-month complete rest in South Africaand did not return to work until earlySeptember.

Strong spent a melancholy summer inFrance. After a few weeks in Paris, he wenton to Evian and Grasse, in the south of

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France. In July, he wrote to Norman of hisdecision to resign. “How hard and how cruellife is.” Norman wrote back, “But what astage ours has been over these ten or twelveyears. . . . Your early dreams set a goal beforea world, which was then so distracted as tobe blind and incredulous. Now your dreamshave come true.”

After Strong returned to New York, onOctober 15, he underwent an operation tostem intestinal bleeding. The next day, hedied in the hospital of a severe secondaryhemorrhage. He was only fifty-five.

Norman took the blow very badly. “I amdesolate and lonesome at Ben’s suddendeath,” he wrote to a friend. They had beenclose for barely seven years. But in that timethe friendship had become central to each oftheir lives. He would soon discover thatStrong’s death had not only robbed him ofhis best friend, but also of much of hispower.

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PART FOUR

REAPING ANOTHERWHIRLWIND

1928-33

16. INTO THE VORTEX

1928-29

At particular times a great deal ofstupid people have a great deal ofstupid money. . . . At intervals . . . .the money of these people—the blindcapital, as we call it, of the coun-try—is particularly large and crav-ing; it seeks for someone to devourit, and there is a “plethora”; it findssomeone, and there is “speculation”;it is devoured, and there is “panic.”

—WALTER BAGEHOT

THE GREAT BEAR of Wall Street legend,Jesse Livermore, once observed that “stockscould be beat, but that no one could beat thestock market.” By that he meant that while itwas possible to predict the factors thatcaused any given stock to rise or fall, theoverall market was driven by the ebb andflow of confidence, a force so intangible andelusive that it was not readily discernible tomost people. There would be no better evid-ence of this than the stock market bubble ofthe late 1920s and the crash that followed

it.42

The bubble began, like all such bubbles,with a conventional bull market, firmlyrooted in economic reality and led by thegrowth of profits. From 1922 to 1927, profitswent up 75 percent and the market rose com-mensurately with them. Not every stock wentup in the rise. From the very start, the 1920smarket had been as bifurcated as the under-lying economy—the “old economy” of

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textiles, coal, and railroads struggling, ascoal lost out to oil and electricity, and thenew business of trucking bypassing the rail-ways while the “new economy” of automo-biles and radio and consumer appliancesgrew exponentially. Of the thousand or socompanies listed on the New York Stock Ex-change, as many went down as went up.

The first signs that other, more psycholo-gical, factors might be at play emerged in themiddle of 1927 with the Fed easing after theLong Island meeting. The dynamic betweenmarket prices and earnings seemed tochange. During the second half of the year,despite a weakening in profits, the Dowleaped from 150 to around 200, a rise ofabout 30 percent. It was still not clear thatthis was a bubble, for it was possible to arguethat the fall in earnings was temporary—aconsequence of the modest recession associ-ated with Ford’s shutdown to retool for thechange from the Model T to the Model

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A—and that stocks were being unusuallyprescient in anticipating a rebound in earn-ings the following year. The market was stillwell behaved, rising steadily with only a fewstumbles, and without the slightly crazed er-ratic moves and frenetic trading that were tocome.

It was in the early summer of 1928, withthe Dow at around 200, that the market trulyseemed to break free of its anchor to eco-nomic reality and began its flight into theouter reaches of make-believe. During thenext fifteen months, the Dow went from 200to a peak of 380, almost doubling in value.

That it was so obviously a bubble was ap-parent not simply from the fact that stockprices were now rising out of all proportionto the rise in corporate earnings—for whilestock values were doubling, profits main-tained their steady advance of 10 percent peryear. The market displayed every classicsymptom of a mania: the progressive

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narrowing in the number of stocks going up,the nationwide fascination with the activitiesof Wall Street, the faddish invocations of anew era, the suspension of every convention-al standard of financial rationality, and therabble enlistment of an army of amateur andill-informed speculators betting on the basisof rumors and tip sheets.

FIGURE 5

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By 1929, anywhere from two to three mil-lion households, one out of every ten in thecountry, had money invested in and were en-gaged with the market. Trading stocks hadbecome more than a national pastime—ithad become a national obsession. Thesepunters were derisively described by profes-sionals like Jesse Livermore as “minnows.”But while the bubble lasted, it was the peoplewho were the least informed who were theones making the most money. As the NewYork Times described it, “The old-timers,who usually play the market by note, are be-hind the times and wrong,” while the “newcrop of speculators who play entirely by earare right.”

The city that was most obsessed was NewYork, although Detroit, home to so manynewly enriched “motor millionaires,” came aclose second, followed by two other new-money towns, Miami and Palm Beach. Theinfatuation with the market took over the life

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of New York City, sucking everything into itsmaw. As Claud Cockburn, a British journalistnewly arrived in America, observed, “Youcould talk about Prohibition, or Hemingway,or air conditioning, or music, or horses, butin the end you had to talk about the stockmarket, and that was when the conversationbecame serious.” Anyone trying to throwdoubt on the reality of this Promised Landfound himself being attacked as if he hadblasphemed about a religious faith or love ofcountry.

As the crowd piling into the market grew,brokerage house offices more thandoubled—from 700 in 1925 to over 1,600 in1929—mushrooming across the country intosuch places as Steubenville, Ohio; Independ-ence, Kansas; Amarillo, Texas; Gastonia,North Carolina; Storm Lake, Iowa; Chick-asha, Oklahoma, and Shabbona, Illinois.These “board rooms” became substitutes forthe bars shut down by Prohibition—the same

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swing doors, darkened windows, and smoke-filled rooms furnished with mahogany chairsand packed with all sorts of nondescript folkfrom every walk of life hanging around to fol-low the projected ticker tape flickering onthe big screen at the front of the office. Thegrail was to discover the next General Mo-tors, which had risen twentyfold during thedecade, or the next RCA, which had gone upseventyfold. The newspapers were full of art-icles about amateur investors who had madefortunes overnight.

The old crowd on Wall Street had a rulethat a bull market was not in full stampedeuntil it was being played by “bootblacks,household servants, and clerks.” By thespring of 1928, every type of person wasopening a brokerage account—according toone contemporary account, “school teachers,seamstresses, barbers, machinists, necktiesalesmen, gas fitters, motormen, familycooks, and lexicographers.” Bernard Baruch,

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the stock speculator who had settled down toa life of respectability as a presidential ad-viser, reminisced, “Taxi drivers told you whatto buy. The shoeshine boy could give you asummary of the day’s financial news as heworked with rag and polish. An old beggar,who regularly patrolled the street in front ofmy office, now gave me tips—and I supposespent the money, I and others gave him, inthe market. My cook had a brokerageaccount.”

The stock pronouncements of shoeshineboys would become forever immortalized asthe emblematic symbol of the excesses ofthat period. Most famously, Joseph Kennedydecided to sell completely out of the marketwhen in July 1929, having already liquidateda large portion of his portfolio, he was accos-ted by a particularly enthusiastic shoeblackon a trip downtown to Wall Street, who in-sisted on feeding him some inside tips.“When the time comes that a shoeshine boy

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knows as much as I do about what is goingon in the stock market,” concluded Kennedy,“it’s time for me to get out.”

About a third of the new speculators werefemale. Articles on investing regularly ap-peared in women’s magazines. Indeed, theseminal manifesto of the time, “EveryoneOught to Be Rich” originally appeared in theAugust 1929 Ladies’ Home Journal. Its au-thor, John J. Raskob, recently treasurer ofGeneral Motors, now sponsor of the EmpireState Building then in its planning stages,made the case that anyone who invested $15a month and reinvested the dividends wouldhave a fortune of $80,000 after twentyyears.

Initially, Wall Street, always a bastion ofmisogyny, dismissed the new class of specu-latrices as “hard losers and naggers . . . stub-born as mules, suspicious as serpents andabsolutely hell bent to have their own way.”Even the New York Times had to have its

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chuckle about some of the characteristics ofthese novices—their memory lapses, their su-perstitions, their gullibility. But women soonbecame so important to the market thatbrokerage houses opened up special officeson the Upper East Side on Fifth or Madisonor on Broadway in the West Seventies tocater specifically to this ever more substan-tial clientele.

The new folk heroes of the market werethe pool operators, a band of professionalspeculators analogous to the hedge fundmanagers of today. They were typically out-siders, despised by the Wall Street establish-ment, who accumulated their for-tunes—though they would soon enough losethem—by betting on stocks with their ownand their friends’ money. The seven Fisherbrothers who had sold their automobile bodycompany to General Motors for $200 millionran such an enterprise, as did Arthur Cutten,an old hard-of-hearing commodity trader

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from the Chicago wheat pits; Jesse Liver-more, the great bear trader; and Kennedy,who had made his first million investing inthe stock of the Hertz Yellow Cab Companyand was now making his profits as an in-vestor in the movie industry.

Biggest of them all was Billy Durant, whobecame the cheerleader for the bull market.Operating from a high-floor office at thecorner of Broadway and Fifty-seventh, theexiled creator of General Motors now spe-cialized in ramping stocks—acquiring largeblocks in secret, eventually publicizing hispositions to drive the price high, then off-loading them as a sadly unsuspecting publicpiled in. He traded so frequently and in suchlarge amounts that he had to use twenty dif-ferent brokers, his commissions just to oneof whom amounted to $4 million a year.When he went to Europe, his transatlanticphone bills alone were said to be $25,000 aweek.

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On Wall Street, opinion about the marketswas as always split. Charles E. Mitchell, headof the National City, the largest bank in thecountry, was nicknamed “Sunshine Charlie”for his infectious optimism. He was the car-nival salesman of American banking, whohad transformed his firm into a giant ma-chine for selling stocks. Paul Warburg, one ofthe wise men of American banking, the intel-lectual father of the Federal Reserve System,kept predicting that it would all end in dis-aster, issuing his most powerful jeremiad onMarch 8, 1929: “History, which has a painfulway of repeating itself, has taught us thatspeculative overexpansion invariably ends inover-contraction and distress.” If the “de-bauch” on the stock market and the “orgiesof unrestrained speculations” continued, hewarned, the ultimate collapse in stockswould bring about “a general depression in-volving the entire country.” He was promptly

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accused of “sandbagging Americanprosperity.”

Even within the same firm opinions weredivided. At Morgans, Thomas Lamont was abeliever in the New Era. Russell Leffingwell,a former assistant secretary of the treasury,who had become a partner in 1923, blamedthe bubble on Norman and Strong. In March1929, on the very same day that Warburg is-sued his ominous pronouncement, Leffing-well predicted to Lamont, “Monty and Bensowed the wind. I expect we shall have toreap the whirlwind. . . . I think we are goingto have a world credit crisis.”

The financial press was as much at odds asthe men they covered. While the Journal ofCommerce and the Commercial and Finan-cial Chronicle hammered away at the “specu-lative orgy,” the Wall Street Journal kept thefaith, insisting that, “There are many under-lying reasons why the size of the marketshould be many times what it was a decade

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ago.” There was much editorial head shakingin the mainstream newspapers. AlexanderDana Noyes, the bespectacled, professorialfinancial editor of the New York Times, whohad been watching the market for fortyyears, warned that “stock speculation hasreached an exceedingly dangerous stage,”while the Washington Post editorialized that“thousands of buyers of stocks are in for seri-ous losses.”

The New York Daily Mirror, by contrast,was so transported by its vision of the futurethat it was unable to restrain its soaringflight of rhetoric:

The prevailing bull market is justAmerica’s bet that she won’t stop ex-panding, that big ideas aren’t peteringout, that ambition isn’t tiring in thewings, that tomorrow is twitchingwith growth pains. Graph hounds,chart wavers and statistic quoters mayshout their pens hoarse with contrary

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sentiment—financial Jeremiahs mayrave of days of doom, but theseminority reports are drowned by thehurrahing ticker tape and the swish ofskyrocketing securities. We’regambling on continued prosperity,full employment, and undiminishedspending capacity—on freight load-ings, automobile output, radio expan-sion—on aviation development, cropyields, beef prices—on mail ordersales and sound retailing.

It was from Washington that the bull mar-ket faced its greatest hostility. Every seniorfinancial official in the government thoughtthat stocks were now in a speculativebubble—everyone, that is, except the presid-ent, Calvin Coolidge. For some reason un-fathomable even to members of his own ad-ministration, Silent Cal seemed blithely un-concerned about developments on WallStreet. In February 1929, as he prepared to

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leave the White House, he declared thatstocks were “cheap at current prices” andconditions absolutely sound, probably just toirritate his successor, Herbert Hoover.

The new president was so well known tobe a fervent opponent of the speculation onWall Street that in the week of his nomina-tion to the Republican candidacy, the stockmarket had gone down 7 percent. Like all ofWashington, he faced a quandary. While hebelieved that the market was now living in aworld of fantasy, the underlying economywas healthy and doing well. It was almostimpossible to craft his comments in such away as to talk the stock market back to earthwithout at the same time damaging the eco-nomy and laying himself open to accusationsof undermining the American dream.

He therefore felt compelled to be ex-tremely circumspect. In the spring of 1929,he did invite the editors of the nation’slargest newspapers to Washington to enlist

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them against the perils of speculation; hesent Henry Robinson, president of the FirstSecurity National Bank of Los Angeles, as hispersonal envoy to Wall Street to warn thatthe market was unsound; and he continuedto press his friend Adolph Miller for theFederal Reserve Board to use its armory ofmeasures to deflate the bubble. All to littleavail.

At the Treasury Department, Andrew Mel-lon was even less successful. By 1929, he hadserved under three presidents and was beinghailed as the “best Treasury Secretary sinceAlexander Hamilton.” Gloomy and gaunt, hewas an unlikely figure to have presided overa decade of such economic exuberance. Thetruth was that most of his public achieve-ments were a matter of luck. In 1921 he hadinherited an economy still on the vestiges ofa war footing. The peace dividend allowedhim to slash public spending almost in half,while at the same time cutting income taxes

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and paying down the national debt from $24billion to $16 billion. In international fin-ance, he had left all currency matters to Ben-jamin Strong. Similarly, though he was amember of the Federal Reserve Board, heusually absented himself from its delibera-tions; most of the Fed’s achievements inmonetary policy were Strong’s. What contri-bution the United States had made to solvingthe problem of reparations was largely thework of private businessmen, such as Dawesand Young. Mellon could claim to haveplayed a key role in restructuring the Alliedwar debts. But the British part of the dealhad been unusually harsh, only agreed to bya Britain eager to resume its place as thelinchpin of the gold standard. Even now, theFrench had yet to ratify their settlement.

The emotionally crippled Mellon, long di-vorced from his wife and now estrangedfrom his children, seemed to find his mainsolace in obsessively collecting works of art.

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By the late 1920s, his avocation had come todominate his life and he had become oddlydisengaged in his role as treasury secretary.For example, when he quite coincidentlyturned up in Paris in the middle of theFrench currency crisis in September 1926, hewas received by the desperate Émile Moreau,who could not help noticing that Mellonseemed almost bored during their discus-sions and “displayed some life only in frontof the Fragonard” that hung on Moreau’s of-fice wall.

Mellon would eventually be accused ofhaving encouraged the market higher out ofthe crude desire to enlarge his personal for-tune. This is unfair. In private, he acknow-ledged that stocks were in a bubble. But hisexperience as one of the country’s great fin-anciers convinced him that there was littlethat the Fed or anyone else could do about it,observing to a fellow member of the FederalReserve Board, “When the American people

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change their minds, this speculative orgy willstop but not before.” Having decided thattrying to talk the market down was an im-possible task and that he would only lookfoolish when he failed, he waited for thefrenzy to burn itself out, saying as little aspossible publicly. In March 1929, he did de-clare that he thought this was a good time forinvestors to buy bonds, but this was so coy apronouncement that those few people whopaid any attention poked fun at Mellon’s ad-monition that “gentlemen prefer bonds.”

The irrepressible gentlemen on CapitolHill were not so reticent. In February andMarch of 1928, the Senate Committee onBanking and Currency held hearings onbrokers’ loans and, from March to May, itsHouse counterpart opened its own investiga-tion into stock market speculation—overall aspectacle somehow both embarrassing anduplifting. It was painful to watch the goodsenators flailing around trying to understand

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the workings of a complicated financial sys-tem and hurling foolish questions at the ex-pert witnesses. But there was also somethingadmirable as they voiced the outrage of thecommon man at the absurdities of WallStreet.

The following exchange captures the qual-ity of the discussion and the mood of theCongress. In the middle of the hearings, Sen-ator Earle Mayfield of Texas suddenly has aninspiration: Why not ban all stock trading?

SENATOR MAYFIELD: Well, instead of ur-ging all these various changes in the law, whydo you not prohibit gambling in stocks andbonds on the New York Stock Exchange? Inthat way you could make a short cut to theproposition. Just stop it.

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SENATOR BROOKHART: Well, I do nothave any objection to doing that. But SenatorCouzens, in discussing the thing, said weneeded a market—a legitimate market forstocks and bonds.

SENATOR MAYFIELD: Preserve the legitim-ate market, but cut out the gambling. . . .

SENATOR EDGE: Does the senator fromTexas seriously consider passing a bill pro-hibiting that?

SENATOR MAYFIELD: There are millions ofdollars of stocks and bonds sold every day bypeople who do not own them and have noidea of owning them. Purely gambling on themarket.

SENATOR BROOKHART: There is notrouble at all in stopping the gambling. . . .We have a law against poker gambling, andwe can have a law against stock gambling.

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The discussion during the hearings contin-ued in an attempt to refine the distinctionbetween investing and gambling. Finally,Senator Carter Glass, one of the architects ofthe Federal Reserve System and secretary ofthe treasury during the last two years of theWilson administration, thought he had itfigured out. A stock he had bought only theprevious January at 108 was now selling onthe market at 69. “Now what is that butgambling?” he exclaimed.

It was great theater, put on, according toTime magazine, with that combination of“oratory, ethics and provincialism” at whichthe U.S. Congress is so good: a reenactmentof an old morality play that had divided therepublic since its founding—between those,like Hamilton, who believed that greatwealth was the reward for taking risks andthose, like Jefferson, who believed thatprosperity should be the reward for hardwork and thrift.

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The strongest calls to do something camefrom senators representing the farm states ofthe Midwest and the Great Plains: Borah ofIdaho, La Follette and Lenroot of Wisconsin,Brookhart of Iowa, Pine of Oklahoma, andMayfield of Texas. They had their roots inthose parts of the country that had alwaysbeen suspicious of bankers and were ambi-valent about the power of money in Americ-an life. Their constituents, the farmers, hadalready been through hard times for most ofthe decade as commodity prices fell and werenow being starved of credit as it was divertedinto the stock market. But the senatorsslowly came to recognize that they wouldonly inflict greater damage upon their peopleif they pressed for tighter credit to forcestock prices down.

And so Congress’s efforts to control specu-lation yielded little except for some glori-ously overheated language. In February1929, Senator Tom Heflin of Alabama

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introduced a resolution asking the FederalReserve Board to control speculation, thun-dering to the Senate: “Wall Street has be-come the most notorious gambling center inthe whole universe . . . the hotbed and breed-ing place of the worst form of gambling thatever cursed the country.” The LouisianaState Lottery “slew its hundreds,” he contin-ued, “but the New York State gambling Ex-changes slay their hundreds of thousands. . .. The government owes to itself and to itspeople to put an end to this monstrous evil.”

It was thus left to the Fed to wrestle withthe conundrum of how to deflate the stockbubble without crippling the economy. Re-cognizing that the easing of credit policy inthe middle of 1927 had been a mistake, itraised rates from 3.5 percent in February1928 to 5 percent in July 1928. But just asthe stock market began its second leg up-ward in the middle of 1928, the Fed fell silent

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and disappeared from view, brutally dividedabout how to react.

Any further measures to bring the marketto earth were bound to inflict collateral dam-age to the economy, especially on farmers.Moreover, capital had once again begunflowing in from abroad, attracted by the re-turns on Wall Street. Were the Fed to raiseinterest rates now, it might well pull in evenmore gold, possibly even forcing sterling offthe gold standard.

Strong was still grappling to the very endwith these issues. He was willing to concedethat it had been a mistake to delay tighteningcredit so long in early 1928, thus letting thebull market build up such a head of steam.Nevertheless, in the last weeks before hedied, he had begun arguing that the Fedshould not tighten any further but step asidein the hope that the frenzy would burn itselfout.

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Strong’s successor at the New York Fedwas George L. Harrison, a forty-two-year-oldlawyer, with impeccable establishment cre-dentials. Born in San Francisco, the son of anarmy colonel, Harrison had had a peripateticchildhood while his father was posted tovarious forts across the country. He had beenlame from childhood as result of a fall andhobbled around with a heavy walking stick.He had gone to Yale, where he had run with“right crowd” and had become a member ofSkull and Bones, the elite secret society forseniors that supposedly serves as an entréeinto the upper echelons of business and gov-ernment. His Yale room-mate and closefriend was Robert Taft, the son of PresidentWilliam Taft, and they had gone on to Har-vard Law School together. Graduating closeto the top of his class, Harrison was offered aclerkship on the Supreme Court with JusticeOliver Wendell Holmes, a position in whichhe would be followed by Harvey Bundy,

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father of the Bundy brothers, William andMcGeorge, and by Alger Hiss, the seniorState Department official later accused of be-ing a Soviet spy.

Harrison had joined the Federal ReserveBoard as assistant general counsel in 1914soon after it opened and in 1920 had beenpersuaded by Strong to come to the NewYork Fed as his deputy. A scholarly-lookingman with a big head of wavy hair, friendlyblue eyes, and a warm and genial manner, hewas a committed bachelor, lived in a smallsuite at the Yale Club, and liked to spend hisevenings playing poker with his friends. Hav-ing been groomed for the job, he was the ob-vious choice to succeed Strong. He sharedhis mentor’s international outlook and as thedeputy governor responsible for the day-to-day’s dealings with European central banks,he had developed close working relation-ships with both Norman and Moreau.

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Nevertheless, filling Strong’s shoes was adaunting task. As Russell Leffingwell, theMorgan partner, put it, Harrison had thedouble disadvantage of “being young andnew,” while as Strong’s protégé he “had in-herited all the antagonisms that poor Benleft behind him.” Harrison also had a verydifferent personality from his predecessor’s.Where Strong was forceful and aggressive,the affable and easygoing Harrison was cau-tious and diplomatic. Strong had a terribletemper and was impatient with incompet-ence in his subordinates. Harrison by con-trast found it hard to fire anyone. There wasnever much doubt where Strong stood on anissue and he did not shy from confrontation,while Harrison believed in keeping his cardsclose to his chest.

Strong’s death had left a political vacuumwithin the system as a whole. The chairmanof the Board, Roy Young, who had taken overfrom Daniel Crissinger in late 1927, was a

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florid-faced glad-handing banker from Min-nesota who loved to regale people with hisstories. With Strong dead, Young very con-sciously set out to reclaim leadership, to re-assert Washington’s control over thedecision-making process, and in his words,“raise the prestige of the Board within thesystem.”

A majority of the Board in Washington,among them Young, Miller, and Hamlin, thesame governors who had been so strongly infavor of raising interest rates to curb specu-lation as the bull market built up, had nowchanged their minds. Fearful that increasingthe price of money at this stage would harmthe economy without checking the orgy onWall Street, they now began to press for “dir-ect action” against speculators.

By early 1929, the bubble was not simply aproblem for the Fed but for almost everyEuropean central bank as well. New Yorkwas sucking in capital from abroad at a time

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when Europe was still very dependent onAmerican money. The weakest links wereGermany and the other Central Europeancountries. But the Bank of England was los-ing gold as well. While in early 1928, it heldover $830 million in reserves, the highestsince the war, by early 1929, these had fallenbelow $700 million and were still goingdown. In the old days, when his gold reservescame under strain, Norman’s first reactionwould have been to press his friend Strong toease Fed policy. Now grimly aware that withWall Street on a roll, no one would dance tothat tune, he thought out a very differentstrategy.

He arrived in New York on January 27armed with his new proposal. Meeting withHarrison at the New York Fed, Norman nowsurprised everyone by arguing for a sharprise in U.S. rates, possibly by 1 percent, evenby 2 percent, taking the discount rate to 7percent. The Fed should try to break “the

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spirit of speculation,” “prostrating” the mar-ket by a forceful tightening of credit. Once achange in psychology had been achieved, in-terest rates could be then brought downagain and capital flows to Europe would re-sume. For some reason Norman thought theFed could pierce the bubble with a surgicalincision that would bring it back to earth,without harming the economy. It was a com-pletely absurd idea. Monetary policy doesnot work like a scalpel but more like asledgehammer. Norman could neither besure how high rates would have to go tocheck the market boom nor predict with anycertainty what this would do to the U.S.economy.

Nevertheless, such was his power thatHarrison embraced the idea. He did,however, warn Norman that since Stronghad died, things had changed within the Fed.The conflict between the Board and the NewYork Fed had become even greater than in

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the past. There was now general agreementthat the United States was faced with a stockmarket bubble. But the system was deeplydivided about how to respond. While the re-serve banks wanted to raise rates, it was nowthe Board that was resisting, and it had be-come more aggressive about getting its way.Harrison himself had just emerged from acollision with the Board over issues of juris-diction, Chairman Young warning him thathe and the other Board members did not“any longer intend to be a rubber stamp.”Harrison urged Norman to visit Washing-ton—which he had till now ignored—and be-gin building a relationship with the Board ifhe wanted to continue to influence U.S. cred-it policy.

On February 5, Harrison, fortified by hisdiscussions with Norman, himself wentdown to Washington and proposed exactlythe Norman strategy to Young. He rejectedthe idea that his old chief, Strong, had been

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advocating in his last few months—that theFed should passively sit by and “let the situ-ation go along until it corrects itself.” In-stead, he now pressed for “sharp incisive ac-tion,” a rise in rates of 1 percent. He hadcome to the conclusion, as he would put inlater, that it would be better “to have thestock market fall out of the tenth story, in-stead of the twentieth later on.” Once thespeculative fever had been broken, ratescould be brought down again. The next day,Norman also turned up in Washington, bear-ing the same message. Members of the Boardcould not help but remark on the almost sin-ister influence that he seemed to exert overthe New York Fed, originally upon Strongand now upon Harrison. One governorwould later comment that Harrison “livedand breathed for Norman.”

While Harrison and Norman were press-ing for rate hikes, the Board continued itscampaign for direct action. On February 2, it

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issued a directive to all its member banksthat they should not borrow from the Fed“for the purpose of making speculative loansor for the purpose of maintaining speculativeloans.” Four days later, it made the directivepublic. The Dow fell 20 points over the nextthree days, but quickly recovered and by theend of the week was back at the highs. Themarket’s attitude was best summarized by aneditorial in the Hearst newspapers. “If buy-ing and selling stocks is wrong, the Govern-ment should close the Stock Exchange. Ifnot, the Federal Reserve Board should mindits own business.”

Norman left for home in the middle ofFebruary shaken by his trip. In the old days,during his visits to the United States, therehad been an easy camaraderie and his friendStrong had always exercised a calming influ-ence over him. This time he returned to Bri-tain as anxious as when he had set out. Ithad been “the hardest time in America that

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he had ever had,” he reported to his col-leagues. He had found the American centralbankers paralyzed by indecision; there was“no leader”; within the Federal Reserve Sys-tem, they were “at odds with one another,drifting and not knowing what to do.” In acircular letter sent to several heads ofEuropean central banks, he wrote that hehad set off in the hope of getting a clearerview of what was going on in the UnitedStates only to return with “an even deeperfeeling of confusion and obscurity.”

Meanwhile, back in the United States thestruggle between the Board and the NewYork Fed was intensifying. On February 11,the directors of the New York Fed voted un-animously to raise rates by 1 percent to 6percent. Harrison called Young in Washing-ton to inform him of the decision, acknow-ledging the Board’s right to override it.Young asked for time to consider the initiat-ive, but Harrison insisted on a definitive

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answer that day. After three hours of callsback and forth in which Young unsuccess-fully tried to persuade Harrison not to forcea showdown, he eventually called to say thatthe Board had voted to disallow the hike.Over the next three months, the directors inNew York voted ten times to raise rates andeach time were overridden by Washington.

The Fed was now paralyzed by this stan-doff between its two principal arms. TheBoard kept insisting that the right way to de-flate the bubble was through “direct action”:credit controls, particularly of brokers’ loans.New York was equally insistent that such apolicy could not work, that it was impossibleto control the application of credit once it leftthe doors of the Federal Reserve. Meanwhile,the pace of speculation was accelerating.

It did not help that the Fed seemed incap-able of even exerting its control over leadingbankers, let alone over the crowd psychologyof investors. At the end of March, it was

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announced that total broker loans had in-creased to almost $7 billion, and the marketswooned. The fear that some drastic actionfrom the Fed to curtail the amount of creditgoing into the stock market was imminentdrove the rate on brokers’ loans to over 20percent. Instead, Charlie Mitchell of NationalCity Bank, himself a director of the New YorkFed, defied the Board by calling a press con-ference and announcing that his bank wouldpump an extra $25 million into brokers’loans to support the stock market. After that,what little credibility the Fed possessed wasirretrievably lost.

It is too easy to mock the Fed for en-tangling itself in a bureaucratic turf feud andfiddling while Rome was burning. Bothparties to the debate were in fact right. TheBoard was undoubtedly correct that with thedemand for money on Wall Street so strong,call money averaging over 10 percent, some-times spiking as high as 20 percent, and

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speculators counting on gains of 25 percent ayear and more, a hike in the Fed’s discountrate from 5 percent to 6 percent or even 7percent at this stage of the game was going tohave almost no effect. To be sure of prickingthe bubble would have required raising in-terest rates higher, perhaps to 10 or 15 per-cent, which would have caused massive cut-backs in business investment and wouldhave plunged the economy into depression.

But the New York Fed also happened to beright. All the jawboning about reducing cred-it for speculators proved to be pointless. Itdid in fact succeed in curbing the amount ofmoney going into brokers’ loans frombanks—between early 1928, when the Boardfirst declared war on brokers’ loans, andOctober 1929, banks cut their loans tobrokers from $2.6 billion to $1.9 billion.Meanwhile, other sources of credit—U.S.corporations with excess cash, British stock-brokers, European bankers flush with

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liquidity, even some Oriental po-tentates—more than made up for the declineby increasing their funding of brokers’ loansfrom $1.8 billion to $6.6 billion. It was theseplayers, all of them outside the Fed’s control,who were by far the most important factorsupporting leveraged positions in the stockmarket.

Even Adolph Miller, the most vocal oppon-ent of speculation in general and brokers’loans in particular, could not resist thetemptation to earn 12 percent on his ownsavings. In 1928, Fed officials discoveredthat he had invested $300,000 of his ownmoney in the call market through a NewYork banker, personally helping to feed thevery speculation that he so vociferously op-posed at the Board.

One is led to the inescapable but unsatisfy-ing conclusion that the bull market of 1929was so violent and intense and driven by pas-sions so strong that the Fed could do nothing

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about it. Every official had tried to talk itdown. The president was against it, Congresstoo; even the normally reticent secretary ofthe treasury had spoken out. But it was re-markable how difficult it was to kill it. Allthat the Fed could do, it seemed, was to stepaside and let the frenzy burn itself out. Bytrying to stand up to the market and thenfailing, it simply made itself look as impotentas everybody else.

PERHAPS THE MOST perverse consequenceof the bubble was that by the strange mech-anics of international money, it helped to tipGermany over the edge into recession. Forfive years, hordes of American bankers haddescended on Berlin to press loans uponGerman companies and municipalities.However much Schacht had tried to wean hiscountry from this dependence on foreign

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capital, there was little he was able to doabout it. Over the five years between 1924and 1928, Germany borrowed some $600million a year, of which half went to repara-tions, the remainder to sustain the reboundin consumption after the years of austerity.

In fact, Germany’s appetite for foreign ex-change was so great that even the deluge oflong-term loans from U.S. bankers was notenough, and it was forced to supplement thiswith short-term borrowings in internationalmarkets closer to home. Out of the total of$3 billion for which German institutionssigned up in those years, a little less than $2billion came in the form of stable long-termloans. But more than $1 billion was “hotmoney,” short-term deposits attracted toGerman banks by high interest rates—7 per-cent in Berlin compared to 5 percent in NewYork—and subject to being pulled at anytime. In late 1928, as the U.S. stock marketkept climbing and call money rates on Wall

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Street skyrocketed, American bankers mes-merized by the phenomenal returns at homesuddenly stopped coming to Berlin.

It was the combination of the drying up offoreign credit due to high interest rates in-duced by the U.S. stock bubble and the resid-ual lack of confidence among German busi-nessmen following Schacht’s ill-fated strikeagainst the stock market in 1927 that droveGermany into recession in early 1929.Moreover, as long-term American loansstopped, Germany was forced to rely moreand more on hot money, some raised fromLondon, but much from by French banks,then flush with all the excess gold that hadbeen sucked into their country. Germanytherefore found itself slipping into recessionjust as its foreign position was becoming in-creasingly vulnerable. A British Treasury of-ficial, recalling how much money France hadpumped into Russia before the war, couldnot help remarking with cynical detachment,

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“The French have always had a sure instinctfor investing in bankrupt countries.”

The collapse in foreign loans and the re-cession could not have come at a worse timefor Germany. Under the Dawes Plan sched-ule, Germany was to have fully recovered bynow, and was due to ramp up its reparationspayments in 1929 to the full $625 million ayear, about 5 percent of its GDP. This wouldnot have been an intolerable burden by his-torical standards. But Schacht, for that mat-ter most of the German leadership, had al-ways been resolute that with its new consti-tution still fragile, its body politic still di-vided, its people still bitter over the defeat,and its middle classes decimated by the rav-ages of the inflation years, Germany simplycould not pay this amount.

As 1929 and the scheduled rise in pay-ments approached, Schacht was of twominds about what to do. He often spokeabout simply waiting for the economic crash

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that so many financial experts were predict-ing. It was a common view in Britain, held,for example, by Frederick Leith-Ross, the topTreasury official responsible for reparations,that the world was headed for a massive pay-ments crisis in which several Europeancountries would default on their debts, set-ting the stage for a general restructuring ofall international commitments arising fromthe war. Europe could then wipe the slateclean of both reparations and war debts andstart over again. Occasionally, Schacht eventalked almost too glibly about provokingsuch an upheaval himself.

The alternative was to reopen negotiationsbefore the jury-rigged payments systembroke down. During the Long Island centralbankers’ meeting of 1927, Schacht had madeenough of a stir about Germany’s foreigndebt problem as to convince Strong and Nor-man that something had to be done soon, tothe point that Strong in turn pressed Agent-

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General Seymour Parker Gilbert to strike adeal before the whole thing blew up in theirfaces.

Gilbert, effectively Allied economic pro-consul for Germany for the last four years,was even then all of thirty-six years old. Aprecocious genius, he had graduated fromRutgers at the age of nineteen, from HarvardLaw School at twenty-two, had become oneof the four assistant secretaries at the U.S.Treasury at the age of twenty-five, and beenpromoted to under-secretary, the secondmost powerful official in the department atthe age of twenty-eight. In 1924, at thetender age of thirty-two he had beenappointed agent-general for reparations, re-sponsible for managing Germany’s pay-ments, and most important, for decidinghow much it could afford to transfer into dol-lars every year. In the hands of this tall, shy,boyish, sandy-haired young man from New

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Jersey lay the immediate fate of the world’sthird largest economy.

There was little doubt that they were verycapable hands. Reserved, bookish, and tacit-urn, Gilbert was uncomfortable aroundpeople, speaking “with a mixture of awk-wardness and arrogance, mumbling thewords so that one could hardly understandhis English.” But his intellectual power andcapacity for work were legendary. At theTreasury, he had usually been at his desk tilltwo or three o’clock in the morning, sevendays a week. Living in Berlin for five years,he did not socialize, never learned German,did “nothing but work without interruption,”according to the German finance minister,Heinrich Kohler. “No theater, no concert, noother cultural events intruded into his life….”

That so young an American should havesuch enormous sway over the life of theircountry was greatly resented by most Ger-mans. Government officials also suspected

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the staff in his office of being espionageagents, sent to report on Germany’s attemptsto cheat on the limitations imposed on itsarmed forces by the Versailles Treaty. InFebruary 1928, a right-wing group staged amock coronation attended by ten thousandpeople in which Gilbert’s effigy was crowned“the new German Kaiser who rules with a tophat for a crown and a coupon clipper forscepter.” Schacht, always attuned to thelocus of power, was one of the few Germanofficials to befriend Gilbert.

Apart from his power to determine trans-fer payments, Gilbert’s most potent weaponwas his annual report. Generally viewed asthe best independent assessment of Ger-many’s economic policy and overall situ-ation, it was always eagerly awaited by Ger-many’s creditors. Though successive minis-ters of finance may have resented being lec-tured for overspending by this absurdlyyoung whippersnapper of an American, no

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German politician dared challenge him be-cause of the influence he carried abroad.

In his 1927 report released in December,Gilbert declared that the time had come forGermany to take control over her own eco-nomic destiny “on her own responsibilitywithout foreign supervision and withouttransfer protection.” Germany should be toldonce and for all exactly how much she owedand for how long. Moreover, the transferprotection clause embodied in the DawesPlan, while useful in 1924 for restarting for-eign lending, was now creating its own per-verse incentives—what we now refer to asmoral hazard. By providing an escape clausein the event of a payments crunch, the planencouraged foreign bankers to be too cava-lier in their lending and allowed Germany tobe too lax about the consequences of accu-mulating so much debt “without the normalincentive to do things and carry through re-forms that would clearly be in the country’s

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own interests.” Though Gilbert thus an-nounced his intention of working himself outof one of the most powerful economic posi-tions in the world, it did help that he had justreceived the highly lucrative offer to join J.P. Morgan & Co. as a partner.

There were many on the British side, andeven among the Germans, who thought thatit was still premature for a final reckoning.The bitterness between France and Germanyhad yet to subside; more time was neededuntil the German economy had truly revivedbefore the amount of foreign payments itcould sustain could definitively be settled.

By late 1928, however, Gilbert had beensuccessful in persuading the Allies to con-vene a conference in Paris in February 1929to do just that. He had even convinced thepowers in Berlin that though the currentsituation—no new foreign loans coming in,large debts to nervous French depositors inGerman banks, and rising domestic

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unemployment—did not provide the idealbackdrop against which to reopen negoti-ations, it was best to try to strike a deal nowwhile at least the rest of the world wasbooming.

Gilbert and the German leadership,Schacht included, were operating, however,from two completely different assumptionsabout what such a deal might look like. Dur-ing his campaign to get a new round of nego-tiations started, the Allies had very explicitlytold Gilbert that any further concessionswould have to be small. Receipts from Ger-many had to cover payments on war debts tothe United States and provide France andBelgium something beyond this to coversome of the costs of reconstruction. The low-est figure that the Allies could concede wasan aggregate payment of $500 million ayear. In his enthusiasm to get the parties tothe table, Gilbert convinced himself and toldeveryone on the Allied side that the Germans

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would be willing to accept such a settlementas the price for getting France out of theRhineland and regaining economicsovereignty.

Meanwhile, Schacht believed that Americ-an bankers had now committed so muchmoney to Germany—they had provided some$1.5 billion of the $3 billion it had bor-rowed—that they represented an effectivelobby for reduction and would bring enoughpolitical pressure on the creditor govern-ments for Germany to swing a settlement of$250 million a year. Schacht, having by nowbroken with the German Democratic Party(DDP), which he had helped found, was be-ginning to flirt with the right-wing reaction-aries of the DNVP, the German NationalistPeople Party. At one point, he even braggedto his new friends that he could get repara-tions below $200 million a year. Gilbert triedhis best to disabuse the Germans of such ex-cessive optimism and they in turn tried to

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convince him that Germany “was dancing ona volcano” and could not afford $500 milliona year. But the two parties ended up talkingpast each other.

Thus as the delegations began to descendon Paris in February 1929 for yet one moresummit devoted to reparations, none of theparticipants realized how wide the chasm ofdisagreement between the various sides re-mained. It came as an ill omen when, just asthe conference convened, a massive coldfront descended across Europe, bringingwith it the coldest temperatures for almost acentury. Temperatures in Berlin fell to theirlowest level in two hundred years; in Silesiait was 49 degrees below zero, the coldest daysince records had begun in 1690. Europe wasicebound. Across the continent, trains wereimmobilized, ships lay frozen in the Balticand on the Danube, and many rural com-munities, particularly in Eastern Europe,faced actual famine. The newspapers carried

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chilling reports evoking the Dark Ages, ofpacks of starving wolves attacking isolatedvillages in Albania and Romania and of awhole band of gypsies found frozen to deathin Poland.

The German delegation, weighed downwith twenty-seven boxes of files, arrived bytrain from Berlin on February 8. Paris hadescaped the worst of the cold—the temperat-ure was only 10 degrees below zero. Never-theless, the city authorities had lined thestreets with braziers. But for all the chill, incontrast to Central and Eastern Europe, theFrench capital was visibly booming. The loc-al economy, fueled by soaring exports, highsavings, and large capital inflows, was ex-panding at 9 percent a year, making it thefastest growing major country. In the lasttwo years, the French stock market had en-joyed the best performance in the world,beating even Wall Street’s—having gone up150 percent since the end of 1926, while the

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Dow had risen 100 percent. With the goodtimes had come a renewed self-confidence,even arrogance, and this being Paris, scan-dals. As the delegates arrived, the city wasstill abuzz with L’Affaire Hanau.

Marthe Hanau was a forty-two-year-olddivorcée who in 1925 had started a stock tipsheet, La Gazette du Franc. By 1928, she hada following of hundreds of thousands of in-vestors. Taking advantage of the gullibilityand cupidity of the small-town savers whowere her clients—local priests, retired sol-diers, schoolteachers, and shopkeepers—shepromoted stocks that were often little morethan paper companies. When her successbrought her to the attention of the authorit-ies, Hanau, nicknamed by the press “LaGrande Catherine de Finance,” kept investig-ators at bay by bribing politicians. The arch-bishop of Paris was one of her clients. Buteventually her extravagance—she alwaystraveled in a convoy of two limousines, in

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case one of them broke down; regularlysplurged $100,000 on diamonds; and peri-odically spent the weekend at the MonteCarlo gaming tables—caught up with her. InDecember 1928, she was arrested and forcedinto bankruptcy, owing $25 million dollars.Now in prison, she was awaiting trial threat-

ening to name names.43

The Germans were put up at the RoyalMonceau, a new luxury hotel near the Arc deTriomphe, and furnished with four new lim-ousines by Mercedes-Benz for the duration.This was the first conference at which theyfelt themselves treated as equals rather thanas the enemy. They were even invited to theopening lunch at the Banque de France onSaturday, February 9, hosted by the head ofthe French delegation, Émile Moreau. Rep-resenting the United States were OwenYoung and Jack Morgan, with Thomas La-mont as Morgan’s alternate; from Britaincame Sir Josiah Stamp, one of the original

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members of the Reparations Commission of1921, and Lord Revelstoke, one of the fivepeers in the Barings family and chairman ofthe bank; the industrialist Alberto Pirelli,one of the richest men in Italy, and thebanker Émile Francqui, the richest man inBelgium, represented their countries. Alsoattending was a delegation from Japan. Itwas a reunion for many of the men, who likeYoung and Stamp, had been on the Dawesnegotiating teams.

Over a six-course lunch—Huîtres d’Ostendwashed down with a 1921 Chablis, Homard àl’Américain with a 1919 Pouilly, Rôti deVenaison accompanied by an 1881 ChâteauRothschild, Faisans Lucullus with a 1921Clos de Vougeot, Salade d’Asperge with a1910 Château d’Yquem, a 1910 Grand FineChampagne with desserts, and finally abottle of the 1820 Cognac Napoléon over cof-fee—the delegates selected Owen Young,

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with his perfect diplomatic skills, as theirchairman.

On February 11, the Young Conference—asit would come to be called but was for themoment referred to as the Second DawesConference—opened in the Blue Room at theHotel George V. During the previous decadeParis had been the scene of so many interna-tional gatherings that every other grandhotel—the Crillon on the Place de la Con-corde, the Bristol on the Rue Saint Honoré,the Majestic on the Avenue Kléber, and theAstoria on the Champs-Élysées—carried inits faded corridors and meeting rooms theechoes of some gathering of statesmen thathad ended in acrimony. It seemed only fit-ting, a sort of rite of passage, for the GeorgeV only recently opened for business to hostthis new meeting before it could claim itsplace in the ranks as a true Parisian hôtel-de-luxe.

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On the second day, seated around thehorseshoe table, Schacht made his openingoffer—$250 million a year for the next thirty-seven years. Moreau conveyed to Young thatFrance would accept nothing less than $600million a year for the full sixty-two years andmight even demand as much as $1 billion.Young was shocked at the huge gap betweenthe main protagonists. Being the consum-mate financial diplomat, and recognizingthat a premature discussion of numbers onreparations would merely lead to an earlybreakdown in negotiations, he arranged forall the delegates to be tied up in subcommit-tees for the next six weeks talking around thesubject, while he used the time in back-chan-nel shuttle diplomacy between the Germansand the French.

As the conference stretched into its sixthweek, a sour and cynical mood began to per-vade its halls. Lord Revelstoke complained inhis diary that the sessions were “lengthy,

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tiresome and far from satisfactory. Schachtresumes his most negative attitude, is un-helpful to the last degree.” One of the journ-alists present described Schacht, stormingout of meetings with threats to abort thetalks, as “a vehement, intolerant man; excit-able and dogmatic; . . . the most tactless, themost aggressive and the most irascible per-son I ever have seen in public life.” He alien-ated all the other delegates with his “tan-trums and exhibitionism.” Revelstokethought that with his “hatchet, Teuton faceand burly neck and badly fitting collar” helooked like a “sea lion at the Zoo.”

Moreau by contrast sat there obstinate andill-tempered, his mouth shut, Revelstoke ob-served, “like a steel trap when Schacht pleadspoverty and inability to pay.” As Moreauwatched the Germans become more isolated,he tried to keep quiet and let them dig theirown graves. But eventually, unable to re-strain himself, he exploded and publicly

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accused Schacht of negotiating in bad faith.Jack Morgan, bored with the sort of detailshe generally left to underlings and shaken byhis one attempt to try to reason withSchacht, left for a cruise on his yacht aroundthe Adriatic and the Aegean with the arch-bishop of Canterbury, complaining that, “IfHell is anything like Paris and an Interna-tional Conference combined, it has many ter-rors and I shall try to avoid them.”

The German delegates found the atmo-sphere in Paris menacing. They were not be-ing paranoid. The French secret police weretapping their phones. All communicationswith their government had to be conductedby courier or by cipher telegrams, with eachof the twenty-eight participants assigned acode name. The three senior representatives,Schacht included, took turns traveling backto Berlin by train every two weeks in order tobrief the cabinet.

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Finally, in early April, Young felt ready toallow the Allies to unveil their proposal. Ger-many would have to make annual paymentsof $525 million for the first thirty-sevenyears and, in order to match exactly the Al-lied war debts to the United States, $400million a year for the subsequent twenty-oneyears. The Allies made it clear that the onlyreason they were saddling two generations ofGermans with reparations was that theythemselves were in debt to the Americans forthe same length of time. On hearing the Al-lied proposal, Schacht turned pale and, in avoice trembling in anger, declared the ses-sion terminated.

By now he realized how totally he had mis-calculated. The American bankers’ power topressure the Allies had foundered on theU.S. government’s unwillingness to contem-plate any further reduction in war debts.Without such an easing, the Allies would notreduce their claims on Germany. Schacht

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was now caught between letting the confer-ence collapse thus very likely provoking afinancial crisis in Germany for which hewould be blamed, or settling for the terms onoffer, for which he feared he would beequally vilified.

Schacht had always been a gambler. In adesperate effort to win more options, he de-cided to change the German offer radically.He had always believed that one of thegreatest injustices of Versailles had been theseizure of Germany’s colonies—an odd col-lection of territories that Germany, late tothe scramble for empire, had accumulated,including most of Samoa, part of NewGuinea, Togoland, German South-WestAfrica, the Cameroons, and Tanga-nyika—which Schacht implausibly claimedhad been worth $20 billion to Germany, anamount that overshadowed even the bill forreparations. He now argued that Germanywould be unable to meet the victors’

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demands unless its former colonies were re-stored. Even more provocatively, he deman-ded that the Danzig corridor, the most con-tentious strip of land in all Europe, takenfrom Germany to give Poland access to thesea, should also be returned.

In seeking to tack what amounted to a ter-ritorial revision of Versailles upon what wassupposed to have been a purely financial ne-gotiation, Schacht had gone out on a limb,and without the permission, or even theknowledge, of his own government. Thedétente between Germany and the Allies, sopainstakingly achieved since the withdrawalfrom the Ruhr five years before, had restedon the principle that Germany would notseek to overturn the political or territorialclauses of the 1919 settlement. Here wasSchacht in one stroke trying to underminethe whole fragile basis of European peace.

It has always been something of a mysterywhat Schacht was hoping to achieve. He did

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have a habit of shaking things up withoutquite knowing where it would all end. But hemust have known that no one at the YoungConference had the authority to renegotiatecrucial parts of the Treaty of Versailles, thatthe gambit was bound to end in failure.Some thought he was just grandstanding fordomestic consumption to prepare for a polit-ical career on his return to Germany, othersthat he was just trying to provoke a crisis togive himself a smoke screen to avoid takingthe blame for the poor deal for Germany.

Schacht’s proposal was initially received instunned silence. Once the other delegateshad had time to absorb his demands—and hehad made them sound like an ultimat-um—the table dissolved into an uproar, withcries of astonishment and outrage. Moreauwas so furious that he pounded the tableand, in a rage, flung his ink blotter across theroom.

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With the conference now close to collapse,Pierre Quesnay of the Banque de France toldone of the Americans that evening thatFrench depositors would withdraw $200million from German banks by noon the nextday. It was unclear whether this was inten-ded as a threat or a prediction. In any case,Germany suddenly began to lose gold at anaccelerating pace—$100 million over thenext ten days, forcing the Reichsbank toraise rates to 7.5 percent, despite Germany’sbeing deep in recession, with two millionunemployed.

Seeing this as the first salvo in an econom-ic war, Schacht accused the Banque deFrance of having secretly orchestrated thewithdrawals to force his hand andthreatened that if Germany’s reserves con-tinued to fall, he would have no option but toinvoke the transfer clause of the Dawes Planto default on all further reparations. At thatmoment, such a move would have set off a

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global financial meltdown. German banks,municipalities, and corporations owedmoney to everybody—$500 million to Britishbanks, several hundred million to Frenchbanks, and some $1.5 billion to Americanlenders. Had it defaulted on reparations atthat point, every financial institution withexposure to Germany would have tried topull what money it could out of the country.Germany would have had to suspend pay-ments on all its commercial loans, creating adomino effect across the globe. Half the Lon-don banks would have gone under. Britain,its reserves already depleted, would havebeen flung off the gold standard. The finan-cial chaos would have been catastrophic.

The Banque de France had in fact con-sidered launching such a preemptive finan-cial strike against Germany but rejected theidea as too risky. Moreau did not want to beblamed for a world economic collapse. SomeFrench banks undoubtedly did pull some

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deposits home but this was mere commercialprudence in the light of the deterioratingturn of events. Meanwhile, in an effort toforestall a breakdown in world finances,Norman and George Harrison of the NewYork Fed had begun mobilizing money tosupport the Reichsbank.

At this point, with a financial crisis loom-ing, Lord Revelstoke saved the day by sud-denly dropping dead. The consequent sus-pension of the proceedings forced the partiesto catch their breath for a few days and stepaway from the brink. Schacht left with theGerman delegation for consultations in Ber-lin. There he found the cabinet up in arms.He had clearly overreached. The foreignminister, Stresemann, who had repeatedlytried to warn Schacht not to overstep his au-thority, feared that he might have jeopard-ized Germany’s still very delicate politicalposition. Other ministers were alarmedabout the domestic economic ramifications.

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Not only had unemployment already reachedtwo million, but a wave of strikes was nowthreatening to put another million men outof work. Schacht’s gamble threatened toplunge Germany into even deeper recession.

Schacht fought back. He blamed Gilbertfor having misled him. He even turned on hiserstwhile patron Stresemann, whom he ac-cused of having undercut him by caving in tothe Allies behind his back even before theconference had started and of now makinghim the scapegoat for the political fallout athome.

While Schacht, even at this stage, wouldhave been willing to go for broke and risk aglobal banking crisis, his government wasnot. Fearing that Germany would once againbecome a pariah nation, the cabinet dis-avowed his position, forced him to recant,and insisted that he return to Paris and re-sume negotiations on the basis of the last Al-lied proposal. He reluctantly agreed,

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provided the cabinet gave him political coverby publicly accepting final responsibility forany settlement. Schacht had no intention ofending up as the fall guy for what national-ists were bound to see as a sellout.

The German delegation returned to thetable. In the middle of May, negotiationswere again suspended for few days—thoughthis time it was so that Moreau could returnto fight the mayoral elections in his tinyhamlet of Saint Léomer. A few weeks later acompromise was reached. Germany wouldpay a little under $500 million for the nextthirty-six years and $375 million a year forthe twenty-two after that to cover the Alliesdebt to the United States. A new bank, theBank of International Settlements (BIS),jointly owned by all the major central banks,would be set up to administer and wherepossible to “commercialize”—the modernterm is securitize—these future payments,that is, to issue bonds against them. Any

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profits generated by the Bank were to accrueto Germany to help defray the burden. Allforeign control over German economic policywas to be removed—Gilbert could pack hisbags and join Morgans. The transfer protec-tion clause was eliminated, although a smallsafety valve was retained whereby shouldGermany get into economic trouble, it couldpostpone two-thirds of its payments for twoyears.

In the circumstances, this was truly thebest deal that Schacht could get. As the del-egates gathered for the signing ceremony inthe meeting room of the George V, the cur-tains suddenly burst into flame—the photo-graphers lights had caused them to overheat.Schacht saw it as an omen. He had been hu-miliated in the negotiations and, on his re-turn to Germany, was criticized from allsides—from the left, for having risked the fu-ture of Germany on a gamble that had gonebadly wrong, and from the right, for having

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put his signature to a bill that would“shackle” the next two generations. Even hiswife greeted him at the station with thewords, “You ought never to have signed.”And though he publicly supported the YoungPlan, in private he painted a much darkerpicture of the future. “The crisis may havebeen postponed for another two years, but itwill arrive with the same certainty and witheven greater severity.” In the ensuing finan-cial chaos, he foresaw that “Germany will becut off from all foreign capital for a longtime, maybe two to three years. For all seg-ments of the German people this will meanmanaging without, longer working hours,lower wages.” An ominous prediction, accur-ate to the year.

THAT OTHER GREAT pessimist on repara-tions, Maynard Keynes, shared Schacht’s

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view of the new arrangements. Believing thatGermany would find it difficult to keep bor-rowing its way out of its hole, Keynes respon-ded to the new plan by proclaiming, “Myprophecy would be that the Young Plan willnot prove practicable for even a short period. . . and I should not be surprised to see somesort of crisis in 1930.”

Marriage had mellowed Keynes. Con-founding all the clever predictions of hissophisticated friends, he and Lydia hadsettled into a blissfully happy union. Hecommuted between the London apartmentin Gordon Square, where they lived duringthe week; his bachelor rooms in college atKings on the weekends; and their countryhouse at Tilton in Kent, during the holidays.Though less prolific with articles on currentaffairs, he had not completely retired fromhis position as the premier gadfly of econom-ic orthodoxy.

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But for the last four years, he had beenhard at work on a new book. After The Eco-nomic Consequences of the Peace and ATract on Monetary Reform, both mono-graphs devoted to the immediate and prac-tical concerns of the chaotic postwar world,he was now struggling with a more ambitiouswork, a theoretical treatise on the interac-tions between the monetary sphere—theworld of banks and other financial institu-tions—and the underlying real economy—theworld of stores and factories and farms. Hehad begun this line of thought in the Tract,but that had been built on a very simple pic-ture, almost a cartoon, of the economy. Inthis new book, he was trying to paint a richerportrait of the paths along which moneyflowed in order to understand better the fun-damental source of the instability he believedto be inherent in the credit system of moderncapitalism.

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He also remained an active speculator, anexhausting and dangerous pastime in thatturbulent decade. As the bursar of Kings, hemanaged a pool of money for the college; hewas chairman of the board of the NationalMutual Insurance Company; and he had setup several investment companies with hisfriend, Oswald Falk, head of the Londonstockbroking firm of Buckmaster and Moore.In addition, he continued to manage his ownmoney very actively, usually from the vant-age point of his bed in the morning. Buyingand selling on margin, he was able to lever-age his positions substantially and his port-folio could be very volatile. He began 1923with about $125,000, the profits of thosefirst forays into the foreign exchange mar-kets. During the next five years, he doubledhis money, making most of it trading com-modities and currencies, rather than stocks.

Despite his reputation as a Cassandra, byearly 1928, his view of the future, as reflected

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in his investment portfolio, was uncharacter-istically sanguine. He avoided the U.S. mar-ket, but made substantial investments in theshares of British motor companies, particu-larly Austin and Leyland. His largest bet,however, was a very substantial complex oflong positions in commodities—especiallyrubber, but also corn, cotton, and tin—astrategy heavily influenced by his perceptionof Fed policy. He thought that the Americancentral bank under Strong had done a re-markable job, a “triumph” he called it. TheFed, while hiding behind the smoke screen ofadhering to the gold standard, had managedvery successfully to stabilize U.S. prices, andKeynes believed that with Strong at thehelm, it could and would continue to do so.

But as 1928 progressed, his portfoliobegan to unravel. He sustained substantiallosses in April when rubber prices collapsedby 50 percent as the world cartel brokedown, forcing him to liquidate large holdings

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at a loss to meet margin requirements. TheFed’s tightening of early 1928 to cap thestock market took Keynes by surprise. Afterall, he argued, U.S. prices were stable andthere was “nothing which can be called infla-tion yet in sight.” In September 1928, withthe Dow at 240, he circulated a short noteamong friends titled “Is there Inflation in theU.S.?” which predicted that “stocks wouldnot slump severely [that is,] . . . unless themarket was discounting a business depres-sion,” which the Fed “would do all in itspower to avoid.”

His big error was a failure to take into ac-count the deflationary forces that had begunto sweep the world. After Strong’s death inOctober and as the Fed initiated its cam-paign of words against the exuberance of themarket, he began slowly to realize that therisk had now shifted “on the side of businessdepression and a deflation.” But by his ownadmission, even in early 1929, he still did not

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comprehend the impact that the scarcity ofgold would have on central banks. He hadthought that over time they would liberatethemselves from the hold of the “barbarousrelic.” He completely failed to foresee thesort of scramble for gold that emerged in1929. “I was forgetting that gold is a fetish,”he confessed.

The price for being a speculator was thatall these miscalculations wrought havoc onhis net worth. By the middle of 1929, he hadlost almost three-quarters of his money. Theonly saving grace was that in order to meethis margin payments, he was forced to li-quidate much of his stock portfolio andentered the turmoil of 1929 only modestlyinvested in the market.

The role of Cassandra was instead takenover by Montagu Norman. Of all the variousflashpoints ready to detonate in the worldeconomy that fateful spring and sum-mer—Germany teetering on the brink of

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default, the shortage of gold, falling com-modity prices, the madness on the U.S. ex-changes, a chronically weak sterling heldhostage by the Banque de France—he foundit hard to tell which was the mostcombustible.

In April 1929, with the negotiations in Par-is deadlocked, Norman wrote, “Picture toyourself that at one and the same time acommittee is laboriously discussing thewhole question of German reparations inParis: that the rate of interest was yesterday20% in New York, where the Reserve Systemis not functioning and where the stock mar-ket is playing ducks and drakes with theirown and other people’s money; that three ofthe central banks in Europe have raised theirrates within the last month, perhaps only asa beginning.” The world, it seemed to him,was sleepwalking toward a precipice.

Germany, now locked out of the Americanmarket, grabbed at any and every source of

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credit on which it could lay its hands. In May1929, the Swiss banker Felix Somary, nick-named by his American colleagues the“Raven of Zurich” for his unremitting dark“croakings” of a crash to come, received afrantic call from the German finance minis-ter, Rudolf Hilferding, desperate to borrow$20 million to pay public employees. Somaryflew to Paris to finalize the necessary ar-rangements with Schacht, reporting back tothe president of the Swiss National Bank,“Almost all the great powers have been nego-tiating for months about how many billions ayear should be paid until 1966, and there-after until 1988, by a country that is not evenin a position to pay its own civil servants’salaries the next day.”

Germany was so hard up that it evenbegan loan negotiations with the mysteriousIvar Kreuger, one of that handful of shadowyfigures, like Calouste Gulbenkian and SirBasil Zaharoff, who hovered over the

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European financial scene in the interwaryears, making fortunes in suspicious dealswith governments. Kreuger himself was saidto be worth several hundred million dollars,and maintained six or seven residences, in-cluding his three summer mansions inSweden, his permanent suite at the Carltonin London, apartments in Berlin, on Park Av-enue in Manhattan, and on the Avenue Vict-or Emmanuel III in Paris, where he had in-stalled a string of mistresses—ex-chorusgirls, students, shop assistants, even the oc-casional streetwalker—on whom he lavishedpresents.

Whereas Gulbenkian, nicknamed “Mr.Five Percent,” dealt in Middle East oil rightsand Zaharoff in arms, Kreuger manufacturednothing grander or more threatening thanplain little matches. Given the scale of hisempire, however—he then controlled three-quarters of the world’s match manufactur-ing—he could borrow money in New York on

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finer terms than most European govern-ments. Exploiting this financial muscle, hefloated bonds on Wall Street and used theproceeds to shore up the finances of the lesscreditworthy governments across the globe,exacting in return match monopolies in thecountries to which he lent. He had concludedsuch deals with Poland, Peru, Greece,Ecuador, Hungary, Estonia, Yugoslavia, Ro-mania, and Latvia. He had even provided$75 million to the French government duringthe stabilization of the franc in return for aquasi monopoly in France. Now he offeredthe German government $145 million in re-turn for a ban on all imports of cheap Russi-an matches.

As interest rates rose in the United Statesand New York functioned as a magnet, draw-ing money from all corners of the globe,every country in Europe, except France,struggled to prevent its gold from escapingacross the Atlantic. Interest rates, as Keynes

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put it, “even in countries thousands of milesaway from Wall Street,” ratcheted upward,propelled by the scramble for gold. In Febru-ary 1929, the Bank of England raised its ratesa full percentage point to 5.5 percent, despiteunemployment above 1.5 million. In March,Italy and the Netherlands followed suit. Ger-many was already deep in recession, butafter the raid on its reserves during theYoung Plan negotiations, had also beenforced to hike its rates to 7.5 percent. Austriaand Hungary more than matched the Reichs-bank, taking their rates to over 8 percent. InJuly, Belgium joined the column.

With the steady erosion in commodityprices, the effect of the rate hikes was to raisethe real cost of money in many places to over10 percent, bringing with it the first signs ofworldwide economic slowdown. This had be-gun in 1928 in the big commodity producers:Australia, Canada, and Argentina. By early

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1929, Germany and Central Europe werealso in recession.

The U.S. stock market meanwhile refusedto pay attention to either the rising cost ofmoney around the world or the first signs ofslowdown abroad. In June, it broke out onthe upside. As reports of outstanding corpor-ate earnings poured in, the Dow kept goingup. In June it rose 34 points and another 16in July.

The character of the market had by nowbecome almost completely speculative. Astrading turned feverish, action increasinglyconcentrated in an ever narrower roster ofcompanies and was no longer led by thosethat were making sustained largeprofits—the General Motors corporations ofthe world. Instead, it was frantically pursu-ing glamour stocks—Montgomery Ward,General Electric, and the most dazzling ofthem all, Radio Corporation of America.Thus, while the market averages continued

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to race up, reaching their peak in September,most individual stocks had hit their highs inlate 1928 or at best in early 1929. Indeed, onSeptember 3, 1929, the day the Dow toppedout, only 19 of the 826 stocks on the NewYork Exchange attained all-time highs. Al-most a third had fallen at least 20 percentfrom their highest points.

It was during these months that most ofthe large stock traders sold their positions.Claims by speculators about what they did in1929 and when they did it need to be takenwith some grains of salt. People rarely tellthe complete truth either about their amor-ous exploits or their stock portfolios, the lat-ter being especially true for professional in-vestors whose reputations hinge on appear-ing to be prescient about the market.

In February, Owen Young, alarmed by thefeverish level of stock prices and the Fed’swar of words, sold his entire portfolio of $2.2million, some of it held on margin. David

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Sarnoff, Young’s vice president at RCA and amember of the U.S. delegation to the Parisconference, got out in June. John J. Raskob,the man who sincerely wanted everyone tobe rich and was touting stocks as a long-terminvestment in the Ladies’ Home Journal,had apparently liquidated most of his portfo-lio before his article appeared. Joe Kennedy,catching the last rally, sold in July 1929.Bernard Baruch claims, in his autobio-graphy, to have had an epiphany on the Scot-tish moors in September of 1929, rushedhome and dumped everything by the end ofthe month. Even Thomas Lamont, the invet-erate optimist, sold substantial amounts ofhis portfolio during the spring and summer.

Even the greatest cheerleader of them all,that most determined of bulls, Billy Durant,got rid of his positions. In April 1929, he hadsome friends arrange for him to meetsecretly with the president. He slipped out ofNew York, careful not to inform even his

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secretary of his destination, took a traindown to Washington, hopped anonymouslyinto a taxi, and arrived at the White House at9:30 in the evening, when he was ushered in-to the president’s study. He told Hoover thatunless the Fed eased up its assault againstthe stock market, there would be a financialcatastrophe. It is not clear whether Durantunderstood that he was wasting his breath,that Hoover was fully behind the Fed’s cam-paign. He does seem to have realized soonafter the meeting that his warnings had gonenowhere. On April 17, he set sail for Europeaboard the Aquitania, and a few weeks later,he and most of his crowd began liquidatingtheir positions.

But behind the scenes, the Board of theFederal Reserve was finally ready to concedethat its attempts at “direct action” were afailure. On August 8, after the market hadclosed, the New York Fed announced that itwas raising its discount rate from 5 percent

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to 6 percent. The next day the Dow plunged15 points in frantic trading, the largest dailydecline in the index’s history. The marketsuddenly realized, however, that speculatorshad been comfortably making large profitswhile paying much higher rates in thebrokers’ loan market. Within a day, all thelosses were recouped.

Over the next three weeks, the Dow wentup another 30 points. Among investors therereigned, as one commentator described it,the sort of “panic which keeps people at roul-ette tables, the insidious propaganda againstquitting a winner, the fear of being tauntedby those who held on.” It was symptomaticof the market’s reach when on August 14, theNew York Stock Exchange firm of Saint-Phalle and Co. announced that it had openeddirect ship-to-shore service aboard thetransatlantic liner Ile de France, to be fol-lowed a few days later by M. J. Meehan and

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Co, opening a similar service on the Ber-engaria and the Leviathan.

Even Europe was drawn into the frenzy.“Scores of thousands of American shares arebought everyday in London alone and Paris,Berlin, Brussels and Amsterdam are pouringmoney into New York as fast as the cable cancarry it,” complained Viscount Rothermerein one of his newspapers, the Sunday Pict-orial. “Wall Street has become a colossal suc-tion pump, which is draining the world ofcapital and the suction is fast producing a va-cuum over here. That is why bank rates arerising throughout Europe. That is the reasonof the steady withdrawal of gold from theBank of England. That is the explanation ofthe frequent visits which the governor of thebank, Mr. Montagu Norman, pays to NewYork and Washington.”

In July, Norman made his second trip ofthe year to the United States. He spent mostof his weeks of holiday with his old friend

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Mrs. Markoe at Bar Harbor in Maine but didgo to see Harrison in New York. He cameback even more pessimistic than after hisFebruary trip. He was now convinced thatsome sort of stock market crash in the Un-ited States was inevitable. No one could besure what might set it off or how bad itwould be. The longer the bubble continued,the more unavoidable would be the break-down. And though the Fed was finally begin-ning to act, it had left things very late andstill remained a bitterly divided institution.

Throughout the summer of 1929, Britain’sreserves came under siege. By the end ofJuly, the Bank of England had already lost$100 million of its $800 million of gold andin August and September, it lost a further$45 million, mainly into the United States.There were also signs that the Banque deFrance had resumed converting its pounds.Since 1927, the flow of money into Francehad continued unabated, although now most

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of it was in the form of gold rather than ster-ling. By the middle of 1929, the Banque deFrance had accumulated $1.2 billion in goldand another $1.2 billion in foreign exchange,giving it an extraordinary hold on the worldfinancial situation.

During the two years since Norman andMoreau had first fallen out, the Banque deFrance, recognizing that it had the power todestabilize the world currency situation, hadactually been very restrained in handling itssterling. But the Young Plan negotiations puta new strain on Anglo-French relations. Hav-ing made some concessions to Germany onreparations, the former Allies fell out on howto divide the burden.

In June 1929, Britain went to the polls.After four years of high unemployment un-der Conservative rule, the Tories were votedout of office and a minority Labor govern-ment took power. Churchill was replaced atthe Exchequer by Philip Snowden, a long and

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bitter opponent of France and French policyon reparations. At a conference at The Haguein August 1929 to wrap up some of the de-tails of the Young Plan, he entered into aparticularly heated exchange with his Frenchcounterpart, Henri Chéron, in the course ofwhich he described the French finance min-ister’s arguments as “ridiculous and grot-esque.” The translation into French, “ridiculeet grotesque” has a much harsher connota-tion, implying bad faith and utter stupidity.As the economic historian Charles Kindle-berger put it, the English expression could beused in the House of Commons, the Frenchexpression would not be allowed in theChambre des Députés. Chéron, a “fat excit-able man” whose enormous girth had madehim the constant victim of jokes and whowas, consequently, unusually sensitive, tookoffense at Snowden’s remarks, and sent hisseconds to demand an apology—the French

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were only just weaning themselves off thepractice of dueling.

Though he was eventually induced to re-turn to the negotiating table, relationsbetween Britain and France were severelystrained. At one meeting during the same ne-gotiations, Pierre Quesnay of the Banque deFrance is said to have threatened to convertFrance’s holdings of sterling into gold unlessthe British conceded. Though the evidence ismurky, this was not mere saber rattling andBritain’s gold continued to come underattack.

On August 19, Time magazine ran a coverstory on Norman, the “Palladin of Gold,” as itcalled him. The article described how withinEurope “invisibly the battle of gold was on.”In late August, as Britain’s reserves hit apostwar low, Norman warned his fellow dir-ectors that unless something were to change,large parts of Europe, including Britain,would be driven off gold and that they

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should begin to prepare for the impendinghavoc. But first another cataclysm was toblindside the world economy.

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Wall Street, Black Tuesday, October 29,1929

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17. PURGING THEROTTENNESS

1929-30

If stupidity got us into this mess,then why can’t it get us out?

—Will Rogers

THERE is an old stock trader’s adage:“Nobody rings a bell at the top of the mar-ket.” As Wall Street returned to work afterLabor Day on Tuesday, September 3, fewpeople thought that this might be the end ofthe bull market. The weekend had been

unusually hot, and the journey home fromthe beach was marred by terrible traffic jamsand long delays at train stations. Congestionon the New Jersey highways was so bad thatthousands of people had parked their carsand finished the journey home to Manhattanby subway.

As bankers assessed the market after thesummer, they were assisted by a fresh newvoice to add to the blithe new-era optimismof the Wall Street Journal and the dark mut-terings about “portents” and “misgivings”from Alexander Dana Noyes, financialcolumnist of the New York Times. Thatweek, the premiere issue of BusinessWeekhit the newsstands. It sought to bring thesuccessful Time magazine formula of snappyand vivid writing to the corporate world.From the very first issue, the editors ex-pressed their skepticism about the bull mar-ket. “For five years at least,” they wrote,“American business has been in the grips of

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an apocalyptic, holy-rolling exaltation overthe unparalleled prosperity of the ‘new era’upon which we, or it, or somebody hasentered.” It had carried the country “into acloud-land of fantasy.” “As the fall begins,”they warned, “there is a tenseness in WallStreet . . . a general feeling that something isgoing to happen during the present season. .. . Stock prices are generally out of line withsafe earnings expectations, and the market isnow almost wholly ‘psychological.’”

The market had become inured to suchprognostications on the way up and contin-ued to ignore them on the first day of trad-ing. On September 3, 1929, the Dow tradedup a single point to close at a record high of381. For the next day and a half, it clung tothat peak.

At two o’clock on the afternoon of Septem-ber 5, the newswires reported that the Mas-sachusetts economist and statistician RogerBabson had announced at his annual

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National Business Conference in Wellesley,Massachusetts, “I repeat what I said at thistime last year and the year before that sooneror later a crash is coming . . . and it may beterrific. . . . The Federal Reserve System hasput banks in a strong position but it has notchanged human nature.” Observing furtherthat “a detailed study of the market showsthat the group of advancing stocks is con-tinually becoming narrower and smaller,” hepredicted that the Dow would probably drop60 to 80 points—15 to 20 percent—and that“factories will shut down . . . men will bethrown out of work . . . the vicious circle willget in full swing and the result will be a seri-ous business depression.” That afternoon theDow fell 10 points, roughly 3 percent.

Babson was a well-known market seer, thefounder of the Babson Statistical Organiza-tion, the country’s largest purveyor of invest-ment analysis and business forecasts. Everymonth the company mailed out reams of

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charts and tables, dissecting the behavior ofindividual stocks, the overall market, and theeconomy. Babson had built his forecastingmethod around two somewhat antitheticalnotions: that the “ups and downs” of the eco-nomy “operate according to definite laws”derivable from Newton’s third law of motionand that emotions were “the most importantfactor in causing the business cycle.”

Babson had some other quirkier ideas.Having suffered a bout of tuberculosis as ayouth, he believed in the benefits of fresh airand insisted on keeping all the windows inhis office wide open. In winter, his secretar-ies, wrapped in woolen overcoats, sheepskinboots, and thick mittens, had to type bystriking the keys with a little rubber hammerthat Babson had himself expressly invented.He was a strict Prohibitionist, believed thatthe gravity of Newtonian physics was amalevolent force, and had published apamphlet entitled Gravity—Our Number

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One Enemy.44 He had been predicting amarket crash for the past two years and untilnow had been completely ignored.

After Babson’s gloomy forecast, the NewYork Times sought a rejoinder from IrvingFisher, professor of economics at Yale, andthe most prominent economist of the time.Originally a mathematician who had gone onto make major contributions to the theory ofmoney and of interest rates, Fisher was quiteas odd a bird as Babson. Having alsosuffered from tuberculosis—although in hiscase at the age of thirty-one—he hademerged from the sanatorium a committedvegetarian. He suffered from terrible insom-nia and, to cope with it, had designed abizarre electrical contraption that he hookedup to his bed and was convinced helped himto fall asleep. He was also a proponent of se-lective breeding and was secretary of theAmerican Eugenics Society; he believed thatmental illness originated from infections of

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the roots of the teeth and of the bowels and,like Babson, was a fervent advocate of Pro-hibition—by 1929, he had even written twobooks on the economic benefits of Prohibi-tion. Again like Babson, he was a wealthyman, having invented a machine for storingindex cards—a precursor of the Rolodex—thepatent of which he sold to Remington Randin 1925 for several million dollars. By 1929,he was worth some $10 million, all of it in-vested in the stock market.

Prefacing his remarks with the concessionthat “none of us are infallible,” ProfessorFisher declared, “Stock prices are not toohigh, and Wall Street will not experienceanything in the nature of a crash.” A noted“student” of the market, he based his assess-ment on the assumption that the futurewould be much like the recent past, thatprofits would continue to grow at over 10percent as they had done over the previousfive years. It was an early example of the

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pitfalls of placing too much faith in the abil-ities of mathematicians, with their flawedmodels, to beat the market. Simple common-sense techniques for valuing equities such asthose Babson relied on—for example, posit-ing that prices should move in tandem withdividends—indicated that stocks were some30 to 40 percent overvalued.

Though the market initially fell sharply onthe day of Babson’s prediction, the next day,deciding that it preferred Fisher’s sweetelixir to Babson’s harsh medicine, it reboun-ded. Babson, the “prophet of loss,” as he wasnow nicknamed, was derided up and downWall Street, mocked even by BusinessWeekfor his “Babsonmindedness.” During themonth of September, these two New Englandcranks—Babson and Fisher—battled for thesoul of the market. Every time one wasquoted, the newspapers obtained a rebuttalfrom the other.

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The official chronicler of business cycles inthe United States, the National Bureau ofEconomic Research, a not-for-profit groupfounded in 1920, would declare, thoughmany months later, that a recession had setin that August. But in September, no one wasaware of it. There were the odd signs of eco-nomic slowdown, especially in some of themore interest-rate-sensitive sectors—auto-mobile sales had peaked and constructionhad been down all year, but most short-termindicators, for example, steel production orrailroad freight car loadings, remained ex-ceptionally strong.

By the middle of the month, the marketwas back at its highs and Babson’s forecast ofa crash had been thoroughly discredited. Thebroader indices even set new records—forexample, the most widely used measure ofthe market, the New York Times index ofcommon stocks, reached its all time peak on

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September 19—though the Dow never did getquite back to 381.

Even the usually bearish Alexander DanaNoyes of the New York Times was skepticalof the forecast of a market collapse. It is “notperhaps surprising that the idea of an utterlydisastrous and paralyzing crash . . . shouldhave found few believers,” he wrote; after all,in contrast to previous episodes, the countrynow has “the power and protective resourcesof the Federal Reserve,” while the marketwas “guarded against the convulsions of old-time panics . . . by the country’s accumula-tion of gold.” Previous crashes had all beenpreceded by an extraneous shock of somesort, which broke the herd psychology. Thecrash of 1873 had been foreshadowed by thebankruptcy of Jay Cooke and Company. In1893, it had been the failure of the NationalCordage Company, while in 1907, it was thecollapse of the Knickerbocker Trust

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Company. Noyes took comfort in the factthat no such event seemed remotely on hand.

He spoke too soon. On Friday, September19, the empire of the British financier Clar-ence Hatry suddenly collapsed, leaving in-vestors with close to $70 million in losses.Hatry, the son of a prosperous Jewish silkmerchant, had attended St. Paul’s School inLondon, immediately thereafter had takenover his father’s business and, by the age oftwenty-five, was bankrupt. By thirty-five,however, he was a rich man again, having re-couped his fortune by speculating in oilstocks and promoting industrial conglomer-ates in the heady postwar merger boom.Throughout the 1920s, he had led a roller-coaster career as an entrepreneur, with somespectacular successes and equally dramaticfailures. By the latter part of the decade, hehad a finger in almost every corner of theBritish economy. He made a fortune bybuilding a retail conglomerate, the Drapery

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Trust, and then selling it to Debenhams, thedepartment store; he engineered the mergerof the London bus corporations into the Lon-don General Omnibus Company, ran a stock-broking firm specializing in municipalbonds, and was the head of an interlockingseries of investment trusts that played thestock market. His latest ventures were thePhotomaton Parent Company, which oper-ated a countrywide chain of photographicbooths, and the Associated AutomaticMachine Corporation, which owned vendingmachines on railway platforms.

A small, sallow, birdlike man with a close-cropped mustache, Hatry was so flamboyantit was said that he even had the bottoms ofhis shoes polished. He lived in a garishly or-nate mansion in Stanhope Gate, off ParkLane, around whose rooftop swimming poolhe held lavish parties. He ran the requisitestring of racehorses, entertained at his coun-try house in Sus-sex, and owned the largest

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yacht in British waters, with a crew of forty.Needless to say, he did not endear himself totraditional British society by this vulgarly ex-travagant Hollywood lifestyle.

The City financial establishment kept awary distance. “Mr. Hatry is very clever, andone or two of the people we know who havehad business relations with him have alwaystold us that they have nothing against him,”wrote Morgan Grenfell to its correspondingpartners J. P. Morgan & Co. But the lettercontinued, “He is a Jew. His standing here[in London] is by no means good. We shouldourselves not think of doing business withhim.” Nevertheless, with his enormous ap-parent wealth, he was able to induce some ofthe grandest names in the country to join hisboards—for example, the Marquess ofWinchester, who could trace his title back tothe time of Henry VIII and was holder of theoldest marquessate in the country, was

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chairman of one of his companies—and noone questioned his financial situation.

In 1929, with grand plans to rationalizethe British steel industry, he acquired a ma-jor manufacturer, United Steel Limited, for$40 million in what would today be called aleveraged buyout. In June, his bankers with-drew their financing at the last moment. Hespent the next few weeks scrambling forcash, even approaching Montagu Norman,for Bank of England help. Needless to say,Norman, who would have found a man likeHatry highly distasteful, refused, telling himthat he had paid too much for United Steel.Having borrowed as much as he couldagainst all of his companies, Hatry eventu-ally resorted to petty fraud: forging a milliondollars worth of municipal bonds to post ascollateral against additional loans.

Early in September, as rumors circulatedthat he was massively overextended, hiscompanies’ shares plunged, and his bankers

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called in their loans. Recognizing that thegame was up, Hatry went under in true Brit-ish fashion. On September 18, he called uponhis accountant, Sir Gilbert Garney, and toldhim of the forgery. After hearing him out, SirGilbert telephoned his old friend SirArchibald Bodkin, the director of public pro-secutions, to say that he had a group of Citymen who wished to come in to confess tofraud of a “stupendous” magnitude. SirArchibald, after hearing that the sum in-volved was as high as $120 million—equival-ent as a percentage of the British economy tothe Enron imbroglio of 2001 in the UnitedStates—arranged for them to turn them-selves in at his office at ten o’clock the nextmorning. Hatry duly arrived the followingday, confessed to his crimes, and was re-manded in custody.

When New York opened on Friday,September 20, the market faltered, losing 8points to close at 362. The following week

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the Bank of England, fearing that sterlingmight be imperiled by Hatry’s collapse,raised interest rates to 7.5 percent and themarket tumbled a further 17 points.

Because the many British investors whohad lost money with Hatry were forced to li-quidate their U.S. stock positions and beganpulling their money out of the New Yorkbrokers’ loan market, the Dow came undermounting pressure, falling another 20 pointsover the week of September 30 to 325. In thespace of two weeks, it had given up the gainsof the previous two months. However, so farthe market crack, while vicious, was not outof the ordinary. Indeed in the week of Octo-ber 7 it surprised everyone by rallying 27points. The Dow thus began the week ofOctober 14 at around 350, a little less than 10percent below its all-time highs.

On Tuesday, October 15, economist andmarket pundit Irving Fisher, in a speech thatwould go down in history for its

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spectacularly bad timing, threw his normalcaution to the winds, with the declaration,“Stocks have reached what looks like a per-manently high plateau.” Among the reasonshe would later cite for this optimistic forecastwere the “increased prosperity from less un-stable money, new mergers, new scientificmanagement, new inventions” and finally,Fisher being Fisher, he could not resistadding, on account of the benefits of “pro-hibition.” The market began to sag onceagain—dropping 20 points the next week andanother 18 points in the first three days ofthe week after. It was by now back to 305,having lost about 20 percent of its valuesince the September peak. So far, however,there had been no real reason to panic.

Another victim of bad timing was ThomasLamont of J. P. Morgan & Co., who chose theweekend of October 19 to send Hoover aneighteen-page letter. “There is a great deal ofexaggeration in current gossip about

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speculation,” he warned the president.Indeed, he suggested that a certain amountof speculation was a healthy way of engagingthe American public in the benefits of own-ing stocks, in the same way that “a jaded ap-petite was sometimes stimulated by a cock-tail to the enjoyment of a hearty meal.” “Thefuture appears brilliant,” he wrote, and vig-orously urged the president not to intervene.The letter is now in the presidential archiveswith the phrase “This document is fairlyamazing” scribbled by Hoover across the top.

On Wednesday, October 23, quite out ofthe blue, a sudden avalanche of sell orders,the origin of which was a complete mystery,knocked the market down by 20 points in thelast two hours of trading. The next day, soonto be known as Black Thursday, saw the firsttrue panic. The market opened steady withlittle change in prices; but at about 11:00a.m, it was blindsided by a flood of large sellorders from all around the country, rattling

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out of such diverse places as Boston, Bridge-port, Memphis, Tulsa, and Fresno. Prices ofmajor stocks started gapping lower. Duringthe next hour, the major indices fell 20 per-cent, while the bellwether of speculation,RCA, plunged more than 35 percent. Addingfurther to the panic, communications acrossthe country were disrupted by storms, andtelephone lines were so clogged that manythousands of investors could not get throughto their brokers.

Rumors of the turmoil spread quicklythrough the city, and by noon, a crowd of tenthousand sightseers, attracted by the reek ofcalamity, had gathered at the corner ofBroad and Wall, just opposite the stock ex-change. Police Commissioner Grover Whalendispatched an extra six hundred policemen,including a mounted detail, to keep orderand rope off the crowd from the entrance tothe stock exchange. A gaggle of newspaperphotographers and film cameramen

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collected on the steps of the SubtreasuryBuilding to document the scene.

A little after noon, the barons of WallStreet—Charles Mitchell of National CityBank, Albert Wiggin of Chase, William Pot-ter of Guaranty Trust, Seward Prosser ofBankers Trust, and George Baker of First Na-tional—were seen pushing their way throughthe crowd into the front door of J. P. Morgan& Co. at 23 Wall Street. After a mere twentyminutes, they emerged grim faced and leftwithout speaking to reporters. A few minuteslater, Thomas Lamont appeared and held animpromptu press conference in Morgan’smarble lobby.

Looking “grave” and “gesturing idly withhis pince-nez as he spoke,” he began by an-nouncing, “There has been a little distressselling on the Stock Exchange.” Though hewas only trying to steady the market’snerves, this was a remark that would godown in history as a classic, forever mocked

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as an embodiment of Wall Street’s capacityfor self-delusion and obfuscation. “Air holes”caused by a “technical condition” had de-veloped in the market, asserted Lamont. Thesituation, he assured his listeners, was “sus-ceptible of betterment.”

What he did not announce was that the sixbankers had agreed to contribute to a poolthat would provide a “cushion” of buyingpower to support stock prices. At 1:30 p.m.,Richard Whitney, president of the stock ex-change—brother of Morgan partner GeorgeWhitney and himself stockbroker for thecompany—strode confidently onto thecrowded floor of the exchange and placed anorder for ten thousand shares of U.S. Steel at205, 5 points above the price of its last sale.He then went from one post to the other,sprinkling similarly huge orders for bluechips—at a total cost of between $20 and$30 million. To the accompaniment of achorus of cheers and whistles from the floor,

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the market rallied dramatically and by theend of the day was off a mere 6 points.Though stocks had taken comfort from therescue operation, even as the market was ral-lying that afternoon, Lamont was closetedwith the governors of the exchange to warnthem that the bankers’ support was limited:“There is no man or group of men who canbuy all the stocks that the American publiccan sell.”

While the private bankers were throwingthe market this life buoy, the central bank,the Federal Reserve, was paralyzed by dis-sension. To try to ease conditions that morn-ing, the directors of the New York Fed hadvoted to cut its lending rate from 6 percent to5.5 percent, only to have the decision vetoedfrom Washington by the Federal ReserveBoard. The latter spent the day closeted inmeetings at its offices in the Treasury Build-ing, next door to the White House. At 3:00p.m., Secretary of the Treasury Andrew

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Mellon joined the conference, which brokeup at 5:00 p.m. with no official announce-ment. A “senior” Treasury official did speak,however, to reporters off the record, express-ing the view that the market had broken un-der the stress of “undue speculation” andthat the harm done, after all, only consti-tuted “paper losses,” which would not prove“disastrous to business and the prosperity ofthe country.”

The newspapers reported next day thatheroic action on the part of the bankers hadsuccessfully halted the panic. The WallStreet Journal carried the headline “BankersHalt Stock Debacle: 2 Hour Selling DelugeStopped After Conference at Morgan’s Of-fice: $1,000,000,000 For Support.”

Though the amount committed by theMorgan-led consortium was nowhere nearthat amount, the market was buoyed by theapparent success of the “organized support”and stabilized over the next two days, though

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trading remained heavy. Rumors circulatedthat the bankers felt sufficiently confident tobegin disposing of the stocks they had ac-quired on Thursday at a small profit. But lateon Saturday, the market began to fall again.

The “second hurricane of liquidation”roared in on Monday, October 28—BlackMonday. It came from every direction: de-moralized individual investors, pool operat-ors liquidating, Europeans throwing in thetowel, speculators forced to sell by margincalls, banks dumping collateral. Investors,who had originally bought stocks only be-cause they saw prices rising, now sold thembecause they saw prices falling. By the end ofthe day, 9 million shares had changed handsand the Dow was down 40 points, roughly 14percent, the largest percentage fall in a singleday in the market’s history—$14 billionwiped off the value of U.S. stocks.

Reporters, remembering all the varioustimes in history that the U.S. banking system

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had been saved from the Morgan offices,were camped out in front of 23 Wall Street.At 1:10 p.m. Mitchell of the National CityBank was seen entering the building. Themarket immediately rallied. But there was nosign of the other bankers or any evidence ofany further “organized support.” It wouldlater turn out that Mitchell was personallyoverextended and, desperate for cash, hadgone in to negotiate a private loan forhimself.

The press was so fascinated by the veryconspicuous comings and goings of bankersto and from “No. 23” that they failed to re-cognize that the true locus of power nolonger lay with Morgan but had shifted threeblocks north to the offices of the New YorkFederal Reserve at 33 Liberty Street. The realhero of the day was not one of those bankersshuttling in and out of Morgan’s offices butGeorge Harrison of the New York Fed.

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Stock market crashes during the nine-teenth and early twentieth century had in-variably been associated with banking crises.The market and the banking system were toointerconnected. Because the big New YorkCity banks held their reserves in the form ofcall loans to stockbrokers, a collapse instocks inevitably raised concerns about thesafety of one bank or the other, often leadingto a run on the system, which in turn led to awithdrawal of liquidity from the market,which in turn drove the market down fur-ther. The Fed had been created in part tobreak that nexus and Harrison was determ-ined to prevent the market turmoil fromwidening into a full-scale financial crisis. Hespent the whole day in close contact with theheads of the city’s major banks.

The country’s money center banks wereconfronted with a potentially life-threateninghit. Many of the largest traders on WallStreet, especially the pool operators, held

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gigantic leveraged positions in the stockmarket that had been financed by brokers’loans—in some cases as much as $50 mil-lion, some of which had come from banks.The danger was that as the market fell,brokers, frantic to recoup their loans, wouldbe forced to dump the stocks they held ascollateral, creating further declines in themarket and intensifying the vicious cycle ofselling.

Rebuffed the previous Thursday by theFederal Reserve Board, Harrison now tookmatters into his own hands. That night, WallStreet bankers were invited to a dinner inhonor of Winston Churchill at the Fifth Av-enue home of Bernard Baruch. Despite thedays’ events, the general consensus amongthe financiers was that stocks were now un-dervalued. Mitchell even managed to raise alaugh when in his toast to the British visitorhe addressed the company as “friends andformer millionaires.”

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Down on Wall Street the lights in the sky-scrapers glowed far into the early hours asexhausted clerks and bookkeepers tried totally their records after a day of unpreceden-ted trading. Meanwhile, at the Fed’s officeson Liberty Street, Harrison and his staff weredeveloping a plan to inject large amounts ofcash into the banking system by buying gov-ernment securities. Fortunately, there wasno time to consult the Board in Washington.He barely managed to reach two of his owndirectors, and then only at 3:00 a.m., to se-cure their approval. Early the next morning,even before the market had opened, the NewYork Fed injected $50 million.

That day, which came somewhat unorigin-ally to be christened Black Tuesday, saw noletup in selling. The crowd of ten thousandthat again gathered that morning stood inhushed awe, fully aware that they were “par-ticipating in the making of history,” and thatthey were unlikely ever again to witness such

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scenes. The New York Times man on thespot described Wall Street that morning as astreet of “vanished hopes, of curiously silentapprehension, and of a paralyzed hypnosis.”Churchill chose that day to visit the stock ex-change and was invited inside to witness thescene. Though he was heavily invested in themarket and lost over $50,000, most of hissavings, in the collapse, he seems to have re-sponded to his change in fortunes quitephilosophically—“No one who has gazed onsuch a scene could doubt that this financialdisaster, huge as it is, cruel as it is to thou-sands, is only a passing episode. . . .” Com-missioner Whalen himself kept a close eyeon the market, and the minute he saw pricessagging, had dispatched an extra squad ofpolicemen downtown. The financial districtlooked like a city under siege.

The bankers’ consortium gathered twicethat day. Lamont struck a noticeably lessconfident note at his next press conference.

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Their objective was not to support prices, hetold the reporters, but to maintain an orderlymarket. Toward the end of the day, after over16 million shares had changed hands and theDow had fallen more than 80 points—it hadnow lost 180 points, or close to 50 percent ofits value in less than six weeks—it seemed asif the selling had begun to burn itself out. Inthe last fifteen minutes of trading, the mar-ket made a vigorous rally of 40 points.

During the day, the New York Fed had in-jected a further $65 million. The Board, es-pecially Roy Young, was greatly irritatedwhen it found out later that day about Har-rison’s show of independence and initiative;his failure to get Washington’s approval firstwas a clear defiance of established protocol.In response to Young’s rebuke, Harrison shotback that there had never been such anemergency, that the world was “on fire” andthat his actions were “done and can’t be un-done.” The Board tried to pass a regulation

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prohibiting the New York Fed from makingany further independent transfusions ofcash, but questions arose about whether ithad the legal authority to do so. During thenext few days, there was considerable legalwrangling over the precise jurisdictions ofthe Board and the New York Fed. Harrisoneventually proposed that they postpone thebureaucratic argument over powers and pro-cedures until the crisis was over, agreeing inthe meantime not to act unilaterallyprovided the Board gave him the authority tobuy as much as $200 million more in gov-ernment securities—an arrangement whichallowed him to draw on the whole FederalReserve System rather than the resources ofthe New York Fed alone.

That evening a somewhat larger group ofbankers once again gathered in the library ofJack Morgan’s house at Madison Avenue andThirty-fifth Street, the scene of his father’slegendary rescue of the New York banking

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system in 1907. Among them was GeorgeHarrison.

With stocks now in free fall, all those whohad pumped money into the brokers’ loanmarket—the corporations with excess cash,foreigners drawn by high rates of interest,small banks around the country—were rush-ing for the exits. In the days since BlackThursday over $2 billion, about one-quarterof all brokers’ loans, had or was about to bepulled out. This was creating massive addi-tional selling and a scramble for cash thatrisked toppling the entire financial structureof brokers and banks on Wall Street. In orderto forestall this financial fire stampede, witheveryone heading for the doors at the sametime, some of the bankers proposed to closedown the stock exchange as had been done atthe outbreak of war in 1914.

The meeting went on till 2:00 a.m. Harris-on was adamant. “The Stock Exchangeshould stay open at all costs,” he told the

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gathering. Closing the stock market wouldnot solve the problem, only postpone it and,by preventing transactions, might possiblyprolong it and force even more bankruptcies.He proposed instead that the New Yorkbanks take over a good portion of brokers’loans from those trying to pull out of themarket. By thus stepping into the breach,they would head off panic selling and a com-plete meltdown. “I am ready to provide allthe reserve funds that may be needed,” he re-assured the bankers.

Over the next few days, as the Fed did justthat, New York City banks took over $1 bil-lion in brokers’ loan portfolios. It was an op-eration that did not receive the publicity ofthe Morgan consortium, but there is littledoubt that by acting quickly and withouthesitation, Harrison prevented not only aneven worse stock collapse but most certainlyforestalled a banking crisis. Though thecrash of October 1929 was by one count the

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eleventh panic to grip the stock market sincethe Black Friday of 1869 and was by almostany measure the most severe, it was the firstto occur without a major bank or businessfailure.

The market traded up for the last couple ofdays of October. It then fell back again, revis-iting the lows of Black Tuesday on November13. By the last weeks of November, the Dowhad settled at around 240—a 40 percent re-treat over the eight weeks since late Septem-ber. The bubble that had begun in early 1928had lasted little more than a year and a half.By all indications, the effect of the Octobercrash had merely been to squeeze out all thefroth and return the stock market closer toits fair value.

IN THE Weeks that followed the GreatCrash, the dazed financial press struggled to

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make sense of what had happened. Despitethe magnitude of the losses—$50 billionwiped off the value of stocks, equivalent toabout 50 percent of GNP—and the ferocity ofthe decline, many papers were surprisinglysanguine, calling it the “prosperity panic.”The New York Evening World even arguedthat the panic had only occurred because“underlying conditions [had] been so good,”that speculators had “an excuse for goingclean crazy,” creating a bubble and thus set-ting the stage for it to burst.

The New York Sun made the case that thecrash would have a minimal impact on theeconomy, that Main Street could be de-coupled from Wall Street. “No Iowa Farmerwill tear up his mail order blank becauseSears Roebuck stock slumped. No Manhat-tan housewife took the kettle off the stovebecause Consolidated Gas went down to 100.Nobody put his car up for the winter because

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General Motors sold 40 points below theyear’s high.”

Indeed, BusinessWeek, which had beenone of the most vocal critics of the specula-tion on the way up, went one step further, in-sisting that the economy would be in evenbetter shape now that the distracting bubblehad burst. “For six years, American businesshas been diverting a substantial part of its at-tention, its energies and its resources on thespeculative game. . . . Now that irrelevant,alien, and hazardous adventure is over. Busi-ness has come home again, back to its job,providentially unscathed, sound in wind andlimb, financially stronger than ever before.”

The consensus, however, was that thecrash would cause a transitory and mildbusiness recession, particularly in luxurygoods. B. C. Forbes, founder of Forbesmagazine, thought that “just as the stockmarket profits stimulated the buying of allkinds of comforts and luxuries, so will the

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stock market losses inevitably have an op-posite effect.”

The immediate impact on the UnitedStates in fact proved to be much greater thatanyone expected. Industrial production fell 5percent in October and another 5 percent inNovember. Unemployment, which duringthe summer of 1929 had hovered at around1.5 million, 3 percent of the workforce, shotup to close to 3 million by the spring of 1930.The country had become so emotionally in-vested in the vagaries of Wall Street that thepsychological impact of the collapse turnedout to be profound, particularly in consumerdemand for expensive goods: the automo-biles, radios, refrigerators, and other newproducts that had been at the heart of theboom. Car registrations across the countryplummeted by 25 percent and radio sales inNew York were said to have fallen by half.

The editor of the Economist, Francis Hirst,who had fallen ill on a trip to the United

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States and was convalescing in Atlantic Cityat year’s end, captured the mood. “Richpeople who have not sold their stocks feelmuch poorer. . . . The first result therefore,has been a heavy decline in luxury buying ofall sorts and also a large amount of selling ofsuch things as motor cars and fur coats,which can now be bought secondhand at sur-prisingly low prices. The favored health re-sorts have suffered enormously . . . a verygreat number of servants, including butlersand chauffeurs, have been dismissed.”

Immediately after the crash, Hoover, wholiked nothing better than emergencies, threwhimself into action. He was one of thehardest-working presidents in the history ofthe office, at his desk by 8:30 a.m and stillthere into the early hours of the next morn-ing. Within a month, his administration hadpushed through an expansion in publicworks construction and submitted a proposalto Congress to cut the income tax rate by a

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flat 1.0 percent. The federal government,however, was then tiny—total expendituresamounted to $2.5 billion, only 2.5 percent ofGDP—and the effect of the fiscal measureswas to inject barely a few hundred milliondollars, less than 0.5 of 1.0 percent of GDPinto the economy.

Hoover had, therefore, to content himselfwith playing the part of chief economiccheerleader. Unfortunately, it was a role forwhich he was poorly suited. Shy, insecure,and stiff, he was ill at ease with people andsurrounded himself with yes-men. He wasalso “constitutionally gloomy,” according toWilliam Allen White, “a congenital pessimistwho always saw the doleful side of any situ-ation.” Unable to inspire confidence or op-timism, he resorted, according to the Nationmagazine, to “trying to conjure up the genieof prosperity by invocations” that thingswere about to get better.

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On December 14, 1929, barely six weeksafter the crash, he declared that the volumeof shopping indicated that country was “backto normal.” On March 7, 1930, he predictedthat the worst effects would be over “duringthe next sixty days.” Sixty days later he an-nounced, “We have passed the worst.”

To some degree he was caught in a di-lemma that all political leaders face whenthey pronounce upon the economic situ-ation. What they have to say about the eco-nomy affects its outcome—an analogue toHeisenberg’s principle. As a consequence,they have little choice but to restrict them-selves to making fatuously positive state-ments which should never be taken seriouslyas forecasts.

The task of trying to talk the economy upwas complicated by the fact that it did not godown in a straight line. At several pointsalong the way it seemed to stabilize. Afterfalling in the last few months of 1929, it

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found a footing in the early months of 1930.The stock market even rallied back above290, a rebound of 20 percent. And the Har-vard Economic Society, which was one of thefew outfits to have predicted the recession,now argued that the worst had passed.Clutching at whatever straws he could find,Hoover seized upon these brief interludes ofgood news, not realizing they were headfakes. In June 1930, when a delegation fromthe National Catholic Welfare Council cameto see him to request an expansion in publicworks programs, he announced, “Gentlemen,you have come sixty days too late. The de-pression is over.” That very month the eco-nomy began another down leg.

Eventually, when the facts refused to obeyHoover’s forecasts, he started to make themup. He frequently claimed in press confer-ences that employment was on the rise whenclearly it was not. The Census Bureau andthe Labor Department, which were

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responsible for data on unemployment,found themselves under constant pressure tofudge their numbers. One expert quit in dis-gust over attempts by the administration tofix the figures. Finally, even the chief of theBureau of Labor Statistics was forced into re-tirement when he publicly disagreed with theadministration’s official statements onunemployment.

In contrast to Hoover, Treasury SecretaryMellon refused even to make a show of join-ing the cheerleading. His view was that spec-ulators who had lost money “deserved it” andshould pay for their reckless behavior; theU.S. economy was fundamentally sound andwould rebound of its own accord. In themeantime, he argued that the best policy wasto “liquidate labor, liquidate stocks, liquidatethe farmers, liquidate real estate. . . . It willpurge the rottenness out of the system . . . .People will work harder, live a more morallife. Values will be adjusted, and enterprising

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people will pick up the wrecks from lesscompetent people.”

One group who seemed to have taken Mel-lon’s advice on liquidation to heart was theRussians. In 1930, desperately in need of for-eign exchange, the Soviet governmentsecretly decided to put its most treasured artworks up for sale to its capitalist enemies.For Mellon, it was a once-in-a-lifetime op-portunity to purchase a unique collection ofart at throw-away prices, and he did not let itpass. Following a series of clandestine nego-tiations through art dealers in Berlin, Lon-don, and New York, Mellon arranged to pur-chase a total of twenty pieces. Each was acloak-and-dagger operation. The money waswired to a dealer in Berlin, who placed it in ablocked account and paid out 10 percent tothe Russians. Meanwhile, the pictures weresurreptitiously removed from the Hermitage,in Saint Petersburg, the surrounding paint-ings repositioned to disguise the

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disappearance. They were then handed overat a secret rendezvous and shipped to Berlinfor transport to the United States. In thisway, during 1930 and into the early monthsof 1931, the secretary of the treasury spentalmost $7 million of his money buying uphalf of the Hermitage’s greatest paintings.Among the paintings he bought were theMadonna of the House of Alba by Raphael,the Venus with the Mirror by Titian, theAdoration of the Magi by Botticelli, and TheTurk by Rembrandt as well as several worksby Van Eyck, Van Dyck, and Frans Hals.

It was probably the greatest single art pur-chase of the century. Leaving mundane mat-ters of economic policy to his deputy, OgdenMills, Mellon became consumed by thewhole transaction. On one occasion inSeptember 1930, he was so engrossed in adiscussion with one of his art dealers that hekept a group of bankers waiting for twohours.

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With the federal government unable andunwilling to act—or in Mellon’s case, perhapsotherwise occupied—the task of managingthe declining economy fell almost entirely onthe Fed. Between November 1929 and June1930 the Fed eased monetary policy dramat-ically. It injected close to $500 million incash into the banking system and cut ratesfrom 6.0 percent to 2.5 percent—mostly thework of Harrison in New York. The Board inWashington only grudgingly registered thefull force of what had happened. Not only didHarrison have to deal with its constantdelaying tactics, but he also faced outrightresistance from the majority of his fellowgovernors of the regional reservebanks—seven out of the twelve of them, fromBoston, Philadelphia, Chicago, Kansas City,Minneapolis, Dallas, and San Francisco, op-posed his attempts at a vigorous easing.

Most governors feared that “artificial” at-tempts to stimulate the economy by injecting

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liquidity into the banking system would notjump-start business activity, but just touchoff another bout of speculation. Too muchcheap credit had created the original bubblein the first place. Now that it had beenpricked and stock prices were falling to morereasonable levels, why short-circuit the pro-cess, they asked, by making credit too cheaponce again. As one argued, further easingwould only result in a replay of the “1927 ex-periment, now quite generally . . . admittedto have been disastrous.” The recession was adirect consequence of the past overspecula-tion, during which money had been throwndown absurd and uneconomic avenues. Theonly way to return to a healthy economy wasto allow it to suffer for a while, a form of pen-ance for the excesses of the last few years.

Because the notion of an active monetarypolicy to combat the business cycle was sonovel and the knowledge of how the eco-nomy worked so primitive, debates among

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the various factions within the Fed becamehighly confused and at times even incompre-hensible. In September 1930, Governor Nor-ris, an otherwise highly competent and re-spected banker, found himself arguing at aFed meeting that by easing interest rates,they had their policy backward. “We havebeen putting out credit, in a period of de-pression, when it was not wanted and couldnot be used, and will have to withdraw creditwhen it is wanted and can be used.” He failedto recognize that the logic of his premisewould have led him to the oddly perverse re-commendation that the Fed should contractcredit in a depression so that it might supplylots of it during a boom.

Without a common vocabulary for ex-pressing ideas, Fed officials resorted to ana-logies. One of the governors likened any at-tempt by the Fed to revive the economy to aband desperately trying to keep the musicgoing at a “marathon dance.” On another

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occasion, he compared it to a physician’s try-ing to bring a dead patient “back to lifethrough the use of artificial respiration or in-jections of adrenalin.”

In the early summer, the Fed stopped eas-ing. It proved to be a mistake. For just as itwent on hold, the economy embarked on asecond down leg, industrial production fall-ing by almost 10 percent between June andOctober. There is some debate about Harris-on’s reasons. Some argue that he thought hehad done enough. Having staved off cata-strophe by pumping a large amount ofmoney into the system and cutting rates toan unprecedented low level, he believed thathe had been as aggressive as he could. Oth-ers argue that he was operating with whatmight be called a faulty speedometer forgauging monetary policy. The usual indicat-ors that he relied upon suggested that condi-tions were very easy—short-term rates weretruly low and banks flush with excess cash.

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The problem was that some of these meas-ures were now giving off the wrong signals.For example, when banks overflowed withsurplus cash, this was generally an index, ina more stable and settled economic environ-ment, the Fed had pushed more than enoughreserves into the system to restart it. In 1930,however, in the wake of the crash, banks hadbegun carrying larger cash balances as a pre-caution against further disasters, and excessbank reserves were more a symptom of howgun-shy banks had become and less howeasy the Fed had been.

IN SEPTEMBER 1930, Roy Young resignedas chairman of the Federal Reserve Board tobecome the head of the Boston Fed, a posi-tion that not only paid two and a half timesas much—$30,000 as compared to$12,000—but also carried some executive

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authority. Finding replacements on theBoard had never been easy; in the middle ofa growing depression, it was doubly hard.Luckily Hoover had exactly the right candid-ate and promptly phoned his old friend, thenoted banker and government financier Eu-gene Meyer, to offer him the job, saying, “Iwon’t take no for an answer,” and hung upwithout even waiting for a reply. He did nothave to. He knew his man.

Few people were more enthusiastic or bet-ter prepared to take on the task of runningthe Federal Reserve than Meyer, a completecontrast to the second-rate figures who hadso far inhabited the Board. A successful fin-ancier, he had accumulated a large fortuneby the age of thirty-five, had run not one buttwo government-backed financial institu-tions, and unlike most bankers, believed verystrongly in activist government policy and amore expansionary Fed policy to reverse theslide in the economy and halt deflation.

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Meyer had been born in California, the sonof Marc Meyer, a self-made man who had be-come a partner in the investment house ofLazard Frères. After graduating from Yale in1895, he, too, went to work at Lazards, butquit in 1901, embarking on his own as a WallStreet speculator. He cleaned up during the1907 panic, and by 1916 had amassed a for-tune of $40 to $50 million.

He came to Washington in 1917 as adollar-a-year man working for WoodrowWilson, and had stayed on, becoming direct-or of the War Finance Corporation and thenhead of the Federal Farm Loan Board. Alarger-than-life figure, he commutedbetween a grand house on Crescent Place offSixteenth Street, full of Cézannes and Mon-ets and Ming vases; a seven-hundred-acreestate in Mount Kisco in New York; a six-hundred-acre cattle farm in Jackson Hole,Wyoming; and a plantation in Virginia. Hiswife, Agnes, a difficult egocentric woman

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who put him through a rocky and unhappymarriage, ran the most fashionable salon inWashington, where poets, painters, and mu-sicians might mingle with politicians and

bankers.45

Meyer’s was not an uncontroversial nom-ination—Huey Long, the populist governorof Louisiana, declared he was nothing but“an ordinary tin-pot bucket shop operator upin Wall Street . . . not even a legitimatebanker.” His confirmation hearings provedto be difficult. Senator Brookhart of Iowacame out against him, calling him a “JudasIscariot . . . one who has worked the Shylockgame for the interests of big business”—forall his wealth, he had had to struggle withanti-Semitism throughout his career.

If there was anyone who seemed capableof reversing the paralysis of the Fed, it wasMeyer. Yet, even he was soon overwhelmed.He found a Board racked by petty intrigues

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and feuds. Adolph Miller was at war withCharles James. Some of the old guard, suchas Hamlin, resented Meyer and thought thathe was too closely identified with thepresident.

The system of decision making and au-thority within the Fed, complex as it hadbeen, had become even more byzantine. Dur-ing Strong’s time, decisions about how muchto inject into the banking system throughopen market purchases of government secur-ities had been taken by the five-memberOpen Market Investment Committee(OMIC), comprising the governors of theFederal Reserve Banks of Boston, New York,Philadelphia, Chicago, and Cleveland.Strong, therefore, had to persuade only twoothers to get a majority vote his way.

In January 1930, policy decisions for openmarket operations were shifted to a newtwelve-man Open Market Policy Conference(OPMC), consisting of all the governors of

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the reserve banks. Each of these, of course,had to refer to his own nine-member boardof directors. The old five-member committee(OMIC), renamed the Executive Committeeof the OPMC, retained responsibility for exe-cution. Now three separate groups were jock-eying for power—one body, the OPMC, couldinitiate policy but could not execute; anoth-er, the Board, had to approve policy de-cisions but could not initiate them; and athird, the Executive Committee of theOPMC, implemented decisions within cer-tain discretionary limits. At each stage policycould be vetoed or stymied. As a con-sequence, even though the two most promin-ent members of the Fed, Harrison and Mey-er, both believed that it should be more ag-gressive, they were defeated by the system.

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THE GREAT CRASH was greeted in Europewith a combination of schadenfreude and re-lief. According to the New York Times, BlackThursday’s “panicky selling left London’sCity in a comfortable position saying, ‘I toldyou so.’” Contacted by the New York Even-ing Post that same day, Maynard Keynescommented that “we in Great Britain can’thelp heaving a big sigh of relief at whatseems like the removal of an incubus whichhas been lying heavily on the business life ofthe whole world outside America.” The WallStreet collapse was, according to one Frenchauthority, like the bursting of an “abscess.”The hope was that all the European capitalthat had been sucked into Wall Street wouldreturn home, alleviating the pressure onEuropean gold reserves, and allowing suchcountries as Britain and Germany to easecredit and restart their economies.

Much to his delight, Émile Moreau had nothad to miss the fall hunting season in Saint

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Léomer that year. By the last week of Octo-ber 1929, he and Hjalmar Schacht were atthe Black Forest spa of Baden-Baden attend-ing an international bankers’ conference tofinalize the Young Plan and draw up the by-laws of the newly created Bank for Interna-tional Settlements. Schacht learned of theevents on Wall Street when he happened tonotice the American delegation looking espe-cially glum on the morning of October 29and could hardly contain his glee when hediscovered the reason. To a visiting Swissbanker, he announced that he hoped that thecoming chaos would finally put an end toreparations.

But of all the central bankers in Europe,Montagu Norman was the most relieved. Thecrash had arrived just in time to rescue ster-ling. Convinced that it had been the rise inBritish interest rates on September 26 thatfinally burst the bubble, he started claimingcredit for the collapse. So relaxed was he

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about the events on Wall Street, that on themorning of October 29, Black Tuesday, whilethe financial world was falling apart, he kepthis usual appointment for a sitting withartist Augustus John, who had been commis-sioned by the Bank of England to paint hisportrait.

During the last week of October and thefirst weeks of November, George Harrisonkept him in touch with developments onWall Street by cable and transatlantic tele-phone, his voice drifting in and out under theusual atmospherics. On October 31, Harrisoncalled to announce cheerfully that the mar-ket had pretty much completed its fall; thebubble had been pricked without a singlebank failure.

For the first few months, things went ac-cording to plan. European stock marketsdropped in sympathy with Wall Street, butnot having gone up so much, they fell muchless precipitously. While the U.S. market slid

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almost 40 percent, Britain’s went down 16percent, Germany’s 14 percent, and France’sonly 11 percent. Though the size of the Brit-ish stock market was comparable as a per-centage of GDP to that in the United States,the average British person preferred to beton sports and left the stock market to theCity bigwigs, while in France and Germanythe size of the stock markets was tiny. Thusthe crash did not exert the same hold on thepsychology of European consumers and in-vestors, and the effect on their economieswas correspondingly less traumatic.Moreover, as credit conditions eased in theUnited States, foreign lending revived.Money suddenly became more freely avail-able. Central banks across Europe, no longerhaving to defend their gold reserves againstthe pull of New York, were able to follow theFederal Reserve in cutting interest rates. ByJune 1930, with U.S. rates at their postwarlow of 2.5 percent, the Bank of England was

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down to 3.5 percent, the Reichsbank to 4.5percent, and the Banque de France to 2.5percent.

Just as the threat of having to fight off anattack on sterling receded, Norman foundhimself harassed from another, and com-pletely unexpected, quarter. In November1929, a few weeks after the crash, the newBritish Labor government responded to criti-cisms about the endemically poor perform-ance of the British economy by appointing aselect committee under an eminent judge,Lord Macmillan, to investigate the workingsof the British banking system. Half of itsfourteen members were bankers; the re-mainder, an assortment of economists,journalists, industrialists, among them threeof the staunchest critics of the gold standard:Maynard Keynes, Reginald McKenna, andErnest Bevin of the Transport and GeneralWorkers Union, the country’s most formid-able trade union leader.

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In setting up this committee, the allegedlyradical government had made it clear thatthe issue of whether Britain should remainon the gold standard should be kept off thetable. Even Keynes, the unremitting critic ofthe mechanism and the strains it had im-posed on the British economy, was ready toconcede that it was a fait accompli and thatdeparting from gold at this stage would bejust too disruptive.

Nevertheless, the Bank of England—andespecially Norman—approached the commit-tee with great suspicion. Within the City, ithad always been said that the motto of theBank of England was “Never explain, neverapologize.” That he and the Bank were nowto be subject to the spotlight of public scru-tiny filled him with dread. The committeebegan its hearings on November 28; Normanwas to appear as one of the first witnesses,on December 5. As the date approached, hisnervous ailments reappeared, and two days

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before he was due to testify, he predictablycollapsed. His doctors recommended a shortleave of absence and Norman duly departedfor the next two months on an extendedcruise around the Mediterranean, ending upin Egypt.

In place of Norman, the deputy governor,Sir Ernest Harvey, appeared. Even withoutits chief, the Bank found its habits of secrecyjust too ingrained to abandon lightly. Con-sider this exchange between Keynes andHarvey:

KEYNES: “Arising from Professor Gregory’squestions, is it a practice of the Bank of Eng-land never to explain what its policy is?”

HARVEY: “Well, I think it has been our prac-tice to leave our actions to explain ourpolicy.”

KEYNES: “Or the reasons for its policy?”

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HARVEY: “It is a dangerous thing to start togive reasons.”

KEYNES: “Or to defend itself againstcriticism?”

HARVEY: “As regards criticism, I am afraid,though the Committee may not all agree, wedo not admit there is need for defense; to de-fend ourselves is somewhat akin to a ladystarting to defend her virtue.”

Norman finally returned in England inFebruary 1930 and agreed to provide evid-ence to the select committee. He was not agood witness. Witty and articulate in private,he became sullen and defensive in public set-tings, replying to the questions, which in de-ference to his position were never aggressive,in curt sentences and sometimes even inmonosyllables. Unaccustomed to having toarticulate his thought processes or justify

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himself, he said things that he did not meanor could not possibly believe, insisting, atone point, that there was no connectionbetween the Bank’s credit policies and thelevel of unemployment. He appeared to becallous and indifferent to the plight of theunemployed, reinforcing the stereotype ofbankers among the Socialists of the new gov-ernment and the voting public who were get-ting their first glimpse of this man. Confron-ted with Keynes’s coldly precise questions,Norman seemed to be dull and slow, retreat-ing behind platitudes.

Finally asked by the chairman what thereasons were for a particular policy decision,he initially said nothing but simply tappedthe side of his nose three times. Whenpressed, he replied, “Reasons, Mr. Chair-man? I don’t have reasons. I have instincts.”

The chairman patiently tried to probe fur-ther, “We understand that, of course, Mr.

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Governor, nevertheless you must have hadsome reasons.”

“Well, if I had I have forgotten them.”

Keynes would later describe Norman aslooking like “an artist, sitting with his cloakround him hunched up, saying, ‘I can’t re-member,’ thus evading all questions.” Nor-man testified for only two days—the bank’ssenior staff realized that he was doing moreharm than good, and the remainder of thetestimony was passed back to the deputygovernor. But the damage to Norman’sstanding had been done. In the aftermath,one banker confided to his colleagues thatthe governor “grows more and more tem-peramental, freakish, and paradoxical.”

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18. MAGNETO TROUBLE

1930-31

To what extremes won’t you compelour hearts,you accursed lust for gold?

—Virgil, The Aeneid

IN December 1930, Maynard Keynes pub-lished an article titled “The Great Slump of1930,” in which he described the world asliving in “the shadow of one of the greatesteconomic catastrophes of modern history.”During the previous year, industrial

production had fallen 30 percent in the Un-ited States, 25 percent in Germany, and 20percent in Britain. Over 5 million men werelooking for work in the United States, anoth-er 4.5 million in Germany, and 2 million inBritain. Commodity prices across the worldhad collapsed—coffee, cotton, rubber, andwheat prices having fallen by more than 50percent since the stock market crash. Threeof the largest primary producing countries,Brazil, Argentina, and Australia, had left thegold standard and let their currencies de-value. In the industrial world, wholesaleprices had fallen by 15 percent and consumerprices by 7 percent.

Despite all this bad news, at this stageKeynes was uncharacteristically sanguine.“We have involved ourselves in a colossalmuddle, having blundered in the control of adelicate machine, the working of which wedo not understand,” he wrote. Comparingthe economy to a stalled car, he declared it

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was a simple matter of some “magnetotrouble” (a magneto was a device then com-monly in use for creating an electric spark inthe ignition system of automobiles), troublethat could be easily cured by “resolute ac-tion” by the central banks to “start the ma-chine again.”

There were in fact reasonable grounds foroptimism. The downturn that had hit theUnited States in 1930 in the wake of thestock market crash had indeed been deep,but the U.S. economy had faced a similarlysharp decline in prices and production in1921 and had bounced back. There had beenas yet no major financial disaster orbankruptcy.

Keynes did recognize that it was hard forany single central bank to act alone. Tojump-start the economy, a central bank hadto have enough gold, the underlying raw ma-terial for credit creation under the goldstandard. The international monetary system

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was now operating, however, in a very per-verse way. Because of investor fear, capital insearch of security was flowing into thosecountries with already large gold re-serves—such as the United States andFrance—and out of countries with only mod-est reserves—such as Britain and Germany.

As it had been during the 1920s, the Un-ited States was major haven for gold flows.Far more damaging than the effect of theprotectionist Smoot-Hawley Act was the col-lapse in capital flows. After a brief revivalearly in 1930, U.S. foreign investment intoEurope suddenly dried to a trickle. Americanbankers became risk averse and cautiousand, claiming that it was hard to find credit-worthy borrowers, pulled in their horns.With American capital bottled up at homeand U.S. demand for European goodsshrinking—a result of the weak U.S. economyand of higher import tariffs imposed in June1930 by the Smoot-Hawley Act—Europe

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could only pay for its imports and service itsdebts in gold. During 1930, a total of $300million in bullion was shipped across the At-lantic into the vaults of the Federal Reserve

system.46

Even more disruptive to international sta-bility, however, was the flow of gold intoFrance, the one country in Europe that hadsomehow remained immune from the worldeconomic storm. Émile Moreau’s strategy ofkeeping the franc pegged at a low rate hadmeant that French goods remained attract-ively priced. As a result the economy held upvery well in 1929 and 1930, and capital, insearch of safety, started flooding into France:a total of $500 million of gold during 1930.It was one of the startling ironies of thatwhole period that France, viewed by bankersin the years after the war as irresponsibleand suspect, had now become the world’sfinancial safe haven. By the end of 1930, theBanque de France, in addition to the $1

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billion it held in sterling and dollar deposits,had accumulated a gold reserve mountain ofover $2 billion, three times that of the Bankof England. French officials, who only a fewyears before had been quick to blame theirwoes on the work of international currency“speculators,” now began touting the superi-or wisdom of these selfsame “investors” forthe votes of confidence they had cast onFrench economic management.

While everywhere else in the global eco-nomy consumers and businesses were cut-ting back and slashing their budgets, inFrance, money remained easily available andpeople continued to spend. French com-mentators were calling their country L’ÎleHeureuse. In the summer of 1930, Paris wasstill full of tourists, and business at Au Prin-temps, the famed Parisian department store,was booming. The contrast with its neigh-bors could not have been greater. While inGermany 4.5 million men were on the dole

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and in Britain 2 million, in France only190,000 men were collecting unemploymentbenefits. And while prices across the rest ofthe world were dropping like stones, inFrance they continued to rise.

Quite without knowing what it was doing,France had backed into the position of thestrongest economy in Europe. After a decadeof suffering an inferiority complex created bythe combination of “the war . . . fear of Ger-many [and] the franc’s fall,” it responded toits unexpected good for-was tune with anoutburst of self-congratulation. According tothe prime minister, André Tardieu, France,having successfully navigated the economicstorm, was admired by the whole for its “har-monious economic structure . . . the naturalprudence of the French people, their abilityto adapt, their modernity and their courage.”Tardieu, with his bejeweled pince-nez andhis gold cigarette holder, his boulevardiertaste in silk hats and fancy waistcoats, his

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fondness for raffish company, his involve-ment before the age of thirty-five in at leasttwo financial scandals, was the embodimentof all that the British despised about Frenchpoliticians. That this “glittering new embodi-ment of Gallic self confidence” could nowlecture the world about prudence and in-dulge in his nation’s habit of attributing itssuccesses to the innate and inestimable ad-vantages of French civilization profoundly ir-ritated France’s neighbors.

FIGURE 6

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British commentators, unable to under-stand why commodity prices kept falling,why, despite the massive cuts in interestrates, production in their own country keptdropping and unemployment rising, blamedthe operation of the gold standard as theprimary cause of world depression, espe-cially the role played by the Federal Reserveand the Banque de France. By the end of theyear, the United States and France, betweenthem, held 60 percent of the world’s gold,

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and neither was doing anything to recircu-late it.

The French came in especially for blamefor starving the world of liquidity by short-circuiting the gold standard mechanism.Paul Einzig, author of the influential Lom-bard Street column for the Financial News,wrote that it was “the French gold hoardingpolicy which brought about the slump incommodity prices, which in turn was themain cause of the economic depression; thatit is the unwillingness of France to cooperatewith other nations which has aggravated thedepression into a violent crisis.” Similarly,the prominent Swedish economist, GustavCassell, the primary exponent of the viewthat world deflation in commodity prices re-flected insufficient circulation of gold, ar-gued, “The Banque de France has consist-ently and unnecessarily acquired enormousamounts of gold without troubling in theleast about the consequences that such a

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procedure is bound to have on the rest of theworld, and therefore on the world economicposition.”

By the end of 1930, the Banque de Francehad begun to understand that this accumula-tion of gold was harming the rest of theworld by starving it of reserves. It was espe-cially damaging because of the idiosyncrasiesof the French banking system. In most coun-tries, banks worked to make every dollar ofgold support a multiple of that amount incurrency and credit. The French banking sys-tem, however, was unusually inefficient inputting its bullion to use. As a result, thenewly arrived $500 million of gold wastranslated into less than $250 million in cir-culating currency.

French officials claimed that there waslittle they could do about this buildup, thatthe high demand for gold in France was aconsequence of the rural character of thecountry or the innate thriftiness and risk

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aversion of its citizenry. In fact, it was clearthat during 1930, the Banque under ÉmileMoreau had been very consciously and delib-erately offsetting—the technical term wassterilizing—the natural tendency of an influxof gold to expand the currency, lest it lead toinflation. With prices around the world col-lapsing, this may sound strange, but it was asymptom of how badly scarred he and otherFrench officials had been by the currencycrises of 1924 and 1926.

Unknown to most people, much of thegold that had supposedly flown into Francewas actually sitting in London. Bullion wasso heavy—a seventeen-inch cube weighsabout a ton—that instead of shipping cratesof it across hundreds of miles from onecountry to another and paying high insur-ance costs, central banks had taken to “ear-marking” the metal, that is, keeping it in thesame vault but simply re-registering its own-ership. Thus the decline in Britain’s gold

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reserves and their accumulation in Franceand the United States was accomplished by agroup of men descending into the vaults ofthe Bank of England, loading some bars ofbullion onto a low wooden truck with smallrubber tires, trundling them thirty feetacross the room to the other wall, and off-loading them, though not before attachingsome white name tags indicating that thegold now belonged to the Banque de France

or the Federal Reserve Bank.47 That theworld was being subject to a progressivelytightening squeeze on credit just becausethere happened to be too much gold on oneside of the vault and not enough on the otherprovoked Lord d’Abernon, Britain’s ambas-sador to Germany after the war and now anelder statesmen-economist, to exclaim, “Thisdepression is the stupidest and most gratuit-ous in history.”

As the French hoard kept piling up duringthe summer and fall of 1930—and with it

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tensions between Britain and France—theFrench went through the motions of propos-ing remedies. The return of French goldpolicy to the forefront of economic debatewas too much for Norman. He happy to dealwith the Americans, but having had his fin-gers burned by his experience with Moreauin 1927, he absolutely refused to have any-thing to do with French officialdom.

Instead, he wisely left it up to the BritishTreasury to try to negotiate with their coun-terparts in the Ministry of Finance. Theseconversations led nowhere. Indeed, theybrought out the worst in the characters ofboth countries. The British insisted uponpatronizing lectures on the primitive natureand deficiencies of the French banking sys-tem, without any sense that they themselveswould have found such advice from abroadintrusive and insulting.

It soon became clear that France was mo-tivated not so much by economic arguments

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but by strategic calculations. French officialstried to use their financial muscle to extractpolitical concessions—money to them not be-ing its own reward. Even the French MilitaryHigh Command became involved. GeneralRéquin, a senior adviser to Minister of De-fense André Maginot, wrote to General Wey-gand, chief of the General Staff, urging thatFrance “lean on England while the pound isat our mercy. . . . We can make her under-stand . . . that if she wants our help as alender, other questions must first be settled.”

In September 1930, it was suddenly an-nounced that Moreau was resigning. Thishad been rumored in Paris for months, but itstill came as a great shock in British bankingcircles. Initially the talk was that he was be-ing forced out by British pressure and thathis departure might foreshadow a change inFrench policy.

In fact, having presided over the recoveryof the franc, he had just been decorated as

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Grand Officier de la Légion d’Honneur anddecided himself that it would be a good timeto go. He was simply following the age-oldpractice in France whereby senior civil ser-vants, unusually poorly paid by internationalstandards, move to the private sector tobuild up a nest egg. He had accepted the pos-ition of vice president of the Banque de Pariset Pays-Bas, the most prominent of theprivate banques d’affaires, a distinctivelyFrench type of banking house that combinedsecurity underwriting with direct invest-ments in industry. Indeed, he had alreadymoved out of the official apartment assignedto him as governor, which despite its “sump-tuous trimmings” was lit by kerosene lamps,had especially “antiquated heating,” andsmelled of “a miser’s snuggery,” into a mag-nificent hôtel particulier, a large town houseon the Rue de Constantine opposite LesInvalides.

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He was succeeded by his deputy, ClémentMoret, like Moreau a graduate in law, whohad then gone on to Sciences Po, and also onto the Ministry of Finance—Moret, however,was not part of the elite Inspectorat des Fin-ances. Instead, the self-effacing Moret hadspent twenty-five years clambering up theMinistry of Finance hierarchy. Plucked fromobscurity by Poincaré, who described him as“abnormally honest,” Moret had become adirector general within the ministry and in1928 had been assigned to the Banque asdeputy governor.

He was of a different generation—at theage of forty-five the youngest man to be ap-pointed governor. And in contrast to Mor-eau, who had been blunt to the point of rude-ness, Moret was courteous and thoughtful.But though there was a change in style at theBanque, there was to be no change in thesubstance of policy. Indeed, Moret thoughtof himself, even more than had Moreau, as a

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civil servant and the Banque de France as es-sentially an arm of the state. He did proposethat if the goal was to redirect gold reservesfrom France to Britain, the British govern-ment should borrow directly in France. Ofcourse, lacking any assurance that the poundwould remain stable, such a loan would haveto be denominated in francs. For Norman,who thought that it was contrary to the“prestige” of London even to appear to “askfavors from the French,” this would havebeen the ultimate humiliation. And so, as acombination of British pride and heavy-handedness locked horns with Frenchselfishness and arrogance, the French goldmountain kept growing.

Norman instead latched onto a grandioseplan that, it was claimed, would provide a“blood transfusion” to cure the Depression.An international bank, a sort of forerunnerof the World Bank, was to be set up andheadquartered in a neutral country,

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Switzerland or the Netherlands, with capitalof $250 million. It would be able to borrowanother $750 million primarily in gold-richFrance and America, which would bechanneled to governments and businessesaround the world in need of capital. Normanrolled it out at the February 1931 monthlymeeting in Basel of the BIS, which had be-come a sort of club for central bankers. Theywould gather there on a Sunday night, havean informal and private dinner together, andspend the next day in meetings. Even beforethe wining and dining was over—for themonthly meetings at Basel would become abyword for good food—it was clear that theplan would go nowhere. Neither the Frenchnor the Americans were willing to hand overlarge amounts of money to an internationallyrun organization likely to be dominated byEnglishmen.

The following month Norman sailed forthe United States, which he had not visited

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since the summer of 1929. It was obviousthat in the intervening two years the Americ-an press had greatly missed him. From thevery start, following the suddenly announcedmission of what the New York Times called“England’s elusive master banker” and “manof mystery,” vaguely hinting that some greatinitiative to solve the world Depression wasin the offing, they would not leave Normanalone. From his departure aboard the Ber-engaria on March 21, he was followed every-where on his “secret mission” and his move-ments—his meetings at the New York Fed,attended by even the secretary of state,Henry Stimson; his trip to Washington; hisvisit to the White House; lunch with Secret-ary of the Treasury Mellon—were all ex-amined in minute detail. He put on a won-derful performance, hamming it up for thecrowd of reporters that pursued him. Look-ing more like “an orchestra leader than abanker of such eminence,” he wished them

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“better luck next time” when they tried to ex-tract the purpose of his visit. When theybegged him for some tidbit of insight into theworld financial situation, he teased them bygravely announcing that he thought the re-cent departure of King Alfonso of Spain intoexile would have no effect on internationalfinance. But for all the frenetic schedule ofmeetings, even his most devoted followersamong the press had the suspicion that therewas much less there than met the eye.

Even before Norman had arrived in theUnited States, J. P. Morgan & Co., usually hisbiggest supporter, had signaled that it hadno intention of backing an “artificial” agencyor any “form of international organization ofcredit.” The New York Fed had cabled that itthought the whole scheme too “visionary andinflationary.”

Norman tried to convince his Americanhosts of the “very gloomy situation” ofEurope. The only hope for Britain now was a

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savage reduction in wages. In Eastern andCentral Europe the position was even moredesperate. “Russia was the very greatest ofdangers,” he told Stimson. Germany andEastern Europe were not receiving enough“help from the capitalist system to stand theexpense of remaining capitalist . . . and allthe time while they wobbled and waveredRussia was beckoning to them to come overto her system.” The specter of communism,which would persuade a later generation ofAmericans to pour vast amounts of moneyinto Europe, did not have the same potencyin 1931.

The United States was in a depression ofits own, had over the previous seventeenyears already committed some $15 billion toEurope, including war loans, and was eagerto avoid any further entanglements acrossthe Atlantic. Norman returned empty-handed. In May, when Thomas Lamont waspassing through London, Norman

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complained to him that the “U.S. was blindand taking no steps to save the world and thegold standard.”

It was becoming apparent to most com-mentators that the continued flow of gold in-to France would eventually create a break-down in the mechanism of international pay-ments. As usual, Keynes put it the mostgraphically, “Almost throughout the world,gold has been withdrawn from circulation. Itno longer passes from hand to hand, and thetouch of the metal has been taken frommen’s greedy palms. The little householdgods, who dwelt in purses and stockings andtin boxes, have been swallowed by a singlegolden image in each country, which livesunderground and is not seen. Gold is out ofsight—gone back into the soil. But when thegods are no longer seen in a yellow panoplywalking the earth, we begin to rationalizethem; and it is not long before there is noth-ing left.” The bullion reserves that backed the

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credit systems of the world, buried as theywere in underground vaults—or in the caseof the Banque de France, underwater, be-cause its vaults lay below a subterraneanaquifer—were invisible to the public eye.They had acquired an almost metaphysicalexistence. Keynes thought that perhaps gold,its usefulness now outlived, might becomeless important. He compared the situation tothe transition in government from absoluteto constitutional monarchy. He would even-tually be proved right but not before awrenching upheaval.

IN EARLY 1931, a similar insidious processof paralysis also began to affect the U.S.banking system. It originated in the most un-likely of places—the Bronx, one of the outerboroughs of New York City—with thestrangely named Bank of United States

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(BUS), which despite its official-soundingtitle bore no relationship to the U.S. govern-ment but traced its very modest roots to thegarment industry on the Lower East Side ofManhattan.

On the morning of December 10, 1930, asmall merchant from the Morrisania sectionof the Bronx went to his local branch of theBank of United States on the corner of Free-man Street and Southern Boulevard andasked that the bank buy back his modestholdings of its stock. This was not as strangea request as it sounds. In the middle of 1929,the bank had set out to support the value ofits shares by selling them to its own deposit-ors. As an inducement, investors were giveninformal assurances that they could sell thestock back to the bank at the original pur-chase price—around $200 a share. If thissounds too good to be true, it was; but in themiddle of 1929, people were willing to be-lieve anything. By the fall of 1930, after the

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collapse on Wall Street and amid mountingconcerns about the economic situation ofNew York, shares were trading at around$40.

Officials at the Bronx branch tried to con-vince the exigent depositor that he shouldhold on to his stock, that even at currentprices it remained an excellent investment.No doubt irritated at this obvious attempt torenege on a clear promise, he stormed outand began reporting that the bank was introuble. By the afternoon, a small horde ofdepositors had begun lining up outside thebranch’s tiny neoclassical limestone buildingto withdraw their savings before closingtime. Until now, despite the Depression,there had been no bank runs in New York,and soon a crowd of twenty thousand curi-ous bystanders had gathered to watch. As theanxious depositors became restless, a squadof mounted police had to be sent in to con-trol them and several customers were

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arrested; and when the mob became frantic,the police charged the crowd with theirhorses.

The Bank of United States had fifty-sevenbranches across the four larger boroughs ofNew York, and over four hundred thousandindividual depositors, more than any otherbank in the country. Rumors of the troublequickly swept the city and similar sceneswere enacted that afternoon at many otherbranches, with armored trucks being calledin to deliver extra cash.

The bank had been founded in 1913 byJoseph S. Marcus, a Russian Jewish immig-rant who had come to the United States in1879, and having begun as a garment workeron Canal Street, had made good as a manu-facturer of clothing and then as a localbanker. The first branch of his bank, locatedon the corner of Orchard and DelanceyStreet, catered to the neighborhood’s mostlyJewish garment workers and merchants. As

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a result of Marcus’s reputation among theLower East Side traders for honesty and fairdealing, the bank had done well, although itwas undoubtedly helped by the name, whichgave many of its Yiddish-speaking clients theimpression that it was somehow backed bythe full faith and credit of the national gov-ernment. By the time the older Marcus diedin 1927, the bank had grown into an institu-tion with $100 million in assets, a head officeat 320 Fifth Avenue, and seven branchesacross the city. But its officers and its clien-tele remained predominantly Jewish, and itwas snidely nicknamed “The Pants Pressers’Bank.”

When Joseph Marcus died, the bank wastaken over by his son Bernard Marcus, a bril-liant but flamboyant businessman with ataste for conspicuous consumption far re-moved from his father’s modest ways. When,for instance, Bernard went to Europe, hetraveled with thirty pieces of luggage and

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always insisted on occupying the grandestsuite on board ship. Over the next two years,he expanded his base through a series ofmergers so that by 1929 it had grown to$250 million in assets.

Marcus resorted to a series of practicesconsidered shady, even by the lax standardsof the time. The bank lent some $16 million,a third of its capital, to officers of the com-pany and their relatives to allow them to buyits stock. To finance its headlonggrowth—the bank more than doubled in sizein two years—Marcus issued large slabs ofequity, which he committed to buy back atthe original price of $200. When the pricebegan to fall in the spring and summer of1929, many investors held Marcus to hisguarantees. In order to take up all the stockcoming on the market, he created a series ofaffiliate companies—in today’s parlance, off-balance-sheet special-purpose vehicles—thatrepurchased the equity with money

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borrowed from the bank itself. Marcus wasin effect using depositors’ money to supportthe shares of his bank.

In its lending policy, the bank made a bigbet on the value of New York City real estate.Half its loan portfolio, double that of com-parable firms, went into real estate finance,though again the true exposure was hiddenby channeling money through affiliate com-panies. When the crash hit, the bank wascommitted to two big projects on CentralPark West: $5 million for the Beresford, atwenty-story building at Eighty-secondStreet with over 170 apartments and another$4 million for the San Remo on Seventy-fourth with 120. Though it was rumored thatMarcus himself owned these two develop-ments, his interest in them was disguisedthrough dummy corporations, and everysingle penny for their construction camefrom the bank.

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Thus by the middle of 1930, while the offi-cial books gave the impression of a bank thathad $250 million in deposits, $300 millionin good quality assets and $50 million inequity, the operational reality behind thesenumbers was quite different. The true valueof assets was worth no more than $220 mil-lion, all its equity had been wiped out, andthe bank was $30 million in the hole.

In the fall of 1930, as rumors that the BUSmight be in trouble circulated through thehigher financial circles of New York, the Fedtried to engineer a merger with some of theother Jewish majority-owned banks in thecity: the Manufacturers Trust, the Public Na-tional Bank, and the International TrustCompany. The deal would have required theresignations of Marcus and his cronies whohad presided over its mismanagement. Butsuspicion of Marcus within the financialcommunity was so great that no one could

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bring themselves to trust the accounts, andthe deal fell through at the last minute.

On the evening after the run began onDecember 10, all of the familiar Wall Streetbarons—George Harrison of the New YorkFed, Thomas Lamont of J. P. Morgan, AlbertWiggin of Chase, Charles Mitchell of Nation-al City, and another half dozen of the city’stop bankers—gathered on the twelfth floor ofthe New York Fed to try to put together arescue package. By 8:30 that evening theywere close to striking a deal and Harrisonhad even begun preparing his press state-ment. To save the bank, they would collect-ively have to be willing to pump in $30 mil-lion. At the last moment, however, severalkey bankers balked.

These men had all been reared on WalterBagehot’s nineteenth-century classic Lom-bard Street, which described how the Bankof England, then the financial center of theworld, handled financial crises and panics.

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Bagehot argued that during normal times acentral bank should follow the gold standardrule book, allowing credit to expand and con-tract in line with bullion reserves. But in afinancial crisis, it should throw away the rulebook and “lend freely, boldly, and so that thepublic may feel you mean to go on.” As heput it, “A panic . . . is a species of neuralgia,and according to the rules of science youmust not starve it.” In other words, a centralbank had to be willing to inject as muchmoney as was necessary to satisfy the publicdemand for cash and safe assets.

But Bagehot did inject one caveat. Thoughhe argued that in a panic the central bankshould lend without hesitation or question, itshould do so only to banks facing a tempor-ary squeeze on liquidity and never to thoseactually insolvent. The problem this timewas that the BUS was not just temporarilyshort of funds, it was insolvent and could nothope to cover its obligations.

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There was another element involved in thedecision not to bail out the Bank of UnitedStates, though it was unspoken. Marcus wasa Jew and, moreover, a Jew of the wrongsort. There had always been a divide betweenthe WASP houses and the Jewish houses onWall Street. But firms such as Kuhn Loeb,Lehman Brothers, and J. W. Seligman rep-resented “Our Crowd,” the German Jewishelite, and for all the anti-Semitic bigotries ofold dinosaurs like Jack Morgan, these firmswere held in very high regard and viewed asreputable and very prestigious institutions.But the Wall Street patricians gathering onthe evening of December 10 would havefound it hard to hide their distaste for bailingout a Jew like Marcus, an ex-garment manu-facturer from the Lower East Side who wasrunning a bank that, according to ThomasLamont’s son, Tommy, was patronizedlargely by “foreigners and Jews.” RussellLeffingwell, the Morgan partner, described it

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as a bank “with a large clientele among ourJewish population of small merchants, andpersons of small means and small education,from whom all the management weredrawn.”

When Joseph Broderick, the New YorkState superintendent of banks, learned of thedecision, he insisted on coming to addressthe meeting. After being pointedly kept wait-ing until 1:00 a.m., he was finally admitted.He would testify later that “I told them thatthe Bank of United States occupied a ratherunique position in New York City, that inpoint of people served it was probably thelargest bank in the city and that its closingmight affect a large number of smaller banksand that I was afraid that it would be thespark that would ignite the whole city.” Bro-derick reminded the grandees that only twoor three weeks before “they had rescued twoof the largest private bankers in the city.”One of them was Kidder Peabody, an

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investment bank run by Boston Brahmins,founded in 1865, which as result of the crashand of subsequent withdrawals of depositsby, among others, the government of Italy,had had to be bailed out in 1930 with $15million from J. P. Morgan and Chase.

Though the meeting continued into theearly hours of the morning, he was unable topersuade the few recalcitrants to changetheir mind. The Fed, believing that it couldthrow a ring fence around the BUS and pre-vent its troubles from spreading, decided toclose the bank’s doors the next morning. “Iwarned them that they were making themost colossal mistake in the banking historyof New York,” Broderick would later testifyat a trial. Marcus and one of his lieutenantswere tried, convicted, and sentenced to threeyears’ imprisonment. Broderick was separ-ately indicted for alleged negligence in notclosing the bank earlier. The case ended in a

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mistrial; after a second trial, he wasacquitted.

Dramatic as it was, the failure of the Bankof United States was in fact not that unusual.The United States had historically alwayssuffered from an unstable banking sys-tem—the consequence of having no centralbank compounded by an astoundingly frag-mented banking structure. The creation ofthe Fed in 1913 had more or less solved thefirst problem, but did nothing to change theorganization of banking in the country. Dur-ing the 1920s, the United States was stillpopulated with some 25,000 banks, many ofthem so tiny, undiversified, and dependenton the economic conditions of their localitiesthat every year roughly 500 went under. Inthe first nine months of 1930, as a result ofthe deepening hard times, 700 had closedtheir doors. That October, two months be-fore the BUS crisis, the terrible droughtacross the Midwest and South led to the

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collapse of the Tennessee investment bank,Caldwell and Company, which controlled thelargest chain of banks in the South, leaving astring of failures in its wake—120 in allacross Tennessee, Kentucky, Arkansas, andNorth Carolina.

After closing the BUS, the Fed did success-fully manage to avoid a chain reactionamong local banks. December 1930 andJanuary 1931 saw a brief spike in bank runsin New York and Pennsylvania, but the senseof panic quickly died down. However, thefailure of the BUS did mark a profoundchange in public sentiment toward banks.

Shaken by such a high-profile failure, de-positors started becoming more cautiousabout where they placed their money. Un-able to tell whether a bank was sound or not,they began pulling their cash indiscrimin-ately out of all banks, good and bad. At firstit was a mere ripple—in the months after thetwin failures a total of $450 million dollars

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left the banking system, less than 1 percentof total deposits.

Because of the way banking works,however, such withdrawals had a negativemultiplier effect. In an effort to maintain aprudent balance between their own liquidityand their loan portfolios, banks had to call inthree or four dollars of loans for each dollarin cash withdrawn. Moreover, as their loanswere called, borrowers in turn withdrewtheir deposits from other banks. The effectwas to spread the scramble for liquidity rightacross the system. In this climate, all banksfelt the need to protect themselves by build-ing up cash reserves and thus called in evenmore loans. By the middle of 1931, bankcredit had shrunk by almost $5 billion, equi-valent to 10 percent of outstanding loans andinvestments.

FIGURE 7

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After a lull during the spring, in May 1931,the bank runs resumed. A real estate bubblein the Chicago suburbs collapsed, and thirtyChicago banks with $60 million in depositswere swept away. Over the summer, the vir-us spread to Toledo—every large bank butone was shut down; the remaining one beingsaved only when, at the last minute, trucksfrom the Federal Reserve Bank of Clevelanddrew up at its doors laden with $11 million incrisp new currency notes. Seventy percent of

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the city’s deposits were frozen, retail busi-ness came to a standstill, and even the In-verness Golf Club, scene of the most recentU.S. Open, was closed.

Within the Fed, officials were fully awareof the strains on the financial system—thehoarding of currency, the growing problemof bank failures, the reluctance of banks tolend, prices falling at a rate of 20 percent perannum. Somehow they were unable to put allthese pieces of the jigsaw puzzle together. Atthe Federal Reserve Board, Meyer pressedfor a more aggressive policy and even AdolphMiller, who with his natural contrarianstreak seemed to end up so often in theminority, joined him. But the Board was leg-ally powerless to initiate action.

Meanwhile, the governors of the variousFederal Reserve banks, who could havetaken the initiative, refused to act. A largenumber of the banks in trouble, particularlythe small ones, were not members of the

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Federal Reserve System—only half of thetwenty-five thousand banks in the countryhad joined the system, although they accoun-ted for about three-quarters of all deposits.The regional bank governors did not feel anyresponsibility for these nonmember banks,despite their impact on the nation’s overallsupply of credit.

The real issue for the governors was thatmany of the banks closing their doors—byone estimate close to half—had sustainedsuch large losses on their loans that theywere, like the BUS, insolvent. Determined tofollow Bagehot’s rule of only lending to“sound” institutions and believing that prop-ping up failing banks would be throwinggood money after bad, the regional gov-ernors made it a principle to let them go un-der. They failed to recognize that by doing sothey were undermining public confidence inbanks as a repository of savings and werecausing the U.S. credit system to freeze up.

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Strangely enough in the first quarter of1931, as the world banking system was hav-ing to cope on one side with the hoarding ofcurrency by a frightened American publicand on the other by the piling up of gold bul-lion at the Fed and the Banque de France,the economy went through one of its little re-bounds, both in the United States and acrossEurope. If the banking system can be com-pared, as it often is, to the plumbing of theworld’s economy, then the double drain ofcash was like two invisible leaks. Their ef-fects were not immediate and would only be-come apparent gradually.

It was during the spring of 1931 after Nor-man had returned from the United Statesthat he wrote his infamous letter to Moret,foreseeing the wreck of “the capitalist systemthroughout the civilized world” within a yearand asking that his prediction “be filed for

future reference.”48 He could sense that theworld’s credit supply was beginning to dry

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up. But he and his fellow central bankers hadbeen unable to agree among themselves onwhat to do. Norman found himself increas-ingly without influence and powerless to act.The letter, a poor substitute for action, wasundoubtedly shrugged off within the Banquede France as only old Montagu Norman go-ing on about the end of Western civilizationfor the umpteenth time.

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19. A LOOSE CANNON ONTHE DECK OF THE WORLD

1931

Money has no motherland; financi-ers are without patriotism andwithout decency; their sole object isgain.

—NAPOLÉON BONAPARTE

IN THE SPRING of 1931, the one majorcountry most weighed down by a sense ofcollective despair and individual hopeless-ness was Germany. The official figures

indicated that 4.7 million people, close to 25percent of the workforce, double that in theUnited States, were without jobs. And thisdid not include another 2 million forced intopart-time work. Pawnshops multiplied as didastrologers, numerologists, and other char-latans. Even before Hoovervilles had becomecommon in cities across America,shantytowns of tents and packing cases hadsprung up in the parks and forests aroundBerlin. These camps, displaying the Germangift for organization, soon had their own“mayors,” “town councils,” and communitykitchens where women cooked turnips.

But then Germany, burdened by the twinproblems of foreign debt and reparations,had been in a constant state of feverish tur-moil ever since the middle of 1929. No soon-er had the Young Plan been signed in Parisin July of that year, than the campaign to re-pudiate it had gone into high gear. A nationalcommittee led by Dr. Alfred Hugenberg,

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chairman of the right-wing German Nation-alist Party—third largest in the Reichstag,where it held 73 seats out of a total of491—was formed to organize a referendumon the plan. Known as the German RandolphHearst, Hugenberg, a former chairman ofthe famed arms manufacturer Krupps, hadbranched out into the news business afterthe war and now controlled some of thecountry’s largest papers, including Der Tag,the biggest movie production company, andthe largest independent telegraph agency.

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Norman and Schacht, 1935

Among those whom Hugenberg enlistedwas Adolf Hitler, then still regarded assomething of a joke, a minor figure from afringe far-right group with an embarrassingpast as the leader of the 1923 “beer cellarPutsch.” In the previous year’s national

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elections, the Nazis had won a bare 2.6 per-cent of the vote and only twelve seats in theReichstag. They did, however, add their owndistinctive brand of venom to the referen-dum campaign. Arguing that the Young Planwould submit Germany to “three generationsof forced labor,” they branded it a “Jewishmachination” and a “a product of the Jewishspirit.” The referendum, which would haverequired the government to renegotiate therepeal of the hated War Guilt clause, sus-pend all payments on reparations, and tomake it a crime for any official to enter intoany further agreement thereon, received4,135,000 votes, a sign of the growing popu-lar disenchantment with the policy offulfillment.

No one provided a better weather vane forthe shifting political winds than HjalmarSchacht. The Young Plan negotiations lefthim disappointed and bitter. In the late1920s, he and his old protector Gustav

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Stresemann had allowed Germany to borrowvast amounts of money from U.S. banks inthe hope of forcing American involvement inthe reparations question. Their strategy ofbinding the German republic to Americanmoney had, however, not paid off. InSchacht’s view, the American bankers hadfailed to deliver. He and Stresemann hadclearly exaggerated the power and influenceof Wall Street to impose a resolution of thereparations issue.

In October 1929, three weeks before theWall Street crash, Stresemann died suddenlyof a stroke at only fifty-one, a victim of stressand overwork. After the grim letdown of theYoung Plan negotiations and Stresemann’sdeath, Schacht lost any remaining faith inthe American solution.

He was now in a quandary. Disillusionedwith the Americans, he was more willing toexplore alternatives, including the unilateralrepudiation being advanced by the

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nationalist right. But it was hard for him tojettison the Young Plan at this stage—afterall, the document bore his signa-ture—without looking like a shamelessopportunist.

In November, during negotiations at TheHague, the German government agreed tomodest adjustments to the Young Planterms. In return, the Allies agreed to advancethe date for withdrawing their remainingtroops from the Rhineland, and reached asettlement on the status of German citizensin lands previously part of East Prussia butceded to Poland at Versailles. The effect of allthese modifications was to add some 4 to 5percent to the Young Plan payments,amounting to about $25 million a year. Theeconomic significance was trivial—neverthe-less, it provided Schacht with just the excusehe needed to break with the government.

Moreover, as the German unemploymentrolls kept rising, the cost of unemployment

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benefits mounted with them and the budgetdeficit kept increasing. The government, agrand coalition of all democratic parties ledby the Socialist Hermann Müller, proposedto finance itself by more borrowing abroad.For Schacht, who had been on a campaignagainst excessive foreign debt since 1927,this was one more sign that a coalition thatincluded the Socialists was incapable of gov-erning Germany. Having failed to controleither its spending or borrowing abroad dur-ing the good times, it was now repeating themistake as times turned bad. He feared thatGermany was heading for nationalbankruptcy.

On December 5, he dropped his bombshellon Berlin. Without warning he issued a pub-lic statement in which he accused the gov-ernment in inflammatory language of “twist-ing” the Young Plan and failing to take thenecessary steps to control its own finances.Declaring that it would be “self-deception”

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for the German people to believe that the na-tion could pay a pfennig more than it hadagreed to in Paris, he publicly repudiated theplan’s latest revisions. A few weeks later, hesabotaged the government’s attempt to raisea loan in New York through the American in-vestment house of Dillon Read.

Such an open declaration of war on thegovernment by the head of the central bankin the middle of an economic crisisthreatened to plunge the country into chaos.The government was barely able to survivefinancially and then only by tapping the loanfrom the munificent Ivar Kreuger.

The following weeks were a time of terriblestress for Schacht. While the ultimate sever-ity of the coming Depression could not yet beforeseen, he could tell that after the WallStreet crash Germany was headed for a cata-strophe and wished to avoid being buried bythe coming disaster. And yet, if he resignednow, he would be giving up the most

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powerful economic position in Germany andstalking off into the political wilderness withno apparent way back. Having already alien-ated the right wing by signing the YoungPlan, he was now falling out with the left andcenter by challenging the coalition’s financialpolicy.

The tension of having to juggle all thesecompeting considerations, some opportun-istic, others heartfelt, began to tell. Heseemed at times to be close to a breakdown.One foreign banker, meeting him in January1930, described his paranoia as he rantedabout how “he was about to be crucified by agang of corrupt politicians.” His old friendParker Gilbert, increasingly baffled at sucherratic behavior, could only say that hethought Schacht had gone “crazy.”

The final and dramatic denouement oc-curred at an intergovernmental conferenceon the Young Plan that opened at The Haguein early January. Shaken by the

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demagoguery of the German Nationalistright and by Schacht’s repudiation of theplan, the French revived the issue of what todo should Germany cease payment by intro-ducing a new clause that in the event thatGermany was held by the InternationalCourt at The Hague to have willfully defaul-ted on its obligations, the creditor powerswould “recover full liberty of action” as en-visaged by the Treaty of Versailles, a propos-al that evoked memories of the occupation ofthe Ruhr in 1923, of French soldiers march-ing back into Germany.

Schacht had promised the governmentthat though he had broken with it, he woulddo nothing to embarrass Germany in an in-ternational forum. Once more his impulsive-ness got the better of him. The new sanctionsclause was a slap in Germany’s face, repres-enting a radical change in the “spirit” of theYoung Plan. Though the Reichsbank waspowerless to prevent the revised plan from

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going into effect, in order to register hisprotest “on the highest moral grounds,”Schacht announced that it would refuse tosubscribe a pfennig to the new Bank for In-ternational Settlements, declaring melodra-matically that he “would stick to his positionuntil he died.”

The German delegation, led by the newforeign minister Julius Curtius, was furious.At a stormy closed-door meeting, Schachtwas accused of fomenting “mutiny before theenemy,” of grandstanding on an issue of nomaterial importance, of using the issue as apolitical gambit aimed at rebuilding his cred-ibility with the right—a rumor was circulat-ing in Berlin that Schacht was contemplatinga run for the presidency when Von Hinden-burg, who was pushing eighty-five, retired inearly 1932. It was, said the Times of London,an example of the sort of “flamboyant polit-ical moves which are expected of him.” Theleft-leaning Die Welt accused him of being

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“the head not only of a state within the State,but of a state above the State.”

The next day, however, he found himselfoutmaneuvered when the German delegationkept its nerve and proposed that if theReichsbank refused to sign, the governmentwould find a consortium of other Germanbanks to subscribe the capital. Schacht’stendency to overplay his hand now undidhim. He negotiated a face-saving formulaunder which the government would pass alaw requiring the Reichsbank to subscribe,thus allowing him to declare that while hestill thought the Young Plan an “immoralagreement,” he was obliged as a good citizento obey the “German law or else emigrate.”Nevertheless, his histrionics at The Haguehad put him in an untenable position. Backin Berlin, on March 7, he announced hisresignation. “I will now become a countrysquire and raise pigs,” he declared at a tur-bulent press conference where he lost his

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temper more than once at the journalistswho questioned his motives for resigning alittle too closely. One correspondent askedbewilderedly, “Dr. Schacht, is there any par-ticular point to your resignation?” “My acthas nothing to do with politics,” replied anagitated Schacht. “It is merely the moral actof a self-respecting man.”

The Vossische Zeitung, the German na-tional paper of record, equivalent to theTimes or Le Monde, expressed the generalsense of puzzlement in Berlin when it asked,“What is the actual reason for his resigna-tion? Nobody knows.” Nevertheless, alert asever to his own self-interest, Schacht did ne-gotiate an attractive severance arrangement,waiving his annual pension for a lump sumof $250,000.

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SCHACHT LEFT office believing that theSocialist-dominated coalition would leadGermany to financial disaster, precipitatedby what he judged to be an inescapable for-eign debt crisis. At this stage he still viewedGermany’s problems through the prism ofthe 1920s; for him the central issue was thatthe country had profligately saddled itselfwith far too much foreign debt. The solution,he thought, was to curb government ex-penditure and avoid borrowing abroad. Hisrecommendations were still very orthodox,designed to prevent an exchange crisis ratherthan to address the growing problem ofunemployment.

Three weeks later, the government withwhich he had broken split over the unem-ployment question and fell, the Socialistswanting to finance an expansion in unem-ployment benefits by more foreign borrow-ing, the center parties to cut the budget defi-cit. A new center-right coalition, excluding

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the Socialists, took office and was led by anew chancellor, Heinrich Brüning, a dourCatholic, former army officer, and staunchmonarchist.

Unable to get anything through a dividedparliament, Brüning was forced to rule bydecree, moving Germany in a more authorit-arian direction by his reliance on the consti-tution’s provisions for emergency powers.Defeated in the Reichstag, he had VonHindenburg dissolve it and hold new elec-tions in September 1930, two years early.The results came as an ugly shock. In a cam-paign dominated by the deteriorating eco-nomy, Hitler appealed across class lines,promising to reunite the nation, rebuild itsprosperty, restore its position in the world,and purge the country of profiteers. He put alid on some of his more extreme anti-Jewishrhetoric. Speaking at giant open-air rallies,many in sports stadiums lit by arrays of blaz-ing torches, he mesmerized the tens of

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thousands who attended these events withhis oratory. Meanwhile in the streets, hisjack-booted paramilitary thugs, armed withtruncheons and knuckledusters, clashed viol-ently with Communists and Socialists. TheNazis won 6.4 million votes, and vaulted intosecond place in the Reichstag with 107 seats.

The election panicked the financial mar-kets; an estimated $380 million, about halfof Germany’s reserves, bolted. To halt theflight, the Reichsbank was forced to raise itsrates, so that while in New York and Paristhese stood at 2 percent, and in London at 3percent, in Germany they went up to 5 per-cent. With prices falling at a rate of 7 percentper year, it meant that the effective cost ofmoney had risen to 12 percent, gravely ex-acerbating the economic weakness.

As the economy lost ground, unemploy-ment climbed, and the budget deficitwidened, Brüning focused on balancing thebudget. Unemployment benefits were

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restricted; salaries of all high federal andstate officials, including the president’s, wereslashed by 20 percent. Wages of lower-levelofficials were cut 6 percent; income taxeswere raised, taxes on beer and tobacco in-creased, and new levies imposed on ware-houses and mineral water. All of these meas-ures made the Depression worse.

Germany was unusual in the degree of de-flation that the government imposed on theeconomy. In the United States, the Hooveradministration had cut taxes and allowed thebudget to go from a surplus of $1 billion in1929 to a deficit of $2 billion in 1931, 4 per-cent of GDP. Britain ran a deficit of $600million in 1931, 2.5 percent of GDP. By con-trast in Germany, even though revenues fellas activity faltered, expenditures were cuteven more, and the deficit was actually re-duced from an already modest $200 millionto $100 million, less than 1 percent of GDP.

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Brüning, who was now being called the“Hunger Chancellor,” would later claim thathis austerity measures had been designed toprove to foreigners that Germany could nolonger pay reparations, a reprise of the oldperverse “hair-shirt” policy attempted in theearly 1920s: to inflict so much damage onGermany’s economy that her creditors wouldbe forced to reduce their demands.

Historians have debated whether the gov-ernment had any alternative. Borrowingabroad was not an option. By the middle of1930, foreign lending throughout the worldhad collapsed. Moreover, Germany had bor-rowed so much during the boom years, livingby the standards of the time so high on thehog that when bad times finally arrived andit really needed the money, it had exhaustedits credit lines and loans were no longeravailable.

The problem was made much worse byone of the unintended consequences of the

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Young Plan. Under the Dawes Plan before it,private commercial lenders had priority overreparations at a time of crisis. In effect, Ger-many’s public creditors, principally the gov-ernments of France, Belgium, and Britain,had to stand last in line. The Young Plan’selimination of this “transfer protection,”which incidentally Schacht had tried to res-ist, put an end to the guarantee. In the eventof a payments crisis, private lenders did notautomatically move to the front of the linebut had to wait their turn with the big gov-ernments. Not surprisingly, private foreignlending to Germany collapsed.

No longer able to borrow abroad, Germanycould only have avoided the Brüning auster-ity package if the government had borrowedfrom the Reichsbank—in other words, fin-anced its budget deficit by printing money.But memories of the hyperinflation of theearly 1920s were too fresh. Moreover, theDawes and Young plans severely limited the

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Reichsbank’s ability to buy government debt.The only way Germany could have followedsuch a policy was to cut loose from gold; andalmost no one was ready for so drastic amove.

Out of office, Schacht was careful not tocriticize Brüning’s domestic policies, perhapsin the hope that he might return to power aspart of a conservative Nationalist govern-ment. At the time, he did not realize howlucky he was. The new government adoptedmany of the austerity policies that he himselfwas advocating, with catastrophic results.But he was able to watch from the sidelineswhile the German economy fell apart, re-maining free from any blame.

He could not, however, keep silent aboutreparations. The idea that the way to escapethem was to inflict a terrible recession onGermany was to him completely absurd.Though he spent the first few months of hisretirement at his estate at Gühlen, he quickly

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became frustrated at his confinement. In thesummer of 1930, he embarked on a world-wide speaking tour, beginning in Bucharest,and thence to Berne, Copenhagen, andStockholm. In September, he departed fortwo months to the United States.

He made something of a splash in Amer-ica. With his pince-nez and his distinctivehair en brosse, the “Iron Man” of Germany,as Time magazine labeled him, was immedi-ately identifiable. He was certainly more fa-miliar to the average reader of the LondonTimes or the New York Times than any ofthe last few German chancellors. He traveledto over twenty cities, giving almost fifty talksto audiences of college students and profess-ors, bankers and business associations, atprivate clubs and in public meetings.

Mostly he spoke about reparations, seek-ing to make his audiences understand Ger-man bitterness over the issue: “You must notthink that if you treat people for ten years as

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the German people have been treated theywill continue to smile.” Germany, with itsGDP of $16 billion, exports of $3 billion, andan overhang of private foreign debt nowamounting to $6 billion, simply could not af-ford to pay $500 million a year to Franceand Britain. In Cincinnati, he declared, “Re-parations are the real cause of the world-wide economic depression.” Everywhere hewent he was asked about the recent electionsand Hitler. “If the German people are goingto starve, there are going to be many moreHitlers,” he would reply. Back in Europe,when a Swedish journalist asked him, “Whatwould you do if you were to become Chancel-lor tomorrow?” Schacht replied with no hes-itation, “I would stop making payments ofreparations that very day.”

In January 1931, he took his first tragicsteps down the Faustian path. In December1930, he had been introduced to HermannGöring. Until then, despite his dealings with

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the Nationalist leader Hugenberg, he hadhad very little contact with the Nazis, whomhe would later claim to have dismissed as afringe group of rabble mongers. Neverthe-less, Schacht’s wife was well known to hero-worship Hitler and was a devoted supporterof the party. In her diary, Bella Fromm, thediplomatic columnist of the Vossische Zei-tung, recounts how she encountered theSchachts in February 1930 at the silver wed-ding reception of a prominent Berlin banker.Frau Schacht wore an expensive swastika ofrubies and diamonds on her ample bosomand Fromm recorded the rumor that Schachthimself was “not above using the swastika ashis insignia whenever he thinks it will suithis purpose.” That night he even told her,“Why not give the National Socialists abreak? They seem pretty smart to me.”

The conversation during his evening withGöring focused on the “economic situation,the rise in unemployment figures, the

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timidity of German foreign policy,” andSchacht took to this “pleasant, urbane” man.On January 5, Göring invited Schacht, alongwith Fritz Thyssen, chairman of the giantUnited Steel Works, to meet Hitler at hismodest apartment in a middle-class neigh-borhood of Berlin—Göring did not yet haveaccess to the government money that wouldallow him to become the corrupt voluptuaryof later years. The Nazi leader arrived afterdinner dressed in the yellow and brown uni-form of his paramilitary forces; JosephGoebbels also showed up. Schacht admittedto being impressed. Hitler was surprisinglymodest and unpretentious, especially for theleader of the second largest party in thecountry. During the next two hours, Hitler,“in spite of a hoarse, somewhat broken andnot infrequently croaking voice,” dominatedthe discussion, doing 95 percent of the talk-ing—about the restoration of Germany’s pos-ition in the world, about the need to get the

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six and a half million unemployed back towork, and how this could only be done bystate intervention. Hitler was articulate,speaking without any “propagandist pathos,”but obviously “a born agitator.” It was a fate-ful encounter for the fascinated banker.

ARNOLD TOYNBEE, IN his magisterial re-view of the year’s events on behalf of theRoyal Institute of International Affairs,would later compare the events of the sum-mer of 1931 to the summer of 1914. Bothbegan with relatively minor events far fromthe hub of the world that nevertheless set intrain a cascade that plunged out of all controland brought down an entire world order. In1914, it was the assassination of the Austrianheir presumptive, the archduke FranzFerdinand, at Sarajevo. In 1931, it was the

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failure of the Credit Anstalt, the oldest andlargest bank in Austria.

On Friday, May 8, the Credit Anstalt,based in Vienna and founded in 1855 by theRothschilds, with total assets of $250 millionand 50 percent of the Austrian bank depos-its, informed the government that it hadbeen forced to book a loss of $20 million inits 1930 accounts, wiping out most of itsequity. Not only was it Austria’s biggestbank, it was the most reputable—its board,presided over by Baron Louis de Rothschildof the Vienna branch of the family, includedrepresentatives of the Bank of England, theGuaranty Trust Company of New York, andM. M. Warburg and Co. of Hamburg. After afrantic weekend of secret meetings, the gov-ernment made the problem public onMonday, May 11, at the same time announ-cing a rescue package of $15 million dollars,which it would borrow through the BIS.

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Austria was a small country, about a tenththe size of Germany, with a population offewer than seven million and a GDP of $1.5billion. Nevertheless, the news burst like abombshell upon the City of London and theBank of England. By an odd coincidence,Schacht was staying with Norman at ThorpeLodge when the story broke. Harry Siep-mann, one of the governor’s principal senioradvisers, knowing something of the scope ofthe tangled mess that lay behind the head-lines, announced, “This, I think, is it, and itmay well bring down the whole house ofcards in which we have been living.”

Like many German banks, the Credit An-stalt made direct investments in industry,similar to those of a modern private equityfirm. It was, however, especially vulnerablenot only because it borrowed short-termmoney to finance what were long-term,highly illiquid, investments but also becauseit had an unusually large amount of foreign

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borrowing on its books—some $75 millionout of a total deposit base of $250 million.

It had grown over the last decade by ab-sorbing a series of failing small banks and, in1929, had been further “persuaded” by theAustrian National Bank to take over theBodencreditanstalt, its next largest rival,whose losses turned out to be gigantic. In or-der to compensate Credit Anstalt for savingthe Austrian banking system by taking on theburden of a such a large bankrupt institu-tion, the Austrian central bank had been fun-neling money secretly to it through Londonbanks, a fact of which the Bank of Englandwas well aware.

The announcement of the rescue packagefailed to stabilize the situation, perhaps be-cause more people knew how deep the prob-lems went than the government real-ized—when Credit Anstalt was finally woundup two years later, the accumulated lossesamounted to $150 million. Over the next

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four days a run developed, not only on theCredit Anstalt but on all Austrian banks,which lost some $50 million in deposits,about 10 percent of the total. In an attemptto shore up its banking system, the AustrianNational Bank followed Bagehot’s principleand lent freely, injecting an extra $50 mil-lion, which caused an overnight jump of 20percent in the national money supply.

Norman had a soft spot for Austria. Afterthe war, he had provided it with the first loanto stabilize its currency—for his services tothe country he had been awarded the GrosseGoldene Ehrenzeichen (Grand Decoration ofHonor in Gold) from the Austrian ambassad-or to the Court of Saint James, Baron Georgvon und zu Franckenstein. For the next sev-eral days, having now discovered the re-markable advantages of international tele-phone calls, he was constantly on the line toHarrison in New York and Luther in Berlin.Fearing that a monetary breakdown in

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Austria would spread to neighboring coun-tries, he was determined to mount an inter-national rescue effort.

None of the central bankers had faced aninternational financial crisis before; theytherefore had to make things up as they wentalong. In so doing they made two mistakes.Given the scale of the problem, they came upwith far too little money; and believing thatit was necessary to put together as interna-tional a consortium as possible, they did notact quickly enough. For all the frantic tele-phone calls, it took them three weeks todrum up the money, and then only came upwith $15 million.

By the time the loans had been agreed to,the promised money had already been usedup and the run on Austrian banks had be-come a run on the Austrian currency. TheNational Bank lost $40 million of its $110million of gold reserves. Faced now withboth a banking system under threat and a

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currency under siege, it now pleaded for an-other $20 million.

The crisis was made immeasurably morecomplicated by the politics of the situation.In March 1930, Germany and Austria hadannounced that they would form a customsunion. Germany’s neighbors, in particularthe French and the Czechs, rememberingthat the nineteenth-century Zollverein, thehistoric customs union among the states ofthe German Confederation, had been a pre-lude to German unification, and fearing thatthis might be the first step to Anschluss, uni-on between Austria and Germany, had beenagitating to block the move.

The French government now saw its op-portunity. Indeed it helped to create it bysecretly encouraging French banks to pullmoney out of Austria. By June 16, the situ-ation was becoming more desperate by thehour. The cabinet, fearing the breakdown oflaw and order in Vienna, was on the verge of

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imposing a bank holiday. Austria was stillwaiting anxiously for the second loan when itreceived word that France had offered toprovide it—but only if Austria would aban-don the customs union. As if in an ultimat-um, the Austrian government was giventhree hours to respond.

With its back to the wall, Austria mighthave accepted. In London, however, Normanwas outraged at this blatant abuse of Frenchmonetary power in such a delicate financialsituation and cabled that the Bank of Eng-land would provide the loan on its own. Butif he thought he had succeeded in prickingthe panic in its bud, he was mistaken.

ON JUNE 5, at 2.30 in the afternoon, Tho-mas Lamont put a call through to PresidentHoover. As soon as the Austrian crisis hadbroken, Germany had also begun to lose gold

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reserves. The contagion was not so much be-cause Germany had a large amount of capitaltied up in Austria, rather it was largely amatter of psychology. The world, which hadnever drawn much of a distinction betweenthe banking situation in Berlin and that inVienna, jumped to the conclusion that if themain Austrian bank was in such serioustrouble, it was very possible that a Germanbank might soon follow. As money startedescaping Germany, rumors circulated thatBerlin might soon request a suspension ofreparations. Lamont feared that to cope withthe political turmoil and flight of capital thatwould ensue, Germany might impose ex-change controls. With American institutionsholding about a billion dollars in short-termcredits to Germany, such a move couldthreaten the solvency of more than one U.S.bank.

Saying that he was about to make a sug-gestion that the president would “more than

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likely throw out of the window,” Lamont pro-posed that Hoover unilaterally declare a holi-day on all payments on war debt and repara-tions. No European country could advancethe idea, for it would immediately call intoquestion its own credit, signaling to its cred-itors as he put it that “the jig is up.” Only theUnited States was in a position to take thelead. Hoover was initially unconvinced. “Iwill think about the matter” he told Lamont,“but politically it is quite impossible. Sittingin New York as you do, you have no ideawhat the sentiment of the country at large ison these intergovernmental debts. . . . Con-gress sees France piling up lots of gold, in-creasing armaments. . . .”

Lamont tried to convince Hoover that itwould actually help him politically. Therewere “a lot of people whispering about the1932 convention,” he warned, and such adramatic move would quiet doubts about thebeleaguered president’s leadership. He

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signed off with the casual authority that wentwith being a senior partner at J. P Morgan &Co: “One last thing, Mr. President, if any-thing by any chance ever comes out of thissuggestion, we should wish to be forgotten inthe matter. This is your plan and nobodyelse’s.”

In response to Lamont’s call, that same af-ternoon Hoover summoned his trio of senioradvisers—Secretary of State Henry Stimson;Secretary of the Treasury Andrew Mellon;and Mellon’s undersecretary, OgdenMills—to work out a moratorium along La-mont’s lines. Mellon declared his “unquali-fied disapproval” of such a move but left onvacation the very next day for Europe.

Stimson, however, was enthusiastic. A trueAmerican aristocrat, born into a wealthyNew York family, a graduate of PhillipsAcademy in Andover, Yale and Harvard LawSchool, a member of Skull and Bones, and apartner in the white-shoe Manhattan law

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firm of Root and Clark, Stimson was the firstof that breed of Wall Street wise men. Hebrought to the State Department a Victoriansense of propriety—he and his wife, for ex-ample, refused to receive divorced people intheir home—and a strongly anti-isolationistinternational perspective. So committed washe to promoting goodwill among nations thatwhen, in 1929, he discovered that the StateDepartment’s “Black Chamber” had beenroutinely breaking the coded communica-tions between foreign embassies and theirhome governments, he immediately closeddown the practice, arguing later that “gentle-men do not read each other’s mail.” Relyingon his fellow Bonesman and internationalist,George Harrison of the New York Fed, tofeed him advice on world finance, he hadever since taking office been an advocate offorgiving war debts.

On the very day that Hoover was propos-ing a moratorium to his cabinet colleagues,

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Chancellor Brüning had launched his owninitiative. On June 5, he unveiled a newpackage of austerity moves that included afurther lowering of civil servants’ salaries, acut in unemployment assistance, and newtaxes. In order to sweeten the pill, Brüningaccompanied the measures with a manifesto.Sensational and provocative in tone, the Ger-man proclamation announced that “the limitof privations that we can impose on the na-tion have been reached.” The economic as-sumptions on which the Young Plan hadbeen based had proved to be wrong, and thus“Germany had to be relieved of “the intoler-able reparation obligations” and “tributarypayments” to which it was subject.

That very weekend, Brüning was in Lon-don on a long-planned visit to the Britishprime minister, Ramsay MacDonald. TheGerman delegation was spending the week-end at the prime minister’s official countryhouse, Chequers, in the Kent countryside,

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where Norman joined the party on Sunday,June 7. After a leisurely lunch for nineteen,which included such guests as John Gals-worthy and George Bernard Shaw, both au-thors very popular in Germany, the officialswithdrew to discuss financial issues. Brüningdescribed the terrible situation in Germany.That year, when the Reichswehr needed sixthousand new recruits, eighty thousand menapplied, half of them undernourished.People were in despair. The social fabric wasunraveling. The menace of Nazi and Com-munist agitation was growing by the day.

While Brüning was holding forth, severalfrantic telegrams arrived from the Britishambassador in Washington, who had justheard from Stimson, who was infuriated bythe manifesto’s confrontational tone. On noaccount, warned the secretary of state,should the Germans take any unilateral ac-tion, which could only trigger a massiveflight of short-term funds out of Germany

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that would rob Hoover’s planned moratori-um, which was still a secret, of much of itsbenefit. The telegrams threw the British intoshock. It was the first they had even heard ofthe manifesto, which had not even been pub-lished in the British newspapers. Theirguests had omitted mentioning it, for it was adocument designed for internal consumptionand Brüning had no real plans to renegotiatereparations at least until the fall.

Any German move to suspend reparationsnow would be disastrous, Norman told theshaken table. Any more surprises like this toEuropean confidence and we will soon be“conducting a post-mortem” on the corpse ofEurope, he declared.

It was now a race. Could Hoover gatherenough support for his initiative before Ger-many ran out of gold? In Washington, thetemperature reached 102 as the teams atTreasury and State toiled eighteen-hour daysto work out the details in offices that had no

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air-conditioning. They were besieged by NewYork bankers who “came crying down . . .and said they were busted,” according toStimson’s economic adviser. Ogden Mills,acting as head of the Treasury in Mellon’sabsence, shuttled back and forth through theunderground passage that linked the Treas-ury Building to the White House to brief thepresident. Hoover himself was racked bydoubts. The constant press criticism and thecynical jokes about his unpopularity hadtaken their toll. When H. G. Wells visited theWhite House later that fall, he found “asickly, overworked and overwhelmed man.”A siege mentality had taken over at the Exec-utive Mansion. The president’s gloom was sooppressive that Stimson complained thatmeeting with him in his room was “like sit-ting in a bath of ink.”

Meanwhile during the first three weeks ofJune, Germany lost some $350 million, overhalf its gold reserves. In London, Norman

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spent the time cajoling British bankers not topull their money out of Germany as currencyand banking crises spilled across Europe intoHungary, Romania, Poland, and Spain.

On Saturday, June 20, Hoover’s plan waspublicly announced. The United Stateswould forgo one year’s principal and interestof $245 million on the war debts due fromBritain, France, Italy, and some of the smal-ler European powers, provided, and onlyprovided, that the Allies themselves suspend$385 million in reparations due from Ger-many. The effect was electric. The followingMonday, the German stock market jumped25 percent in a single day.

Hoover had tried to consult everyone pos-sible in the lead-up to his announcement—hewas said to have already enlisted the supportof twenty-one senators before publicly re-vealing the plan. Senator Arthur Vandenbergof Michigan, off junketing in Canada, wasconnected by phone to the president from a

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Toronto drugstore. Several senators and rep-resentatives had even been invited to spendthe night at the White House. The secretaryof state got up one morning at 5:30 a.m. toput a call through to Prime MinisterMacDonald.

The administration had consulted every-one—everyone, that is, except the French. Inthe most astoundingly inept piece of dip-lomacy of his whole presidency, the oneparty Hoover neglected to prepare not onlyhappened to be Germany’s largest creditorbut was at the moment the dominant finan-cial power in Europe. The French govern-ment reacted with astonishment and thenfury.

The U.S. ambassador, Walter Edge, wasdue to spend the afternoon with the rest ofthe diplomatic corps at the Longchampsraces as a guest of the president of the repub-lic. He had spent his two years trying to dis-pel the suspicion within French government

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circles that “we [the Americans] and the Brit-ish had been plotting against France.” Francehad the world’s largest standing army; withthe second highest gold reserves in the worldafter the United States, it was financially thestrongest country in Europe; its economyhad weathered the global Depression betterthan almost any other. And yet, complainedthe men who ran France, the Anglo-Saxonsstill treated it as a mere second-rate power.

In the president’s box at the races, Edgewas peppered with questions by a phalanx ofsteaming French politicians. It was fine forthe United States to forgive its debtors; buthow could the United States unilaterally sus-pend Germany’s debts to France withouteven bothering to consult France herself?She was being treated as a “stepchild.” PierreLaval, the prime minister, former Socialistnow turned nationalist, demanded to knowwhat guarantee the United States couldprovide that payments would resume after a

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year. Another minister launched into ahighly colorful and sarcasticdiatribe—France was being asked to pay thebill for the “reconciliation feast” in honor ofthe “prodigal Reich,” while Wall Street andthe City of London rejoiced over “the killingof the fatted calf.” The foreign minister,Aristide Briand, called in Edge the next dayto subject him to a tirade, singling out theBank of England as the mainspring of thewhole plot—he cited Norman’s visit to theUnited States a few weeks earlier as inescap-able confirmation of an Anglo-Saxonbankers’ conspiracy.

The following Monday, the French pressuniversally condemned any notion of amoratorium. The Journal des Débats, the or-gan of French industry, said in a fume that“the more one reflects, the more one is stu-pefied by the initiative of Mr. Hoover.”

In Washington, the president decided thatMellon, then in Britain to attend his son

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Paul’s graduation ceremony from King’s Col-lege, Cambridge, and to receive an honorarydegree himself, his fifteenth, should be dis-patched to Paris to bring the French around.For all that a world financial crisis was ra-ging, Mellon had arrived in London and verydeliberately avoided contacting any UKTreasury or Bank of England officials, believ-ing that his vacation time was sacrosanct.When Norman tried to get in touch with himthrough his secretary in Washington, he wasfobbed off with the excuse that Mellon wason a private visit and incommunicado. Fin-ally, Norman got hold of young Mellon atCambridge and tracked his father down atClaridges. After some persuading, Mellon re-luctantly agreed to suspend his impendingholiday at Cap Ferrat and go to Paris.

He arrived on June 25, to be greeted at theGare du Nord by Robert Lacour-Gayet of theBanque de France. When asked, “Are youglad to be in Paris, Mr. Mellon?” the

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secretary of the treasury replied noncommit-tally with a barely perceptible smile, “M.Lacour-Gayet, we are here.” Obviously un-happy, he kept reminding reporters that hehad come to Europe planning on a pleasuretrip in the Riviera with his daughter, Ailsa,and her husband, the young diplomat DavidBruce.

For the next couple of weeks, Mellon en-gaged in a protracted bout of negotiation.Every day he would dutifully troop off withAmbassador Edge to the ancient and mustybuilding that housed the Ministry of the In-terior and was also home to the Frenchsecret police. Mellon, who generally pre-ferred a club sandwich at his desk, had to sitthrough the eight-course meals, each with itsown wine, that were a customary part ofFrench diplomacy.

The French team, who negotiated by dayand had to sit though all-night sessions inthe National Assembly, was led by Prime

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Minister Laval. He was a protégé of Tardieu,who had been compelled to resign in Decem-ber, after becoming caught up in yet anotherbanking scandal. At forty-six, Laval was theyoungest premier in the history of the ThirdRepublic. Born of peasant stock in the southof France, with his dark skin, straight blackhair, and scraggly mustache, he looked“dopey in appearance, like an overworkedheadwaiter on his day off.” He liked to weardingy white bow ties and a straw boater.

Mellon tried to convince the French that inreturn for giving up about $200 million dol-lars a year in reparations, they would avoidhaving to pay $115 million in war debts—at anet cost to them of “only” $85 million a year.The Americans, on the other hand, would beconceding a total of $260 million a year.Laval was implacable. For two weeks the ne-gotiations dragged on.

The seventy-six-year-old Mellon had towork both Washington and Paris hours.

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Statesmen had just discovered the advant-ages of the telephone. Every evening andsometimes two or three times a day Mellonwould place a call to the White House fromthe U.S. ambassador’s residence. The Frenchphone system was being revamped and therewere only two phones working: one in theconcierge’s room in the basement and theother in the bedroom of the ambassador’swife. The soft-spoken Mellon could oftenbarely be heard.

Tempers began to fray. Growing more ir-ritated by the day, Hoover vented against theFrench and accused Mellon of being soft onFrance. Meanwhile, Germany’s gold reservescontinued to hemorrhage. Central bankersprovided a loan of $100 million on June 24.Within ten days, it was gone. Berlin was be-ing “bled to death” while the French and theAmericans were busy arguing, complainedNorman on what had become one of his reg-ular calls to Harrison in New York. The

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British prime minister put it more pungentlyin his diary: “France has been playing itsusual small minded and selfish game overthe Hoover proposal. . . . To do a good thingfor its own sake is not in line with France’sofficial nature. So Germany cracks whileFrance bargains.”

The negotiations were finally concluded onJuly 7, the Americans conceding that Ger-many would only suspend payments on aportion of its reparations, the French,however, agreeing to lend the remaining re-parations they did receive straight back toGermany. Both sides could claim victory.“Now, Monsieur Mellon, you can take upyour interrupted vacation,” said the Frenchprime minister sarcastically. The secretary ofthe treasury promptly set off for the Riviera.

It was too late. On June 17, the Nord-deutsche Wolkkammerei—“Der Nordwolle,”a large German wool combine—declaredbankruptcy, revealing losses amounting to

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$50 million, which it had managed to con-ceal by transferring its inventory at bloatedprices to its Dutch subsidiary. The Nordwollehad not lost all this money in the productionof blankets and comforters—it seems that itsmanagement had speculated on a rise inwool prices by building up its inventoriesand buying in the forward market, a bet thathad gone badly wrong.

On July 5, a Basel newspaper stated thatan unnamed German bank was in trouble. AsBerlin swirled with rumors, on July 6, theday before the negotiations on the moratori-um were concluded, the Danatbank,Schacht’s old employer, the third largest inGermany, issued a denial that it was havingdifficulties. A bank cannot survive withoutconfidence; when it is forced to deny rumorsthat it is in trouble, it is by definition in seri-ous trouble. Two days later, the head of theDanatbank, Jacob Goldschmidt, Schacht’sold colleague and nemesis, informed the

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Reichsbank that his bank could not meet itsliabilities.

Schacht’s successor at the Reichsbank wasHans Luther, who as minister of finance in1923 at the height of the hyperinflation hadoriginally and reluctantly appointed Schachtcurrency commissioner. Luther, though not amember of the Reichstag and “a politicianwithout party,” had been chancellor foreighteen months in 1925 but had been humi-liatingly forced out when his governmenthad instructed German consulates and diplo-matic offices to fly, in addition to the repub-lican flag (black, red, and gold), the flag ofthe merchant marine, which looked suspi-ciously like the banned imperial flag (black,white, and red). He was not a good choice forthe Reichsbank. Though a competent admin-istrator, he had made his reputation as astolid municipal official and simply lackedwhat it took to run a central bank, especiallythe understanding of the psychological

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dimension to the crisis and the importanceof restoring confidence.

On July 8, Luther called Norman. TheReichsbank was in a desperate situation. Ithad lost a huge slice of its gold reserves. If ittried to bail out the Danatbank, it would fallbelow the minimum reserve threshold it wasrequired to maintain by law which, in thecurrent environment, was bound to provokea run on its currency. It therefore faced a ter-rible dilemma: support its currency and letthe Danatbank fail or try to support its do-mestic banking system and watch what re-serves it had left fly out of the country. It wasone of those situations in which there are nogood options—only the choice between a badoutcome and a disastrous one.

Luther’s only solution was to borrowabroad. He needed $1 billion, he told Nor-man. On July 9, Luther, his “round face deeplined with anxiety,” boarded a private planein Berlin—the first such resort by a desperate

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central banker. In Amsterdam he met withthe governor of the Dutch central bank fortwo hours, then took off for Britain. He wasreceived at Croydon Aerodrome by Normanand the British foreign secretary, ArthurHenderson. The party drove up to London,where Luther briefly met with the chancellorof the exchequer Philip Snowden. Normanwas due in Basel for the monthly boardmeeting of the BIS and Luther decided to ac-company him on the boat train as far asCalais.

It was on that journey, as Luther describedthe deteriorating situation in Germany, thatit finally dawned on Norman that the gamewas up. The German economic position wasnow irretrievable. As a central banker, all hecould do was provide a temporary loan tobuy a little more time. Germany was now indeep water and sinking. The numbers wouldnot add up. It had a GDP now of $13 billionthat was shrinking by the month, reparation

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debts of $9 billion, and foreign private oblig-ations of $6 billion, $3.5 billion of it short-term that could be pulled at any moment.Over the last year, $500 million in capitalhad fled the country. Barely $250 million ingold reserves remained. Harrison and Nor-man had been pushing Luther to restrictcredit yet more rigorously in order to curbthe outflow of capital. But with the bankingsystem on the verge of collapse, he had runout of room. His only hope, Norman toldhim, lay in a long-term loan from France, theone European nation with sufficient gold re-serves to bail out Germany. But he warnedthat French money would only come withdraconian political conditions. Luther andNorman separated at Calais, Norman to goon to Basel, Luther to Paris.

Luther was received at the Gare du Nordby Governor Moret of the Banque de France.On Friday, July 10, he lunched at the Banquewith the regents, the two most powerful of

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whom, François de Wendel and Baron Ed-mond de Rothschild, both resolutely anti-German, turned down the idea of a creditfrom the Banque and told Luther that hisonly hope was a loan from the government.That afternoon and into the evening, theReichsbank president shuttled back andforth from ministry to ministry, missing onetrain after another for Berlin. The Frenchgovernment informed him that it might beprepared to lend as much as $300 million,provided that Germany abandon the customsunion with Austria, suspend the constructionof two new pocket battleships, raise interestrates sharply to halt the flight of capitalabroad, and “orient itself definitely towards apolicy of democracy and pacifism” by ban-ning public demonstrations by Nationalistorganizations.

Merely president of the Reichsbank, Luth-er did not have the authority to agree tothese terms. On Saturday, July 11, he

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boarded an airplane at Le Bourget for Berlin.“Not since those days of July 1914 when theWorld War was brewing have potent rumorsbeen so thick,” wrote Time magazine of thatweekend. The German cabinet convened at8:00 p.m. and debated into the early hoursof the morning. Every major German news-paper fulminated against French “politicalblackmail” and warned that this would onlyincrease the “bitterness of the Germanpeople” toward France. Rumors circulatedthat President Hindenburg would resign ifthe government knuckled under. An evenmore startling rumor came over the wires.The cabinet was considering nationalizing allprivate industry, banks, shipping, and trade.

That Sunday, the German cabinet an-nounced that it was rejecting the French of-fer. The French cabinet, which had dispersedfor the long Bastille Day weekend—Laval tohis country cottage, Foreign Minister Briandfishing on his farm at Cocherel, Finance

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Minister Flandin at the beach in Brit-tany—was summoned back to Paris. Theyheard an impassioned plea for reconsidera-tion from the German ambassador, Dr. Leo-pold von Hoesch. Did they really want toprovoke a revolution in Germany? ThoughLaval agreed that “they had come to a decis-ive point in world history,” he was unwilling

to offer anything new.49 Paul Einzig capturedthe view of many in Europe at that pointwhen he later wrote, “On the ruins of thewealth, prosperity, and stability of other na-tions, France has succeeded in establishingher much desired politico-financial hege-mony over Europe.”

The American ambassador in Berlin, Fred-erick Sackett, cabled to Washington that un-less Germany received $300 million immedi-ately, it would declare national bankruptcyand default on the $3 billion it owed Americ-an banks and investors. George Harrisonconvened an emergency meeting at the New

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York Fed with Under Secretary Mills and thetwo most knowledgeable men on Germany,Owen Young and Parker Gilbert. They con-cluded it would be throwing good moneyafter bad, when the United States hadalready contributed $300 million by itsmoratorium on war debts.

Another long Cabinet meeting in Berlinensued that evening. To the surprise of mostattending, Schacht was invited and seatednext to the chancellor. By a strange quirk offate, the English and American editions ofhis book The End of Reparations were to bepublished in London and New York the verynext day. The book was a long assault on re-parations, the policy as Schacht described itof “bleeding Germany white” and “destroyingGermany’s credit.” One excerpt in particularwas heavily quoted in British and Americannewspapers: “Never has the incapacity of theeconomic leaders of the capitalist world soglaringly demonstrated as today. . . . A

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capitalism which cannot feed the workers ofthe world has no right to exist. The guilt ofthe capitalist system lies in its alliance withthe violent policies of imperialism and milit-arism. . . . The ruling classes of the worldtoday have as completely failed in politicalleadership as in economic.” Such criticismfrom “the head of one of the world’s mostpowerful capitalist organizations” was some-what unusual, commented the New YorkTimes.

Speaking with his usual self-assurance,Schacht urged the cabinet to suspend pay-ments to the foreign creditors of Danatbank,forcing them to bear the consequences oftheir foolhardy and unsound lending prac-tices. The government, believing that thiswould completely destroy any hope of a res-cue from abroad, decided not to take hisadvice.

The cabinet meeting finished at 2:00 a.m.Later that morning Luther boarded yet

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another plane, this time for Basel, to makeone last desperate plea to the central bankersgathered at the BIS. After being closeted inconference for twelve hours, they emerged toannounce that no new credits would beforthcoming. At 11:20 p.m. Basel time, Har-rison got through to Norman. The English-man sounded “tired, disgruntled and dis-couraged.” The problem was just “too big forthe central banks,” he reported. The onlysolution was for the whole structure of wardebts and reparations that had weigheddown the world for the last dozen years to beswept away.

On the morning of Monday, July 13, asLuther was setting off for Basel, the Danat-bank had failed to open. On the locked doorsof all its branches was posted a governmentdecree guaranteeing its deposits. At a pressconference, Jacob Goldschmidt revealed thatthe bank had lost 40 percent, some $240million, in deposits over the last three

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months, about half of which were to foreign-ers. He blamed the run on wild rumorsfueled by anti-Semitic agitation in the Na-tionalist press.

The Reichsbank, hoping that the impactmight be contained, kept the rest of thebanking system open that day. By lunchtime,branches of every bank in the country werebesieged. The leading banks restricted with-drawals to no more than 10 percent of a de-positor’s balance. In the Berlin suburbs, sav-ings banks were so overwhelmed that thatthey closed under heavy police guard. InHamburg, sporadic riots were blamed onCommunist agitators. That evening Presid-ent Hindenburg proclaimed a two-day bankholiday. The authorities hoped that a shortbreathing space would allow people to cometo their senses. In the event, banksthroughout Germany remained closed—ex-cept for the most essential business of payingwages and taxes—for another two weeks,

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during which commercial life in the countrywas brought to a virtual standstill.

All the banks in Hungary were closed forthree days. In Vienna, another of the largebanks shut its doors. In Danzig and Riga, inPoland, Yugoslavia, and Czechoslovakia,banks were suspended. German touristsacross Europe, even in fashionable sophistic-ated cure resorts like Marienbad and Carls-bad, were stranded when no hotels or shopswould accept their marks. The German gov-ernment issued one decree after another.Despite the massive unemployment, interestrates were hiked to 15 percent just to keepmoney in the country. All payments on Ger-many’s short-term foreign debt were suspen-ded. All foreign exchange had to be turnedover to the Reichsbank and all movements ofmoney out of Germany were tightly regu-lated, the practical equivalent to going offgold.

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For the second time in less than eightyears, Germany faced economic disaster.Despite the chaos, the country remained sur-prisingly peaceful, save for a few small riotsin Leipzig and Dresden, Düsseldorf andKoblenz. There was an atmosphere of“resigned passivity born of a weary submis-sion to the inevitable,” wrote the New YorkTimes, the consequence of a decade of eco-nomic turmoil. The British ambassador, re-turning after a few weeks’ absence, notedthat he was “much struck by the emptiness ofthe streets and the unnatural silence hangingover the city, and particularly by an atmo-sphere of extreme tension similar in manyrespects to that which I observed in Berlin inthe critical days immediately preceding thewar . . . an almost oriental lethargy andfatalism.”

“In such circumstances,” he continued,“Dr Schacht’s financial reputation has re-vived and he has reappeared on the stage . . .

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there are small but widening circles whichfeel that Dr. Schacht, if only he could over-come his unpopularity abroad, and especiallyin the U.S.A. and with Social Democrats athome, might yet be the man to save Ger-many.” The government did try to induceSchacht to return to power, offering him theposition of the banking czar with responsibil-ity for sorting out the whole mess caused bythe meltdown. Fearing he was being offereda poisoned chalice, he refused and returnedto his country estate to wait upon events.

The collapse of the German banking sys-tem in the summer of 1931 sent the economylurching downward once again. Over thenext six months production fell by another20 percent. By early 1932, the industrial pro-duction index reached 60 percent of its 1928level. Nearly six million men—a third of thelabor force—were without work.

In October 1931, the parties of the rightcollectively staged a rally in the little

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mountain spa of Bad Harzburg, one of thefew places where the wearing of brownshirtNazi uniforms had not been banned. It was areunion of everyone who was or had everbeen against democracy in Germany. Thetown was festooned with banners in the oldimperial colors. Aged generals and admiralsfrom the previous war turned out, as did twoof the sons of the ex-kaiser, the princes EitelFriedrich and August Wilhelm, rubbingshoulders with an assorted collection of in-dustrialists, politicians, and five thousandgoose-stepping paramilitary militia andstorm troopers from various factions. Theevent was kicked off by an invocation for di-vine guidance by a Lutheran pastor and aCatholic priest. The star of the occasion wasHitler, who hogged the spotlight with his im-promptu speeches.

An equally big stir occurred, however,when Schacht, in his first public appearanceas an associate of the Nazis, ascended the

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stage to speak. He accused the governmentof misleading the country on the amount offoreign debts and gold reserves. As to theeconomic policies of the opposition, he wasobscurely vague, saying only that “the pro-gram to be executed by a national govern-ment rests on a very few fundamental ideasidentical to those of Frederick the Great afterthe Seven Years War.”

The speech provoked outrage in the Reich-stag and within the government. For the ex-president of the Reichsbank to declare pub-licly that the country was bankrupt—thoughthis was essentially true—was viewed as anact of vindictive irresponsibility and betrayalthat could only add to the economic turmoil.That most of the foreign debt had beenamassed on Schacht’s watch only added tothe anger. There were even calls in parlia-ment and in the press for his prosecution ona charge of high treason. Schacht had longsince broken with the left. He had now

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estranged himself from the democratic cen-ter. His only home was with the Nazis. Andthough the struggle against reparations wasnow essentially over, the fight for the futureof Germany was still to enter its last act.

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20. GOLD FETTERS

1931-33

Lo! thy dread empire Chaos! isrestored:Light dies before thy uncreatingword;Thy hand, great Anarch! lets thecurtain fall,And universal darkness buries all.

—ALEXANDER Pope, The Dunciad

ON July 14, Norman returned from Basel tofind the crisis now spreading to Britain. Thatevening Robert Kindersley, a director of the

Bank of England and head of the Londonarm of the great investment house of Laz-ards, asked to see him in private and toldhim that Lazards itself was in serioustrouble. Ironically enough it had little to dowith the crisis ravaging Central and EasternEurope. In the midtwenties, a rogue trader inthe Brussels branch of the bank had made awild bet on the collapse of the French francand lost $30 million, almost double thebank’s capital. He had managed to cover upthe loss for years with the connivance of sev-eral members of the Brussels office, by issu-ing IOUs on behalf of Lazards to its counter-parts. The extent of the problem had only re-cently come to light when these obligationswere finally presented. When confrontedwith the evidence, the trader in question, aCzech, confessed, then suddenly pulled out agun in the office and shot himself. Fearingthat the failure of a merchant bank of Laz-ards’ standing would set off a panic in the

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City, the Bank of England agreed to bail itout. The following week two other Britishmerchant banks, Kleinworts and Schroders,informed Norman that they, too, were introuble. Unable to prop up everyone, theBank arranged for them to be rescued byloans from the commercial banks.

Meanwhile, on the heels of the closure ofbanks in Germany, a “blizzard” sweptthrough the world’s financial system. A bankholiday was imposed in Hungary, major fin-ancial institutions failed in Romania, Latvia,and Poland. In Cairo and Alexandria, a runbegan on the German-owned Deustche Ori-entbank and police had to be called in to pro-tect the management. Istanbul saw runs onthe local branches of the Deutsche Bank, andthe Banque Turque pour le Commerce etl’Industrie was closed.

The world economic crisis had already en-gulfed large tracts of South America—Boliviahad defaulted in January and Peru in March.

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In the last two weeks of July, the contagionextended to other Latin countries. On July16, the government of Chile suspended pay-ments on its foreign debt. Five days later, itfell and the head of the central bank tookover as premier. He lasted barely three days.Over the next twenty-four hours, three dif-ferent premiers were sworn in, until, fed upwith the turmoil, the military took over. OnJuly 25, the Mexican government announcedthat gold was no longer legal tender and thatinstead it was shifting to silver. The currencydropped 36 percent and after days of confu-sion a leading bank, the Credito Español deMexico, was forced to close its doors.

As the world financial system ground tohalt, the City of London, with tentacles thatstretched into every corner of the globe,found itself especially vulnerable. On July 13,as the German crisis reached its denoue-ment, the Macmillan Committee on theworkings of the British banking system

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issued its report. Considering all that was go-ing on in Europe, the press paid little atten-tion to it. Nevertheless, hidden in the reportwas a set of figures that shook the City.

During London’s heyday as a financialcenter, British industry and British bankinghad complemented each other. The large ex-port surpluses generated by what was then“the workshop of the world” had providedthe funds to finance Britain’s long-term glob-al investments and underpinned London’sstatus as banker to the world. After the warand the return to the gold standard, Britain’smanufacturing capacity had stagnated.Throughout the 1920s, however, London, de-termined to maintain its primacy in globalfinance, continued to lend $500 million ayear to foreign governments and companies.But because Britain was unable to generatethe same export surpluses as before the war,the City had to finance its long-term loans byrelying more and more on short-term

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deposits. While everyone was dimly aware ofthis growing mismatch between liabilitiesand assets, no one had any idea of itsmagnitude.

The Macmillan Report now revealed thatthe City’s short-term liabilities to foreignerscame close to $2 billion. This was viewed asa shocking number even though it eventuallyturned out to be a gross underestimate—thetrue figure was closer to $3 billion.

Furthermore, after the imposition of Ger-man exchange controls, a good percentage ofthe loans made with these deposits were nowfrozen—British banks had an estimated $500million tied up in Germany and several hun-dred million more in Central Europe andLatin America. Suddenly, confronted withthe previously unthinkable prospect thatLondon houses, weighed down by bad loans,might fail to meet their obligations, investorsaround the world started withdrawing fundsfrom the City.

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In the last two weeks of July, the Bank ofEngland lost $250 million—almost half itsgold reserves. It reacted by raising interestrates modestly from 2.5 percent to 4.25 per-cent in the hopes of inducing capital not todesert sterling. Norman resisted furtherhikes, fearing that they would only createmore unemployment and by intensifying thedomestic depression, might even reinforcethe speculative attack on the pound. Since hedid not know what else to do, he acted as ifthe crisis were a temporary bout of nervesand arranged to borrow $250 million fromthe New York Fed and from the Banque deFrance to tide the Bank of England through.

Norman had now been dealing with oneemergency after another for ten weeks andthe “steady drip of the unseen pressure” wasbeginning to tell on his fragile constitution.He was easily distraught, changed his mindfrequently, and at times seemed paralyzed byindecision—bouts of “nervous dyspepsia,” as

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one of his fellow directors described it. Asthe prospect of a break from gold loomed, hewould portray the consequences in apoca-lyptic terms—an evaporation of confidencein money such as had occurred during theGerman hyperinflation, a collapse in cur-rency values, spiraling prices, food short-ages, strikes, rationing, and riots. So exag-gerated and gloomy was the portrait hepainted that Russell Leffingwell, a partner inthe House of Morgan, where he was usuallytreated with enormous deference, finallycomplained, “Can’t he be persuaded to quithis panicky talk?”

Finally, on Wednesday, July 29, Normanleft work early, noting meticulously in his di-ary, “Feeling queer.” That evening he col-lapsed and was confined to his house underdoctors’ orders to take a complete rest. Hiscolleagues at the Bank, fearing that his errat-ic moods and impaired judgment would onlycomplicate their efforts to deal with the

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impending crisis, urged him to go abroad torecuperate. Jack Morgan, possibly promptedby one of the Bank directors, even gener-ously offered his yacht, the Corsair IV, withits crew of fifty. Instead, on August 15, Nor-man set sail for Canada aboard the Duchessof York.

On July 31, as Parliament rose for its sum-mer recess and politicians and bankers leftLondon for the country, yet another officialcommittee—the May Committee—submittedits report. As the Depression in Britain haddeepened, the budget had slipped into deficitand was running around $600 million, 2.5percent of GDP—a modest gap in the circum-stances. The May Committee formed to con-sider economy measures, exaggerated thesize and significance of the deficit out of acombination, in the words of historian A. J.P. Taylor, of “prejudice, ignorance, and pan-ic,” which, in the middle of a run on sterling,created only even more alarm. The May

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Committee proposed that the governmentseek to reverse the budgetary slide by cuttingits expenditures by $500 million—includinga 20 percent reduction in unemployment be-nefits—and raise an extra $100 million fromhigher taxes. In the light of what we nowknow about the way the economy works, itwas completely absurd for the committee topropose that the solution to Britain’s eco-nomic problems, with 2.5 million men out ofwork, production down by 20 percent, andprices falling at a rate of 7 percent a year,was to cut unemployment benefits and raisetaxes. But at the time, the prevailing ortho-doxy held that budget deficits were alwaysbad, even in a depression. Maynard Keynescalled the May report “the most foolish docu-ment I have ever had the misfortune toread.”

The committee’s recommendations splitthe cabinet. The majority, led by the primeminister, Ramsay MacDonald, and the

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chancellor, Philip Snowden, though all fer-vent and committed Socialists, were weddedto the belief that the budget must be bal-anced, no matter that Britain was indepression.

Meanwhile, the $250 million loan fromthe New York Fed and the Banque de Francehad already been used up—the Bank of Eng-land had now paid out a total of $500 mil-lion in gold and still the drain continued.Bank officials, taken aback by the immensityof the outflow but convinced that raising in-terest rates was not the answer, could onlypropose more borrowing—this time not bythe Bank itself, whose credit lines were run-ning out, but by the government. At the be-ginning of August, the government requestedthat the Bank put out informal feelers to as-certain the conditions that American bankersmight attach to such a loan. The New YorkFed, itself precluded by statute from lending

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directly to foreign governments, passed theinquiry on to J. P. Morgan & Co.

Bankers confronted with a country in needof money almost instinctively reach forbudget cuts, preferably achieved by slashingpublic expenditure, as the right solution foralmost any problem. During the followingcouple of weeks, as the conditions were beinghammered out, the government, the Bank ofEngland, and the House of Morgan threw upan intricate smoke screen around their dis-cussions. Morgans certainly did not want itsfingerprints on any evidence that it had im-posed “political conditions” on a sovereignBritish government. Nor did the Labor primeminister want it known, not even within hisown cabinet, that he had sought the permis-sion of foreign bankers before acting. Thechancellor put together a package of meas-ures cutting $350 million in expenditures,including a 10 percent reduction in the dole,and raising taxes by $300 million and

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submitted it, through back channels at theBank of England, for Morgan’sconsideration.

By the weekend of August 22, as goldlosses mounted, a sense of crisis pervadedLondon. The king suddenly and mysteriouslycut short his three-week holiday at Balmoralto return to Buckingham Palace. The cabinetremained in session over the weekend, thefirst time since the war. For all the primeminister’s efforts at keeping the negotiationsunder wrap, the whole country, it seemed,awaited the telegram from New York signal-ing Morgan’s approval. “It certainly is a tra-gically comical situation,” wrote BeatriceWebb, wife of Sidney Webb, one of the recal-citrant minority in the cabinet against thebudget cuts, “that the financiers who havelanded the British people in this giganticmuddle should decide who should bear theburden, The dictatorship of the capitalistwith a vengeance!”

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On Saturday, August 22, the Morgan part-ners assembled at the house of F. D. Bartowin Glen Cove, Long Island, and after a longweekend of debate, gave the budget theirblessing on Sunday afternoon. A telegramsignaling their approval, its language suit-ably camouflaged to hide any hint that thebudget had been submitted to the Americanbankers for vetting, was dispatched to SirErnest Harvey, deputy governor of the Bankof England, anxiously waiting at his City of-fice. It arrived at 8:45 p.m. London time. Herushed it over personally to 10 DowningStreet, outside which a large crowd hadgathered as it always did at a time of nationalemergency—the street was littered with ci-garette boxes, burned matches, paper bags,and newspapers. It was a balmy summerevening and the cabinet members were inthe garden, nervously pacing around. WhenHarvey arrived, the prime minister snatchedthe telegram from his hands and rushed

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toward the Cabinet Room. Minutes later, thesound of angry voices emerged. To Harvey itseemed that “pandemonium had brokenloose.”

Despite the promise of Morgan money, thecabinet remained split over the cuts in un-employment benefits, and that evening theprime minister went to Buckingham Palaceto tender his government’s resignation. Twodays later, the Daily Herald, official organ ofthe Labor Party, believing erroneously thatthe telegram had come from the Fed and notfrom Morgan, carried a photograph of Ge-orge Harrison on its front page under theheadline “Banker’s Ramp,” a ramp being afraudulent move by financiers to manipulatethe market. Within Britain, it remained anarticle of faith among left-wingers that theLabor government had been deliberately un-dermined by American fat-cat bankers op-posed to socialism.

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Within three days, a new National govern-ment, a coalition of fragments of Labor andthe Liberals with a united ConservativeParty, assumed office led by MacDonald andintroduced much the same budget packagethat had split the previous ministry. In addi-tion to cutting the dole by 10 percent, at theking’s insistence his Civil List, the provisionby the state for his expenses, a total of $2.25million a year, was also reduced by 10 per-cent. Other members of the royal familycopied his example, the Prince of Wales evenreturning $50,000 of his income of$300,000 from the Duchy of Cornwall. Noone knows whether the next time George Vand his friend Jack Morgan went out shoot-ing, the topic of the loan and the king’s eco-nomies ever came up in conversation.

On August 28, the British government re-ceived a $200 million loan from a consorti-um of American banks led by Morgans and afurther $200 million from a group of French

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banks. It was gone within three weeks. Thebudget cuts did no good, largely because theywere beside the point. A reporter for theBritish left-wing magazine New Statesmanand Nation tried to describe the issue in thesimplest of terms, as follows:

What the City did in fact was to bor-row from the French at 3% in order tolend to the Germans at 6% or 8%.Then came the crash in Vienna; theBank [of England] lent money. Nextthe crash in Berlin, and again theBank [of England] lent money. TheFrench thereupon had a vision: theysaw the various banks. Austrian, Ger-man, and English tied together likeAlpine climbers above the abyss. Twoof them had tumbled over; might theynot drag the third with them? Actingon this vision they started a run onthe Bank of England; in plain words

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they called in their deposits. . . . The“dole” has nothing to do with it.

In other words, Britain’s problem was notits budget deficit, but rather that it had clungto the role of banker to the world withoutany longer having the money or the re-sources to do so and at a time when most ofthe world was a damn poor risk.

It was by now increasingly obvious to mostobservers that Britain would have to cutloose from gold. Back from America on July18, Maynard Keynes, in a private letter,warned the prime minister, “It is now clearlycertain that we shall go off the existing parityat no distant date . . . when doubts as to theprosperity of a currency, such as now existabout sterling, have come into existence, thegame’s up.” In a series of magazine articleshe argued that the deflationary budget cutswould only make the situation worse, de-scribing them in a meeting with parliament-arians as “the most wrong and foolish things

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which Parliament has deliberately perpet-rated in my lifetime.” Even though he madean effort to be restrained in his public criti-cism of the Bank of England, recognizingthat it would only add to the currency’s prob-lems, on August 10, Harry Siepmann invitedhim to the Bank to persuade him to tonedown his writings. In fact, by now even suchBank men as Siepmann were losing faith. Ac-cording to one visiting New York Fed official,Bank officers “admit quite frankly that theway out is for England and most of the otherEuropean countries to go off the gold stand-ard temporarily, leave France and the UnitedStates high and dry, and then return to goldat a lower level.”

The UK Treasury became the last bastionof the diehards. When a journalist evenraised the question at a press conferencethere of whether Britain could or should re-main on a gold standard that had becomeunworkable, required Britain to borrow

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gigantic amounts of money to sustain it, andwas imposing intolerable sacrifices on thegreat mass of people, Sir Warren Fisher,head of the civil service and permanent sec-retary to the treasury, “rose to his feet, hiseyes flashing, his face flushed with passion,”and berated the journalists as if he hadcaught them “exchanging obscenities.” “Gen-tlemen, I hope no one will repeat such senti-ments outside this room,” he scolded. “I amsure all those of you who know the Britishpeople will agree with me that to make sucha suggestion is an affront to the nationalhonor and would be felt as a attack on theirpersonal honor by every man and woman inthe country. It is quite unthinkable.” Mean-while, the flight from sterling continuedunabated.

Among the new government’s economymeasures were pay cuts for all public em-ployees, including the military. Within thenavy, a flat shilling a day was taken from the

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pay of all ranks from admirals to ordinaryseamen. Not surprisingly, this provokedenormous resentment among the lowerdecks at the unfairness of the differentialburden so imposed. On September 14, agroup of sailors of the Atlantic Fleet at Inver-gordon refused to muster and put to sea. Itwas a minor incident of no great significancebut was reported in the foreign press as amutiny, conjuring up the image that Britainwas on the verge of revolution and that thatlast bastion of empire, the Royal Navy, wasfalling apart.

By now the Bank was losing $25 million ofgold a day. Ministers kept leaking the figureson reserves to their cronies on the back-benches, who promptly passed them along toCity speculators. On Thursday, September17, the losses rose to over $80 million andsimilarly the following day. Since the crisishad begun, the Bank had watched $1 billionfly out of the window.

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On Saturday, September 19, the Britishgovernment made a last desperate plea tothe Hoover administration for help. An emo-tional Stimson, a great Anglophile, called theBritish ambassador to the White House, toexplain that every possible avenue for help-ing Britain had been explored, including fur-ther reductions in war debt, but that the Un-ited States was helpless. That weekend, theprime minister, after meeting with the offi-cials of the Bank of England, took the de-cision to suspend gold payments.

A telegram was dispatched to Norman,then in mid-Atlantic aboard the HMSDuchess of Bedford, on his way home fromCanada but still two days from shore. He hadnot taken his codebook and the radio mes-sage had to be sent on an open line. There isa wonderful but apocryphal story that to dis-guise the message, the deputy governorwrote, “Old Lady goes off on Monday.”Puzzled by this cryptic note, Norman

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assumed that it referred to his mother’splans to go on holiday and thought nothingfurther of it.

The real story is almost as good. The cablein fact read, “Sorry we have to go off tomor-row and cannot wait to see you before doingso.” Norman assumed that it meant Harveywas going to be away on the day of his returnto Britain. He only discovered the truth whenhe landed at Liverpool on Wednesday,September 23. After meeting with the primeminister, he departed for a long weekend inthe country to get over the shock. As hisfriend Baldwin put it indelicately, “Going offthe gold standard was for him as though adaughter should lose her virginity.” But, forall his anger, it is hard to see what he wouldor could have done differently had he beenaround.

The initial public reaction that week wasone of alarm and astonishment. Few peopleunderstood what it meant. Most newspapers

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lamented it as the end of an epoch. Only theDaily Express, organ of that clear-sightedfinancial adventurer Lord Beaverbrook,called it a victory for common sense. “Noth-ing more heartening has happened in years .. . we are rid of the gold standard, rid of it forgood and all, and the end of the gold stand-ard is the beginning of real recovery intrade,” he beamed.

The Sunday Chronicle of September 20carried a profile of Montagu Norman byWinston Churchill, as part of a commis-sioned series on contemporary figures. Sinceleaving office in June 1929, Churchill hadquarreled with his Conservative colleaguesover Indian self-rule and, now isolated andout of favor, felt free to express his disillu-sionment with the gold standard orthodoxyopenly. The problem was not so much thestandard itself, he argued, but the way it hadbeen allowed to operate. It was the hoardingof gold by the United States and France and

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the resulting shortage in the rest of the worldthat had brought on the Depression. He hadbegun to sound almost like Keynes—in aspeech to Parliament the week before he haddescribed how gold “is dug up out of a holein Africa and put down in another hole thatis even more inaccessible in Europe andAmerica.”

That weekend Churchill had the star ofThe Gold Rush, Charlie Chaplin, as a guest atChartwell, his country house in Kent—theyhad met in Hollywood when Churchill wasvisiting the United States in October 1929 atthe time of the crash. Over dinner Chaplinopened the conversation by saying, “Youmade a great mistake when you went back tothe gold standard at the wrong parity of ex-change in 1925.” Churchill was somewhattaken aback. As the film star proceeded tohold forth at length about the subject with agreat deal of knowledge, Churchill, whohated to be reminded of past mistakes, sank

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into a morose silence, a mood broken onlywhen the comedian picked up two rolls ofbread, put two forks in them and did thefamous dance from the movie.

The next day, Monday, September 21, thefirst day off gold, by an odd quirk of fate,Churchill lunched with Maynard Keynes,now an ally and friend. Churchill spent muchof the time protesting that he had never beenin favor of returning to gold in 1925 and beenoverridden by Norman and the rest of theCity. For Keynes it was a day of celebrationand not regret. He could hardly contain hisglee, “chuckling like a boy who has just ex-ploded a firework under someone he doesn’tlike.” “There are few Englishmen who do notrejoice at the breaking of the gold fetters,” hewrote in an article later that week. “We feelthat we have at last a free hand to do what issensible. . . . I believe that the great events ofthe last week will open a new chapter in theworld’s monetary history.”

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But among bankers, especially Europeanbankers, the British departure from gold wasseen as an utterly dishonorable step, a “tra-gic act of abdication” that “inflicted heavylosses on all those who had trusted” the wordof the Bank of England. Within a few daysthe pound had fallen by almost 25 percent inthe foreign exchange markets from $4.86 to$3.75. By December it was a little below$3.50, a drop of 30 percent. Altogethertwenty-five countries followed Britain offgold during the next few months, not onlythe nations of the empire and its satellitesCanada, India, Malaya, Pales-tine, andEgypt, but also the Scandinavians—Sweden,Denmark, Norway, and Finland—and finallythose European countries with close com-mercial ties to Britain: Ireland, Austria, andPortugal.

Though the papers kept telling him that itwas the end of an era, for the average Eng-lishman, after a few days of stunned

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confusion, it was as if nothing had happened.There were no bank runs, no food shortages,no rush to the stores, no hoarding of goods.Indeed, while wholesale prices in the rest ofthe world would continue to fall, dropping 10percent over the next year, in Britain defla-tion came to an end—prices over the nextyear even rose a modest 2 percent.

The one group who received a big shockwas the small number of British people trav-eling abroad. Time magazine recounted howone man in an Old Etonian tie was suffi-ciently incensed at being offered only $3 forhis pounds in New York—a “hold-up,” hecalled it—that he stormed off muttering, “Apound is still a pound in England. I shallcarry my pounds home with me.”

The recriminations began almost immedi-ately. Snowden in his speech to the Com-mons on September 20 blamed the debacleon the gold policies of the United States andFrance. Though Americans came in for their

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fair share, the greatest vituperation was re-served for the French. Margot Asquith, in aletter to Norman wishing him well on his re-turn, captured the country’s mood when shewrote, “France will be heavily punished forher selfish short-sightedness. She has beenthe curse of Europe. . . .” Ironically, the oneinstitution upon which the devaluationwrought disaster was the Banque de France.For years an urban myth insisted that it hadbeen French selling of the pound that had setoff the debacle. In fact, the Banque had hungon to every penny of its $350 million in ster-ling deposits. So supportive had it been dur-ing the crisis that Clément Moret was laternamed an honorary Knight Commander inthe Order of the British Empire. The Banquede France ended up losing close to $125 mil-lion, seven times its equity capital. A normalbank would have been driven under.

Other central banks, especially those ofSweden, the Netherlands, and Belgium, that

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had been persuaded during the 1920s tokeep part of their reserves in sterling lostenormous amounts. The Dutch central banklost all its capital—the bitterness ran particu-larly deep because a few days before the de-valuation, its governor, forgetting that onlysimpletons ask a central banker about thevalue of his currency and expect an honestanswer, had inquired whether his depositswere safe and had been unequivocally reas-sured. Norman was so embarrassed by thelosses sustained by his fellow central bankersthat he contemplated submitting a letter ofresignation to the BIS. It would have been aquaintly anachronistic gesture—like anashamed bankrupt resigning from hisclub—but he was persuaded that it would beimpractical for the institution to operatewithout a Bank of England presence at itsmeetings.

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No ONE HAD done more to prop up Europethat summer than George Harrison. It musthave seemed to him at times that he hadspent most of the summer on transatlantictelephone calls—at the height of the CentralEuropean crisis he and Norman must havespoken on the phone, not a simple matter inthose days, more than twenty-five times.After the first Austrian loan back in May,when few could have foreseen how far thepanic would go, the Fed had provided theReichsbank with $25 million, been ready tothrow in a mammoth $500 million for thesecond loan that never got off the ground,supplied a further $250 million to the Bankof England, and, finally, been instrumentalin orchestrating the last $200 million loanfrom the Morgan consortium to the Britishgovernment. It had all been to no effect.Europe’s problems had proved to be much

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deeper, and its needs far larger, than the Fedwas capable of handling.

After Britain left the gold standard, thefinancial crisis now spread across the At-lantic. Over the next five weeks, Europeans,fearing that the United States would be nextto devalue, converted a massive $750 millionof dollar holdings into gold. While some pop-ular accounts attributed the outflow of goldto “panicky millionaires” and speculatorshoping to make a buck from such a collapse,it was not private investors who were prin-cipally behind the flow but European centralbanks, the largest single mover of capital be-ing the staid and upright Swiss NationalBank, which transferred close to $200 mil-lion. The National Bank of Belgium moved$130 million; the already badly burnedNetherlands Bank, $77 million; and theBanque de France, $100 million. Having lostits capital seven times over during the ster-ling devaluation out of a misplaced sense of

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“solidarity and politeness”—GovernorMoret’s words—and having been rewardedwith a campaign of public vilification in Bri-tain, the Banque de France had learned itslesson. The cost of being a responsible globalcitizen was just too great.

The outflow of gold came at a particularlycrucial juncture for the U.S. banking system,then reeling under the wave of failures thathad begun in the spring in Chicago. BySeptember, the panic had swept Ohio andwas circling back to Pittsburgh and Phil-adelphia. A committee of prominent Phil-adelphians, including the president of theUniversity of Pennsylvania, the cardinalarchbishop, and the mayor, published an ap-peal in the newspapers urging faith in localbanks. To no avail—39 banks in the city withover $100 million dollars in deposits wereforced to close down. In one month aloneafter the British departure from gold, 522American banks went under—by the end of

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the year, a total of 2,294, one out of every tenin the country, with a total of $1.7 billion indeposits, would suspend operations.

The mounting bank failures intensifiedhoarding—$500 million dollars in cash waspulled from banks. While most of this wasstashed away in traditional hidingplaces—socks, desks, safes, strongboxes un-der the bed, deposit vaults—some found itsway to very unconventional spots, including,according to a congressional report, “holes inthe ground, privies, linings of coats, horsecollars, coal piles, hollow trees.” Anywherebut bank accounts.

The Fed had begun 1931 with a massive$4.7 billion in gold reserves. Even after thefall outflow, it had more than enough bullionand was never at any risk of being strippedbare as the Bank of England or the Reichs-bank had been. Nevertheless, because of astrange technical anomaly in its governing

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laws, it found itself facing an artificialsqueeze on its reserves.

By statute, every $100 in Federal Reservenotes had to be backed by at least $40 ingold, the remaining $60 by so-called eligiblepaper—that is, prime commercial bills usedto finance trade. Even though the FederalReserve banks were permitted to hold gov-ernment securities, and the buying andselling of such securities—open market oper-ations—was one of the mechanisms by whichthe Fed injected money into the system, gov-ernment paper could not be employed as anasset to back currency. Even when first intro-duced in the original 1913 legislation settingup the Fed, the restriction had been redund-ant, since the 40 percent gold requirementwas enough to prevent the central bank frombeing used as an instrument of inflation. By1931, with no risk of inflation—the country infact facing a problem of deflation—the

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restriction served no purpose. Nevertheless,it remained obstinately on the books.

With the Depression and the ensuing stag-nation in trade, prime bills were scarce andhard to find. The Fed had to rely on gold toback its currency. Thus, in the fall of 1931,instead of having $2 billion too much goldand being grateful that some of it was finallyflowing back to Europe, it found itself scram-bling to hold on to its reserves. It was a man-ufactured problem, the result of an ana-chronistic regulation that had no basis ineconomic reality but which tied up a largeamount of U.S. gold unnecessarily.

And so early that October, in the midst ofthe Depression, as bank runs raged acrossthe Midwest, thousands of businesses closeddown, and industrial production contractedat an annualized rate of 25 percent, the Fedraised interest rates from 1.5 percent to 3.5percent. With prices falling by 7 percent ayear, this put the effective cost of money

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above 10 percent. So dominant was the viewthat abiding by these reserve requirementstrumped every other consideration, therewas no internal resistance at the Fed to jack-ing up the cost of credit. Even the two prin-cipal expansionists, Meyer and Harrison,went along.

The president still continued to cling tothe notion that private sector initiatives werethe best way to revive the economy. On theevening of Sunday, October 4, he secretlyslipped out of the White House and made hisway to Mellon’s apartment at 1785 Mas-sachusetts Avenue, where Harrison of theNew York Fed had assembled a group ofnineteen New York bankers, among themThomas Lamont and George Whitney of J. P.Morgan & Co., Albert Wiggin of Chase Na-tional, William Potter of Guaranty Trust, andCharlie Mitchell of National City—in short,the usual suspects. Amid the Rubens andRembrandts, which Mellon had so

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assiduously collected, the president outlineda plan to try to break the vicious cyclewhereby people were pulling cash out ofbanks and banks were having to cut credit.

Banks were going under in part becausethe assets they held on their books could notbe used as collateral to borrow from the Fed.By the fall of 1931, the neat distinctionbetween liquidity and solvency on which theFed, following Bagehot, had placed so muchemphasis, was becoming meaningless. Manybanks experiencing withdrawals would havebeen fine under normal circumstance, butforced to call in loans and liquidate assets ina falling market at fire-sale prices, they werebeing driven into insolvency. Hoover pro-posed that a new fund of $500 million becreated by the larger and stronger privatebanks to lend to smaller banks on collateralthat the Federal Reserve was legally unableto accept.

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That meeting went on long into the even-ing. The bankers were dubious about theidea and kept asking why the government orthe Fed did not act—had not the Fed after allbeen created precisely to avoid such bankingpanics? Hoover returned to the White Houseafter midnight “more depressed than everbefore.” The next day, prodded by Harrison,the bankers reluctantly agreed to try theplan. Over the next few weeks, the new fundlent a grand total of $100 million and then,paralyzed by its proprietors’ ultraconservat-ism and fear of losing money, folded. Thedays of the great Pierpont Morgan, whenlarge banks assumed responsibility for prop-ping up smaller ones and for supporting theintegrity of the entire financial system, werelong gone.

The bank runs, the spike in currencyhoarding, and now the rising cost of moneyimposed a massive and sudden credit crunchupon an already fragile United States.

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Between September 1931 and June 1932 thetotal amount of bank credit in the countryshrank by 20 percent, from $43 billion to$36 billion. As loans were called in, smallbusinesses were driven into default. Lenderswere forced to absorb losses and in turn losttheir own cushion of capital, making deposit-ors quite justly fearful for the security oftheir money and leading to further with-drawals from banks, which in turn forcedmore loan recalls and thus more defaults.Though depositors and bankers individuallybehaved quite rationally to protect them-selves, collectively their actions imposed a vi-cious spiral of tightening credit and loanlosses on the already depressed U.S.economy.

“If there is one moment in the 1930s thathaunts economic historians,” writes the eco-nomist J. Bradford DeLong, “it is the springand summer of 1931—for that is when thesevere depression in Europe and North

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America that had started in the summer of1929 in the United States, and in the fall of1928 in Germany, turned into the Great De-pression.” The currency and banking convul-sions of 1931 changed the nature of the eco-nomic collapse. As prices fell and businesseswere unable to service their debts, bank-ruptcies proliferated, further chilling spend-ing and economic activity. A corrosive defla-tionary psychology set in. Fearing that priceswould fall further, consumers and businessescut spending, adding to the downward spiralin consumption and investment.

Every economic indicator seemed to falloff a cliff—1932 was the deepest year of de-pression in the United States. BetweenSeptember 1931 and June 1932, productionfell 25 percent; investment dived a stunning50 percent; and prices dropped another 10percent, reaching 75 percent of their 1929level. Unemployment shot up beyond ten

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million—more than 20 percent of the work-force was now without jobs.

American corporations, which had madealmost $10 billion in profits in 1929, collect-ively lost $3 billion in 1932. On July 8, 1932,the Dow, which had stood at 381 on Septem-ber, 3, 1929, and was trading around 150 be-fore the European currency crisis, hit a lowof 41, a drop of almost 90 percent over thetwo and a half years since the bubble firstbroke. General Motors, which had traded at$72 a share in September 1929, was now alittle above $7. And RCA, which had peakedat $101 in 1929, hit a low of $2. When, inAugust 1932, a reporter for the SaturdayEvening Post asked John Maynard Keynes ifthere had ever been anything like this before,he replied, “Yes. It was called the Dark Ages,and it lasted four hundred years.”

In 1932, Meyer, having uncharacteristic-ally allowed himself to be hamstrung by theFed bureaucracy for his first year in office,

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finally took charge. In January, he persuadedthe administration that its attempt to havethe large banks voluntarily take responsibil-ity for supporting the system had failed. TheReconstruction Finance Corporation (RFC)was established to channel public money—atotal of $1.5 billion—into the banking sys-tem. Congress would agree to the new agencyonly if Meyer took on the chairmanship. Forsix months Meyer held two full-time posts:head of the RFC and chairman of the FederalReserve Board. Eventually the toll on himbecame so great that his wife, Agnes, person-ally lobbied the president for him to resignone of the positions.

In February 1932, he pressed Congress topass legislation that would make governmentsecurities an eligible asset to back currency.At the stroke of a pen the gold shortage waslifted, allowing the Fed to embark on amassive program of open market operations,injecting a total of $1 billion of cash into

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banks. The two new measures com-bined—the infusion of additional capital intothe banking system and the injection of re-serves—allowed the Fed finally to pumpmoney into the system on the scale required.But Meyer had left it too late. A similarmeasure in late 1930 or in 1931 might havechanged the course of history. In 1932 it waslike pushing on a string. Banks, shaken bythe previous two years, instead of lendingout the money used the capital so injected tobuild up their own reserves. Total bank cred-it kept shrinking at a rate of 20 percent ayear.

Bankers and financiers, the heroes of theprevious decade, now became the whippingboys. No one provided a better target thanAndrew Mellon. In January 1932, a fresh-man Democratic congressman from Texas,Wright Patman, opened impeachment hear-ings for high crimes and misdemeanorsagainst the man once hailed as the “greatest

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Secretary of the Treasury since AlexanderHamilton.” Mellon found himself accused ofcorruption, of granting illegal tax refunds tocompanies in which he had an interest, of fa-voring his own banks and aluminum con-glomerate in Treasury decisions, and of viol-ating laws against trading with the SovietUnion. During the ensuing investigations, itturned out that he had used Treasury tax ex-perts to help him find ways to reduce his per-sonal tax bill and that he had made liberaluse of fictitious gifts as a tax-dodging device.Being a member of the Federal ReserveBoard, he had been required to divest hisholdings of bank stock, with which he hadduly complied—except that he had trans-ferred the stock to his brother. In February,Hoover, recognizing that Mellon had now be-come a liability, packed him off as ambassad-

or to London.50 His place was taken by hisundersecretary, Ogden Mills.

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On March 12, 1932, the world learned thatIvar Kreuger, the Swedish match king, whohad bailed out so many penniless Europeancountries, had shot himself in his apartmenton the Avenue Victor Emmanuel III in Paris.At first it was assumed that he was just an-other victim of the times—he had recentlysuffered a nervous breakdown and his physi-cian had warned him about the constantstrain of his lifestyle on his heart. Withinthree weeks it became apparent that hiswhole enterprise had been a sham. His ac-counts were riddled with inflated valuationsand bogus assets, including $142 million offorged Italian government bonds. When thelosses to investors were eventually tallied,they amounted to $400 million.

Bankers were now increasingly viewed ascrooks and rogues. In early 1932, the SenateBanking and Currency Committee beganhearings on the causes of the 1929 crash.Designed at first to appease a public hungry

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for scapegoats, the hearings achieved littleuntil, in March 1933, a young assistant dis-trict attorney from New York City, FerdinandPecora, took over as chief counsel. The pub-lic was soon riveted by the tales of financialskull-duggery in high places. It learned thatAlbert Wiggins, president of Chase, had soldthe stock of his bank short at the height ofthe bubble and collected $4 million in profitswhen it collapsed during the crash; thatCharles Mitchell, old “Sunshine Charlie,” ofthe National City Bank had lent $2.4 millionto bank officers without any collateral to helpthem carry their stock after the crash, only 5percent of which was repaid; that Mitchellhimself, despite earning $1 million a year,had avoided all federal income tax by sellinghis bank stock to members of his family at aloss and then buying it back; that J. P. Mor-gan had not paid a cent of income taxes inthe three years from 1929 to 1931.

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“If you steal $25, you’re a thief. If you steal$250,000, you’re an embezzler. If you steal$2,500,000, you’re a financier,” wrote themagazine the Nation. Few critics went as faror tapped into as strong a vein of populardiscontent as Father Charles Coughlin.Pastor of the Shrine of the Little Flower inRoyal Oak, Michigan, Coughlin was the ori-ginator of right-wing radio. His Sunday af-ternoon broadcasts delivered in a soothingand intimate voice of mellow richness captiv-ated millions as he held forth on the “bank-sters,” as he called them, who had led thecountry into the Depression.

He actually did have some understandingof the driving forces in international finance.For example, in a broadcast delivered onFebruary 26, 1933, he explained somewhatcogently that “the so-called depression, withits bank failures, is traceable to the inordin-ate, impossible debts payable in gold—debtswhich came into being and were multiplied

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as a result of the war.” But he embellishedhis radio sermon with one of his fire-and-brimstone rants on “the filthy gold standardwhich from time immemorial has been thebreeder of hate, the fashioner of swords, andthe destroyer of mankind,” and ended by ur-ging his listeners to rise up “against the Mor-gans, the Kuhn-Loebs, the Rothschilds, theDillon-Reeds, the Federal Reserve banksters,the Mitchells and the rest of that un-deserving group who without either theblood of patriotism or of Christianity flowingin their veins have shackled the lives of menand of nations with the ponderous links oftheir golden chain.”

The 1932 presidential campaign was dom-inated by the Depression. The Democraticcandidate, Franklin Roosevelt, the handsomeand attractive, astoundingly self-confidentgovernor of New York, was initially dis-missed as a lightweight. But his jaunty op-timism—his campaign’s signature tune

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became “Happy Days Are Here Again”—hisinspirational speeches, and his promise ofvigorous action to restore prosperity made asharp contrast with the dour and resentfulHoover.

On economics, Roosevelt had a breezy anddisconcerting ability to put forward contra-dictory policies without the slightest em-barassment. So while he pledged to increasefederal relief for unemployment, supportedhigher tariffs, government development ofpower projects, increased regulation of se-curities markets, and the separation of com-mercial and investment banking, he also cri-ticized Hoover for fiscal extravagance, ac-cused him of encouraging inflation, andpromised to balance the budget and commithimself to “sound money.” But voters did notcare about consistency, they wanted bold ac-tion. In November 1932, Roosevelt got 22.8million votes against Hoover’s 15.7 million,

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the greatest electoral sweep since Lincolnbeat McClellan in 1864.

In the interregnum between the electionand inauguration, a new wave of bank fail-ures swept the country—this time starting inthe West. On November 1, the governor ofNevada declared a twelve-day bank holiday,after the suspension of a bank chain that ac-counted for 65 percent of the state’s deposits.He was followed by his counterparts in Iowain January 1933 and Louisiana in earlyFebruary.

It was, however, the run on the GuardianTrust Company of Detroit, a bank controlledby Edsel Ford, scion of the Ford motor fam-ily, that transformed the new crisis into a na-tional one. The Guardian Trust had donewell during the 1920s financing consumerpurchases of Ford cars. When auto salesdried up in the early 1930s, the bank founditself in serious trouble and had been forcedto borrow from the RFC. In early 1933, the

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RFC balked at providing more money unlessthe sponsors, who were, after all, the secondrichest family in the country after the Rocke-fellers, put in more capital. Patriarch HenryFord, now in his seventies and increasinglyautocratic and unreasonable, refused to bailout his son. He had a long-standing anti-pathy to bankers and could not quite graspwhy banks should be allowed to use themoney he deposited for making riskyloans—“It’s just as if I put my car in a garageand when I came to get it, I found somebodyelse had borrowed it and run it into a tree,”was the way he saw it. Faced with a statewiderun on its banking system, on February 14,the governor of Michigan issued a proclama-tion closing all 550 banks in the state foreight days. The residents of Michigan wokeup on Saint Valentine’s Day to find that allthat they could draw upon was the cash intheir pockets.

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Across the country, depositors watchingthe whole monetary system of a major indus-trial state shut down began pulling theirmoney out of their banks just in case.Governor after governor was forced to followMichigan and declare a state bank holiday.Indiana closed its banks on the twenty-thirdof February, Maryland on the twenty-fifth,Arkansas on the twenty-seventh, and Ohioon the twenty-eighth. In early March, thecontagion spread into Kentucky andPennsylvania. During February and the firstfew days of March, close to $2 billion, a thirdof all the currency in the country, was with-drawn from banks.

A banking panic on such a scale raised thespecter of Central Europe in the summer of1931 when the sequence of banking criseshad forced country after country off the goldstandard. The domestic run on the U.S banksnow provoked a similar international run onthe dollar.

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The flight from the dollar was exacerbatedby suspicions over the incoming president’scurrency intentions. Ever since he had beenelected, Roosevelt had been floating trial bal-loons about abandoning gold. In January, hetold an emissary from William RandolphHearst, “If the fall in the price of commodit-ies cannot be checked, we may be forced toan inflation of our currency.” On January 31,his secretary-of-agriculture designate, HenryWallace, was quoted as saying, “England hasplayed us for a bunch of suckers. The smartthing to do would be to go off the gold stand-ard a little further than England has. TheBritish debtor has paid off his debts 50%easier than the U. S. debtor has.”

Roosevelt was not alone in his talk of de-valuation. At least six bills were circulatingthrough the halls of Congress that involvedthe emergency issue of currency or a changein the value of the dollar. The Frazier-Sinclair-Patman bill provided for

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government financing of farm mortgages bythe issue of Federal Reserve notes withoutgold backing; the Campbell bill would haveallowed issue of full legal tender Treasurynotes backed by municipal bonds. Congresswas considering one bill to devalue the dollaragainst gold by 50 percent and another oneto reinstate silver as a monetary metal. Themost extreme of the measures, the McFad-den bill, called for the abolition of the goldstandard and the Federal Reserve Systemand their replacement by a new monetarysystem based on units of “human effort.”

Hoover had meanwhile convinced himselfyet again that the economy had been on theverge of recovery before this last panic hit,which he attributed solely to fears overRoosevelt’s inflationary policies. On Febru-ary 17, Hoover composed a ten-page hand-written letter and had it delivered by SecretService messenger to Roosevelt. What wasneeded to restore confidence, he wrote, was a

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formal statement from the president-electpledging himself to a balanced budget andeschewing inflation or devaluation. If Hooverwas trying to elicit Roosevelt’s support forpreemptive bipartisan action, this was aclumsy, inept, and transparently self-servingway to go about it. Hoover himself admittedin a private letter that it would have involvedRoosevelt abandoning 90 percent of his “socalled New Deal” program. The incomingpresident dismissed the letter as “cheeky”and chose simply to sit on it for a couple ofweeks.

Until then, panics had mainly affected thesmallest banks in the nation. But as the runtook on an international dimension, themost important financial institution in thecountry, banker to its largest banks, the NewYork Fed became the center of the storm. Inthe last two weeks of February, it lost $250million, almost a quarter of its gold reserves.Though the Federal Reserve System as a

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whole had more than ample gold reserves,had the New York Fed run out of gold andbeen compelled to call in its loans to banksand shrink its balance sheet in a hurry, thiswould have created a disastrous situation forthe banking system not only in New York butacross the country. Theoretically, it could al-ways have borrowed from other FederalReserve banks in the system—but with everybank in every region under threat, there wasno guarantee that its sister banks would havecooperated. There was a real fear that if it be-came a situation of every man for himself,even the Federal Reserve System might fallapart.

George Harrison had become convinced asearly as mid-February that the only solutionto the spreading panic caused by state-by-state bank closures was a nationwide bankholiday. In a visit to the White House, heurged the president to close all banks.Hoover tried to pass the buck back to the

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Fed, requesting that the Board come up witha set of proposals for saving the banking sys-tem short of shutting it down completely.Eugene Meyer had come to a similar conclu-sion to Harrison. He feared that if the Fedtook inadequate measures that then failed, itwould only make the situation worse and hewould be blamed. So Meyer kicked the ballback to Hoover.

On the afternoon of Thursday, March 2,two days before the new president was to beinaugurated, Harrison called Meyer to in-form him that the New York Fed had fallenbelow its minimum gold reserve ratio.

During the next forty-eight hours, as thenation’s banking system unraveled by thehour, the Fed, unwilling to act on its own,tried to find someone else to take responsib-ility for the situation. But it was caught in thelimbo between administrations. That sameThursday afternoon, Harrison called thepresident, begging him once again to declare

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a national banking holiday. Hoover repliedthat he “did not want his last official act inoffice to be the closing of the banks.” AdolphMiller, Hoover’s old friend and neighbor,also went to the White House to try to per-suade the president. Hoover said he woulddo nothing unless Roosevelt also signed up.

Roosevelt traveled down to Washingtonthat day, and no sooner had he checked intohis suite at the Mayflower Hotel than thephone began ringing. It was Meyer calling tourge him to endorse a national proclamationclosing all banks. Roosevelt refused to com-mit himself to any course of action until hewas inaugurated—why box himself in at thisstage? he quite justly thought.

On Friday, March 3, the New York Fed losta total of $350 million—$200 million in wiretransfers out of the country and $150 millionin actual physical currency withdrawals frombanks in the New York area. Now short some$250 million in reserves, it tried to borrow

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from the Chicago Fed but was turneddown—the risk of the Federal Reserve Sys-tem balkanizing and falling apart was be-coming a reality.

March 3 was Hoover’s last full day in of-fice, and that afternoon Roosevelt and someof his family—Eleanor, his son James, andhis daughter-in-law, Betsy—paid him a cour-tesy call. After a strained tea party of politesmall talk, Hoover asked to see Rooseveltalone. They retired to Hoover’s study wherethey were joined by Meyer; Secretary ofTreasury Mills; and Roosevelt’s aide, Ray-mond Moley. Meyer and Mills again tried topersuade the president-elect to join the out-going Republican administration in somesort of bipartisan action. Roosevelt stood hisground. The sitting president should do whathe had to—he himself would do nothing untilafter his inauguration at noon the next day.Eleanor heard snatches of the conversationthrough the open door. At one point, Hoover

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asked, “Will you join me in signing a jointproclamation tonight, closing all the banks?”Roosevelt replied, “Like hell, I will! If youhaven’t got the guts to do it yourself, I’ll waituntil I am President to do it!” It was nowvery obvious that Roosevelt’s strategy was towithhold his cooperation in the hope thatconditions would deteriorate so badly beforehe took office that he would get all the creditfor any subsequent rebound.

That evening at the Roosevelt suite, thetelephone would not stop ringing. Among thecallers was Thomas Lamont who was at theNew York Fed with sixteen of the mostpowerful bankers in the city. An old friend ofRoosevelt’s, Lamont had sent him a lettertwo weeks earlier warning him against clos-ing the banks, “Urban populations cannot dowithout money. . . . It would be like cuttingoff a city’s water supply. Pestilence and fam-ine would follow. . . .” Lamont now reiteratedthis view, telling Roosevelt that he was sure

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that there would be a change in national psy-chology after the inauguration that would re-store confidence.

The Fed made one last attempt to bridgethe gap between Hoover and Roosevelt withMeyer calling Hoover and Miller callingRoosevelt. Hoover and Roosevelt even ex-changed several calls, at 8:30 p.m., at 11:30p.m., and at 1:00 a.m. Neither of them shif-ted their positions. Finally Roosevelt sugges-ted that they both turn in and get some sleep.

Meyer, having been repeatedly rebuffed bythe White House over the last two days anddespite knowing that it was futile, decided tomake one last effort—perhaps he wanted toprotect himself and the Fed from the verdictof history. At 9:15 p.m. on March 3, he as-sembled his colleagues on the Board for thethird time that day. Charles Hamlin wascalled out of the inaugural concert he was at-tending and despite the foul weather—it hadbeen sleeting—George James was dragged

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from his sickbed. The Board drafted a formalrequest in writing to the president to pro-claim a national bank holiday. It was 2:00a.m before the letter was sent to the WhiteHouse. The president had gone to bed. Noone wanted to wake him up and the letterwas slipped under his door. The next morn-ing, he was furious at this ploy by hiserstwhile friend, Meyer, to leave him holdingthe bag.

Having failed with the president, theFederal Reserve Board now focused on get-ting the governors of the two most importantstates to close their banks. Governor Hornerof Illinois could not be found at first. Whentracked down, he refused to move unlessNew York governor Herbert Lehman of theeponymous banking family acted first. In themiddle of the night, Harrison, Lamont, and agroup of bankers trooped over to Lehman’sPark Avenue apartment. Lamont and theprivate banks tried to persuade Lehman to

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hold off doing anything while Harrison keptinsisting that they had no choice—gold with-drawals had become unbearable, and if theydid nothing, on Monday morning the NewYork Fed would run completely out of re-serves. Finally at 2.30 a.m. Lehman relentedand proclaimed a three-day bank holiday inNew York. An hour later Governor Hornerfollowed his lead. The governors of Mas-sachusetts and New Jersey moved to closetheir banks early the next morning. Fed offi-cials tried to contact Governor Gifford Pin-chot of Pennsylvania, who was in Washing-ton for the inauguration and staying at aprivate residence, but no one would pick upthe telephone. Finally a Fed official volun-teered to go by his house to rouse him. He fi-nally issued his proclamation to close thebanks in his state as dawn was breaking, not-ing ruefully that he was only carrying 95cents in his pocket.

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That day as a hundred thousand peoplestood on the Mall to witness Roosevelt beingsworn in on the steps of the Capitol, theywere watched over by army machine guns. Itwas like “a beleaguered capital in wartime,”wrote Arthur Krock of the New York Times.

Meanwhile, the credit and currency ma-chinery of the country had come to grindinghalt. The banking systems in twenty-eightstates of the union were completely closedand in the remaining twenty partially closed.In three years, commercial bank credit hadshrunk from $50 billion to $30 billion and aquarter of the country’s banks had collapsed.House prices had gone down by 30 percent,leaving almost half of all mortgages in de-fault. With the contraction in credit, minesand factories across the country had to shutdown. Steel mills operated at less than 12percent of their full capacity. Automobileplants, which had once churned out twentythousand cars a day, were now producing

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less than two thousand. Industrial outputhad fallen in half, prices had tumbled 30 per-cent, and national income had contractedfrom over $100 billion to $55 billion. Aquarter of the workforce—13 million men inall—were without jobs. In the richest nationin the world, 34 million men, women, andchildren out of a total population of 120 mil-lion had no apparent source of income.

More than half a century before, Karl Marxhad predicted that as the boom and bustcycles of capitalism became progressivelyworse, it would eventually destroy itself.That day, it seemed that the back of the sys-tem had finally broken in one last stu-pendous crisis.

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PART FIVE

AFTERMATH

1933-44

21. GOLD STANDARD ONTHE BOOZE

1933

In order to arrive at what you do notknowYou must go by a way which is theway of ignorance.

—T. S. ELIOT, Four Quartets, “East Coker”

ONE DAY into office, the very first actionthat Roosevelt took was to close every bankin the country. Invoking an obscure provi-sion of the 1917 Trading with the Enemy Act,

designed to prevent gold shipments to hos-tile powers, he imposed a bank holiday untilThursday, March 9. Simultaneously, he sus-pended the export or private hoarding of allgold in the United States.

To the surprise of many, Americans adap-ted to life without banks remarkablywell—the initial reaction was not chaos butcooperation. Store-keepers liberally exten-ded credit, while doctors, lawyers, and phar-macists continued to provide services in re-turn for personal IOUs. Harvard Universityallowed its students to obtain meals on cred-it. Across the country in El Paso, Texas, theFirst Baptist Church announced that person-al promissory notes would be welcome in theSunday collection plate instead of silver.Even taxi dancers at Manhattan’s Roselanddance hall on Broadway agreed to take IOUsfor the 11 cents that they charged perdance—provided their customers could pro-duce bankbooks showing evidence of funds.

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More than a hundred cities and towns, in-cluding Atlanta, Richmond, Knoxville,Nashville, and Philadelphia, issued their ownscrip. The Dow Chemical Company coinedmagnesium into alternative coins. Thatprominent undergraduate newspaper, theDaily Princetonian rose to the occasion byassuming the role of central bank of Prin-ceton and issuing $500 of its own currency,in denominations of 25 cents, which localmerchants agreed to accept—a reflection ofhow adaptable and elastic the notion ofmoney can be.

Other places resorted to barter. In Detroit,the Colonial Department Store agreed to ac-cept farm produce in exchange for goods—adress went for three barrels of Saginaw Bayherring, three pairs of shoes for a 500-poundsow, and other merchandise went for fiftycrates of eggs or 180 pounds of honey. InManhattan, the promoters of the GoldenGlobe amateur boxing tournament

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announced that fans would be admitted inreturn for anything assessed to be worth 50cents—that night the box office took in hats,shoes, cigars, combs, soap, chisels, kettles,sacks of potatoes, and foot balm.

There were, of course, some disruptions.In Detroit, now in its fourth week withoutbanks, merchants stopped extending credit,food disappeared from the shelves, and theCity of Detroit defaulted on its bonds. InReno, the divorce industry ground to a haltwhen women could not pay the filing fees.Tourists and traveling salesmen around thecountry found themselves stranded. In Flor-ida, the American Express office agreed tocash checks up to a limit of $50 and was be-sieged by five thousand tourists. The first of-ficial task for the new secretary of state, Cor-dell Hull, was to placate the diplomatic corpsin Washington, who argued that their moneywas entitled to immunity from sequestrationand should be immediately released. The

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movie King Kong in its second week playedto half-empty theaters—total box office re-ceipts were down almost 50 percent.

The biggest problem was not cash butchange. Nickels for use on the subway andon trolley and bus lines were so scarce thatan officer of the Irving Trust Company de-clared that a “nickel famine” was in effect.Suddenly automats, where food was servedfrom coin-operated vending machines andwhere a lot of coins changed hands, were be-sieged by women in mink desperate not for ameal, but for loose silver.

On Sunday, March 5, the day after the in-auguration, William Woodin, the new secret-ary of the treasury, began organizing a teamof experts to put together a bank rescuepackage. The diminutive Woodin, who hadbeen the president of the American Car andFoundry Company, was a far cry from theaustere Mellon. A Republican who hadswitched parties to support Roosevelt, he

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was as multifaceted as Charles Dawes of theDawes Plan. An accomplished musician, hav-ing composed several orchestral pieces, in-cluding the Covered Wagon Suite, the Ori-ental Suite—and in honor of the inaugura-tion, the “Franklin Delano RooseveltMarch”—he liked to unwind at the office byplaying the mandolin or strumming hisguitar.

Woodin quickly recognized that neither henor his aides had the knowledge or experi-ence to handle the situation alone. He man-aged to persuade none other than his prede-cessor as secretary of the treasury, OgdenMills, and Mills’s deputy, Arthur Ballantine,to lead the bank rescue effort, even thoughMills, who owned an estate in the HudsonValley just five miles north of Roosevelt’shome, Hyde Park, was no admirer of the newpresident—later he would become a very vo-cal critic of the New Deal. On the very lastday of Hoover’s presidency and his own

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tenure in office, Mills had prepared a draft,which now became the foundation of theRoosevelt plan. Even Roosevelt’s proclama-tion closing the banks in the country wasbased on a draft of a statement that Ballan-tine had originally prepared for Hoover.

The team’s other principal player was Ge-orge Harrison, who came down to Washing-ton that Sunday. Realizing that any bankplan would have to pass muster withbankers, Woodin wanted someone whocould be a bridge to Wall Street, and as aformer outside director of the New York Fed,he knew Harrison well. He also very deliber-ately kept the group of presidential adviserswith a reputation for being left-wing—mensuch as Adolph Berle, Rex Tugwell, and Ray-mond Moley—well in the background.

During the next few days, as bankers cameand went, the Treasury team, led by the trioof Woodin, Mills, and Harrison, consideredand rejected numerous proposals. Some

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people wanted a nationwide issue ofscrip—paper currency backed only by a gov-ernment pledge. Others recommended thatall state banks be incorporated into theFederal Reserve System. Yet others believeda federal government guarantee on all bankdeposits was the solution. The presidenthimself came up with the zaniest idea—thatall government debt, $21 billion, be immedi-ately convertible into currency, in effectdoubling the money supply at a stroke.

By Thursday, March 9, the EmergencyBanking Act was ready to be submitted toCongress. Most of it was based on the origin-al Mills proposal. Banks in the country wereto be gradually reopened, starting with thoseknown to be sound, and progressively mov-ing to the shakier institutions, which wouldneed government support. A whole class ofinsolvent banks would never be permitted toreopen. The bill also granted the Fed theright to issue additional currency backed not

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by gold but by bank assets. And it gave thefederal government the authority to directthe Fed to provide support to banks. The le-gislation was supplemented by a commit-ment from the Treasury to the Fed that thegovernment would indemnify it for anylosses incurred in bailing out the bankingsystem. This unprecedented package finallyforced the Fed to fulfill its role as lender oflast resort to the banking system. But toachieve this, the government was in effectproviding an implicit blanket guarantee ofthe deposits of every bank allowed to reopen.

For Harrison the transformation was al-most too much to believe, leaving him con-stantly beset by doubts. Only a week beforehe had been dealing with a president whoseemed incapable of taking action. He nowhad to contend with a president who wouldtry anything. As a protégé of BenjaminStrong, Harrison believed fervently in whathe called the “separation of the central bank

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from the state”—the financial equivalent ofthe separation of the powers in the politicalsphere. The new legislation would give thepresident unprecedented control over theFed. Harrison had also been to taught thatcurrency should be backed either by gold orliquid assets readily convertible into cash.The new law expanded the category of assetsagainst which the Fed could lend, compellingit to print money, Harrison agonized, against“all kinds of junk, even the brass spittoons inold-fashioned country banks.” But at leastthe drift was over and something was finallybeing done.

At ten o’clock on the evening of Sunday,March 12, Roosevelt gave the first of hisfireside chats over the radio. “My friends,” hebegan in his easy patrician voice, “I want totalk for few minutes with the people of theUnited States about banking . . . I want to tellyou what has been done in the last few days,why it was done, and what the next steps are

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going to be.” In simple and clear language,he explained to the sixty million peoplelistening in countless homes across the na-tion, “When you deposit money in a bank,the bank does not put the money in a safedeposit vault. It invests the money, puts it towork.” “I know you are worried . . . ,” he toldthem, “I can assure you, my friends, it issafer to keep your money in a reopened bankthan under the mattress.” The next day thecomedian Will Rogers wrote to the New YorkTimes, “Our President took such a dry sub-ject as banking . . . [and] he made everyoneunderstand it, even the bankers.”

As the first banks prepared to open onMonday, March 13, no one could be surewhat would happen. Many feared that afterthe measures restricting the convertibility ofcurrency into gold, the panic might even con-tinue and indeed become worse. As Harrisonput it, “We had closed in the midst of a great

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bank run, and as far as we knew would re-open under the same conditions.”

That morning, long lines of depositorsformed outside the reopened banks. But in-stead of taking their money out, they wereputting it back in. The combination of thebank holiday, the rescue plan, andRoosevelt’s masterful speech—there is noway of distinguishing which was the moreimportant—created one of those dramatictransformative shifts in public sentiment. Ason other similar occasions where a new ad-ministration has taken charge in the middleof a crisis and introduced a radically newpackage of policies—for example, in Ger-many in November 1923 when hyperinfla-tion was ended or in France in July 1926when Poincaré stabilized the franc—themood of the nation changed overnight.

On March 15, when the New York StockExchange reopened after being closed for tendays, the Dow jumped 15 percent, the largest

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move in a single day in its history. By the endof the first week, a total of $1 billion incash—half of everything that had been pulledout in the previous six weeks—had been re-deposited in banks. By the end of March,two-thirds of the banks in the country,twelve thousand in total, had been permittedto resume business and the currency hoardin the hands of the public had dropped by$1.5 billion.

This was one more bitter pill for Hoover toswallow. A bank rescue plan introduced byRoosevelt, a man he despised, drafted byHoover’s own people on principles he hadoriginally proposed, had in the space of aweek restored confidence that had eludedpoor old Hoover in three years of fighting theDepression.

Raymond Moley would later write of thatweek, “Capitalism was saved in eight days.”He was only half right. The rescue plan mayhave saved the banking system. But the tasks

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of getting the factories across the countryproducing once again and of putting averageAmericans back to work still remained.

Over the next three months—the celeb-rated “first hundred days”—Roosevelt bom-barded Congress and the country with newlegislation. On March 20, Congress passedthe Economy Act, which cut the salaries ofpublic employees by 15 percent, slashed de-partment budgets by 25 percent, and cut al-most a billion dollars in public expenditures.At the end of March, it approved the creationof the Civilian Conservation Corps to employyoung men in flood control, fire prevention,and the building of fences, roads, andbridges in rural areas. In the middle of Maycame the Emergency Relief Act and thatsame day Congress passed the AgriculturalAdjustment Act, designed to push agricultur-al prices higher by controlling productionand reducing acreage. The Tennessee ValleyAuthority was set up to build dams and

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construct public power plants. The NationalIndustrial Recovery Act was passed in themiddle of June to permit price fixing. It alsoauthorized $3.5 billion in public works pro-grams. The Glass-Steagall Act, also passed inthe middle of June, divorced commercial andinvestment banking and guaranteed bankdeposits up to a maximum of $2,500, whilethe Truth-in-Securities Act established dis-closure provisions to govern the issue of newsecurities.

The string of measures was a strange mix-ture of well-meaning steps at social reform,half-baked schemes for quasi-socialist indus-trial planning, regulation to protect con-sumers, welfare programs to help the hard-est hit, government support for the carteliza-tion of industry, higher wages for some,lower wages for others, on the one hand gov-ernment pump priming, on the other publiceconomy. Few elements were well thoughtout, some were contradictory, large parts

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were ineffectual. While much of the legisla-tion was very laudable, aimed as it was at im-proving social justice and bringing a modic-um of economic security to people who hadnone, it had little to do with boosting theeconomy. Tucked away, however, in thiswhole motley baggage, as a last-minuteamendment to the Agricultural AdjustmentAct, was one step that succeeded beyondanyone’s wildest expectations in getting theeconomy moving again. This was the tem-porary abandonment of the gold standardand the devaluation of the dollar.

The rescue of the banks had been broughtabout by one of the oddest partnerships inthe history of economic policy mak-ing—between a Democratic treasury secret-ary and his Republican predecessor. Devalu-ation involved one of the strangest confront-ations in that history. On one side stood thetop echelon of presidential economic ad-visers, a brilliant group of young men, most

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of them new to government, the “hardmoney” men, as they were colloquially re-ferred to in the press. At Treasury wasWoodin’s undersecretary, the polished andurbane forty-year-old Dean Acheson, son ofthe Protestant Episcopal bishop of Connecti-cut, a graduate of Groton, Yale, and HarvardLaw School, a protégé of Felix Frankfurterand clerk for Justice Louis Brandeis at theSupreme Court. Though he knew little abouteconomics—and with his British colonel’smustache and his tweed bespoke suits, helooked like an old fogy—Acheson had a repu-tation as an outstanding corporate lawyer, apragmatist with an incisive brain and a tal-ent for crafting solutions to complexproblems.

The adviser to the president on monetaryaffairs was the thirty-seven-year-old JamesWarburg, son of Paul Warburg, the father ofthe Federal Reserve System. After graduat-ing from Harvard, the debonair Warburg

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embarked upon a stellar career in banking,becoming the youngest chief executive onWall Street while still finding time to publishhis poetry in the Atlantic Monthly and writethe lyrics to a Broadway musical, Fine andDandy. He had turned down Acheson’s jobas undersecretary of the treasury, preferringto exert his influence as an unpaid and un-titled adviser to the president, who liked torefer to him as “the white sheep of WallStreet.”

And finally, the hardest-currency man ofthem all was the thirty-eight-year-old budgetdirector, Lewis W. Douglas. Scion of an Ari-zona mining family, Douglas had taught atAmherst and since 1927 had been in Con-gress, where he had championed the cause ofgovernment economy and balanced budgetsduring the Depression.

The spokesman for Wall Street shouldhave been the head of the Federal ReserveBoard, Eugene Meyer. But he found himself

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completely out of sympathy with the new ad-ministration and submitted his resignationat the end of March. As a consequence, Har-rison of the New York Fed acted as theprimary go-between for bankers and theWhite House.

Every one of Roosevelt’s advisers, includ-ing Harrison, believed that having stabilizedthe banking system, they could rely on thetraditional levers—expanding credit, under-taking open market operations—to get theeconomy moving again. Most important,none of them could see any reason for break-ing with gold.

Pitted against this array of economic ex-pertise was one man—the president himself.Roosevelt did not even pretend to grasp fullythe subtleties of international finance; butunlike Churchill, he refused to allow himselfto be in the least bit intimidated by the sub-ject’s technicalities—when told by one of hisadvisers that something was impossible, his

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response was “Poppycock!” Instead, he ap-proached the subject with a sort of casual in-souciance that his economic advisers foundunnerving but which nevertheless allowedhim to cut through the complications and goto the heart of the matter.

His simplistic view was that since the De-pression had been associated with fallingprices, recovery could only come about whenprices began going the other way. His ad-visers patiently tried to explain to him thathe had the causality backward—that risingprices would be the result of recovery, not itscause. They were themselves only half right.For in an economy where everything is con-nected, there is often no clear distinctionbetween cause and effect. True, in the initialstages of the Depression the collapse in eco-nomic activity had driven prices downward.But once in motion, falling prices createdtheir own dynamic. By raising the real cost ofborrowing, they had discouraged investment

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and thus caused economic activity to weakenfurther. Effect became cause and cause be-came effect. Roosevelt would have been un-able to articulate all the linkages very clearly.But he had an intuitive understanding thatthe key was to reverse the process of defla-tion and kept insisting that the solution tothe Depression was to get prices movingupward.

There still remained a chicken-and-eggproblem. How to get prices up without firsthaving to wait for economic recovery? Sever-al years before when Roosevelt needed helpwith the trees on his estate in Hyde Park, hisHudson Valley neighbor and friend HenryMorgenthau introduced him to an obscurefifty-nine-year-old economist, George War-ren, professor of farm management at Cor-nell, under whom Morgenthau had studiedas an undergraduate.

The short and stocky professor, with hisowlish spectacles, Quaker-like earnest

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demeanor and a bunch of pencils protrudingfrom his top pocket, had none of the earthi-ness that one might associate with an expertin farming. He had in fact grown up herdingsheep on a Nebraska ranch and still livedfirmly rooted to the soil on a five-hundred-acre working farm outside Ithaca, New York,where he raised cash crops and a large herdof Holstein cows. He had published a varietyof books and pamphlets on agriculture, in-cluding a monograph titled Alfalfa and an-other, An Apple Orchard Survey of Wayneand Orleans County, New York, which ex-haustively documented the various tech-niques for growing apples in upstate NewYork, down to which manures worked thebest; a standard textbook, Dairy Farming;and two seminal works, The Elements ofAgriculture and Farm Management. He hadalso devised a system for inducing chickensto lay more eggs. As a teacher, he was knownto be dismissive of theories and made a point

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of taking his students out to working farms.His quaint pastoral homilies on these visitshad become part of the Cornell folk-lore—“You paint a barn roof to preserve it.You paint a house to sell it. And you paintthe sides of barn to look at”—although noneof his students were quite sure what theymeant.

During the 1920s, as agricultural priceskept falling, this expert on cows, trees, andchickens had also spent a decade researchingthe determinants of commodity price trends.In 1932, he and a colleague published theirwork in an exhaustive monograph titledWholesale Prices for 213 Years: 1720- 1932,which created enough of a stir that, in 1933,it was issued as a book. Warren was able todocument how trends in commodity pricescorrelated strongly with the balance betweenthe global supply and demand for gold.When large gold discoveries came onto theworld market and supply out-paced demand,

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commodity prices tended to rise. By contrast,when new supply lagged behind, this showedup in declining prices for commodities. Itwas easy to quibble with some of the detailsof the thesis—the correlation was not perfectbecause a variety of other factors, not least ofwhich were wars, intervened to blur the link.Nevertheless, it was hard to argue with thegeneral conclusion. After all, under the goldstandard, there was supposed to be a directconnection between bank credit and gold re-serves—thus when gold was plentiful, so wascredit, which in turn caused prices to rise.

It was Warren’s policy conclusions,however, that generated the most contro-versy. If commodity prices fell because of ashortage of gold, he argued, then one way toraise them was to raise the price of gold—inother words, to devalue the dollar. An in-crease of 50 percent in the price of bullionwas no different in its effects from suddenlydiscovering 50 percent more of the metal.

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Both brought about a higher value of goldwithin the credit system and both wouldtherefore stimulate higher commodity prices.

It sounded simple, but to most ofRoosevelt’s economic advisers, talk of de-valuation was plain blasphemy, smacking ofthe worst forms of repudiation. How was thisdifferent from the practice of clipping anddebasing coins adopted by insolvent mon-archs in the Middle Ages? Given its vast goldreserves, the United States had little reasonto resort to this currency manipulation,which might threaten confidence in the cred-it standing of the U.S. government and evenendanger rather than promote recovery.

During the first few weeks of the adminis-tration, following the proclamation suspend-ing gold exports on Roosevelt’s first day inoffice, the currency situation remained inlimbo. Secretary Woodin tried to reassureeveryone that the United States had not leftthe gold standard, but the president was not

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so unequivocal. At his first press conference,on March 8, he joked with reporters, “Aslong as nobody asks me whether we are offthe gold standard or gold basis, that is allright, because nobody knows what the goldbasis or gold standard really is.”

On the evening of April 18, he gathered hiseconomic advisers in the Red Room at theWhite House to discuss preparations for theforthcoming World Economic Conference inLondon. With a chuckle, Roosevelt casuallyturned to his aides and said “Congratulateme. We are off the gold standard.” Display-ing the Thomas amendment to the Agricul-tural Adjustment Act, which gave the presid-ent the authority to devalue the dollaragainst gold by up to 50 percent and to issue$3 billion in greenbacks without gold back-ing, he announced that he had agreed to sup-port the measure.

“At that moment hell broke lose in theroom,” remembered Raymond Moley.

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Herbert Feis, the economic adviser to theState Department, looked as if he were aboutto throw up. Warburg and Douglas were sohorrified that they began to argue with thepresident, scolding him as if “he were a per-verse and particularly backward schoolboy.”Warburg declared that the legislation was“completely hare-brained and irresponsible”and would lead to “uncontrolled inflationand complete chaos.” Imperturbable as ever,Roosevelt bantered good-naturedly withthem, insisting that going off gold was thebest way to lift prices and that unless theydid something to reflate, Congress wouldtake matters in its own hands.

The discussion continued until midnight.Leaving the White House, a group ofaides—Warburg, Douglas, Moley, and Willi-am Bullitt, a special assistant to the secretaryof state—having just been presented withwhat many of them viewed as the most fate-ful step since the war, were unable to sleep

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and continued the discussion in Moley’shotel room. They talked for half the night,analyzing the impact on the credibility of thewhole New Deal program, the value of thedollar, capital flows, and relations with othercountries. Finally, Douglas announced,“Well, this is the end of western civilization.”

ROOSEVELT’S DECISION To take the dollaroff gold rocked the financial world. Mostpeople could not understand why a countrywith the largest gold reserves in the worldshould have to devalue. It seemed so per-verse. Indignant bankers lamented the lossof the one anchor that could keep govern-ments honest. Bernard Baruch, the notedfinancier, went a little overboard thoughwhen he said that the move, “can’t be defen-ded except as mob rule. Maybe the countrydoesn’t know it yet, but I think we may find

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that we’ve been in a revolution more drasticthan the French Revolution.”

But in the days after the Roosevelt de-cision, as the dollar fell against gold, thestock market soared by 15 percent. Financialmarkets gave the move an overwhelmingvote of confidence. Even the Morganbankers, historically among the moststaunch defenders of the gold standard,could not resist cheering. “Your action in go-ing off gold saved the country from completecollapse,” wrote Russell Leffingwell to thepresident.

Taking the dollar off gold provided thesecond leg to the dramatic change in senti-ment, which had begun with the bank rescueplan, that coursed through the economy thatspring. Harrison, spurred into action by thethreat that the government might issue unse-cured currency, injected some $400 millioninto the banking system during the followingsix months. The combination of the renewed

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confidence in banks, a newly activist Fed,and a government that seemed intent ondriving prices higher broke the psychology ofdeflation, a change reflected in almost everyindicator. During the following threemonths, wholesale prices jumped by 45 per-cent and stock prices doubled. With pricesrising, the real cost of borrowing moneyplummeted. New orders for heavy machinerysoared by 100 percent, auto sales doubled,and overall industrial production shot up 50percent.

If the decision to take the dollar off goldsplit the U.S. banking community, it unifiedEuropean bankers—provoking another quipfrom Will Rogers: that it was obviously thebest thing to do if both Britain and Francewere against it.

After the pound had been so humiliatinglyejected from the gold standard, MontaguNorman seemed to lose his bearings. Hefound himself on a road without familiar

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guideposts, and all his old certainties hadgone. As he confessed at his annual MansionHouse Speech in October 1932, “The diffi-culties are so great, the forces are so unlim-ited, precedents are so lacking, that I ap-proach the whole subject in ignorance. . . . Itis too great for me—I will admit that for themoment the way, to me, is not clear.”

Though the press still continued to beoddly fascinated by him, the tone of the cov-erage had changed—it was now tinged with ahint of mockery. When he came to the Un-ited States in August 1932, Time magazinedescribed him as “a handsome, fox-beardedgentleman with a black slouch hat and themysterious manner of the Chief Conspiratorin an Italian opera.” The New York Timesscolded him for his “penchant for mysteriouscomings and goings, his acceptance of thealias ‘Professor Clarence Skinner’ to maskwhat purported to be a simple vacation,” and

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“his affectation of the role of internationalman of mystery.”

When, he dropped the pseudonym on hisvisit to the United States the next year, theNew York Post could not help poking fun:

Deport The Blighter:

We have a bone to pick withMontagu Norman, governor of theBank of England. He has enjoyedAmerican hospitality for several sum-mers, and his visits have providedcopy for the press during thedoldrums. Not because the Americanpublic is interested in the Bank ofEngland but because Mr. Norman hadthe bright idea of traveling incognitoas Professor Skinner.

Mr. Norman, governor of the Bankof England, is worth a paragraph. ButMr. Norman, governor of the Bank ofEngland, traveling as Professor

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Skinner, commanded reams of copy.It suggested plots. It conjured up vis-ions of international cabals. . . .

We regard “Montagu C. NormanLands in New York Under His OwnName” as a threat to an establishedAmerican institution. . . . How muchlonger must we suffer the machina-tions of international bankers?

Though Norman no longer dominated thestage of international finance, most of hiscolleagues remarked on how much easier hewas to deal with. The reason was revealed onJanuary 20, 1933. The press uncovered thathe had applied to the Chelsea Registry Officefor a marriage license. The next day, to thegreat bemusement of all London, he wasmarried at the age of sixty-one to the thirty-three-year old Priscilla Worsthorne. Born in-to an old aristocratic Roman Catholic family,she had been married once to a rich and in-dolent Belgian émigré, Alexander Koch de

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Gooreynd, who had adopted the anglicizedname of Worsthorne. They had two sons butwere now divorced. Norman had hoped for asmall private ceremony. Instead the ChelseaRegistry Office was mobbed by reporters andthe newly married couple had to make a get-away by the back door and through an alms-house. Later that afternoon to avoid thepaparazzi, they escaped Thorpe Lodge byclimbing over the back garden wall.

The week that Roosevelt took the dollar offgold, Norman was away in the Mediter-ranean on a belated honeymoon. On his re-turn to London the following week, no onecould tell him what was going on. Even Har-rison was able to provide only a little direc-tion, telling Norman on the phone that hehad been taken completely by surprise by thedollar devaluation. He himself was having torely on the newspapers for information oncurrency policy, which as far as he could tellwas being decided by the “whims” of the

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brain trust in the White House. With thepresident’s hands on the lever, the Fed itselfwas now “completely in the dark as to whatour policy is or is to be.” Meanwhile, Meyerhad resigned from the Fed Board, which wasnow hardly functioning, and Morgans wassupporting the president’s inflation policy.

It was hard for Norman to know how to re-spond. However much he longed for the cer-tainties of the gold standard, he had to admitthat going off gold had worked for Britain.The country had benefited enormously fromthe 30 percent fall in the pound. The sinkingcurrency had insulated the local economyfrom the worldwide chaos of late 1931 and1932—while prices in the rest of the worldhad fallen 10 percent during 1932, in Britainthey actually rose by a couple of percentagepoints. Moreover, once the need to keep thepound pegged to gold had been removed,Norman had been able to cut interest rates to2 percent. The combination of the end to

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deflation, cheap money at home, and a lowerpound abroad, making British goods morecompetitive in world markets, touched off aneconomic revival. Britain was thus the firstmajor country to lift itself out of depression.

Norman, however, drew a distinctionbetween the situation of Britain, which hadbeen forced off gold by its weak internationalposition, and the situation of the UnitedStates, which with its enormous bullion re-serves could play the leadership role in theworld economy. He feared that the UnitedStates was now abdicating that position, thatthe dollar devaluation might be a first pred-atory step in a full-scale currency war ascountries tried to weaken their exchangerates in order to steal markets from one an-other and that the world might be entering aperiod of monetary anarchy.

While Norman was worried about whatthe dollar move might mean for Britain, heat least shared Roosevelt’s belief that falling

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prices were the cause of the Depression. Clé-ment Moret, the governor of the Banque deFrance, saw the world in very differentterms. For France, the last major power stillclinging to gold, the fall in the dollar was adisaster. By undervaluing the franc duringthe 1920s and thus undercutting its compet-itors in world markets, France had managedto sidestep the collapse of the world eco-nomy in 1929 and 1930. It was now havingthe tables turned on it. It had been hit hardwhen sterling was knocked out of the goldstandard in 1931. The U.S. devaluation com-pounded the problem. France now risked be-ing left stranded as the highest cost producerof all the major powers in the world.

Moret, however, refused to subscribe tothe view that the solution was to inject moremoney into the system. For him the source ofthe world’s economic problems was a lack ofconfidence brought on precisely by too muchexperimentation with money. Having been

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scarred so badly by their experience in theearly 1920s, French monetary officials be-lieved, with all the fervor and dogmatism ofreformed alcoholics, that the path to recov-ery was a generalized return to the goldstandard. In Moret’s case, his orthodoxy ineconomic matters was not mere theorizing.He practiced it in his personal life. After atwenty-five-year career as an official in theMinistry of Finance, he had grown so used toliving modestly that in the years since he wasappointed governor of the Banque de France,he had ended up saving 85 percent of his$20,000 a year salary. It was all invested inFrench gold bonds.

Roosevelt’s decision to devalue came just afew weeks before a long-planned World Eco-nomic Conference was scheduled to open inLondon. It had originally been conceived un-der Hoover, who, believing that the Depres-sion originated with international problems,thought that a global conference might be

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the answer. In the event, the London confer-ence proved to be a complete fiasco, the lastof that long line of disastrous summits thathad begun in Paris in 1919.

It started with the usual squabbles aboutthe agenda. The British wanted to talk aboutwar debts. The Americans refused, presum-ably on the principle that one cannot beforced into concessions about something onewill not discuss. As a tactic for debt collect-ing, it did not work. France had alreadystopped making payments on its war debts.Britain would make a token payment thatJune, in the middle of the conference, andthen also stop paying. The only country thateventually paid the Americans in full wasFinland.

After the U.S. break from gold, the onlything that everyone—except the Americ-ans—wanted to talk about was currency sta-bilization, how to prevent the dollar fromfalling too low. In the weeks before the

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meeting, as one foreign leader after anotherparaded through Washington in preparationfor the conference, Roosevelt was his usualobtuse self. The visiting delegations all cameaway with the impression that the presidentwas open to an arrangement for stabilizingthe dollar. Even his own financial advisersreached that conclusion. The problem wasthat Roosevelt, who disliked open confronta-tions, had mastered the art of seeming toagree with whom-ever he was talking towhile keeping his own cards close to hischest. He was not exactly being deceitful—hehad not decided himself what to do.

The president’s true attitude to the confer-ence should have been obvious from hischoices for the U.S delegation. Even by theinsular standards of the Congress, they weresingularly unqualified to represent theircountry in an international forum. Secretaryof State Cordell Hull led the team, accom-panied by James M. Cox, former governor of

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Ohio; Senator James Couzens of Michigan, anoted protectionist; Senator Key Pittman ofNevada, a longtime believer in inflation andadvocate of the remonetization of silver; Ral-ph W. Morrison of Texas, a bigwig in Demo-cratic Party finances; and Samuel D.McReynolds, a congressmen from Tenness-ee. None of them had ever been to an inter-national conference before, most of themknew little or nothing of economic matters,and three were isolationists convinced thatthe whole exercise was bound to fail.

The conference opened on June 12 in theGeological Museum in South Kensington. Ofthe sixty-seven nations invited, all but oneaccepted—poor little Panama replied that ithad insufficient funds to pay for its deleg-ates. Attending the conference were oneking—Feisal of Iraq—eight prime ministers,twenty foreign ministers, and eighty othercabinet members and heads of central banks.Even Foreign Commissar Maxim

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Maximovitch Litvinov of the Soviet Union,which had almost completely cut itself offfrom the world economy, decided to attend.

While the American delegates may nothave matched these luminaries in prestige,they made up for it in colorfulness, SenatorPittman in particular providing great fodderfor scandalmongers. At an official receptionat Windsor Castle, he broke with all socialconvention by wearing his raincoat and apair of bright yellow bulbous-toed shoeswhile being presented to King George V andQueen Mary, greeting them with the saluta-tion, “King, I’m glad to meet you. And youtoo Queen.” He was usually drunk but eventhen amazed everyone by his ability to spittobacco juice into a spittoon from a great dis-tance with remarkable accuracy. One nighthe was discovered by floor waiters at Clar-idges sitting stark naked in the sink of thehotel pantry, pretending to be a statue in afountain. Another night, he amused himself

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by shooting out the streetlamps on UpperBrook Street with his pistol. Pittman did takeone subject seriously—the remonetization ofsilver, of which Nevada was a major produ-cer—an issue about which he was so passion-ate that one evening when one of the Americ-an experts expressed a contrary opinion onits merits, Pittman pulled out a gun andchased the poor man through the corridorsof Claridges. For his part, CongressmanMcReynolds paid only the most cursory ofattention to the business of the conferenceand rarely attended any meetings. He spenthis energies on getting his daughter presen-ted at court, at one point threatening theprime minister’s private secretary that theAmerican delegation would pack up and gohome unless the desired invitation from thepalace arrived.

The first big spat of the conference wasover the chairmanship. Before they sailed forEurope, the Americans had been led to

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believe that they had been promised thechair. In London they discovered that theFrench finance minister, Georges Bonnet,coveted the post. After all, this was a confer-ence about international money and Francewas the sole great power still on the goldstandard. “With Washington committed todevaluation we cannot have an American asmonetary chairman,” declared Bonnet.“With France committed to repudiation,”replied James Cox, referring to the Frenchdefault on war debts, “we cannot have aFrenchman.” It was all downhill from there.

In the first few days of the conference asmore than a thousand people crammed intothe small and poorly ventilated museum,each nation was permitted a fifteen-minuteopening statement—which, allowing fortranslations, occupied four whole days. Sup-porting the American delegation was a teamof financial experts, which included War-burg, Harrison, and Oliver Sprague,

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professor of economics at Harvard,Roosevelt’s old economics teacher, a long-time adviser to the Bank of England and nowan adviser to the U.S. Treasury. They had allarrived in London believing—perhaps be-cause they wanted to believe it—that thepresident had given them a mandate to ne-gotiate an arrangement to stabilize curren-cies. But recognizing that a debate about keycurrencies in a forum of a thousand deleg-ates would quickly deteriorate into incoher-ence, they decided to take the discussion off-stage. Led by the three major central bankersof the conference—Harrison of the New YorkFed, Norman of the Bank of England, andMoret of the Banque de France—a selectband gathered out of the limelight at theBank of England to hammer out an arrange-ment for stabilizing currencies. For a fewdays it looked as if the “Most Exclusive Clubin the World” was back in business.

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They had almost reached agreement—itwould have involved allowing the pound toremain some 30 percent below its originalgold standard level, the dollar to be proppedup at some 20 percent below its par value,and the franc to remain at parity, thus leav-ing Britain with a modest cost advantage andsetting the floor to currencies, which theFrench were demanding—when word leakedout. Though they had only agreed to a tem-porary attempt at currency stability for aperiod limited to the duration of the confer-ence, New York financial markets, fearing areturn to the gold standard and the end ofRoosevelt’s experiment with inflation, took atumble. Commodity prices fell 5 percent andthe Dow swooned by 10 percent. Roosevelt,who by now had begun taking his cue fromthe commodity exchanges and stock mar-kets, dispatched a cable to the American del-egates curtly reminding them that they werethere to focus on plans for economic

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recovery and were not to be sidetracked bythe European obsession with currencystabilization.

Moreover, the White House went out of itsway to disavow any knowledge of Harrison’sactivities, pointedly reminding reporters thathe was not a representative of the govern-ment but of the New York Fed, an independ-ent entity. With the rug pulled out from un-derneath him and feeling betrayed, Harrisonreturned to New York—he told friends that“he felt as if he had been kicked in the faceby a mule.” It was a lesson that the old daysof the “Most Exclusive Club in the World,”when central bankers meeting in privatecould set credit and currency conditionswithout reference to politicians, were nowgone.

The American experts in London still hada hard time getting the message. By the endof June, a new yet more innocuous agree-ment was negotiated with the British and the

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French, this time by Warburg and Moley. Itcommitted no one to anything. It merely ex-pressed the intention of the parties to returnthe pound and the dollar to the gold stand-ard at an unspecified exchange rate and at anunspecified date when the time was right.Again as word of the new agreement cameover the wires, New York financial marketsexpressed their discomfort.

Roosevelt was on his summer yachtingholiday with Morgenthau aboard the schoon-er Amberjack II off the coast of New Eng-land. As he torpedoed this new agreement,he made sure on this occasion not to mincehis words. “I would regard it as a catastropheamounting to a world tragedy,” he cabledfrom the naval destroyer Indianapolis,which had been escorting his boat “if thegreatest conference of nations, called tobring about a real and permanent financialstability . . . allowed itself a purely artificialand temporary expedient. . . .” Condemning

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the “old fetishes of so-called internationalbankers . . . ,” he declared that the currentplans for stabilization were based on a “spe-cious fallacy.” Though Roosevelt would laterconcede that his choice of words for a cableto be publicly released to the whole confer-ence was a little too strong, he had at least fi-nally got his point across with brutal clarity.He would not allow international considera-tions to stand in the way of getting the U.S.economy moving again, and devaluation ofthe dollar was the key to revival.

Maynard Keynes was among the few eco-nomists to applaud Roosevelt’s decision. Inan article in the Daily Mail headlined “Pres-ident Roosevelt Is Magnificently Right,” hehailed the message as an invitation “to ex-plore new paths” and “to achieve somethingbetter than the miserable confusion and un-utterable waste of opportunity in which anobstinate adherence to ancient rules ofthumb has engulfed us.”

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Thereafter the conference limped to a sadclose. A disillusioned Warburg resigned, say-ing, “We are entering upon waters for whichI have no charts and in which I therefore feelmyself an utterly incompetent pilot.”

Roosevelt was still not finished. By Octo-ber 1933, though the dollar had fallen bymore than 30 percent, commodity pricesbegan to sink again and the economy startedto stall once more. Roosevelt decided that itwas time for a new initiative. Warren’s ori-ginal proposal to devalue the dollar had beencontroversial enough. Now the professor re-commended that the government give thedollar another nudge downward by itselfbuying gold in the open market.

On October 22, Roosevelt told the countryin another of his fireside chats, “Our dollar isaltogether too greatly influenced by the acci-dents of international trade, by the internalpolicies of other nations and by political dis-turbances in other continents. Therefore the

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United States must take firmly in its ownhands the control of the gold value of thedollar.” Whereas the first fireside chat hadbrought clarity to a complex issue, this onewas a masterpiece of obfuscation. The fol-lowing day the government started to buygold.

Every one of the president’s economic ad-visers was opposed to the policy. SecretaryWoodin had fallen fatally ill with cancer andUndersecretary Acheson was acting for him.Though the punctilious Acheson believedthat the new policy was in fact against thelaw, he decided to sit on his objections tem-porarily in the hope of heading off evenworse policies. Even so he was contemplat-ing resigning when Roosevelt, falsely sus-pecting that he might be the source of news-paper leaks critical of the gold purchases,fired him. In a surprise appointment, HenryMorgenthau, the man who had first broughtGeorge Warren to Washington, became

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acting secretary of the treasury. In the fol-lowing weeks, Professor Sprague alsoresigned from the Treasury, no doubt disap-pointed at his former student’s failure tograsp the fundamentals of monetaryeconomics.

Every morning at nine o’clock, Mor-genthau; Jesse Jones, the head of the RFC;and George Warren would meet with thepresident over his breakfast of soft-boiledeggs, to determine the price of gold for thatday. They began at $31.36 an ounce. Thenext morning this increased to $31.54, then$31.76 and $31.82. No one had a clue howthey went about setting the price, althougheveryone presumed that some subtle ana-lyses of the world bullion and foreign ex-change markets went into their calculations.In fact, the choice of price was completelyrandom. All they were trying to do was pushthe price a little higher than the day before.The exercise brought out the juvenile in

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Roosevelt. One day he picked an increase of21 cents, and when asked why, replied that itwas a lucky number, three times seven.

Everyone wanted to know more about themysterious “crack-brained” economist ofwhose theories Roosevelt had become so en-amored. Much to the dismay of the publicity-shy Warren, his face appeared on the coverof Time magazine. Reporters finally man-aged to track down the elusive professor whohad taken leave from Cornell; he was livingat the Cosmos Club in Washington andworked from an office in the CommerceBuilding with an unlisted phone number.There were no files in the office—he carriedall his research in his briefcase and slippedin and out of the White House through oneof the side entrances. Anyone knocking atthe door would be greeted with a cry, “Notin!”

As the bridge between the government andthe markets, it was Harrison at the New York

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Fed who actually had to buy the gold. Herewas a man trained to believe that nothingwas more sacrosanct than the value of thecurrency, a protégé of one of the key archi-tects of the postwar gold standard, beingasked to weaken the dollar as an act ofpolicy. It was, as one journalist put it, “likeasking a sworn teetotaler to swallow a bottleof gin.”

Harrison was by nature a diplomat. WithWall Street mocking the president for allow-ing currency policy to fall into the hands ofan expert on chickenfeed, it required all histact and diplomatic skills to act as the inter-mediary between the bankers and a WhiteHouse that was breaking every monetaryconvention in the rule book. When Harrisonfirst informed Norman of the new policy, theBritish central banker “hit the ceiling.” “Thisis the most terrible thing that has happened.The whole world will be put into bank-ruptcy,” he exclaimed. Roosevelt and

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Morgenthau both roared with laughter at thethought of “old pink whiskers”—Roosevelt’snickname for Norman—and the other “for-eign bankers, with everyone of their hairsstanding on end with horror.”

During November and December 1933,Harrison and the president would talk on thetelephone several times a week, sometimesseveral times a day. Though Harrisonthought that Warren’s ideas were completebunkum, he gradually found himself suc-cumbing to Roosevelt’s seductive charm,even becoming an honorary associate mem-ber of the president’s circle. And so while allthe other hard-currency men who had comein with the new administration—Warburg,Sprague, Acheson, Moley—resigned or werefired, Harrison hung in there, convinced thatif he went, Roosevelt might come up withsome even more harebrained scheme; oreven worse, that Congress would get into theact. And he feared the inflationists in

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Congress more than Roosevelt’s predilectionfor wacky ideas.

THE THREE-MONTH interlude in whichRoosevelt spent his breakfast hours man-aging the world’s gold price represents one ofthe more bizarre episodes in the history ofcurrency policy. It undermined the dignity ofthe office of president and diminished re-spect for him abroad. Even Maynard Keynes,who was in favor of managed currencies, dis-missed the exercise as “the gold standard onthe booze.” But at least the dollar staggeredin the right direction.

By the end of the year, Roosevelt had be-gun to tire of the game; and in January 1934he agreed to stabilize gold at $35 to theounce. The dollar had now been devalued byover 40 percent. And while the high priestsof Wall Street had prophesied chaos,

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Roosevelt’s instincts were vindicated. De-valuation changed the whole dynamic of theeconomy.

This worked in two ways. First, as Warrenhad predicted, the fall in the dollar did getprices moving upward—by roughly 10 per-cent per annum. Once prices began rising,the burden of interest payments and the realcost of money were automatically reduced,making businesses more willing to borrowand consumers more ready to spend. By thusshaking the country out of its funk, the dollarmove reversed expectations out of their vi-cious and self-fulfilling downward spiral intoa virtuous circle pointing the other way. Foras the economy developed momentum, therecovery fed on itself.

Devaluation not only changed the dynamicof spending, it also supplied the fuel topower those expenditures. In the four yearsafter 1933, the value of gold held by the Fedalmost tripled, to $12 billion, in part due to

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the higher value of the existing stock of gold,in part to new inflows of gold fromabroad—over $5 billion of additional bullionarrived in the country. Some of this wasdrawn from other central banks. But mostcame from the ground, as the higher pricespurred the mining industry—worldwidegold production added almost $1 billion ayear to world reserves. A high fraction of thisadditional liquidity went into building up thereserves of banks, which, scarred by theyears from 1931 to 1933, took a long time toregain their nerve. Nevertheless, there wasenough money flooding through the systemthat it percolated though to the rest of theeconomy.

As a consequence, during Roosevelt’s firstterm, U.S. industrial production doubled andGDP expanded by 40 percent—the largestpeacetime increase in economic activity in apresidential term. The expansion did not oc-cur in a straight line and was not uniform.

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Confidence was still fragile and recovery thussubject to fits and starts. Investment did notrebound as much as consumption—for manyof the New Deal policies to support wageshurt both profits and general business con-fidence. The economic indicator, which tookthe longest to recover, was employment.Even while production doubled in four years,the number of unemployed remained stub-bornly high—by 1936, there were still tenmillion men without jobs. Again, many ofRoosevelt’s measures to boost prices orwages by government fiat raised the cost ofhiring workers and hampered recovery. Be-cause the contraction had gone so deep, itstill took ten years for the economy to regainits old trend.

While the rebound was powered by anabundance of money at low interest rates,the Fed found itself ejected from the drivingseat. Having made such a mess during the

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collapse, it had lost whatever prestige it oncepossessed.

In 1935, Congress passed a banking act de-signed to reform the Federal Reserve.Authority for all major decisions was nowcentralized in a restructured Board ofGovernors. The regional reserve banks werestripped of much of their powers and re-sponsibility for open market operations wasnow vested in a new committee of twelve,comprising the seven governors and a rotat-ing group of five regional bank heads, re-named presidents. The secretary of the treas-ury and the comptroller of the currency wereremoved from the Board, giving it theoretic-ally even greater independence from an ad-ministration. While these measures im-proved the efficiency of the Fed’s decision-making machinery, they came ironicallyenough at a time when there were few de-cisions to take. In 1934, Marriner Eccles, aMormon banker from Utah, had taken over

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as the head of the Federal Reserve Board.Scarred by the experiences of running a bankduring the Great Depression, Eccles held tothe view that with unemployment still highand confidence still weak, the Fed’s primetask should be to keep interest rates as lowas possible.

Though the New York Fed lost much of itsclout and was now overshadowed by theBoard in Washington, George Harrison sol-diered on as its president for another eightyears. In 1941, he left to become the chief ex-ecutive the New York Life Insurance Com-pany. During World War II, he was asked byhis old friend Henry Stimson, now secretaryof war, to become his special assistant formatters related to the Manhattan Project. Heserved on the Interim Committee, a secrethigh-level group formed in May 1945 to ex-amine problems related to the creation of theatomic bomb and to advise on its use againstJapan. On July 16, after the successful

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detonation of the world’s first nuclear devicein the New Mexico desert, it was Harrisonwho was the author of the now-famous cableto Secretary Stimson and President Trumanat Potsdam: “Operated on this morning. Dia-gnosis is not complete but results seem satis-factory and already exceed expectations.”

After the war he returned to the New YorkLife Company. Like so many central bankers,he married late—at the age of fifty-three—toMrs. Alice Grayson, widow of his old friendAdmiral Grayson, who had been WoodrowWilson’s doctor and accompanied him to theParis Peace Conference. Harrison died in1958 at the age of seventy-one.

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22. THE CARAVANS MOVEON

1933-44

If a man will begin with certainties,he shall end indoubts; but if he will be content tobegin withdoubts, he shall end in certainties.

—FRANCIS BACON

BREAKING with the dead hand of the goldstandard was the key to economic revival.Britain did so in 1931 and began its recovery

that year. The United States followed inMarch 1933 and that proved to be the lowpoint in its depression. France hung on to itslink with gold for the longest. In 1935, Clé-ment Moret was fired as governor of theBanque de France for resisting governmentmeasures to utilize its gold reserves to ex-pand credit. Only in the following year didFrance finally abandon the gold standard. Itwas thus the last of the major economies toemerge from depression.

The exception to this pattern was Ger-many. After the summer 1931 crisis, it de-faulted on reparations and introduced ex-change controls. But it never officially leftthe gold standard. Still obsessed by an archa-ic fear of inflation, a carryover from 1923,and despite having no gold reserves, Ger-many decided to act as if it were still on gold,nailing itself to a sort of shadow standardand thereby forgoing the benefits of a cheapcurrency. x When Britain devalued the

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pound in September, German foreign tradecompletely collapsed.

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Schacht with Adolf Hitler

FIGURE 8

The continued economic slide in 1932 pre-cipitated even more political turmoil. In May1932, Brüning was turned out of office by aright-wing cabal. The following month,France and Britain, finally recognizing that itwas impossible to squeeze any money out of

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Germany in the current environment, form-ally agreed to forgive all reparations. In thefourteen years since these had first been im-posed, the Allies, who had once demanded$32 billion, and had settled on $12 billion,had succeeded in collecting a grand total of$4 billion from their old enemy.

Brüning was replaced by Franz von Papen,an ex-cavalry officer from an impoverishedaristocratic family who had married intowealth and whose only talent was his horse-manship. In August, he called new elections,in which the Nazis won 230 seats, more thandouble their previous representation, mak-ing them the largest party in the Reichstag.But President Von Hindenburg was not yetready to invite the “Bohemian Corporal,” ashe referred to Hitler, to become chancellor.

In 1931, Hjalmar Schacht had been inter-viewed by the American journalist DorothyThompson. “If Hitler comes to power, theNazis can’t run the country financially,

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economically. Who will run it?” she asked. “Iwill,” replied Schacht. “The Nazis cannotrule, but I can and will rule through them.” Ithad become clear to him even then that itwas only a matter of time before Hitlerwould become chancellor.

Schacht would later claim that he never al-lowed himself to fall under Hitler’s spell andthat because Hitler needed him, he was ableto maintain a certain degree of independ-ence. This is not apparent in a creepy letterhe wrote to Hitler after the August elections,congratulating him on his victory and regret-ting that he was not already chancellor:“Your movement is carried internally by sostrong a truth and necessity that victory inone form or another cannot elude you forlong. During the time of the rise of yourmovement you did not let yourself be ledastray by false gods. . . . If you remain theman that you are the success cannot eludeyou for long.” But the main purpose of the

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letter was to urge Hitler to avoid becomingentangled in economic ideology—for Schachtrealized that if he wanted to run Nazi eco-nomic policy, he would have to counteractsome of the anticapitalist sloganeering of theparty’s left. At this stage he believed that itsvirulently anti-Semitic ragings were restric-ted to a lunatic fringe. He ended by salutingHitler “with a vigorous Heil.”

Over the next few months, as the Nazismaneuvered to undermine successive gov-ernments in the Reichstag, Schacht became aprominent supporter of the movement and amajor fund-raiser for the party. In Novem-ber, he was one of twenty-tour industrialists,including the steel magnate Fritz Thyssenand the arms manufacturer Gustav Krupp,who signed a public letter urging VonHindenburg to appoint Hitler chancellor. Inan interview carried in newspapers aroundthe world, Schacht declared that Hitler was“the only man fit for the Chancellorship.”

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Finally, in January 1933, the presidentbowed to necessity and appointed the “Bo-hemian corporal” as chancellor.

Two months later, on March 16, 1933,Schacht was back at the Reichsbank, after athree-year hiatus. Hitler, who showed littleinterest in economics, had two overridingobjectives—to combat unemployment and tofind the money to rearm. The details of howto achieve these goals he left to Schacht, whoin those early years was given almost com-plete control over economic policy—in addi-tion to being president of the Reichsbank, hebecame minister of the economy in August1934. Hitler would later confess that hethought Schacht “a man of quite astonishingability . . . unsurpassed in the art of gettingthe better of the other party. But it was justhis consummate skill in swindling otherpeople which made him indispensable at thetime.”

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Displaying the inventive genius that dis-tinguished him as the most creative centralbanker of his era, immediately upon takingoffice, Schacht threw the whole baggage oforthodox economics overboard. He em-barked on a massive program of publicworks financed by borrowing from the cent-ral bank and printing money. It was a re-markable experiment in what would come tobe known as Keynesian economics even be-fore Maynard Keynes had fully elaboratedhis ideas. Over the next few years, as theGerman economy experienced an enormousinjection of purchasing power, it underwenta remarkable rebound. Unemployment fellfrom 6 million at the end of 1932 to 1.5 mil-lion four years later. Industrial productiondoubled over the same period. Schacht alsorenegotiated the terms of Germany’s massiveforeign debts, ruthlessly playing off its cred-itors against one other, particularly the Brit-ish and the Americans.

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The recovery was not quite the miraclethat Nazi propagandists made everyone be-lieve it was. Though there were some highlyvisible achievements—the creation of mil-lions of jobs, the construction of the famedautobahns—the boom remained stunted andlopsided. Much of the increase in productioncame in arms-related industries, such asautos, chemicals, steel, and aircraft, whilesuch everyday consumer items as clothing,shoes, and furniture stagnated. As a con-sequence, the standard of living of ordinaryGermans rose hardly at all. They had to con-tent themselves with a drab existence ofshoddy goods made of ersatz materials—sug-ar from sawdust, flour made with potatomeal, gasoline distilled from wood, margar-ine from coal, and clothes made out of chem-ical fibers.

While other European countries let theircurrencies fall against gold, Schacht, motiv-ated by a combination of concern for prestige

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and fear of inflation, refused to break offi-cially from gold and devalue the Reichsmark.German goods were overpriced on the worldmarkets and its exports stagnated. In orderto cope with the pressures created by thisbloated exchange rate, an elaborate systemof import controls was put in place and for-eign trade was largely based on barter.Under this “Schachtian” system, Germanywas reoriented from an open economy integ-rated with the West to a closed autarkic eco-nomy connected to Eastern Europe and theBalkans, a precursor of the inefficient Soviettrade system of the 1950s and 1960s.

Behind the gleaming achievements, there-fore—the autobahns, the Volkswagen, theJunker bombers, and the Messerschmittfighter planes—the Nazi economy was a rick-ety machine plagued by shortages and rely-ing heavily on rationing to allocate scarceconsumer goods.

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Schacht, once such a strong believer in anopen Germany integrated with the West, jus-tified himself by arguing that he had beendriven to the policy of hunkering down andlooking inward by a deranged internationalsystem: “The whole modern world is crazy.The system of closed national boundaries issuicidal . . . everybody here is crazy. And soam I. Five years ago I would have said itwould be impossible to make me so crazy.But I am compelled to be crazy.”

When he first came to power, Schachtused to say that he would be willing to makea pact with the devil in order to restore Ger-man economic strength. By the late 1930s,he began to fear he had done just that. Henever joined the Nazi Party nor did he be-come a member of Hitler’s inner circle. Butas the regime’s abuse of power mounted, hefound himself increasingly at odds with thedirection of those who ran it. He had alwayskept his distance from the other Nazi

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bigwigs—Himmler, Göring, Goebbels— oftentreating them with contempt and relying onHitler to protect him. Now he came intoopen conflict with them, especially overcorruption.

On the Berlin cocktail circuit the rumorwas that Schacht had the banknotes issued tothe ministries controlled by Göring,Goebbels, and Himmler marked, thus en-abling him to track how much ended up inforeign accounts. He was increasingly heardreferring to the Nazis as a bunch of “crimin-als” and “gangsters,” and even calling Hitlera “cheat and a crook.”

Schacht was not above exploiting the pop-ular irrational hatred and suspicion of Jewsby peppering his speeches with anti-Semiticremarks. Nevertheless, he fought againstmany of the regime’s more extreme policiesagainst Jews not so much on moral groundsas out of the pragmatic fear that they wereharming the economy. In 1938, he was one

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of the architects of a plan to allow four hun-dred thousand German Jews to emigrateover the coming three-year period, their as-sets to be expropriated and placed in a trustas collateral for bonds that were to be sold torich Jews outside Germany. The money soraised was to be used to resettle GermanJews and to subsidize German exports—amacabre extortionary scheme in effect toransom these desperate people. It placed theinternational Jewish community in aquandary—whether to agree to a plan thatimplicitly sanctioned seizing Jewish propertyin Germany and Austria, channeling moneyto the Nazi regime and setting a precedentfor other blackmail elsewhere in Europe, butwhich had the potential to save lives. Schachtwould later defend himself by claiming thathis scheme could have saved hundreds ofthousands of lives—he seemed conspicuouslyunaware of the moral dilemmas it posed. In

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any case, it died for lack of money and ofcountries willing to accept the refugees.

By 1937, the strains of helter-skelterrearmament and deficit financing began totell. Shortages began to bite. Schacht tried topush Hitler to go slow on the arms buildupand ease up on consumer austerity. InNovember 1937, after falling out with Her-mann Göring, he was fired by Hitler as min-ister of the economy and replaced by WalterFunk, an alcoholic homosexual. Two yearslater, when Schacht tried to resist furthercentral bank financing of the ever-growingbudget deficit, he was also removed from theReichsbank, again to be replaced by Funk.Though Hitler gave him the titular positionof minister without portfolio, this was largelywindow dressing for foreigners—Schacht wasstill respected by the international bankingcommunity—and he was now for all intentsand purposes a private citizen.

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In the years immediately before the war,Schacht took a leading part in several of theconspiracies by conservative politicians andbusinessmen to overthrow Hitler. They in-volved trying to induce members of the armyhigh command to stage a coup by convincingthem that under the Nazis, Germany wouldbe plunged into a war for which it was ill pre-pared. The first took place in 1938 whenHitler tried to take over Czechoslovakia.Plans for that pustch were aborted at the lastminute when British prime minister NevilleChamberlain and French premier ÉdouardDaladier backed away from the brink bymaking concessions at Munich. A second oc-curred in late 1939 in the weeks before theinvasion of Poland. This final conspiracy wasovertaken by events before the plotters couldact.

After war broke out, Schacht kept a lowprofile, retiring to his estate in Gühlen awayfrom the intrigue and paranoia of Berlin. It

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was ironically a time of great personal happi-ness. His first wife died in 1940. They hadbecome estranged over time and lived apart.The following year, at the age of sixty-four,he married a woman thirty years his junior, amuseum curator whom he had met at a fash-ionable Munich nightclub. Over the nextthree years, they had two children, both girls.

Though Schacht remained on the fringesof the resistance movement, he was nevertrusted enough to be included in the innercircles. But his name was frequently mootedas a potential successor to Hitler in the eventof a coup. In April 1944, his son-in-law Hil-ger von Scherpenberg, a German foreign ser-vice officer based in Stockholm, was arrestedby the Gestapo. Following the failed July 20plot to assassinate Hitler, Schacht was alsoarrested and imprisoned in Berlin—not be-cause of any evidence of his complicity butbecause of his potential usefulness as a host-age or an intermediary in future negotiations

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with the Allies. In April 1945, he was sent toDachau. Two weeks later, as the Alliedarmies advanced into Germany, he was oneof a group of high-value prisoners, includingPrince Philip of Hesse: the French ex-primeminister Léon Blum and his wife; GeneralFranz Halder, formerly chief of the armystaff, and his wife; Fritz Thyssen, the steelbaron; and Prince Frederick Leopold ofPrussia, who were shipped out—to be tradedas potential hostages. They were finally liber-ated by the Allies from a camp in the south-ern Tyrol.

Instead of greeting Schacht as a hero, theAmericans arrested him, and he was amongthe twenty-four major figures to be prosec-uted at Nuremberg. Furious at being lumpedin with the “gangsters” of the Nazi regime, heinsisted that he was different, that he had ac-ted only in self-defense to protect Germanyagainst the Allied economic stranglehold andhad broken with the führer once he realized

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war was inevitable. A prison psychologist de-scribes Schacht losing his temper one dayand ranting, “Don’t forget what desperatestraits the Allies drove us into. They hemmedus in from all sides—they fairly strangled us!Just try to imagine what a cultured peoplelike the Germans has to go through to fall fora demagogue like Hitler. . . . All we wantedwas some possibility for export, for trade, tolive somehow. . . .”

In the lead-up to the trial, each of the de-fendants was subject to extensive interroga-tion, a battery of psychiatric interviews, andeven an intelligence test—Schacht achievingthe highest score, 143. During the ensuingtrial, he found it hard to disguise his fury.The novelist John Dos Passos described himas glaring “like an angry walrus” during thewhole proceedings. Rebecca West wrote thathe sat “twisted in his seat so that his tallbody, stiff as a plank, was propped againstthe side of the dock. Thus he sat at right

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angles to his fellow defendants and lookedpast them and over their heads: it was alwayshis argument that he was far superior toHitler’s gang. He was petrified by rage be-cause this court was pretending to have thisright. He might have been a corpse frozen byrigor mortis. . . .”

Schacht and Von Papen were acquitted, onthe grounds that their involvement with theNazi regime had ended before war broke out.Three days after being released, he was re-arrested by the new government of the Stateof Bavaria under its de-Nazification laws.After five different trials, all of which endedwithout a conviction, he was finally releasedin 1950.

In the last few days of the war, his onlyson, Jens, had been captured by the Russiansand was never heard of again, one of thecountless German soldiers who disappearedin the death march of prisoners on theEastern front. Destitute at the age of

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seventy-three, Schacht started a new life anda new career as an independent economicconsultant and became an adviser to the gov-ernments of Indonesia, Egypt, and Iran. Hedied, substantially prosperous, in 1970, agedninety-three. To the end he refused to con-cede that he had ever done anything wrong.

THE WAR MADE for strange bedfellows.The other member of the quartet, ÉmileMoreau, had become president of theBanque de Paris et des Pay-Bas after retiringas governor of the Banque de France in Octo-ber 1930. In 1940, after the fall of France andthe German occupation, Moreau was forcedout by the Vichy regime for being too sym-pathetic to Britain—the ultimate irony for aman who at the peak of his career had donehis best to undermine British dominance infinance.

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Horrified at the social and ideological con-flicts by which France was riven in the 1930s,Moreau became progressively more disillu-sioned with French republican politics andparliamentary democracy. He could not sup-port the left, and the right was becomingmore fascist by the day. Instead, he became aroyalist—a quixotic commitment. Royalistswere a fringe group—one poll found less than6 percent of the French believed that themonarchy had any role whatever to play inthe politics of the country.

In 1935, he took on the position of secret-ary to the pretender to the throne, Jeand’Orléans, duc de Guise, great-grandson ofLouis Philippe, the liberally inclined king ofFrance from 1830 to 1848. The law of exilepassed in 1886 prohibited the heirs of formerFrench dynasties from entering France, andMoreau acted as the duke’s liaison in France.In 1940, when Jean d’Orléans died, his sonHenri, comte de Paris, succeeded as

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pretender. After the fall of France that year,Henri tried to provide a bridge between theFree French and the collaborators at Vichyand for a brief moment there was even talkthat the monarchy might return. ThoughMoreau did his best to promote the idea,nothing came of it and the comte de Paris re-turned to his place on the social pages ofParis Match.

In 1950, the law of exile was finally re-pealed and the comte de Paris was allowedback to France. Moreau lived long enough toreceive his beloved sovereign at his home inParis, which subsequently became the secret-ariat for the comte’s activities. Moreau diedthat November.

WHILE HJALMAR SCHACHT was propelledback into power during the 1930s, his friendMontagu Norman had to content himself

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with a much diminished role in British andinternational financial affairs. In October1933, he crowned his annual Mansion Housespeech by quoting an old Arab proverb: “Iconsole myself with this thought, that thedogs bark but the caravan moves on.” In theold days it would have been viewed as one ofthose enigmatic Zen-like pronouncementsthat evidenced the governor’s superior wis-dom. Instead, it now provoked an outcry.The implication that his critics were no morethan barking dogs unleashed a torrent of in-dignation directed against the entire bankingand financial establishment. “They werewrong about reparations from Germany andits effects. They were wrong when they ad-vised Mr. Churchill about the gold standard,and wrong when they pled in 1931 that theresuspension of the standard would knockthe bottom out of civilization.” He was in-creasingly viewed as an “old gentleman com-plaining that things were not what they

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were.” Despite all this, he was reappointedgovernor for an additional eleven years—per-haps because with his authority so dimin-ished there was little damage he could do.

In the late 1930s, he became associatedwith the party of appeasement. Though hewas not part of the whole Cliveden setaround Nancy Astor, finding the whole at-mosphere of political gossip and scandal dis-tasteful, he shared their belief that anotherwar would just be too catastrophic to con-template and was willing to do almost any-thing to avoid it. Appeasement was still thena respectable word—it had not yet come toimply cowardice or self-deception. Indeed, itwas considered to be not simply a pragmaticpolicy but a moral one as well. In the wake ofthe carnage of the First World War, pacifismwas much in vogue, and German anger andbitterness at the Treaty of Versailles wereviewed as justified. In Norman’s case thiswas reinforced by his preference for the

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diligent Germans over the treacherousFrench and for his admiration of Schacht,and during the early years of Nazi rule, eventhe achievements of Hitler—he is said tohave told a Morgan partner that “Hitler andSchacht are the bulwarks of civilization inGermany.”

In the last months of 1939, as war seemedincreasingly likely, he lamented to the U.S.ambassador in London, Joseph Kennedy, “Ifthis struggle goes on, England as we haveknown her is through. . . . Without gold orforeign assets, England’s trade is going to beforced to narrow itself more and more. . . .The end is likely to be that . . . the Empirewill contract in power and size to that of oth-er nations.”

During the 1930s, he and Schacht main-tained their close friendship—they wouldmeet regularly at the monthly BIS meetingsin Basel. In January 1939, he visited Berlinto attend the christening of Schacht’s

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grandson, who was named Norman in hishonor. The Foreign Office tried to convincehim that, in the circumstances, such a visitwas undesirable, but Norman insisted on go-ing. It was to be their last meeting. Oncetheir two countries were at war, they couldnot communicate, though there were con-stant rumors even in official circles that theystayed in touch. After the war, while Schachtwas in prison, Norman sent him food par-cels. But when the German tried to come toBritain in 1950 to visit his old friend, he wasdenied a visa.

In 1944, during a bad fog, Norman trippedover a large granite stone at his country cot-tage, and after grazing his leg, developed aninfection that spread to his brain. Though herecovered after an operation, his health wasnow seriously impaired and he was finallypersuaded at the age of seventy-three to re-tire as governor. He was elevated to the peer-age that year as Lord Norman of St. Clere,

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the name of the village in Kent where hisgrandfather’s house was located and whichhe had inherited from his uncle. He spentmost of his last years there as an invalid. Hedied in 1950.

Norman himself provided the mostpoignant assessment of his own career. In1948, he wrote: “As I look back, it now seemsthat, with all the thought and work and goodintentions, which we provided, we achievedabsolutely nothing . . . nothing that I did, andvery little that old Ben did, internationallyproduced any good effect—or indeed any ef-fect at all except that we collected moneyfrom a lot of poor devils and gave it over tothe four winds.”

AFTER 1931, As Norman’s star fell, that ofMaynard Keynes rose. Before the breakup ofthe gold standard Keynes had been the

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maverick. After the rupture he was increas-ingly acknowledged to have been right notsimply about the gold standard but about al-most every one of the battles in which he hadbeen engaged during the previous decade.German reparations had now been canceled;France and Britain had defaulted on wardebts; and the two major central banks, theBank of England and the Fed, had embraceda policy of keeping money deliberatelycheap.

With the world economy still stuck in theDepression, Keynes took a step back frompublic life and began work on a new theoret-ical book—an attempt to understand thecauses of mass unemployment. Some of thedriving forces behind the Depression, suchas the collapse in Germany, could be ex-plained by country-specific factors, for ex-ample, reparations and the overhang of for-eign debt. But the United States had sufferednone of these problems—it was a creditor

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country and had ample gold reserves. That ittoo had been hit by a downturn as deep, insome respects deeper, as that in Europe re-mained a mystery. Keynes wanted to under-stand how an economy could get stuck insuch a severe slump and what might preventconventional corrective forces—cuts in in-terest rates, for example—from working.

He drew on many of the same themes thathad informed much of his previouswork—the pervasive effects of uncertainty,the ways in which the financial system couldshort-circuit the normal operations of theeconomy, the inherent instability caused byfluctuations in confidence. The book was notcompleted until late 1935, and was pub-lished, in February 1936, as The GeneralTheory of Employment, Interest, andMoney. By the time it came out, Britain, theUnited States, and Germany were all on theroad to recovery and the book itself did nothave much impact on immediate

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government policy. Nevertheless, it was to beKeynes’s masterpiece. While it was not uni-versally accepted and indeed remained bit-terly disputed for many years, it transformedthe understanding of the modern monetaryeconomy and still today provides the founda-tion for much of the government and centralbanks’ management of the system.

A year after The General Theory was pub-lished, in the spring of 1937, Keynes sufferedthe first of his many “heart attacks.” He wasdiagnosed with a chronic cardiac conditioncaused by a bacterial infection of the heartvalves. For the next three years he was al-most an invalid. In 1939, he fell into thehands of a Dr. Janos Plesch, a HungarianJewish émigré, who, according to Keynes,was a cross between a “genius” and a“quack.” In addition to some highly unortho-dox protocols—three-hour sessions of icepacks placed on the chest or Dr. Pleschjumping up and down on his patient as he

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lay in bed—the doctor put Keynes on acourse of the newly discovered and much invogue sulfa drugs, the first and only effectiveantibiotic in the years before the large-scaleuse of penicillin. Though his heart conditionwas not completely cured, under the care ofthe eccentric Dr. Plesch—whom Lydia nick-named “The Ogre”—Keynes was at least ableto return to work.

During the 1930s, Keynes’s speculativeactivities made him a rich man. After losing80 percent of his money when commodityprices collapsed after 1928, he had ended1929 with a portfolio of under $40,000. Heshifted his strategy from short-term specula-tion to long-term investment and at the lowsof the Depression put together a concen-trated portfolio of a select number of Britishand American equities. Convinced thatRoosevelt would succeed in reviving the U.S.economy, Keynes used margin to leveragehis portfolio by as much as two to one. By

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1936, his net worth was close to $2.5 mil-lion—the equivalent today of $30 million.Though the bear market of 1937 more thanhalved this, by 1943 it had recovered to $2million.

By the late 1930s, Keynes was the mostfamous economist in the world and a pillarof the British establishment. He was elevatedto the peerage in 1941, as Lord Keynes ofTilton, and much to the amusement of hisbohemian Bloomsbury friends, was to befound regularly in attendance at the Houseof Lords. He was even invited to be a directorof the Bank of England by his old opponent,Montagu Norman. While they continued todisagree—“I do enjoy these lunches at theBank: Montagu Norman, always absolutelycharming, always absolutely wrong,” he re-marked after one of his regular weekly meet-ings—it was now Keynes’s ideas that were inthe ascendancy.

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When the Second World War broke out inEurope, Keynes became an unpaid economicadviser to the chancellor of the exchequer.Within a short time he was Britain’s princip-al wartime economic strategist. Determinedto avoid a repeat of the mistakes of the FirstWorld War, which had largely been financedby printing money, Keynes designed theframework for paying for this war without asmuch recourse to inflation. He also acted asthe principal negotiator for Britain with theAmericans over the scope, terms, and condi-tions of Lend-Lease.

In 1942, he turned his attention to plan-ning for the postwar world. After the FirstWorld War, central bankers had tried to re-create the golden age before 1914, to whichthey looked back so nostalgically. Keynes, inputting together his plan for a new interna-tional monetary system, had no such illu-sions—no one, least of all him, looked back

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except with horror to the chaos of the twen-ties and thirties.

In developing his ideas for the postwarworld, Keynes sought to create an interna-tional financial system based like the goldstandard on rules while tempering its rigid-ity. His plan called for currencies to be“pegged but adjustable.” In contrast to thegold standard, under which currency valueswere supposed to be immutable fixed points,countries would be allowed to alter the valueof their currencies when their economic cir-cumstances changed. He was determined toavoid the need for the sort of straitjacketpolicies of the twenties and thirties whenGermany and Britain had been forced to hikeinterest rates and create mass unemploy-ment to protect currency values that were inany case unsuitable.

A second element of the plan was an inter-national central bank. In order to avoid thechronic shortage of gold reserves that had

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prevented the global financial system fromfunctioning smoothly between the wars,Keynes proposed creating an institution thatwould lend money to countries in need on atemporary basis, rather like an overdraft fa-cility at a bank.

Luckily for Keynes, the Americans beganworking independently on a similar concep-tion. The architect of the U.S. plan was HarryDexter White, the assistant secretary for in-ternational affairs at the U.S. Treasury.White had been born in Boston in 1892 ofLithuanian parents who had fled the czaristpogroms. Educated at Stanford and Harvard,he had eventually joined the Treasury in1934 as a New Dealer and enjoyed a meteoricrise within the department through a com-bination of hard work, intelligence, and flat-tery in the right places.

Short and stocky with a round face, rim-less glasses, and fleshy lips topped by a trimmustache, White was an unprepossessing

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man with few friends. He seemed unable toresist being overbearing and rude in his pro-fessional dealings, even to his colleagues,and he has variously been described by thosewho knew him as “the unpleasantest man inWashington,” “a son-of-a bitch,” and “an in-tolerable human being.” Keynes, who was re-markably able to put up with people’s foiblesand idiosyncrasies, wrote that “he has notthe faintest conception of how to behave orobserve the rules of civilized discourse.” Buteven though White was often overtly anti-British, Keynes grew to develop great respectfor his incisive intelligence, his single-mindedness, and his drive.

White also happened to be a Soviet agent,originally recruited in 1935 to the same spyring that included Whittaker Chambers andAlger Hiss. During the war, along with sever-al colleagues at the Treasury’s Division ofMonetary Research, whom he talked into thecause, he did much to support the Soviet war

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effort and beyond. As the principal Treasuryrepresentative on interagency committeesdealing with international affairs, Whitehandled more pieces of classified informa-tion than any other single official in the ad-ministration, including the president, andpassed on secrets about the whole range ofU.S. financial policies to Soviet intelligence,including U.S. strategy on financial aid to theUSSR. He helped the Communist cause inChina by delaying payments of American aidto Chiang Kai-shek, and arranged for theU.S. government to furnish the Soviets witha duplicate set of printing plates of the cur-rency to be issued under the Allied occupa-tion of Germany—thereby allowing the Sovi-ets to finance their share by printing Americ-an money with American-supplied plates.When these activities eventually came tolight after the war, he insisted that he hadnot been a Soviet agent—he was neither amember of the Communist Party nor had he

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accepted any money from the Soviets—buthad only been acting in the best interests ofthe United States, believing that the UnitedStates and the Soviet Union, allies at thattime, had closely aligned objectives. But in1942, no one was yet aware of White’s secretlife.

As originally conceived, the British andAmerican plans did differ in emphasis.Keynes’s plan was more ambitious in sizeand scope. Remembering the acute lack of li-quidity during the 1920s, he wantedsomething closer to a world central bankwith the power to create an internationalcurrency; White wanted an institution morelike an international credit cooperative thatwould give countries access to loans, the sizeof which would be constrained by theamounts paid in by the other member coun-tries. Keynes wanted the fund to be $26 bil-lion, while White, conscious that the UnitedStates would be paying much of the bill,

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wanted to limit it to $5 billion; they finallycompromised on $8.5 billion. Keynes alsowanted to introduce a mechanism for discip-lining countries that unfairly cheapenedtheir currencies and accumulated excessiveamounts of the world’s reserves without re-cycling them, as France had done in thetwenties and thirties. But the United States,fearing that in the aftermath of the war itmight find itself flooded with gold, and thusbe accused of underpricing its currency,would not agree.

After two years of negotiations betweenKeynes and White, the differences wereironed out—largely in favor of the morepowerful Americans. By 1944, with much ofthe design work done and with the two prin-cipal Western Allies in a position to present aunited front, the United States felt ready toinvite some forty-four countries to a confer-ence to discuss reconstructing the postwarinternational monetary system.

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The United States chose to host the gath-ering at the Mount Washington Hotel atBretton Woods in the White Mountains ofNew Hampshire. With its rural seclusion,mild summer weather, and cool high-countryair, it was a perfect site for such a meeting.Built in 1902 to cater to rich Bostonians andNew Yorkers escaping the summer heat ofthe East Coast, the hotel looked like a greatSpanish castle, with white stucco walls, twolarge castellated turrets, and a red roof. Theinterior was decorated in a rich Victorianstyle with Tiffany stained-glass windows.Though the hotel had fallen upon hard timesin the 1930s, a victim of the Depression, ithad recently been bought and refurbished bya syndicate of Boston-based investors.Moreover, unlike most large hotels in theWhite Mountains, which did not allowJews—inconvenient for a conference hostedby Treasury Secretary Morgenthau, himself

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Jewish—the Mount Washington had no suchrestrictions on guests.

The conference opened on June 30, 1944.In contrast to the many international sum-mits of the interwar period, which had beencharacterized by a corrosive atmosphere ofmistrust, Bretton Woods was a collegial, al-most jovial, affair. “The flow of alcohol is ap-palling,” wrote Keynes. With 750 delegates,and even more assistants, it was, accordingto Lydia Keynes, a “madhouse with mostpeople . . . working more than humanly pos-sible.” Committees met all day, broke forevening cocktails and rounds of dinnerparties, reconvening thereafter till 3:00 a.m.,only to resume at 9:30 the next morning.

By the time of the Bretton Woods confer-ence, Keynes’s wartime efforts had taken asevere toll on his health. The drugs, whichPlesch had prescribed, had not cured thebacterial infections in his heart, and he wasnow seriously sick. Lydia forbade Keynes to

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attend the cocktail parties and required himto take his dinner with her in their suite.Nevertheless, she contributed her own partto the madhouse atmosphere by doing balletexercises late at night in her room and keep-ing other guests awake, including Mrs. Mor-genthau in the suite below.

Much of the negotiating had been doneprior to the conference between the Americ-ans and the British. At Bretton Woods, thebiggest controversy was over how muchmoney each country would be eligible to bor-row from what was now being called the In-ternational Monetary Fund. The Russians,who were there in strength though very fewof them spoke English, demanded that theirborrowing rights reflect not simply economicpower but also military strength, and in-sisted on equality with the British; Indiawanted to be on a par with China; the Bolivi-ans wanted parity with the Chileans and theChileans with the Cubans. The United States,

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as the fund’s prime financier, set thesequotas in a series of back-room deals orches-trated by White.

On July 22, the conference came to itsformal close with a great banquet. Keynesgave a final address. He reminding the parti-cipants of the economic chaos that had afflic-ted the world for almost a generation andpaid tribute to the spirit of cooperation thathad informed the discussions: “If we can socontinue, this nightmare, in which most of uspresent have spent too much of our lives, willbe over. The brotherhood of man will havebecome more than a phrase.” As he left theroom, the delegates sang “For He’s a JollyGood Fellow.”

Two years later, Keynes’s heart finally gaveout and he died at the age of sixty-one. Whitewas appointed the U.S. executive director ofthe International Monetary Fund after thewar, but in 1947, under investigation by theFBI, he was forced to resign, citing ill health.

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The next year, after being publicly named asa Soviet agent by Whittaker Chambers, hewas called to testify before the House Com-mittee on Un-American Activities. Threedays after his testimony, on August 16, 1948,he, too, collapsed and died of a heart attackat the age of fifty-six.

Nevertheless, the legacy of these two men,the international monetary arrangementsknown as the Bretton Woods System, fruit-fully endured for another thirty years. Itprovided the foundations for the reconstruc-tion of Europe and Japan after the war, it al-lowed the global economy to boom throughmuch of the 1950s and 1960s without any ofthe financial crises that had been so much apart of its history, and it set the stage for oneof the longest periods of sustained economicgrowth the world has ever seen.

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23. EPILOGUE

I have yet to see any problem,however complicated,which, when looked at in the rightway did not becomestill more complicated.

—Poul ANDERSON

ANYONE who writes or thinks about theGreat Depression cannot avoid the question:Could it happen again? First it is importantto remember the scale of the economic melt-down that occurred in 1929 to 1933. During athree-year period, real GDP in the major eco-nomies fell by over 25 percent, a quarter ofthe adult male population was thrown out of

work, commodity prices fell in half, con-sumer prices declined by 30 percent, wageswere cut by a third. Bank credit in the UnitedStates shrank by 40 percent and in manycountries the whole banking system col-lapsed. Almost every major sovereign debtoramong developing countries and in Centraland Eastern Europe defaulted, includingGermany, the third largest economy in theworld. The economic turmoil created hard-ships in every corner of the globe, from theprairies of Canada to the teeming cities ofAsia, from the industrial heartland of Amer-ica to the smallest village in India. No otherperiod of peace time economic turmoil sincehas even come close to approaching thedepth and breadth of that cataclysm.

Part of the reason for the extent of theworld economic collapse of 1929 to 1933 wasthat it was not just one crisis but, as I de-scribe, a sequence of crises, ricocheting fromone side of the Atlantic to the other, each one

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feeding off the ones before, starting with thecontraction in the German economy thatbegan in 1928, the Great Crash on WallStreet in 1929, the serial bank panics that af-fected the United States from the end of1930, and the unraveling of European fin-ances in the summer of 1931. Each of theseepisodes has an analogue to a contemporarycrisis.

The first shock—the sudden halt in theflow of American capital to Europe in 1928which tipped Germany into recession—hasits counterpart in the Mexican peso crisis of1994. During the early 1990s, Mexico, muchlike Germany in the 1920s, allowed itself toborrow too much short-term money. WhenU.S. interest rates rose sharply in 1994, Mex-ico, like Germany in 1929, found it progress-ively harder to roll over its loans and wasconfronted with a similar choice between de-flation or default.

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There are, of course, differences. Germanyin 1928 was much larger compared to theworld economy—about three times the relat-

ive economic size of Mexico in 1994.51 Butthe biggest difference was to be found in themanagement of the crisis. The U.S. Treasuryunder Secretary Robert Rubin forestalled adefault by providing Mexico an emergencycredit of $50 billion with astonishing rapid-ity. Germany in 1929 had no such savior.Moreover, in 1994, Mexico could devalue thepeso. In 1929, having only just emerged froma terrible bout of hyperinflation, Germanyfelt bound by gold-standard rules and sacri-ficed its economy to maintain the parity ofthe Reichsmark.

The second crisis of the series, the GreatCrash, has a very obvious modern-day paral-lel in the fall of the stock market in 2000.Both followed a frenzied bubble in whichstocks completely lost touch with economicreality, becoming grossly overvalued—by

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most measures 30 to 40 percent. In bothcases, after the sell-off it became apparentthat much of the rise had been pushed by arogue’s gallery of Wall Streeters and corpor-ate insiders. Both resulted in similar lossesinitial in wealth expressed as a percentageofGDP—roughly 40 percent in the firstyear—and were followed by a sharp contrac-tion in investment. The reaction of the au-thorities was not that dissimilar—in the firstyear after the 1929 crash interest rates in theUnited States were cut from 6 percent to 2percent; in 2000 they were slashed from 6.5percent to 2.0 percent.

The 1931-33 sequence of banking panicsthat started with the failure of the Bank ofUnited States has many of the same charac-teristics as the current global financial crisisthat began in the summer of 2007 and, as Iwrite, is still sweeping through the world’sbanking system. Both originated with doubtsabout the safety of financial intermediaries

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that had sustained large losses. In 1931-33those fears precipitated a series of bank runs,as depositors pulled their money out ofbanks and hoarded currency, that over atwo-year period spread in waves across theUnited States. The present turmoil has alsoled to a mass run on the financial sys-tem—this time not by panicked individualsdesperate to withdraw their money but bypanicked bankers and investors pulling theirmoney out of financial institutions of allstripes, not only commercial banks but in-vestment banks, money market funds, hedgefunds, and all those mysterious “off-balance-sheet special-purpose vehicles” that havesprung up over the past decade. Every finan-cial institution that depends on wholesalefunding from its peers has been threatenedto a greater or lesser degree.

In some respects the current crisis is evenmore virulent than the banking panics of1931-33. In the 1930s most depositors had to

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line up physically outside their bank to gettheir money. Now massive amounts ofmoney are being siphoned off with the clickof a mouse. Moreover, the world’s financialsystem has become both larger compared toGDP and more complex and interconnected.There is much greater leverage, and manymore banks rely on short-term wholesalesources of funding that can evaporateovernight. The world’s banks are thereforemuch more vulnerable than they were then.As a result panic has swept through the sys-tem faster and more destructively.

Offsetting this has been the response ofcentral banks and financial officials. In1931-33 the Fed stood passively aside whilethousands of banks failed, thus permittingbank credit to contract by 40 percent. In thecurrent crisis, central banks and treasuriesaround the world, drawing to some degreeon the lessons learned during the Great De-pression, have reacted with an

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unprecedented series of moves to inject gi-gantic amounts of liquidity into the creditmarket and provide capital to banks.Without these measures, there is little doubtthat the world’s financial system would havecollapsed as dramatically as it did in the1930s. Though the net impact on creditavailability of the present crisis and the re-medial actions taken by central banks is stilluncertain and won’t be known for manymonths, the authorities seemed to have atleast staved off a catastrophe.

Finally, the European financial crisis of1931 also has its modern-day counterpart inthe “emerging markets” crisis of 1997-98. In1931, the evaporation of confidence inEuropean banks and currencies caused Ger-many and much of the rest of Central Europeto impose capital controls and default ontheir debts, leading to a contagion of fearthat culminated in forcing Britain off thegold standard.

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In 1997, a similar sequence of rolling crisesafflicted Asia. South Korea, Thailand, andIndonesia all had to suspend payments onhundreds of billions of dollars of debt. Asiancurrencies collapsed against the dollar, un-dermining all confidence in emerging-mar-ket securities and eventually setting off thedefault of Russia in 1998 and of Argentinatwo years later. But in 1931, that part ofEurope affected by the crisis was about halfthe size of the U.S. economy; in 1997, theGDP of the emerging markets that defaultedrepresented about a quarter of U.S. GDP.

As with all analogies, the comparisons arenever exact. Nevertheless, they illustrate thescale of the economic whirlwind of1929-32—a crisis equivalent in scope to thecombined effects and more of the 1994 Mex-ican peso crises, the 1997-98 Asian and Rus-sian crises, the 2000 collapse in the stockmarket bubble, and the 2007/8 world finan-cial crisis, all cascading upon one and other

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in a single concentrated two-year period. Theworld has been saved in part from anythingapproaching the Great Depression becausethe crises that have buffeted the world eco-nomy over the past decade have convenientlystruck one by one, with decent intervals inbetween.

For many years people believed—eventoday many continue to do so—that an eco-nomic cataclysm of the magnitude of theGreat Depression could only have been theresult of mysterious and inexorable tectonicforces that governments were somehowpowerless to resist. Contemporaries fre-quently described the Depression as an eco-nomic earthquake, blizzard, maelstrom, de-luge. All these metaphors suggested a worldconfronting a natural disaster for which nosingle individual or group could be blamed.To the contrary, in this book I maintain thatthe Great Depression was not some act ofGod or the result of some deep-rooted

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contradictions of capitalism but the directresult of a series of misjudgments by eco-nomic policy makers, some made back in the1920s, others after the first crises set in—byany measure the most dramatic sequence ofcollective blunders ever made by financialofficials.

Who then was to blame? The first culpritswere the politicians who presided over theParis Peace Conference. They burdened aworld economy still trying to recover fromthe effects of war with a gigantic overhang ofinternational debts. Germany began the1920s owing some $12 billion in reparationsto France and Britain; France owed the Un-ited States and Britain $7 billion in wardebts, while Britain in turn owed $4 billionto the United States. This would be the equi-valent today of Germany owing $2.4 trillion,France owing $1.4 trillion, and Britain owing$800 billion. Dealing with these massiveclaims consumed the energies of financial

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statesmen for much of the decade andpoisoned international relations. More im-portant, the debts left massive fault lines inthe world financial system, which cracked atthe first pressure.

The second group to blame were the lead-ing central bankers of the era, in particularthe four principal characters of this book,Montagu Norman, Benjamin Strong,Hjalmar Schacht, and Émile Moreau. Eventhough they, especially Schacht and Norman,spent much of the decade struggling to mit-igate some of the worst political blunders be-hind reparations and war debts, more thananyone else they were responsible for thesecond fundamental error of economic policyin the 1920s: the decision to take the worldback onto the gold standard.

Gold supplies had not kept up with prices;and the distribution of gold bullion after thewar was badly skewed, with much of it con-centrated in the United States. The result

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was a dysfunctional gold standard that wasunable to operate as smoothly and automat-ically as before the war. The problem of inad-equate gold reserves was compounded whenEurope went back to gold at exchange ratesthat were grossly misaligned, resulting inconstant pressure on the Bank of England,the linchpin of the world’s financial system,and a destructive and petty feud betweenBritain and France that undermined interna-tional cooperation.

The quartet of central bankers did in factsucceed in keeping the world economy goingbut they were only able to do so by holdingU.S. interest rates down and by keeping Ger-many afloat on borrowed money. It was asystem that was bound to come to a crashingend. Indeed, it held the seeds of its own de-struction. Eventually the policy of keepingU.S. interest rates low to shore up the inter-national exchanges precipitated a bubble inthe U.S. stock market. By 1927, the Fed was

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thus torn between two conflicting objectives:to keep propping up Europe or to controlspeculation on Wall Street. It tried to do bothand achieved neither. Its attempts to curbspeculation were too halfhearted to bringstocks back to earth but powerful enough tocause a collapse in lending to Germany, driv-ing most of central Europe into depressionand setting in train deflationary forcesthroughout the rest of the world. Eventuallyin the last week of October 1929, the bubbleburst, plunging the United States into itsown recession. The U.S. stock market bubblethus had a double effect. On the way up, itcreated a squeeze in international credit thatdrove Germany and other parts of the worldinto recession. And on the way down, itshook the U.S. economy.

The stresses and strains of trying to keepthe limping gold standard going may havemade some sort of financial shakeout inevit-able. It was, however, not necessary for the

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crisis to metastasize into a worldwide cata-strophe. European central bankers had beendealing with financial crises for more than acentury. They had long absorbed the lessonthat while most of the time the economyworks very well left in the care of the invis-ible hand, during panics, that hand seems tolose its grip. Markets, particularly financialmarkets, became unthinkingly fearful. Toreestablish sanity and restore some sort ofequilibrium in these circumstances requireda very visible head to guide the invisiblehand. In a word, it required leadership.

After 1929, responsibility for world monet-ary affairs ended up in the hands of a groupof men who understood none of this, whoseideas about the economy were at best out-moded and at worst plain wrong. Strong diedin 1928. His successor, George Harrison,tried his best to fill his shoes but did nothave the personality or the stature to assumecontrol. Instead, authority at the Fed shifted

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to a group of inexperienced and ill-informedtimeservers, who believed that the economywould automatically return to an even keel,that there was nothing to be done to counter-act deflationary forces except wait them out.They failed to fulfill even the most basiccentral banker’s responsibility: to act aslender of last resort and support the bankingsystem at a time of panic.

Norman and Schacht both understood thata financial system in free-fall requires activecentral bank intervention. But their twocentral banks, the Bank of England and theReichsbank, were both chronically short ofgold and had no room for maneuver. As aconsequence, for all of Norman’s enormousprestige and Schacht’s creativity, they wereboth hamstrung by the dictates of the goldstandard and were forced to remain lockedin with the United States, deflating as it did.

The only central banker outside the Fedwith enough gold to act independently was

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Moreau at the Banque de France. But havingstumbled inadvertently into a position of fin-ancial dominance, he seemed more intent onusing France’s newfound strength for politic-al rather than economic ends. And so whatbegan as modest and corrective recessions inthe United States and Germany were trans-formed by sheer folly and short-sightednessinto a worldwide catastrophe.

In 1934, Yale economist Irving Fisher test-ified before a House committee that whenStrong died, “his policies died with him. Ihave always believed, if he had lived, wewould have had a different situation.” Hewas the first of many economists and histori-ans to raise the tantalizing counterfactualthat things would have turned out differentlyif Strong had lived. Though Strong was re-sponsible for many of the errors surroundingthe reestablishment of the gold standard,and for the easy money policy that led to thestock market bubble, there is little doubt that

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in early 1931 he would have acted more vig-orously and with greater effect than his suc-cessor, George Harrison, to prevent the cas-cade of bank runs. Moreover, on the interna-tional front he was the only member of thequartet with the necessary combination ofability, brains, and vision but also the eco-nomic firepower of the Fed’s gigantic goldreserves behind him to have assumed theleadership of the world economy and takensteps to counteract the global deflation.

More than anything else, therefore, theGreat Depression was caused by a failure ofintellectual will, a lack of understandingabout how the economy operated. No onestruggled harder in the lead-up to the GreatDepression and during it to make sense ofthe forces at work than Maynard Keynes. Hebelieved that if only we could eliminate“muddled” thinking—one of his favorite ex-pressions—in economic matters, then societycould allow the management of its material

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welfare to take a backseat to what he thoughtwere the central questions of existence, tothe “problems of life and of human relations,of creation, behavior and religion.” That iswhat he meant when in a speech toward theend of his life he declared that economistsare the “trustees, not of civilization, but ofthe possibility of civilization.” There is nogreater testament of his legacy to that trust-eeship than that in the sixty-odd years sincehe spoke those words, armed with his in-sights, the world has avoided an economiccatastrophe such as overtook it in the yearsfrom 1929-33.

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TRANSLATING SUMS OFMONEY

This book is inevitably full of figures—partic-ularly financial figures—in a variety of cur-rencies. To keep things simple and help thereader, I have converted amounts that wouldnormally be expressed in other currencies(for example French francs or Germanmarks) into U.S. dollars—except in thosecases where the context clearly requiresotherwise.

Understanding the significance of eco-nomic numbers from the 1920s and relatingthem to today’s dollars is not a straightfor-ward exercise. Not only have prices risenenormously since then, but the United Statesand European economies have also growngigantically.

Financial magnitudes that relate to an in-dividual’s economic situation—say HjalmarSchacht’s salary—are best translated by ad-justing for changes in the cost of living. As arule of thumb, to compensate for the effectsof inflation, multiply by a factor of 12. ThusBenjamin Strong’s salary of $50,000 as gov-ernor of the New York Fed in the mid-1920swould be the equivalent today of $600,000.And Keynes’s nest egg of $2 million built upover a long career of speculating in financialmarkets would be the same as $24 milliontoday.

By contrast, in order to grasp the true sig-nificance of sums of money that relate to theeconomic situation of whole countries, suchas the size of war debts owed to the UnitedStates, it is most useful not simply to makeallowances for changes in the cost of living,but instead to adjust for changes in the sizeof economies. To translate such figures into

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comparable 2008 magnitudes, multiply byfactor of 200.

For example, the bill for German repara-tions was fixed in 1921 at $12 billion. A simil-ar debt today would be $2.4 trillion.

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ACKNOWLEDGMENTS

I have been thinking about this book now forover a decade. In 1999, Time magazine fea-tured a cover story entitled “The Committeeto Save the World.” The cover depicted threemen: Alan Greenspan, then chairman of theFederal Reserve Board; Robert Rubin, thensecretary of the treasury; and Larry Sum-mers, then deputy secretary of the treasury.The article described how close the worldhad come to an economic meltdown in 1997and 1998—the big Asian economies of Korea,Thailand, and Indonesia had had to suspendpayments on hundreds of billions of dollarsof debt, Asian currencies had collapsedagainst the dollar, Russia had defaulted onits domestic debt, and the hedge fund, Long-Term Capital Management, had lost $4 bil-lion of its investors’ capital, threatening the

stability of the entire U.S financial system.The three “economist heroes,” as Timemagazine called them, were able to avert adisaster by acting quickly and aggressively tocommit billions of dollars in public funds tostem a panic of proportions not experiencedsince the 1930s.

While the crisis of 1997 and 1998 was be-ing played out, I was a professional invest-ment manager. In trying to understand theorigins of that economic breakdown and therole of central bankers in the drama, I beganreading about the history of past upheavals,and in particular about the greatest financialcrisis of them all, that which began in 1929and led to the Great Depression. I discoveredthat in the 1920s, there was another group ofhigh financial officials, this one dubbed bythe press the “Most Exclusive Club in theWorld,” which in its day also sought to man-age the international financial system. But,instead of averting a catastrophe and saving

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the world, the committee from the 1920sended up presiding over the greatest collapsethat the global economy had ever seen. Thisbook is the result of that research.

My biggest debts are to Strobe Talbott andBrooke Shearer. Ever since I began seriouswork on the book in 2004, they have beenmentors, promoters, counselors, and editors,painstakingly reading and commenting oneach successive draft. I also owe an enorm-ous debt to Timothy Dickinson. He too readand commented on various drafts. With hisastounding knowledge of history and hisprodigious memory for facts, quotes, and an-ecdotes, he has helped me to understandmuch better the wider social and politicalcontext in which the events described heretook place.

I would also like to thank all those whohelped in various ways in the researchingand writing of this book: David Hensler,Peter Bergen, and Michael D’Amato, whom I

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press-ganged into reading various sections ofthe book; Derek Leebaert, who guided methrough the ways and byways of embarkingon such a venture; Lily Sykes, who was socreative in hunting down documents and oldnewspapers clippings from archives inFrance and Germany; Felix Koch, who as-sisted with translations from German; SarahMillard, Hayley Wilding, and Ben White atthe Bank of England, Joseph Komljenovichand Marja Vitti at the Federal Reserve Bankof New York and Fabrice Reuzé at theBanque de France for their help in trackingdown letters, documents, and photographsin their collections; and Reva Narula andJane Cavolina for so efficiently organizingthe footnotes. In addition, thanks to thosefriends who have listened so patiently to metalk about this book and given their supportand encouragement: Michael Beschloss,David and Katherine Bradley, Jessica andBob Einhorn, Michael Greenfield, Philip and

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Belinda Haas, John Hauge, MargaretHensler, Homi Kharas, and Shahid Yusuf.

I would like to express my gratitude toPeregrine Worsthorne for spending an after-noon with me sharing his memories of hisstepfather, Montagu Norman.

Over the years, including while research-ing this book, my whole family and I havebenefited from the generosity of Richard andOonagh Wohanka, who have opened theirvarious homes to us in London, Paris, andmost inspiringly Cap d’Antibes—whichmakes an unlikely but important cameo ap-pearance in this book. Another place in thesouth of France, Cap Ferrat, shows up in thestory. It is therefore fitting that I thankMaryam and Vahid Allaghband. I had fewmore productive weeks of writing than theone I spent working from the terrace of theirvilla on Cap Ferrat overlooking theMediterranean.

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I discovered that becoming an author canbe a lonely business. I am therefore gratefulto all those who have given me an excuse toget away periodically from pouring over oldbiographies and newspaper articles from the1920s. I especially want to thank my col-leagues at The Rock Creek Group, AfsanehBeschloss, Sudhir Krishnamurthy, and Sid-darth Sudhir and Nick Rohatyn of The Ro-hatyn Group for allowing me to keep at leastone foot in the world of investments.

I had the good fortune to persuade DavidKuhn to take me on as a client. He has notsimply been my agent but more than anyoneelse helped give substance to what was at thetime only the germ of an idea. I would alsolike to thank Billy Kingsland.

I have also had the benefit of working withtwo great editors at Penguin. Scott Moyersprovided me with his incisive comments anddirection during the early stages andVanessa Mobley helped shape the book into

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its final form. I must also thank Ann Godofffor taking a gamble on an unknown and un-proven writer. Susan Johnson did a stellarjob with the copy-editing while the wholeteam at Penguin, particularly Nicole Hughesand Beena Kamlani, shepherded the bookthrough the production process with greatefficiency.

Finally, I would like to thank my family.My constant companion while writing hasbeen our dog Scout, who took over the arm-chair in my study. My two daughters, Shab-nam and Tara, have now flown the coop, butfrom afar have humored—and also encour-aged—their father in his endeavor to trans-form himself from investment manager towriter. No one has been a greater championof that change than my darling wife, Meena.For thirty years, she has been my anchor. Itis to her that this book is dedicated.

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NOTES

xi “Read no history”: Disraeli, ContariniFleming, 141.

INTRODUCTION

1 “I feel I want a rest”: “Norman Sails Unex-pectedly for a Vacation in Canada,” NewYork Times, August 16, 1931.

2 “monarch of [an] invisible empire”: Kath-leen, Woodward. “Montagu Norman: Bankerand Legend,” New York Times, April 17,1932.

2 “the citadel of citadels” and “Montagu Nor-man was the man”: Monnet, Memoirs, 95.

2 “the most exclusive club”: New York Her-ald Tribune, July 10, 1927.

4 “We are today”: Keynes, J. M., “An Eco-nomic Analysis of Unemployment?” June 22,1931, in Collected Writings, 13: 343.

5 “In 1931, men and women”: Toynbee, Sur-vey of International Affairs, 1.

5 “Unless drastic measures are taken”: “Ein’Feste Burg.” Time, July 27, 1931, and Howe,World Diary, 111.

5 It was rumored: Taylor, English History,290.

5 “the wisest man”: Letter from Lamont toNorman, December 4, 1946, cited inSchuker, The End of French Predominancein Europe, 291.

5 “might have stepped out”: Snowden,Philip, “The Governor of the Bank of Eng-land,” The Banker, February 1926.

6 “Everyone I meet”: Hassall, EdwardMarsh, 570.

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9 “second rate people,” “the Jew is always aJew”: Chernow, The House of Morgan, 215,310.

11 The pound sterling: There were 480 grainsto a troy ounce, a measure of weight some 10percent greater than a conventional ounce.

13 The totality of gold: The total amount ofgold mined until 1913 was calculated to be750 million ounces, or 22,500 tons. SeeTriffin. The Evolution of the InternationalMonetary System, Table 17, 79. Because acubic foot of gold is estimated to weigh abouthalf a ton, this would amount to 45,000 cu-bic feet, equivalent to a cube with sides ofabout 35 feet.

13 “You came to tell us”: Bryan, The FirstBattle: A Story of the Campaign of 1896,199-206.

1: PROLOGUE

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19 “What an extraordinary episode”: Keynes,Collected Writings: The Economic Con-sequences, 2: 6.

20 “a magnificent stupid honesty”: Wells,The Work, Wealth, and Happiness of Man-kind, 398.

21 Even Kaiser Wilhelm: “Successful War NoAdvantage to Victor Says Angell,” New YorkTimes, June 15, 1913.

21 In February 1912: Committee of ImperialDefense, Testimony of Sir John H.Luscombe, Chairman of Lloyds, Report andProceedings of the Standing Sub-Committeefor the Committee of Imperial Defense onTrading with the Enemy, 1912, paragraphs120-143.

21 “new economic factors,” “commercial dis-aster”: Esher, Journals and Letters, 211-28and 229-261, quoted in Tuchman, Guns ofAugust, 10.

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2: A STRANGE AND LONELY MAN

23 “Anybody who goes”: Samuel Goldwynquote from Bartlett’s Familiar Quotations,695

23 “feeling far from well”: Letter to CarolineBrown from Boyle, Montagu Norman, 98.

27 “I feel a different person”: Clay, LordNorman, 44.

28 He would end up embracing: Boyle,Montagu Norman, 87.

29 “with tears in his eyes”: McEwen, TheRiddell Diaries, 85.

30 “the coming conflict”: Geiss, July 1914:The Outbreak of the First World War, Docu-ment 162.

30 “acute anxiety”: Wilson and Hammerton,The Great War, 26.

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30 “stood nervously fingering their notes”:“London Exchange Closes Its Doors.” NewYork Times, August 1, 1914.

31 “although many hundreds of people,”“traditionally phlegmatic and cool”: Times,August 1, 1914.

31 Nevertheless, just in case: “English BankAct to Be Suspended.” New York Times,August 2, 1914.

31 “in case of an outbreak”: Memorandum bySir Felix Shuster, director of the Union Bankof London, circulated to the ClearingBankers’ Gold Reserves Committee quoted inKynaston, The City of London: GoldenYears, 588.

32 “European prospects very gloomy”: Clay,Lord Norman, 81.

32 “Financiers in a fright”: Lloyd George,War Memoirs, 111.

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32 “shook his fist”: Sayers, The Bank of Eng-land, 75.

33 “I have been at work”: Boyle, MontaguNorman, 98.

3: THE YOUNG WIZARD

36 One of those who: Chernow, The War-burgs, 153.

36 The famously indiscreet kaiser: Ferguson,The Pity of War, 191.

36 There was also talk: Wilson and Hammer-ton, The Great War, 68.

37 “considerably outshone his fellow direct-ors”: Somary, The Raven of Zurich, 71.

37 “curiously stiff gait”: Bonn, WanderingScholar, 303.

38 “a restless wanderer”: Schacht, My FirstSeventy-six Years, 24.

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38 “sentimental, gay and full of feeling”:Goldensohn, The Nuremberg Interviews,231.

41 “Germany’s steady advance”: Schacht, MyFirst Seventy-six Years, 129.

42 a large “howling mob”: Tuchman, TheGuns of August, 129.

42 Bizarre rumors spread: Wolff, The Eve of1914, 524.

43 “The next time”: Charles A. Conant, “HowFinancial Europe Prepared for the GreatWar,” New York Times, August 30, 1914.

44 “a tremendous solemnity”: Schacht, MyFirst Seventy-six Years, 60.

4: A SAFE PAIR OF HANDS

45 “Show me a hero”: F. Scott Fitzgeraldquote from The Yale Book of Quotations,274.

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45 Strong had been elected president: “E. C.Converse Drawing Out,” New York Times,January 9, 1914.

45 He had left the United States: “Cloud andRain Mar Berlin Season,” New York Times,June 14, 1914.

47 Finished from floor to ceiling: “No Mor-gan Bower atop Bankers Trust,” New YorkTimes, May 16, 1912.

47 In 1912, during the Pujo Committee hear-ings: “Five Men Control $368,000,000Here,” New York Times, December 11, 1912.

48 Anxious to avoid: “Bankers Here Conferon War,” New York Times, July 31, 1914.

49 “The credit of all Europe”: Chernow,House of Morgan, 185.

51 In later years: Nicolson, Dwight Morrow,111.

51 In May 1905: “Mrs. Strong Kills Herself,”New York Times, May 11, 1905.

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53 “And to think”: Strouse, Morgan, 15.

53 they were exactly the type of young men:Strouse, Morgan, 576.

54 Besides Davison himself: The only twoparticipants who wrote about the Jekyll Is-land meeting were Frank Vanderlip in hisautobiography From Farm Boy to Financierand Paul Warburg in a communication toThomas Lamont reproduced in Thomas W.Lamont, Henry P. Davison, 97-101. The firstcontemporary description, though second-hand, appeared in an article by BertieCharles Forbes, who later founded Forbesmagazine, in Current Opinion, December1916, 382. An account is also given in Steph-enson, Nelson Aldrich. Recent descriptionsare in West, Banking Reform and the Feder-al Reserve, 222-224; Chernow, The War-burgs, 133-134; and Michael A. Whitehouse,“Paul Warburg’s Crusade to Establish a Cen-tral Bank in the United States” in The

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Region, Federal Reserve Bank of Minneapol-is, May 1989.

55 “the highest pitch of intellectual aware-ness”: Vanderlip, From Farm Boy to Finan-cier, 216

57 Reports were rife: “Army of RefugeesFlees to London,” New York Times, August3, 1914.

57 He immediately organized: “Exiles Meetin London,” New York Times, August 4,1914.

58 Strong persuaded: “Gold Cruiser to SailToday,” New York Times, August 6, 1914.

58 “Wherever he sat”: Chandler, BenjaminStrong, 48.

58 “Jekyll and Hyde personality”: Interviewswith Leslie Rounds, Committee on the His-tory of the Federal Reserve System, Wash-ington: Brookings Institution, 1954-55

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58 If the Aldrich Plan of a single centralbank: Interviews with William McChesneyMartin Sr., Committee on the History of theFederal Reserve System, Washington:Brookings Institution, 1954- 55.

59 The salary he would receive: “BankHead’s Pay $30,000,” Chicago DailyTribune, October 27, 1914.

59 “Ben is not going to live” : FederalReserve Bank of New York, “Biography ofBenjamin Strong by his Son, BenjaminStrong.” 1978

59 Only the year before: Details of Strong’sapartment at 903 Park Avenue from “TheReal Estate Field,” New York Times, January15, 1914.

5: L’INSPECTEUR DES FINANCES

61 “There isn’t a bourgeois alive”: GustavFlaubert quote from Bartlett’s Familiar Quo-tations, 527

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61 It was the latest in a long chain: Berenson,The Trial of Madame Caillaux, 2.

63 the École Libre des Sciences Politiques:Zeldin, French Passions: Intellect and Pride,343.

64 His family, minor gentry: Dutron deBornier from Pierre Lyautey, “Eloge de M.Moreau,” Comptes Rendus Mensuels deL’Académie des Sciences Coloniales, Séancedu 15 Octobre 1954, Paris, 1954. JosephMarie-François Moreau from “LeurVacances,” Le Petit Parisien, September 4,1927.

64 Although the examination system hadmade: Zeldin, French Passions: Ambitionand Love, 118.

65 To be chef de cabinet: For role of cabinetsministériel, see Keiger, Raymond Poincaré,34.

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66 “increased abnormally”: Brogan, FranceUnder the Republic, 128.

66 “moral collapse”: Moreau, The GoldenFranc: Memoirs, 17-18.

67 Over the next eight years: Moreau’s careerat Banque d’Algérie from Pierre Lyautey,“Eloge de M. Moreau,” Comptes RendusMensuels des L’Académie des Sciences Colo-niales, Séance du 15 Octobre 1954, Paris,1954.

68 When he thought back: Moreau, TheGolden Franc: Memoirs,12.

68 It was there: Jacques Rueff. “Preface tothe French Edition,” in Moreau, The GoldenFranc: Memoirs, 2.

68 In any other year: Adam, Paris Sees ItThrough, 15.

68 “to keep it exciting”: “Leur Vacances,” LePetit Parisien, September 4, 1927, and Gis-card D’Estaing, Edmond, “Notice sue Emile

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Moreau,” Comptes Rendus Mensuels deL’Académie des Sciences Coloniales: Séancedu 1 Decembre 1950, Paris, 1950.

69 “Brawls were now breaking”: Adam, ParisSees It Through, 12-13.

69 At the first sign: “French Gold Famine,”Times, July 30, 1914.

69 That afternoon: Le Figaro, July 31, 1914

70 “All classes of society”: “Vanished Gold,”Times, August 1, 1914.

70 “immense and perilous duties,” “formid-able test,” “calmness, vigilance, initiative,”and “all [his] authority”: “Circulaire Bleu”from the Banque de France, Le Patrimonie,423.

71 An hour later: “Paris Has Given Up AllHope of Peace, ” New York Times, August 2,1914.

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71 Within days of the outbreak: Cronin, Parison the Eve, 441-42, and Adam, Paris Sees ItThrough, 21.

71 The next day, a Sunday: Clarke, ParisWaits, 65-67, and “Un Avion Allemand SurParis,” Le Figaro, August 31, 1914.

71 Few people: Lucien Klotz, “Mes Souvenirsdu Temps de Guerre,” Le Journal, December14, 1922, and Gaston-Breton, Sauvez L’Or,28.

6: MONEY GENERALS

73 “Endless money”: Cicero quote fromBartlett’s Familiar Quotations, 91.

73 “the amounts of coin”: Quoted in Blainey,The Causes of War, 215.

74 “unlimited issue of paper”: Charles A.Conant, “How Financial Europe Prepared forthe Great War,” New York Times, August 30,1914.

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74 Sir Felix Schuster: Stone, World WarOne, 30.

74 “he was quite certain”: Ferguson, The Pityof War, 319, and Bell, Old Friends, 45.

74 That same month: Strachan, First WorldWar, 816.

74 The Hungarian finance minister: Stone,World War One, 30.

75 By then the five major powers: “Fifty Bil-lions Cost of War Up To Date.” New YorkTimes, July 30, 1916.

79 “quiet serious men”: Bagehot, LombardStreet, 156.

79 “a shifting executive”: Bagehot, LombardStreet, 157.

80 An economist of the 1920s: Hawtrey, Artof Central Banking, 246-47.

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81 “very, very considerable”: Cyril Asquithquoting Keynes in Jackson, The Oxford Bookof Money, 46.

81 “take over the Bank”: Sayers, The Bank ofEngland, 105.

81-82 “to accept my unreserved apology”:Sayers, The Bank of England, 107.

83 “There goes that queer-looking fish”:Boyle, Montagu Norman, 105.

84 “into the most holy recesses”: Brogan,France Under the Republic, 115.

85 The Banque opened its doors: StephaneLausanne. “The Bank of France,” Banker,August 1926, 93.

86 “The Banque does not belong”: Valance,La Legende du Franc, 167.

86 Indeed, Caillaux made things: Gunther,Inside Europe, 145.

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88 “Obedience and subordination”: Feld-man, The Great Disorder, 795.

88 Convinced like everyone else: Hjalmar,Schacht. “Bemerkungen über die Art undWeise der vorassichtlichen Kriegsentschäd-gung Frankreichs an Deutschland,” August26, 1914, in Bundesarchiv Koblenz, NachlassSchacht, Nr. 1.

90 “insincere replies to the questions”: Müh-len, Schacht: Hitler’s Magician, 9.

90 But even Schacht: Testimony of WilhelmVolcke on May 3, 1946, in Trial of MajorWar Criminals Before the International Mil-itary Tribunal.

90 Rumors circulated that he had em-bezzled: For example, the entry for “Schacht,Hjalmar Horace Greeley” in Current Bio-graphy 1944, 594-97, includes the followingpassage: “With the endorsement of the milit-ary government he issued several millions ofcounterfeited banknotes to pay for supplies

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bought from the Belgians but Berlin author-ities became suspicious when he never ac-counted for the bulk of this money. Also ac-cused of having seen to it that his bankingconnections profited from his knowledge ofGovernment secrets. . . .”

94 On one occasion: “Vote for Trenches inCentral Park over Protests,” New YorkTimes, March 23, 1918.

94 To kick off another campaign: “Wilson toMake War Speech Here in Drive for Loan,”New York Times, September 26, 1918.

7: DEMENTED INSPIRATIONS

99 “Lenis was certainly right”: Keynes, Col-lected Writings: The Economic Con-sequences, 2: 148. In four years: Hardach,The First World War, 153.

100 By the end of the war: Ferguson, ThePity of War, 322-31.

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102 “fate of Germany”: Schacht, My FirstSeventy-six Years, 158.

103 “hard . . . callous . . . and buttoneddown”: Schacht, My First Seventy-six Years,17.

103 “He managed to look”: Bonn, Wander-ing Scholar, 303.

104 “Nothing seems sacred”: Roberts, TheHouse That Hitler Built, 182.

104 “He was a man”: Rauschning, Men ofChaos, 117.

104 “caused more trouble”: Macmillan,Peacemaker, 191.

105 “little more than a shot”: Lentin, Guilt atVersailles, 21.

106 “twenty million too many: Holborn, AHistory of Modern Germany, 566.

106 “the only Jew”: Macmillan, Peacemaker,201.

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107 “costly frontal attacks”: Taylor, EnglishHistory, 74.

107 The great natural resources: Wolff,Through Two Decades, 261.

108 “unbearable, unrealizable, and unaccept-able”: Eyck, A History of the Weimar Repub-lic, 1: 98.

109 “You seem to forget”: Schacht, My FirstSeventy-six Years, 161-162.

110 “If Germany is to be”: Keynes, “Memor-andum by the Treasury on the IndemnityPayable by the Enemy Powers for Repara-tions and Other Claims,” in Collected Writ-ings, 16: 375.

110 “the sharpest and clearest”: Russell,Autobiography, 1: 69.

110 “I evidently knew more”: Harrod, TheLife of John Maynard Keynes, 121.

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111 “an illustrated appendix”: Skidelsky,John Maynard Keynes: Hopes Betrayed1883-1920, 177.

112 “I tried to get hold”: Keynes, “Letter fromBasil Blackett,” in Collected Writings, 16: 3.

113 “greedy for work”: Skidelsky, JohnMaynard Keynes: Hopes Betrayed, 304.

113 His Bloomsbury friends: Bell, OldFriends: Personal Recollections, 48.

113 “With the utmost respect”: Harrod, TheLife of John Maynard Keynes, 201.

113 But to the many other: Skidelsky et al.,Three Great Economists, 232, and Harrod,The Life of John Maynard Keynes, 31.

113 He looked so very ordinary: Skidelsky etal., Three Great Economists, 231.

113 “I have always suffered”: Skidelsky, JohnMaynard Keynes: Hopes Betrayed, 67, 169.

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113 “gay and whimsical,” “that gift of amus-ing”: Bell, Old Friends: Personal Recollec-tions, 52, 60.

114 “probably means the disappearance”:Skidelsky, John Maynard Keynes: HopesBetrayed, 346.

114 “a sense of impending”: Keynes, Collec-ted Writings: The Economic Consequences,2: 2-3.

114 “The battle is lost”: Keynes, “Letter toDavid Lloyd George,” June 5, 1919, in Collec-ted Writings, 16: 469.

115 “dry in soul”: Keynes, Collected Writ-ings: The Economic Consequences, 2: 20.

115 “his thought and his temperament”:Keynes, Collected Writings: The EconomicConsequences, 2: 26.

115 “his mind . . . slow”: Keynes, CollectedWritings: The Economic Consequences, 2:27.

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115 “with six or seven senses”: Keynes, Col-lected Writings: The Economic Con-sequences, 2: 26.

115 “rooted in nothing”: Keynes, “Lloyd Ge-orge,” in Collected Writings, 10: 23-24.

115 “civilization under threat,” “men drivenby”: Keynes, Collected Writings: The Eco-nomic Consequences, 2: 144.

116 “ought to have been”: Trachtenberg, Re-paration in World Politics, 94.

116 “is to us the most important”: Schuker,End of French Predominance in Europe, 17.

117 “la politique des casinos”: Steiner, TheLights That Failed, 183.

117 “As far as I am concerned”: Howe, AWorld History, 152.

117 “France could not decide”: Garratt, WhatHas Happened, 161.

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117 “vainglorious, quarrelsome”: Carlyle,1870 letter to the Times quoted in Wilson,the Victorians , 345.

117 “the gratification of private”: Schuker,End of French Predominance in Europe, 17.

117 “I can’t bear him”: Adamthwaite,Grandeur and Misery, 75.

117 “uneasy vanity”: Collier, Germany andthe Germans, 470.

118 The Germans responded: Martin, Franceand the Après Guerre, 75.

120 “Nothing like this”: Keynes, “Speculationin the Mark and Germany’s BalancesAbroad,” in Manchester Guardian Commer-cial, September 28, 1922, in Collected Writ-ings, 18: 49-50.

120 A visitor in the late 1920s: Kindleberger,A Financial History, 310-11.

120 “In the whole course”: d’Abernon, TheDiary of an Ambassador, 2: 124.

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121 “133 printing works”: Schacht, The Stab-ilization of the Mark, 105.

121 Basic necessities: “Berlin Now Shiveringin Sudden Cold Wave,” New York Times,November 8, 1923.

122 German physicians: “Cipher Stroke aNew Disease for Germans Figuring Marks.”New York Times, December 7, 1923.

122 “For a salary”: Cowley, Exile’s Return,142.

123 “How wild anarchic”: Zweig, The Worldof Yesterday, 301.

124 During those days of violence:Habedank, Die Reichsbank, 34.

125 “whether one wished”: WarburgArchives, Jahresbericht 1923, 43, quoted inFerguson, Paper and Iron, 9.

126 “The Reichsbank today”: Ferguson,When Money Dies, 169.

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127 “No-one could anticipate”: D’Abernoncommunication to Foreign Office, quoted inFerguson, When Money Dies, 169.

127 “It appears almost impossible”:d’Abernon, The Diary of an Ambassador, 2:240.

128 “old style Prussian,” “permanent order”:Schacht, My First Seventy-six Years, 161.

128 “hell’s kitchen”: Schacht. My FirstSeventy-six Years, 177.

8: UNCLE SHYLOCK

132 “The principal danger”: Bank of Eng-land, letter from Strong to Norman, Novem-ber 22, 1918.

132 “help to rebuild”: “Wilson Stirs Audi-ence,” New York Times, September 28, 1918.

133 “The Family”: Bacevich, “Family Mat-ters” and “Bachelor as Guest Is Sole Occu-pant of Exclusive Club,” Washington Post,August 22. 1926.

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134 “pallid career”: Phillips, Ventures in Dip-lomacy, 6, quoted in Bacevich, “Family Mat-ters,” 406.

135 “constructive policy”: Letter from Strongto Leffingwell, July 31, 1919, quoted inChandler, Benjamin Strong, 144.

136 “in which [Sir Edward]”: Strong toJames Brown, September 14, 1916, quoted inRoberts, “Benjamin Strong, the FederalReserve.”

136 “that the Allies,” “been slight”: Letterfrom Strong to Leffingwell, July 25, 1919,quoted in Chandler, Benjamin Strong, 142.

136 “their hearts to rule”: Letter from Strongto Leffingwell, July 31, 1919, quoted inChandler, Benjamin Strong, 143.

136 “In the useless slaughter”: Masterton,England After the War, 32-33.

137 “The consequences”: Steffens, Autobio-graphy, 803.

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138 “lack of leadership,” “people in author-ity”: Letter from Strong to Leffingwell,August 30, 1919, quoted in Chandler, Ben-jamin Strong, 145-46.

138 “desert Europe,” “prolonged disorder”:Letter from Strong to Leffingwell, August 30,1919, quoted in Chandler, Benjamin Strong,145-46.

139 “the most wonderful,” “the most gor-geous”: Bank of England, letter from Strongto Norman, March 1, 1920.

139 “Whenever you do come”: Bank of Eng-land, letter from Norman to Strong, Decem-ber 3, 1920.

140 “makes the whole of Paris”: Nicolson,Peacemaking 1919, 330.

140 “top-hatted frock-coated”: Brendon,Eminent Edwardians, 115.

140 “Lord Balfour seems”: Quoted inMiddlemas and Barnes, Baldwin, 133.

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140 “In the Balfour Note”: Quoted inRhodes, “The Image of Britain,” 196.

140 “Has America which but yesterday”:“Still Scolding America for Funding Bill,”New York Times, February 7, 1922.

140 “lay a tribute upon”: Garet, Garrett.“Shall Europe Pay Back Our Millions,” NewYork Times, November 26, 1922.

141 “to approach the discussion”: “British toPay All, Ask a Square Deal, Debt Board IsTold”, New York Times, January 9, 1923.

142 “they seemed to understand”: Boyle,Montagu Norman, 156.

143 “merely sell wheat”: “Baldwin Says WeDon’t Understand Situation on Debt,” NewYork Times, January 28, 1923.

143 “a hick”: Grigg, Prejudice and Judgment,102.

143 “I should be the most cursed”: Blake, TheUnknown Prime Minister, 492.

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143 “in order to give them”: Keynes. “Letterto J. C. C. Davidson,” January 30, 1923, inCollected Writings, 8: 103.

144 As the decade went on: Edwin L. James,“Europe Scowls at Rich America,” New YorkTimes, July 11, 1926; Frank H. Simonds,“Does Europe Hate the U.S. and Why?”American Review of Reviews, September1926; “Uncle Shylock in Europe,” AmericanReview of Reviews, January 1927.

145 “Mr. Montagu Collet Norman”: “TheMission to America,” Times, December 27,1922.

145 “singularly gifted”: Charles Addis diaryquoted in Kynaston, The City of London: Il-lusions of Gold, 64.

145 “He never made jokes”: George Boothquoted in Kynaston, The City of London: Il-lusions of Gold, 66.

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146 His unorthodox appearance: Kynaston,The City of London: Illusions of Gold, 64-66;“The Governor of the Bank of England,” theStrand Magazine, April 1939.

146 At some point: “Along the Highways ofFinance,” New York Times, September 4,1932.

147 Take a typical incident: “Bank of Eng-land Head May Be in Berlin,” New YorkTimes, March 18, 1923; and “Bank of Eng-land Governor Settles Problem in Berlin,”Christian Science Monitor, March 17, 1923;and “France Against Mediation in Ruhr byOutside Power,” Washington Post, March 17,1923.

147 “Mr. Norman’s dislike”: Winston.Churchill, “Montagu Norman,” Sunday Pict-orial, September 20, 1931.

148 “poseur”: Vansittart, The Mist Proces-sion, 301.

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148 “sensation of being”: Letter from Nor-man to Caroline Brown, quoted in Boyle,Montagu Norman , 140.

148 “secretive, egotistic”: Williams, A Pat-tern of Rulers, 205.

148 “a brilliant neurotic”: Boyle, MontaguNorman, 129-30.

149 “delighted in appearing,” “those of anold”: Templewood, Nine Troubled Years, 78.

149 Still an Edwardian: Worsthorne, Demo-cracy Needs Aristocracy, 26-28.

149 “Only lately have the countries”: Bank ofEngland, letter from Norman to Strong,March 22, 1922.

149 “Anything in the nature”: Bank of Eng-land, letter from Strong to Norman, July 14,1922. “Dear Strongy”: Bank of England, let-ter from Norman to Strong, May 24, 1922.

150 “Dear Old Man”: Bank of England, letterfrom Norman to Strong, March 27, 1923.

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150 “Dear old [sic] Monty”: Bank of England,letter from Strong to Norman, May 1, 1927.

150 “You are a dear”: Bank of England, letterfrom Strong to Norman, May 1, 1927.

150 “Dear Ben.”: Bank of England, letterfrom Norman to Strong, January 24, 1925.

151 they sounded like a couple of: Bank ofEngland, letter from Norman to Strong,April 2, 1927, and letters from Strong to Nor-man, March 25, 1927, and April 14, 1927.

151 “Let me beg you”: Bank of England, letterfrom Norman to Strong, September 15, 1921.

151 “what is happening”: Bank of England,letters from Norman to Strong, March 21.1925, and February 26, 1927.

151 “To have a sympathetic person”: Bank ofEngland, letter from Strong to Norman,February 15, 1927.

151 “the Civilization”: Bank of England, letterfrom Norman to Strong, December 18, 1921.

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152 “The black spot of Europe”: Bank of Eng-land, letter from Norman to Strong, April 9,1923.

152 “afflicted by the generous use”: Bank ofEngland, letter from Strong to Norman,February 18, 1922.

152 In those days: “Finance as Recreation,”Gettysburg Times, November 19, 1928.

153 “The temptation”: Bank of England, let-ter from Strong to Norman, January 4, 1924.

9: A BARBAROUS RELIC

155 Time will run back: John Milton quotefrom Bartlett’s Familiar Quotations, 258.

165 In the latter half of 1919: Moggridge,Maynard Keynes, 349-50.

166 “disliked being in the country”: Harrod,The Life of John Maynard Keynes, 364.

166 “ovary”: Skidelsky, John MaynardKeynes: Hopes Betrayed, 211.

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166 “tentative almost”: Harrod, The Life ofJohn Maynard Keynes, 339-40.

167 “London’s position”: Keynes, “Memor-andum Against the Suspension of Gold,”August 3, 1914, in Collected Writings, 16:7-15.

167 “humbly and without permission”:Keynes, Collected Writing: A Tract, 4: xv.

167 “conservative bankers”: Keynes, Collec-ted Writings: A Tract, 4: 56.

168 “the allegiance of”: Harrod, The Life ofJohn Maynard Keynes, 339-40.

168 “For the moment”: Bank of England, let-ter from Norman to Strong, January 30,1924.

169 “the most vindictive man”: Kynaston,The City of London: Illusions of Gold, 65.

169 “He is a brilliant”: Bank of England, let-ter from Strong to Norman, February 6,1920.

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170 “Keynes’s little book”: Bank of England,letter from Strong to Norman, January 4,1924.

170 Having jettisoned : Friedman andSchwartz, A Monetary History, 240.

172 “I do not intend”: Bank of England, letterfrom Norman to Strong, January 30, 1924.

172 “A dollar standard”: Keynes, CollectedWriting: A Tract, 4: 155.

173 “they might come”: Walworth, WoodrowWilson, 320, n. 12.

173 Not surprisingly, the Board: Norris, En-ded Episodes, 204.

173 “a body of startling incompetence”: Gal-braith, The Great Crash, 32.

173 “utterly devoid of global”: Hoover, Mem-oirs, 9.

174 From Memphis, Tennessee: Interviewswith Roy Young and Chester Morrill,

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Committee on the History of the FederalReserve System, Washington: Brookings In-stitution, 1954-55.

174 From Iowa came: Interviews with GeorgeHarrison, Leslie Rounds, Roy Young, andChester Morrill, Committee on the History ofthe Federal Reserve System, Washington:Brookings Institution, 1954-55.

175 “I’ll see them damned”: Letter fromStrong to J. H. Case, April 21, 1923, quotedin Chandler, Benjamin Strong, 228.

176 In the process: Interview with LeslieRounds, Committee on the History of theFederal Reserve System, Washington:Brookings Institution, 1954-55.

176 “worshipped”: Interview with Jay Crane,Committee on the History of the FederalReserve System, Washington: Brookings In-stitution, 1954-55.

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10: A BRIDGE BETWEEN CHAOS ANDHOPE

179 At 10:00 p.m. on November 8 1923:Stresemann, Diaries, Letters and Papers,199.

180 On November 5: “Berlin Food RiotersAttack and Beat Jews.” New York Times,November 6, 1923; “Berlin Now Shivering inSudden Cold Wave,” New York Times,November 8, 1923; Feldman, The GreatDisorder, 780.

181 “Babylon of the world” “A kind of mad-ness”: Zweig, The World of Yesterday, 238.

181 “German Chicago”: Large, Berlin, 48.

181 “stone-grey corpse”: Quote by GeorgeGrosz in Hanser, Putsch, 253.

181 “beggars, whores”: Sahl, Memoiren,36-37 quoted in Ian Buruma, “WeimarFaces,” New York Review of Books, Novem-ber 2, 2006.

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183 The previous month: Stresemann, Diar-ies, Letters and Papers, 145-47.

183 “living on the edge”: Schacht, My FirstSeventy-six Years, 177.

184 “hindered by personal considerations”:Schacht, My First Seventy-Six Years,177.

184 “narrow Prussian”: Schacht, My FirstSeventy-six Years, 120.

185 “an enthusiasm suitable”: Feldman, TheGreat Disorder, 793.

185 Schacht was as skeptical: Schacht, TheStabilization of the Mark, 79, and Feldman,The Great Disorder, 751.

187 “He sat on his chair”: Schacht, My FirstSeventy-six Years, 187.

187-188 “father of the inflation”: “StinnesWould Oust Head of Reichsbank,” New YorkTimes, November 13, 1923.

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188 “preserve his honor”: Feldman, TheGreat Disorder, 715.

189 “astonishing appeasement”: d’Abernon,The Diary of an Ambassador, 2: 283.

190 “he always had good luck”: Feldman,The Great Disorder, 822.

190 On November 20: “Herr HavensteinDead,” Times, November 21, 1923.

190 “an extraordinarily sympathetic person-ality”: Max Warburg Papers, UnpublishedMemoirs, 1923, 69, quoted in Feldman, TheGreat Disorder, 795.

190 During the war: Feldman, The GreatDisorder, 74.

11: THE DAWES OPENING

194 “Be extremely subtle”: Sun Tzu quotefrom Bartlett’s Familiar Quotations, 83.

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194 “a tall man with a pointed grayish beard”“I want to get on”: Schacht, My FirstSeventy-six Years, 194.

194 Decorated in a neoclassical: “TheGovernor of The Bank of England,” StrandMagazine, April 1939.

196 “quiet, modest”: Bank of England, letterfrom Norman to Strong, October 28, 1921.

196 “You know, of course”: Bank of England,letter from Norman to Strong, January 7,1924.

197 “entertainments,” “sad fate”: d’Abernon,The Diary of an Ambassador, 2: 122-23.

198 “Hell and Maria”: “The Committees,”Time, January 7, 1924.

199 “hollow deep-set eyes”: Klingaman,1929: The Year of the Crash, 95.

201 “both the element of novelty”: Dawes,The Dawes Plan in the Making, 34-35.

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202 “those foul and carrion-loving,” “impen-etrable and colossal”: “Whirlwind Dip-lomacy: How Dawes Plays Game,” New YorkTimes, January 27, 1924.

202 Through a combination of charm:Schuker, End of French Predominance, 284.

203 in 1922, an audit: Brogan, France Underthe Republic, 517.

203 $150 million of National Defense Bonds:Shirer, The Collapse of the Third Republic,161.

204 On January 14: “La Foire aux Devises,”Le Quotidien, March 12, 1924, cited inSchuker, End of French Predominance, 89.

204 Prime Minister Poincaré declared:Jeanneney, François de Wendel, 187-88.

204 “assist in bringing France”: “The FrancFighting for Its Life,” The Literary Digest,March 22, 1924.

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204 “Each time the franc loses”: Keynes, Col-lected Writing: A Tract, 4: xvi-xvii

205 “stool of repentance”: Schacht, My FirstSeventy-six Years, 208.

206 “His pride is equaled”: Dawes, A Journ-al of Reparations, 54.

206 “remarkable revelation”: Dawes, AJournal of Reparations, 54.

209 “It looks to me”: Bank of England, letterfrom Norman to Strong, January 30, 1924.

210 “six main powers”: Ziegler, The SixthGreat Power, 1.

210 One story was that the family: Ferguson,The House of Rothschild: Money’s Prophets,95-98.

210 “undertaken by any European”: Hobson,Imperialism, 64.

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211 The son of an austere Methodist: “La-mont, Thomas William,” in Current Bio-graphy, 1940, 476.

213 “until the French are out”: Schuker, Endof French Predominance, 215.

213 “swarming, gesticulating”: Saint-Aulaire,Confessions, 718, quoted in Schuker, End ofFrench Predominance, 299.

214 “Europe shall not,” “America’s onlypurpose,”

214 “In the lean years”: Edwin L. James,“French Condemn Our Role in London,”New York Times, July 26, 1924, and “The‘Money Devil’ Mixes in the ReparationsRow,” The Literary Digest, August 9, 1924.

215 “We cannot accept”: Klein, Road toDisaster, 248.

216 “The United States lends money:”Keynes, “The Progress of the DawesScheme,” in The Nation and the Athenaeum,

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September 11, 1926, in Collected Writings,18: 281.

12: THE GOLDEN CHANCELLOR

217 “I never knew a man”: Greene, TheQuiet American, 72.

217 “in the full sunshine”: Graves andHodges, The Long Weekend, 102.

217 Regent Street had been made over: “Eng-land Not Merry Under Labor’s Rule,” NewYork Times, June 8, 1924.

217 There was a new freedom: Graves andHodges, The Long Weekend, 108-110.

219 “While England is financially sound”:Sisley, Huddelston. “Personalities and Polit-ics in France,” Atlantic Monthly, January1925, 117.

221 “You know how controversial”: Bank ofEngland, letter from Norman to Strong,October 16, 1924.

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221 “hand over to Germany”: Notes on dis-cussion with Walter Leaf, June 13, 1924.Bank of England quoted in Kynaston, TheCity of London: Illusions of Gold, 109.

221 “rather far behind”: Bank of England,letter from Strong to Norman, July 9, 1924.

222 “There never was a Churchill”: Quotedin Wilson, The Victorians, 485.

222 “how anybody can put their”: Letterfrom William Bridgeman to his wife, quotedin Manchester, The Last Lion, 785.

223 F. E. Smith, Lord Birkenhead: Wilson,After the Victorians, 248-49

224 “his only mistress” : Moreau, TheGolden Franc, 51.

224 He had a Rolls-Royce: Manchester, TheLast Lion, 778-79.

224 Norman, despite his inherited wealth:Lyttelton, Memoirs of Lord Chandos, 137.

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225 “undetected, like a shadow”: “From the‘Old Lady.’ ” Time, January 12, 1925.

225 “unremarked”: “Plan to Pay Gold CallsNorman Here” New York Times, January 1,1925. carved out of the solid bedrock:“Federal Bank Vault Carved in Solid Rock.”New York Times, October 18, 1924.

225 Most noticeable was the number of cars:“One Auto in the City to Each 16 Persons,”New York Times, May 18, 1924, and “Auto-mobile Census Shows World Has 21,360,779Cars,” New York Times, March 8, 1925. Forrelative wages between the United States andEurope, see “Premium on Dollar KeepsWages Up,” New York Times, December 31,1924.

226 “The great problem is sterling”: Strongmemorandum to Carl Snyder, April 3, 1922,quoted in Chandler, Benjamin Strong, 291.

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227 “a long period of unsettled conditions”:Strong memorandum, January 11, 1925,quoted in Chandler, Benjamin Strong, 309.

228 “My dear Ben”: Bank of England, letterfrom Norman to Strong, January 18, 1925.

229 “the Louis XVI of the monetary revolu-tion”: Keynes, “Letter to Sir Charles Addis,”July 25, 1924, in Collected Writings, 19:371-72.

229 “We should run the risk”: Keynes, “TheProblem of the Gold Standard,” in The Na-tion and Athenaeum, May 2, 1925, in Collec-ted Writings, 19: 337-44.

230 “faults in her economic structure”:Keynes, “The Return Towards Gold,” in TheNation and Athenaeum, February 21, 1925,in Collected Writings: Essays in Persuasion,7: 192-200.

230 “pressing the return to the gold stand-ard”: Taylor, Beaverbrook, 227.

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230 “It is an absurd and silly notion”: Taylor,Beaverbrook, 319.

231 “he never could make out”: Churchill,Lord Randolph Churchill, 2: 184.

231 “If they were soldiers”: James, Churchill:A Study in Failure, 204.

231 “survival of a rudimentary”: “Mr.Churchill Exercise,” February 29, 1925, U.K.Treasury Papers, quoted in Moggridge, Brit-ish Monetary Policy, 76.

232 “We, and especially Norman, feel”: Let-ter from Edward Grenfell to Jack Morgan,March 23, 1925, quoted in Chernow, TheHouse of Morgan, 275-76.

232 “The Gold Standard is the best‘Governor’ ”: Moggridge, British MonetaryPolicy, Appendix 5, 270-72.

232 “The Governor of the Bank”: WinstonChurchill to Otto Niemeyer, February 22,

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1925, U.K. Treasury Papers in Moggridge,British Monetary Policy, Appendix 5.

233 “Norman elaborates his own schemes”:Letter from Edward Grenfell to Jack Mor-gan, March 23, 1925, quoted in Chernow,The House of Morgan, 274.

233 “None of the witch doctors”: Leith-Ross,Money Talks, 91.

233 Norman often stopped by: Templewood,Nine Troubled Years, 78.

234 “knave-proof,” “living in a fool’s para-dise”: Grigg, Prejudice and Judgment, 183.

235 “You have been a politician”: Grigg, Pre-judice and Judgment, 184.

235 “I will make you the golden Chancellor”:Boyle, Montagu Norman, 189.

236 “It is imperative that”: Text ofChurchill’s speech, including remark aboutfortifying himself, from Hansard, House of

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Commons Debates, 5 Series, vol. 183, cols49-114.

236 “an amber-coloured liquid”: Howe, AWorld History, 290.

236 “If the English pound is not”: Churchill,Complete Speeches, 4: 3587.

236 “greatest achievement . . .”: Winston,Churchill. “Montagu Norman,” Sunday Pict-orial, September 20, 1931.

237 “a signal triumph”: Times, April 29,1925.

237 “the crowning achievement”: Economist,May 2, 1925.

237 “The proper object of dear money”:Keynes, “The Economic Consequences of Mr.Churchill,” in Collected Writing: Essays inPersuasion, 9: 220.

237 “because he has no instinctive judg-ment”: Keynes, “The Economic

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Consequences of Mr. Churchill,” in CollectedWriting: Essays in Persuasion, 9: 212.

237 In 1927, he invited Keynes: Skidelsky,John Maynard Keynes: The Economist asSaviour, 203.

238 “the victims,” “in the flesh [of] the fun-damental”: Keynes, “The Economic Con-sequences of Mr. Churchill,” in CollectedWriting: Essays in Persuasion. 9: 223.

239 “the biggest blunder”: Moran, WinstonChurchill, 303-304, quoted in Kynaston, TheCity of London: Illusions of Gold, 129.

239 “misled by the Governor”: Toye, LloydGeorge and Churchill, 256.

239 “that man Skinner”: Grigg, Prejudiceand Judgment, 193.

239 “to everyone’s surprise”: Amery, Diaries,552, quoted in Kynaston, The City of Lon-don: Illusions of Gold, 129.

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239 “The gold standard party”: Keynes, “TheGold Standard,” in The Nation and Athen-aeum, May 2, 1925, in Collected Writings,19: 361.

240 “In a new country”: Strong Memor-andum, January 11, 1925, quoted in Chand-ler, Benjamin Strong, 309.

13: LA BATAILLE

241 Only peril: Charles de Gaulle quote fromBartlett’s Familiar Quotations, 728.

245 Noblemen, who might otherwise:Plessis, Histoires de la Banque, 205-10.

246 Over the 120 years: Garratt, What HasHappened to Europe, 164-65.

246 “The hardest thing to understand”:Quoted in Brogan, France Under the Repub-lic, 66.

249 “a kind of Treasury magician”: Binion,Defeated Leaders, 95.

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249 As he strode into the Chamber:“Caillaux’s Political Resurrection,” The Liter-ary Digest, May 2, 1925, and “In Parlia-ment,” Time, May 4, 1925.

249 “frivolity”: Moreau, The Golden Franc,37.

250 “in elegant social circles”: Jeanneney,François de Wendel, 248.

250 “regretted not having thrown”:Jeanneney, François de Wendel, 254.

252 “we are the soldiers”: Bonnet, Vingt Ansde Vie Politique, 101-102, quoted inJeanneney, François de Wendel, 271.

252 “battle of the franc”: Sisley, Huddleston.“France Mobilizes to Save the Franc,” NewYork Times, May 30, 1926.

252 It managed to raise: “Save the Franc,”Time, May 3, 1926, and New York HeraldTribune, April 21, 1926.

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253 “which must never be brought out”: Sis-ley, Huddleston. “France Mobilizes to Savethe Franc,” New York Times, May 30, 1926.

253 “[laid] down their squabbles”: Letterfrom Strong to Peter Jay, May 9, 1926,quoted in Chandler, Benjamin Strong, 362.

253 “excoriated from one end”: Letter fromStrong to George Harrison, May 23, 1926,quoted in Chandler, Benjamin Strong, 363.

254 “Am I to become the liquidator”: Mor-eau, The Golden Franc, 12.

255 “My doubt is only about”: Bank of Eng-land, letter from Norman to Strong, June 8,1926. The two bankers did manage: “StrongRefuses to Discuss Finance,” New YorkTimes, June 30, 1926, and “Financiers Gath-er at Antibes,” New York Times, July 9,1926.

255-56 Another intrepid journalist: “M.Strong et Sir [sic] Montagu Norman se

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reposent paisiblement a Antibes,” La Vo-lonté, July 5, 1926.

256 Strong found his French banking:Leffler, The Elusive Quest, 146.

256 By 1926, an estimated forty-five thou-sand: “Il y a 500,000 Étrangers a Paris,” LeJournal, February 2, 1925.

256 The French press had: “L’Infiltration desCapitaux Américains dans l’Économie Fran-caise.” La Vie Financier, April 26, 1926.

257 “destructive grasshoppers”: Le Midi,April 17, 1926.

257 On July 11, in a dramatic protest:“Maimed and Blind Lead Paris Parade toProtest on Debt,” New York Times, July 12,1926.

258 A couple of days later another party:“Reasonable Resentment,” Washington Post,July 26, 1926.

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258 “Don’t boast in cafes”: “Our TouristTroubles in France,” The Literary Digest,August 14, 1926.

259 “Xenophobic displays”: Moreau, TheGolden Franc, 53.

259 “friendly but reserved”: Moreau, TheGolden Franc, 43.

259 The governor’s suite at the bank: “LeurVacances,” Le Petit Parisien, September 4,1927, and Banque de France, Treasures.

260 “Mr. Norman arrived at eleven”: Mor-eau, The Golden Franc, 51.

260 “stupid, obstinate”: H. A. Siepman,“Central Bank Cooperation,” quoted inMouré, The Gold Standard Illusion, 156.

261 “a commodity,” “only ready to sell”:Moreau, The Golden Franc, 182.

263 “slave to the books he has written”: Mor-eau, The Golden Franc, 124.

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263 “You are not going to remain”: See theIntroduction by Jean-Noël Jeanneney toRist, Une Saison Gatée, 11.

264 “The level of the franc”: Keynes, Collec-ted Writing: A Tract, 4: 60.

264 “the sacrifices demanded”: Boyle,Montagu Norman, 226.

265 “The past clung to everything”: Fer-guson, The House of Rothschild, 458.

265 A familiar figure: Obituary in Le Monde,July 2, 1949.

266 “No cabinet was formed”: Lottman, TheFrench Rothschilds, 136.

266 an enraged mob had howled: Chapman,The Dreyfus Trials, 52.

266 “Maître de Forges”: “‘The Iron Master,’”Time, January 24, 1949, and “Francs andFrenchman,” Time, May 18, 1936.

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267 Moreau had had his first taste: Moreau,The Golden Franc, 73.

268 Rothschild and Wendel employed every:Moreau, The Golden Franc, 261, 264, 279;Netter, Histoire de la Banque de France,153.

14: THE FIRST SQUALLS

270 “Circumstances rule men”: Herodotusquote from Bartlett’s Familiar Quotations,71.

270 “to make a fortune”: Fraser, Every Mana Speculator, 45.

270 “The English, however speculative”: So-bel, Panic on Wall Street, 223.

270 In 1913, the total value: Rajan, “Thegreat reversals,” Table 3, 15.

271 The “merger” bull market: Leonard P.Ayres, “The Great Bull Market of 1925,”American Review of Reviews, January 1926.

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272 No company better exemplified: Sobel,The Great Bull Market, 100-105.

273 The buoyant stock market was accom-panied: Allen, Only Yesterday, chap. XI.

275 “Before the butler could move”:Wueschner, Charting Twentieth-CenturyMonetary Policy, 91.

275 “the only man who emerged”: Keynes,Collected Writings: The Economic Con-sequences, 2: 174, n.1.

275 “Secretary of Commerce”: SchlesingerJr. The Crisis of the Old Order, 84.

276 “a mental annex”: Hoover, Memoirs, 9.

276 “May it not be the case”: Strong memor-andum to Carl Snyder, May 21, 1925, quotedin Chandler, Benjamin Strong, 428.

277 “Must we accept parenthood”: Strongmemorandum to Carl Snyder, May 21, 1925,quoted in Chandler, Benjamin Strong, 428.

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277 “affairs of gamblers”: Letter from Strongto Governor George Norris, August 18, 1927,quoted in Chandler, Benjamin Strong, 444.

277 “It seems a shame”: Letter from Strongto Norman, November 7, 1925, quoted inChandler, Benjamin Strong, 329.

280 “tactic of consulting everyone”: James,The Reichsbank, 26.

280 “He looked upon the world”: Bonn,Wandering Scholar, 303.

281 “infatuated by Dr. Schacht”: Bennett,Germany and the Diplomacy of the Finan-cial Crisis, 127, and Vansittart, The Mist Pro-cession, 301.

281 “He is undoubtedly”: Letter from Strongto Peter Jay, July 20, 1926, quoted in Chand-ler, Benjamin Strong, 333.

281 his salary was the equivalent: Kopper,Hjalmar Schacht, 86.

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281 “ugly clown mask,” “vigilant watch”:Dodd, Through Embassy Eyes, 234.

282 “he dresses with the taste”: Johannes,Steel. “The Ambitious Dr. Schacht,” CurrentHistory, June 1934, 285-90.

282 “cutting and devastating humor”: Dodd,Through Embassy Eyes, 234.

282 “a whole table enthralled”: Aga Khan,Memoirs, 337.

282 “Life seemed more free”: Shirer, TheRise and Fall of the Third Reich, 118.

282 “jewel-like sparkle”: Large, Berlin, 211.

282 “You feel all the time”: Boyle, MontaguNorman, 167.

283 The recovery was reflected in the stockmarket: Voth, “With a Bang, Not a Whim-per.” one small town in Bavaria: Frieden,Global Capitalism, 141.

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284 He had hoped that: James, Europe Re-born, 112. a “chimera”: Voth, “With a Bang,Not a Whimper,” 72.

285 “not wish to have things seem too good”:Letter from Pierre Jay to Strong, June 22,1927, quoted in McNeil, American Moneyand the Weimar Republic, 152.

285 “changeable and moody”: Letter fromParker Gilbert to Strong, September 8, 1927,quoted in McNeil, American Money and theWeimar Republic, 174.

285 “irresponsibility and unpredictability,”“extreme and erratic”: James, The Reichs-bank, 61, and McNeil, American Money andthe Weimar Republic, 180.

286 At a cabinet meeting: Stresemann diaryentry, June 22, 1927, in Stresemann, Diaries,Letters and Papers, 2.

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287 made him “smile”: Bank of England, let-ter from Norman to Strong, November 23,1925.

287 “seem to be afraid of him”: Letter fromStrong to Pierre Jay, September 15, 1926,quoted in Chandler, Benjamin Strong, 348.

287 “imperialist dreams”: Moreau, TheGolden Franc, 220.

288 “capricious,” “menace the gold stand-ard”: Norman cables to Strong, May 24 and25, 1927, quoted in Clarke, Central Bank Co-operation, 117, n. 25.

289 “he could not do so”: Moreau, TheGolden Franc, 295.

289 “I do not want to trample”: Moreau, TheGolden Franc, 298.

15: UN PETIT COUP DE WHISKY

292 She had just landed a part: “Actress aSuicide by Poison in Hotel,” New YorkTimes, December 10, 1926, and “Illness

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Drives 2 Women to Suicide in Hotels,”Washington Post, December 10, 1926.

294 In 1926, while Strong was in France:Wueschner, Charting Twentieth-CenturyMonetary Policy, 125.

294 “thoroughly enjoy getting into a fight”:Interview with Leslie Rounds, Committee onthe History of the Federal Reserve System,Washington: Brookings Institution, 1954-55.

294 the constant sniping: Wueschner, Chart-ing Twentieth-Century Monetary Policy,123.

295 Over the years, each of the centralbanks: John, Brooks. “Annals of Finance: InDefense of Sterling,” New Yorker, May 23,1968, 44.

297 “closeted together”: Sayers, The Bank ofEngland, 339.

297 Norman dominated the proceedings: In-terview with Mrs. Ogden Mills, Committee

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on the History of the Federal Reserve Sys-tem, Washington: Brookings Institution,1954-55.

298 “un petit coup de whisky”: Banque deFrance, Charles Rist memorandum “Conver-sation du 1 au 7 Juillet, 1927 a New York etWashington;” Charles, Rist. “Notice Bio-graphique,” Review D’Économie Politique.Nov-Dec 1955, 1006; and Sayers, The Bankof England, 340.

298 “courtesy calls”: Entry for July 7, 1927:Hamlin diary, Volume 14, Library ofCongress.

299 “inflation of credit”: Hoover, Memoirs,11.

299 “That man has offered me unsolicitedadvice”: Schlesinger Jr., The Crisis of the OldOrder, 88.

299 Fobbing Hoover off: Hoover, Memoirs,11.

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300 “the greatest and boldest operation”:Robbins, The Great Depression, 53.

300 “takes great interest”: “ManuscriptNotes by the Governor on Benjamin Strongand on Europe, 3-9 July 1927,” reproducedas Appendix 17 in Sayers, The Bank of Eng-land, 2: 96-100.

301 “I had an important conversation”: Mor-eau, The Golden Franc, 430-31.

302 “intrigues to prevent France,” “ask Nor-man to choose”: Moreau, The Golden Franc,443, 445. “to establish some sort of dictator-ship”: Letter from Strong to Walter Stewart,quoted in Clay, Lord Norman, 265.

303 “speculation on the stock market”: Ch-icago Tribune, July 14, 1928.

303 “most vehement language”: “Memor-andum on Bank of England—Bank of FranceRelations,” May 24, 1928, quoted in Chand-ler, Benjamin Strong, 417-18.

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304 At one point, several frustrated seniordirectors: Letter from Siepmann to Steward,July 8, 1928, cited in Boyce, British Capital-ism, 23, n. 69.

304 “One moment he would be sunny”:Boyle, Montagu Norman, 235.

304 “How hard and how cruel”: Chandler,Benjamin Strong, 472.

304 “I am desolate and lonesome”: Boyle,Montagu Norman, 238.

16: INTO THE VORTEX

307 At particular times: Bagehot, “EdwardGibbon,” National Review, January 1856, inThe Collected Works: Literary Essays, 352.

307 “stocks could be beat”: “The Magnet ofDancing Stock Prices,” New York Times,March 24, 1929.

308 The bubble began: Acampora, TheFourth Mega-Market, 129.

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309 “The old-timers”: “The Magnet of Dan-cing Stock Prices,” New York Times, March24, 1929.

310 “You could talk about Prohibition”:Cockburn, In Time of Trouble, quoted inBrooks, Once in Golconda, 82.

310 Anyone trying to throw doubt: Noyes,The Market Place, 322.

310 As the crowd piling into the market:Charles, Merz. “Bull Market,” HarpersMonthly Magazine, April 1929, 643.

310 “bootblacks, household servants”:Charles, Merz. “Bull Market.” HarpersMonthly Magazine, April 1929, 643.

311 “Taxi drivers told you what to buy”:Baruch, The Public Year, 220.

311 “When the time comes that a shoeshineboy”: Goodwin, The Fitzgeralds and theKennedys, 488.

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311 “hard losers and naggers”: Patterson, TheGreat Boom and Panic, 18.

311 Even the New York Times: “The Army ofWomen Who Watch the Ticker,” New YorkTimes, March 31, 1929.

312 Biggest of them was Billy Durant: Spar-ling, Mystery Men of Wall Street, 3-42.

312 “History, which has a painful way”:“Warburg Assails Federal Reserve,” NewYork Times, March 8, 1929.

312 “sandbagging American prosperity”: Gal-braith, The Great Crash, 77.

313 “Monty and Ben sowed the wind”:Chernow, The House of Morgan, 313.

313 “speculative orgy,” “There are many un-derlying reasons,” “stock speculation,” “Theprevailing bull market”: “The Stock-Specu-lating Mania,” The Literary Digest, Decem-ber 8, 1928.

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314 It was from Washington: Ellis, A Nationin Torment, 40.

315 “displayed some life”: Moreau, TheGolden Franc, 89.

315 “When the American people”: Interviewwith Roy Young, Committee on the Historyof the Federal Reserve System, Washington:Brookings Institution, 1954-55.

316 The following exchange: Hearings ofSenate Committee on Banking and Cur-rency on Brokers’ Loans. Washington: Un-ited States Government Printing Office,1928, quoted in Lawrence, Wall Street andWashington.

317 “oratory, ethics and provincialism”:“Federal Reserve versus Speculation,” Time,February 25, 1929.

317-18 “Wall Street has become the most no-torious”: “Senate Votes to Ask Reserve Board

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How to Bar Speculation,” New York Times,February 12, 1929.

318 Nevertheless, in the last weeks: Letterfrom Strong to Walter Stewart, August 3,1928, quoted in Chandler, Benjamin Strong,460-61.

318 Strong’s successor: Matthew, Josephson.“Money Men are Different Now,” SaturdayEvening Post, February 26, 1949.

319 “being young and new,” “had inheritedall antagonisms”: Letter from Leffingwell toEdward Grenfell, May 29, 1919, quoted inKunz, The Battle for Britain’s Gold Stand-ard, 19.

319 With Strong dead: Interview with LeslieRounds, Committee on the History of theFederal Reserve System, Washington:Brookings Institution, 1954-55.

320 “raise the prestige”: “Memorandum onconversation with Governor Young: March 6,

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1929,” Goldenweiser Papers, Library of Con-gress, quoted in Clarke, Central Bank Coop-eration, 156.

321 “any longer intend to be”: Bierman, TheGreat Myths of 1929, 78.

321 Harrison urged Norman: Hamlin Diary,February 11, 1929, quoted in Bierman, TheGreat Myths of 1929, 105, n. 11.

321 “to have the stock market fall”: Joseph-son, Infidel in the Temple, 22.

321 Once the speculative fever: HarrisonMemorandum, “Conversations with FederalReserve Board: February 5, 1929,” quoted inClarke, Central Bank Cooperation, 152.

321 “lived and breathed”: Hamlin Diary,March 5, 1929, Library of Congress;“Memorandum on conversation withGovernor Young: March 6, 1929,” Golden-weiser Papers, Library of Congress, quotedin Clarke, Central Bank Cooperation, 157.

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322 “If buying and selling stocks”: “The WarAgainst Wall Street Speculation,” The Liter-ary Digest, April 13, 1929.

322 “the hardest time in America”: Letterfrom Peacock to Revelstoke, February 18,1929, quoted in Kynaston, The City of Lon-don: Illusions of Gold, 157.

322 “an even deeper feeling”: Letter fromNorman to European Central Bankers,February 21, 1929, quoted in Clay, Lord Nor-man, 249.

322 Over the next three months: Friedmanand Schwartz, A Monetary History, 259.

324 Even Adolph Miller: Hamlin Diary,January 3, 1929, quoted in Wueschner,Charting Twentieth-Century MonetaryPolicy, 153.

325 “The French have always had”: McNeil,American Money and the Weimar Republic,228.

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325 Under the Dawes Plan schedule: Underthe Dawes Plan, reparations were supposedto increase according to a “prosperity index,”calculated based on trends in foreign trade,the budget, coal production, railway traffic,consumption of sugar, tobacco, and beer andspirit. While the increase in payments waspotentially indefinite, most people workedon the calculation that the annual tributewould settle somewhere around $700million.

326 “with a mixture of awkwardness”:McNeil, American Money and the WeimarRepublic, 228.

327 “nothing but work ”: McNeil, AmericanMoney and the Weimar Republic, 228

327 Government officials: Bennett, Germanyand the Diplomacy of the Financial Crisis, 5.

327 “the new German Kaiser”: “69,” Time,February 6, 1929.

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327 “without the normal incentive”: AnnualReport of Agent General for Reparations,1927, quoted in Eyck, A History of the Wei-mar Republic, 2: 174.

329 “was dancing on a volcano”: StresemannNote on Meeting with Parker Gilbert,November 13, 1928, in Stresemann, Diaries,Letters and Papers, 2: 406.

329 It came as an ill omen: “Europe’s ColdSnap Worst in Centuries,” New York Times,February 12, 1929; “100 Die in Europe asCold Holds Grip,” New York Times, Febru-ary 13, 1929; “Freezing Europe Faces ColdFamine,” New York Times, February 14,1929.

330 Marthe Hanau was a forty-two-year-old:Janet Flanner, “Annals of Finance: TheSwindling Presidente,” the New Yorker,August 26 and September 2, 1939.

332 “lengthy, tiresome”: Ziegler, The SixthGreat Power, 357.

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332 “a vehement, intolerant man”: Huddle-ston, In My Time, 256.

332 “tantrums and exhibitionism”: Leith-Ross, Money Talks, 119.

332 “hatchet, Teuton face,” “like a steeltrap”: Ziegler, The Sixth Great Power,356-57.

332 “If Hell is anything like Paris”: Klinga-man, 1929: The Year of the Crash, 163.

332 The German delegates: Kopper,Hjalmar Schacht, 146.

334 Schacht’s proposal was initially received:Stuart Crocker Memoirs, quoted in Jacob-son, Locarno Diplomacy, 257.

334 Pierre Quesnay: Stuart Crocker Mem-oirs, quoted in Jacobson, Locarno Dip-lomacy, 265.

337 “You ought never to have signed”:Schacht, My First Seventy-six Years, 247.

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337 “The crisis may have been”: Kopper,Hjalmar Schacht, 154.

337 “My prophecy would be”: Keynes, “Let-ter to Andrew Mcfadyean,” January 5, 1930,in Collected Writings, 18: 346-47.

338 In addition, he continued to manage:Hession, John Maynard Keynes, 175.

338 Despite his reputation: Skousen,“Keynes as a Speculator,” 161-69.

338 “triumph”: Keynes, Collected Writing: ATract, 4: 231.

339 “nothing which can be called inflation”:Keynes, “Is There Inflation in the UnitedStates?” September 1, 1928, in CollectedWriting, 13: 52-59

339 “on the side of business depression”:Keynes, “Letter to Charles Bullock,” October4, 1928, in Collected Writings 13: 70-73.

339 “I was forgetting that gold”: Keynes, “IsThere Enough Gold? The League of Nations

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Inquiry,” The Nation and Athenaeum, Janu-ary 19, 1929, in Collected Writing, 19:775-80.

339 “Picture to yourself”: Kynaston, The Cityof London, Illusions of Gold, 157.

340 “Almost all the great powers”: Somary,The Raven of Zurich, 155.

341 “even in countries thousands of miles”:Keynes, “A British View of the Wall StreetSlump,” New York Evening Post, October25, 1929, in Collected Writings, 20: 2-3.

341 The character of the market: White, “TheStock Market Boom and Crash of 1929 Revis-ited,” 77.

342 Indeed, on September 3, 1929: Paul,Desmond. “An Exploration of the Nature ofBull Market Tops,” Lowry Reports, 2006.

342 In February, Owen Young: Klingaman,1929: The Year of the Crash, 159, 211.

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342 Joe Kennedy: Goodwin, The Fitzgeraldsand the Kennedys, 488.

342 Bernard Baruch claims: Baruch, ThePublic Years, 224-25.

342 Even Thomas Lamont: Lamont, TheAmbassador from Wall Street, 260.

342 In April 1929, he had some friends: Dur-ant’s secret visit to the White House fromSparling, Mystery Men of Wall Street, 3-6.

343 “panic which keeps people”: Seldes, TheYears of the Locust, 40.

343 “Scores of thousands: “Europe’s ‘WallStreet Panic,’” The Literary Digest, August24, 1929.

345 “fat excitable man”: Snowden, Autobio-graphy, 2: 827.

345 “invisibly the battle of gold”: “Palladin ofGold,” Time, August 19, 1929.

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345 In late August, as Britain’s reserves hit:Clay, Lord Norman, 252.

17: PURGING THE ROTTENNESS

347 “For five years at least”: BusinessWeek,September 7, 1929

348 “I repeat what I said”: “Babson Predicts‘Crash’ in Stocks,” New York Times, Septem-ber 6, 1929.

349 He was a strict Prohibitionist: Fridson,It Was a Very Good Year, 87-88.

350 “none of us are infallible”: “FisherDenies Crash Is Due,” New York Times,September 6, 1929.

350 Simple commonsense techniques:White, “The Stock Market Boom and Crashof 1929 Revisited,” 72-73.

351 “not perhaps surprising”: “FinancialMarkets: Last Week’s Reaction in Stocks andthe Talk of a Future ‘Crash,’” New YorkTimes, September 9, 1929.

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352 “Mr. Hatry is very clever”: Kynaston,The City of London: Illusions of Gold, 140.

353 “Stocks have reached what looks like”:“Fisher Sees Stocks Permanently High,” NewYork Times, October 16, 1929.

353 “increased prosperity”: “Says StockSlump is Only Temporary,” New York Times,October 24, 1929.

354 “There is a great deal of exaggeration”:“Letter from Lamont to Herbert Hoover,”October 19, 1929, quoted in Lamont, TheAmbassador from Wall Street, 266-68.

354 “This document is fairly amazing”: Kunz,The Battle for Britain’s Gold Standard, 55.

354 On Wednesday, October 23: Henry, Lee.“1929: The Crash That Shook the World,”American Mercury, November 1949.

355 “grave,” “gesturing idly”: Brooks, Oncein Golconda, 124.

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355 “susceptible of betterment”: “FinanciersEase Tension,” New York Times, October 25,1929.

355 “There is no man or group”: Bell, “Crash:An Account of the Stock Market Crash of1929.”

356 “undue speculation”: “Treasury OfficialsBlame Speculation,” New York Times, Octo-ber 25, 1929.

356 “Bankers Halt Stock Debacle”: WallStreet Journal, October 27, 1929.

358 “friends and former millionaires”:Manchester, The Last Lion, 826.

358 “participating in the making of history”:“Closing Rally Vigorous” and “Crowds SeeMarket History Made,” New York Times,October 30, 1929.

358 “No one who has gazed”: WilliamManchester, The Last Lion, 827.

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359 “on fire,” “done and can’t be undone”:Josephson, The Money Lords, 82.

359 That evening: Josephson, The MoneyLords, 82.

360 Though the crash of October 1929:Soule, Prosperity Decade, 309.

361 “underlying conditions,” “an excuse forgoing”: “What Smashed the Bull Market? ”The Literary Digest, November 9, 1929.

361 “No Iowa Farmer will tear up his mailorder blank”: “Wall Street’s ‘Prosperity Pan-ic,’” The Literary Digest, November 9, 1929.

361 “For six years, American business”: Busi-nessWeek, November 2, 1929.

361 Industrial production fell: Romer, “TheGreat Crash and the Onset of the Great De-pression,” and Galbraith, The Great Crash,142.

362 “Rich people who have not sold”: Hirst,Wall Street and Lombard Street, 59.

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362 “constitutionally gloomy”: White, Auto-biography, 515.

363 “back to normal,” “during the next sixtydays,” “We have passed the worst”: Mangold,W. P. “The White House Magicians: Prosper-ity Invocations,” The Nation, October 21,1931, and Allen, Washington Merry-Go-Round, 75-76. At several points along theway: Galbraith, The Great Crash, 76, 149-51.

363 “Gentlemen, you have come”: Schlesing-er, The Crisis of the Old Order, 231.

363 He frequently claimed in press confer-ences: Mangold, W. P. “The White HouseMagicians: Playing with Statistics,” The Na-tion, October 28, 1931; “Victory in Mainepredicted by Fess,” New York Times, August27, 1930; “Labor Commissioner StewartQuits Post,” New York Times, July 3, 1932.

364 “liquidate labor, liquidate stocks”:Hoover, Memoirs, 30.

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364 For Mellon, it was a once-in-a-lifetime:Cannadine, Mellon, 414-27.

365 Between November 1929 and June 1930:Chandler, American Monetary Policy, 144.

365 “1927 experiment”: Federal ReserveBoard letter from John Calkins, Governor ofSan Francisco Fed, to George Harrison,January 7, 1930.

366 “We have been putting out credit”:Federal Reserve Board, Minutes of the OpenMarket Policy Committee, September 25,1930: quoted in Chandler, American Monet-ary Policy, 137.

366 “marathon dance”: Federal ReserveBoard of Governors, letter from Talley,Governor of Dallas Fed to J. Herbert Case,Chairman of New York Federal ReserveBank, March 13, 1930.

366 “back to life”: Harrison Papers, Letterfrom Talley to Harrison, July 15, 1930,

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quoted in Friedman and Schwartz, A Monet-ary History, 372.

367 In September 1930, Roy Young: Pusey,Eugene Meyer, 203.

368 “an ordinary tin-pot bucket shop operat-or,” “Judas Iscariot”: “Meyer, Eugene” inCurrent Biography, 1941, 575-78.

368 In January 1930, policy decisions:Chandler, American Monetary Policy, 133.

369 “panicky selling left London’s city”:“London Disturbed by Continued Fall,” NewYork Times, October 30, 1929.

369 “we in Great Britain”: Keynes, “A BritishView of the Wall Street Slump,” New YorkEvening Post, October 25, 1929, in CollectedWritings, 20: 2-3.

369 like the bursting of an “abscess”: Sauvy,Histoire Economique, 115.

370 To a visiting Swiss banker: Somary, TheRaven of Zurich, 157.

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370 Convinced that it had been the rise: Say-ers, The Bank of England, 229, n. 3.

370 During the last week of October: Bank ofEngland, Notes on telephone calls betweenHarrison and Norman, October 25, October31, and November 15, 1929.

372 Keynes: “Arising from”: HMSO. Reportof Committee on Finance and Industry(Cmd. 3897), Minutes of Evidence, 1931,27-31.

372 “Reasons, Mr. Chairman”: Boyle,Montagu Norman, 327.

373 “an artist, sitting with his cloak”: Woolf,Diary, 208.

373 “grows more and more temperamental”:Papers of Sir Charles Addis, May 7, 1930,quoted in Kynaston, The City of London, Il-lusions of Gold, 202.

18: MAGNETO TROUBLE

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374 “To what extremes”: Virgil, The Aeneid,Book iii, l. 79-81.

374 “the shadow of one of the greatest”:Keynes, “The Great Slump of 1930,” Nationand Athenaeum, December 20 and 27, 1930,in Collected Writing: Essays in Persuasion,9: 126-34.

376-77 “the war . . . fear of Germany”:Adamthwaite, Grandeur and Misery, 132.

377 “harmonious economic structure”:L’Echo de Paris, December 7, 1930, cited inMouré, Managing the Franc Poincaré, p. 27.

377 “glittering new embodiment”: Brendon,The Dark Valley, 132.

378 “the French gold hoarding policy”: Ein-zig, Behind the Scenes, vii.

378 “the Banque de France”: Howe, WorldDiary, 65.

379 In fact, it was clear that during 1930:Mouré, Managing the Franc Poincaré, 143.

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and Johnson. Gold, France and The GreatDepression, pp. 152-57.

379 Bullion was so heavy: “Gold: 150 Tons,”Time, December 26, 1932.

379 “This depression is the stupidest”:“D’Abernon on Gold,” Time, January 5, 1931.

380 “lean on England”: General Réquin toGeneral Weygand, February 2, 1931, quotedin Adamthwaite, Grandeur and Misery, 138.

381 “sumptuous trimmings: “Tightwad Upand Out,” Time, January 14, 1935.

381 He was succeeded by his deputy: “Tight-wad Up and Out,” Time, January 14, 1935.

381 Moret thought of himself: Netter, His-toire de la Banque de France, 341.

381 “ask favors from the French”: Boyce,British Capitalism, 296.

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382 From his departure aboard the Ber-engaria: “Along The Highways of Finance,”New York Times, April 12, 1931.

382 “an orchestra leader”: “Norman Arriveson Banking Mission,” New York Times,March 28, 1931.

382 When they begged him: “Norman GoesHome Silent on His Plans,” New York Times,April 15, 1931.

383 “artificial” agency: Clarke, Central BankCooperation, 180.

383 “visionary and inflationary”: Clarke,Central Bank Cooperation, 180.

383 “very gloomy situation”: Morison, Tur-moil and Tradition, 345.

383 “Russia was the very greatest”: StimsonDiary, April 8, 1931, quoted in Schmitz,Henry Stimson, 85.

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383 “U.S. was blind”: Lamont Diaries, May8, 1931, quoted in Kunz, The Battle for Bri-tain’s Gold Standard, 46.

385 Rumors of the trouble: “False RumorsLead to Trouble at Bank,” New York Times,December 11, 1930.

385 The bank had been founded: Werner,Little Napoleons and Dummy Directors,1-12.

385 When, for instance, Bernard went toEurope: Ellis, A Nation in Torment, 109.

386 The Bank lent some $16 million: Lucia,“The Failure of the Bank of United States”and Trescott, “The Failure of the Bank of Un-ited States, 1930.”

386 two big projects on Central Park West:Werner, Little Napoleons and Dummy Dir-ectors, 125-27.

387 “lend freely, boldly”: Bagehot, CollectedWorks, Volume 9: Lombard Street, 79.

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387 “A panic . . . is a species”: Bagehot, Col-lected Works, Volume 9: Lombard Street,73.

388 “foreigners and Jews”: Letters fromThomas S. Lamont to Edward C. Grenfell,December 13 and 30, 1930, quoted inChernow, The House of Morgan, 326.

388 “with a large clientele”: Letter from Rus-sell Leffingwell to Benjamin Joy, January 23,1931, quoted in Chernow, The House of Mor-gan, 326-27.

388 “I told them”: Werner, Little Napoleonsand Dummy Directors, 206-07.

388 “I warned them”: Friedman andSchwartz, A Monetary History of the UnitedStates, 309n.

389 shaken by such: Friedman andSchwartz, A Monetary History, Appendix A.

390 By the middle of 1931: Federal ReserveSystem, Banking and Monetary Statistics,

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Washington, D.C., 1943, 18. See Bernanke,“Nonmonetary Effects of The FinancialCrisis,” in Essays on the Great Depression,41-69. in May 1931, the bank runs resumed:“More Bank Trouble,” Time, August 24, 1931.

391 The real issue for the governors: GaryRichardson, “Bank Distress During the GreatDepression: The Illiquidity-Insolvency De-bate Revisited” (December 2006), NBERWorking Paper.

392 “the capitalist system”: “Ein’ FesteBurg,” Time, July 27, 1931, and Howe, WorldDiary, 111.

19: A LOOSE CANNON ON THE DECK OFTHE WORLD

395 “three generations,” “Jewish machina-tion,” “a product of the Jewish spirit”:Chernow, The Warburgs , 323.

396 On December 5, he dropped his bomb-shell on Berlin: “Schacht Protests Demands

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on Reich,” New York Times, December 6,1929.

397 “he was about to be crucified”: Letterfrom de Sanchez to Lamont, April 28, 1934,quoted in James, The German Slump, 59.

397 Schacht had gone “crazy”: Kopper,Hjalmar Schacht, 171.

398 “on the highest moral grounds”: “Suc-cess at The Hague,” Time, January 27, 1930.

398 “flamboyant political moves”: TheTimes, January 14, 1930, quoted in Simpson,Hjalmar Schacht in Perspective, 52.

398 “immoral agreement”: “Schacht to a Pig-gery,” Time, March 17, 1930.

399 “What is the actual reason”: Quoted inMühlen, Schacht: Hitler’s Magician, 28.

401 Historians have debated: Balderston,Economics and Politics, 92.

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401 unintended consequences of the YoungPlan: Ritschl. “Reparations transfers, theBorchardt hypothesis and the GreatDepression.”

402 “You must not think”: “Schacht BlamesReparations for World Slump: Holds Morat-orium for Germany Inevitable,” New YorkTimes, November 22, 1930.

402 “If the German people are going tostarve”: “Schacht, Here, Sees Warning inFascism,” New York Times, October 3, 1930.

402 “I would stop making payments”:Schacht, My First Seventy-six Years, 277.

403 “not above using the swastika”: Fromm,Blood and Banquets, 29.

403 “economic situation,” “pleasant, urbane”man: Schacht, My First Seventy-six Years,279.

403 On January 5, Göring invited Schacht:Schacht, My First Seventy-six Years,

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279-280, and Schacht, Account Settled,29-30.

405 It had grown over the last decade:Schubert, The Credit Anstalt Crisis, 31-44.

405 to compensate Credit Anstalt: Aguado,“The Creditanstalt Crisis of 1931.”

406 The French government: Aguado, “TheCreditanstalt Crisis of 1931,” and Lewis, Eco-nomic Survey, 63.

407 “more than likely throw out of the win-dow”: Lamont Memorandum to Leffingwell,”Debt Suspension Matters,” June 5, 1931,quoted in Lamont, The Ambassador fromWall Street, 295-96.

408 “gentlemen do not read each other’smail”: Stimson and Bundy, On Active Ser-vice, 188.

409 “conducting a post-mortem”: LeithRoss, Money Talks, 135.

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410 “came crying down . . .”: Interview withHerbert Feis, November 4, 1955, quoted inMorrison, Turmoil and Tradition, 349.

410 “a sickly, overworked and overwhelmedman”: Wells, Experiment in Autobiography,679, quoted in Schlesinger Jr. The Crisis ofthe Old Order, 244.

410 “like sitting in a bath of ink”: Stimson di-ary, June 18, 1931, quoted in Schlesinger,The Crisis of the Old Order, 243.

411 “we [the Americans] and the British”:Edge, Jerseyman’s Journal, 156.

411 “the killing of the fatted calf”: Edge, Jer-seyman’s Journal, 192.

412 “the more one reflects”: Howe, WorldDiary, 105.

412 Norman got hold of young Mellon:Anon, High Low Washington, 99.

412 “Are you glad to be in Paris”: “SecretaryActs Quickly,” New York Times, June 26,

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1931. Hoover vented against the French: Fer-rell, American Diplomacy, 114.

413 Berlin was being “bled to death”: FederalReserve Bank of New York, Memorandum ontelephone call between Harrison and Nor-man, July 1, 1931.

413 “France has been playing”: MacdonaldDiary, July 5, 1931, quoted in Boyce, BritishCapitalism, 336.

414 “Now, Monsieur Mellon”: Cannadine,Mellon, 438.

415 “round face deep lined”: “Beggar NoChooser,” Time, July 20, 1931.

416 “Not since those days of July 1914”:“Beggar No Chooser,” Time, July 20, 1931.

417 “they had come to a decisive point”: Ben-nett, Germany and the Diplomacy of theFinancial Crisis, 236.

417 “On the ruins of the wealth”: Einzig, Be-hind the Scenes of International Finance, vii.

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417 “Never has the incapacity of the econom-ic leaders”: “Schacht Arraigns CapitalistGreed,” New York Times, July 11, 1931.

418 the Danatbank had failed to open: “Ger-man Banks Curb Runs by Depositors,” NewYork Times, July 14, 1931.

419 “resigned passivity”: Guido Enderis,“Berliners Calm in Money Crisis,” New YorkTimes, July 17, 1931.

419 “much struck by the emptiness,” “Insuch circumstances”: E. L. Woodward and R.Butler, eds., Documents on British ForeignPolicy, 2: 225-26.

420 “the program to be executed”: “HitlerUnites Ranks of the Old Germany to War onBrüning,” New York Times, October 12,1931.

20: GOLD FETTERS

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422 “Lo! thy dread empire Chaos!”: Alexan-der Pope quote from Bartlett’s FamiliarQuotations, 313.

424 Macmillan Report: Williams, “Londonand the 1931 Financial Crisis.”

425 “nervous dyspepsia”: Addiss Papers,August 5, 1931, quoted in Kynaston, The Cityof London: Illusions of Gold, 234.

425 “Can’t he be persuaded”: Letter fromLeffingwell to Jack Morgan, July 28. 1931,quoted in Kunz, The Battle for Britain’s GoldStandard, 107.

425 “Feeling queer”: Bank of England, Nor-man Diary, July 29, 1931.

425 “prejudice, ignorance, and panic”:Taylor, English History, 288.

427 “It certainly is a tragically comical situ-ation”: Webb, Diary, 253. 10 DowningStreet: Harold Callender, “A Picture of

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Britain in the Time of Crisis,” New YorkTimes, August 30, 1931.

427 “pandemonium had broken loose”:Boyle, Montagu Norman, 272-73.

428 “What the City did”: Howe, World Di-ary, 115.

429 “It is now clearly certain”: Keynes, “Let-ter to Ramsay MacDonald,” August 5, 1931,in Collected Writings, 20: 591-93.

429 “the most wrong and foolish things”:Keynes, “Speech to Members of Parliament,”September 16, 1931, in Collected Writings,20: 607-11.

429 “admit quite frankly that the way out”:Moggridge, Maynard Keynes, 525.

430 “rose to his feet, his eyes flashing”: Wil-liams, Nothing So Strange, 105.

431 “Going off the gold standard”: Jones, Di-ary, 32-33, quoted in Brendon, The DarkValley, 164.

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431 “Nothing more heartening hashappened”: “Run,” Time, September 28,1931.

432 gold “is dug up out of a hole in Africa”:Manchester, The Last Lion, 862.

432 Charlie Chaplin, as a guest at Chartwell:Boothby, Recollections of a Rebel, 51.

432 “chuckling like a boy”: Rolph, Kingsley,164, quoted in Skidelsky, John MaynardKeynes: The Economist as Saviour, 397.

432 “There are few Englishmen who do notrejoice”: Keynes, “The End of the GoldStandard,” in the Sunday Express, Septem-ber 27, 1931, in Collected Writings: Essaysin Persuasion, 9:245-49.

432 “tragic act of abdication”: Bonn, Wan-dering Scholar, 318-19.

433 “A pound is still a pound”: “Pound, Dol-lar and Franc,” Time, October 5, 1931.

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433 “France will be heavily punished”: Boyle,Montagu Norman, 276.

435 “solidarity and politeness”: Letter fromMoret to Harrison, October 7, 1931, quotedin Kindelberger, The World in Depression,168.

435 “holes in the ground, privies”: Congres-sional Record, 72 Congress, 1 Session,December 9, 1931, 75: 233-6, quoted in War-ren, Herbert Hoover, 164.

437 “more depressed than ever”: Hoover,Memoirs, 86.

438 “If there is one moment”: J. BradfordDeLong, “The Economic Foundations ofPeace” http://econ161.berkeley.edu/Econ_Articles/lal.html

439 “Yes. It was called the Dark Ages”: Ed-win Lefèvre, “When Is It Safe to Invest?”Saturday Evening Post, August 6, 1932.

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439 A similar measure in late 1930: Bordo etal., “Was Expansionary Monetary PolicyFeasible?”

441 “If you steal $25”: The Nation, March 8,1933, quoted in Kennedy, The BankingCrisis of 1933, 126.

441 “the so-called depression”: “Radio ad-dress delivered on February 26, 1933, inCoughlin, Driving Out the Money Changers.

442 “It’s just as if I put my car”: “Close toBottom,” Time, March 6, 1933.

443 “If the fall in the price of commodities”:Schlesinger Jr., The Crisis of the Old Order,453. “England has played us”: “Roosevelt’sTen,” Time, March 6, 1933.

443 At least six bills were circulating: “Infla-tion—Curse or Cure?” The Literary Digest,February 11, 1933.

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444 Hoover composed a ten-page handwrit-ten letter: Schlesinger Jr., The Crisis of theOld Order, 477.

445 he “did not want his last official act”:Josephson, The Money Lords, 120.

445 the New York Fed lost: Wigmore, “Wasthe Bank Holiday of 1933 Caused by a Runon the Dollar?” Tape 1, 745.

446 “Like hell, I will!”: Dorothy Roe Lewis,“What FDR told Hoover, March 3, 1933,”New York Times, March 13, 1981.

446 “Urban populations cannot do without”:“Letter from Lamont to Franklin D.Roosevelt,” February 27, 1933, quoted in La-mont, The Ambassador from Wall Street,330.

447 At 9.15 p.m. on March 3: Pusey, EugeneMeyer, 235-36.

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448 “a beleaguered capital”: Arthur, Krock.“100,000 at Inauguration,” New York Times,March 5, 1933.

21. GOLD STANDARD ON THE BOOZE

451 “In order to arrive”: Eliot, CollectedPoems, 187.

451 To the surprise of many: See WilliamManchester, “The Great Bank Holiday,” Hol-iday, February 1960; “City Awaits Scrip asCash Dwindles,” “Harvard Students Aided,”“Divorce Holiday in Reno,” and “Scrip atPrinceton,” New York Times, March 7, 1933;“Envoys Lack Cash; Complain to Hull,” NewYork Times, March 9, 1933; “Michigan,” and“Money and People,” Time, March 13, 1933.The legislation was supplemented: WilliamL., Silber, “Why Did FDR’s Bank HolidaySucceed?”

455 “all kinds of junk”: Josephson, TheMoney Lords, 120.

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455 the first of his fireside chats: “The Pres-ident’s Speech,” New York Times, March 13,1933.

455 “Our President took such a dry subject”:“Will Rogers Claps Hands for the President’sSpeech,” New York Times, March 14, 1933.

455 “We had closed in the midst”: Joseph-son, The Money Lords, 120.

456 “Capitalism was saved in eight days”:Moley, After Seven Years, 155.

458 “the white sheep of Wall Street”: War-burg, The Long Road Home, 107.

459 “Poppycock!”: Schlesinger Jr., The Com-ing of the New Deal, 195.

459 His simplistic view was: Wicker,“Roosevelt’s 1933 Monetary Experiment.”

460 “You paint a barn roof”: “Teachers andPupils,” Time, November 27, 1933; Brooks,Once in Golconda , 160-63.

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461 “As long as nobody asks me”: Schlesing-er Jr., The Coming of the New Deal, 195.

462 “Well, this is the end of western civiliza-tion”: Accounts of that meeting are variouslyprovided by Moley, After Seven Years,159-61; Feis, 1933: Characters in Crisis,126-30; Warburg, The Long Road Home,119-20; James Warburg, Oral History Pro-ject, 492-99, quoted in Schwarz, 1933:Roosevelt’s Decision; and Schlesinger, TheComing of the New Deal, 200-201.

462 “can’t be defended except as mob rule”:Schlesinger Jr., The Coming of the NewDeal, 202.

462 “Your action in going off gold”: Letterfrom Leffingwell to Roosevelt, October 2,1933, quoted in Schlesinger, The Coming ofthe New Deal, p. 202.

462 dramatic change in sentiment: Teminand Wigmore, “The end of one big deflation,”

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463 “The difficulties are so great”: Gunther,Inside Europe, 287.

463 “a handsome, fox-bearded gentleman”:“Professor Skinner,” Time, August 29, 1932.

463 “his affectation of the role”: “Along theHighways of Finance,” New York Times,September 4, 1932.

464 “Deport the Blighter”: from Press Time:A Book of Post Classics, 310-11.

465 “whims” “completely in the dark”: Bankof England telephone conversations betweenHarrison and Norman, April 27, 1933, andMay 26, 1933.

466 He practiced it in his personal life:“Tightwad Up and Out,” Time, January 14,1935.

468 “King, I’m glad to meet you.”: Brooks,Once in Golconda, 158; Galbraith, Money,202-203; Warburg, The Long Road Home,128-29.

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468 “With Washington committed”:“Disgust,” Time, June 26, 1933.

470 “he felt as if he had been kicked”:Josephson, The Money Lords, 130.

471 “President Roosevelt is MagnificentlyRight”: Keynes, “President Roosevelt is Mag-nificently Right,” Daily Mail, July 4, 1933, inCollected Writings, 21: 273-77.

471 “We are entering upon waters”: War-burg, The Long Road Home, 135-36.

472 “crack-brained” economist: “Teachersand Pupils,” Time, November 27, 1933;Brooks, Once in Golconda, 160-63.

472 “like asking a sworn teetotaler”: Joseph-son, The Money Lords, 131.

473 “hit the ceiling”: Harrison Diary, Octo-ber 28, 1933, quoted in Brooks, Once in Gol-conda, 168.

473 “This is the most terrible thing”: HenryMorgenthau, Jr., “The Morgenthau Diaries:

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Part V: The Paradox of Poverty and Plenty,”Colliers, October 25, 1947.

473 “the gold standard on the booze”:Maynard Keynes, “Keynes to Roosevelt: OurRecovery Plan Assailed—An Open Letter,”New York Times, December 31, 1933, in Col-lected Writings, 21: 289-97.

474 In the four years after 1933, the value ofgold: Romer, “What Ended the Great De-pression?” and Meltzer, A History of theFederal Reserve, 573.

476 “Operated on this morning”: Rhodes,The Making of the Atomic Bomb, 685-86.

22. THE CARAVANS MOVE ON

477 If a man will begin: Francis Bacon quotefrom Bartlett’s Familiar Quotations, 166.

477 Breaking with the dead hand of the goldstandard: Eichengreen and Sachs, “ExchangeRates and Economic Recovery,” andChoudhri and Kochin, “The Exchange Rate

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and the International Transmission of Busi-ness Cycle.”

480 “If Hitler comes to power”: Gunther, In-side Europe, 99; Mühlen, Schacht: Hitler’sMagician, viii.

480 “Your movement is carried internally”:Letter from Schacht to Hitler, August 29,1932, in Office of the Counsel for Prosecutionof Axis Criminality, Nazi Conspiracy andAggression, Vol VII, Washington D.C.:Government Printing Office, 1946, 512-14.

480 “the only man fit”: “Hitler Holds BackDecision on Cabinet as Aides Disagree,” NewYork Times, November 23, 1932.

481 “a man of quite astonishing ability”:Hitler, Hitler’s Secret Conversations, 350.

481 The recovery was not quite the miracle:This section draws heavily on Tooze, TheWages of Destruction, 37-43, and Evans, TheThird Reich in Power, 322-77.

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482 “The whole modern world is crazy”:Dodd and Dodd, Ambassador Dodd’s Diary,175.

485 “Don’t forget what desperate straits”:Gilbert, Nuremburg Diary, 153-54.

485 In the lead-up to the trial: Overy, Inter-rogations, 73.

485 “like an angry walrus”: Dos Passos, Tourof Duty, 301.

485 “twisted in his seat”: West, A Train ofPowder, 5.

487 “They were wrong about reparations”:Kynaston, The City of London: Illusions ofGold, 373-74.

487 “old gentlemen complaining”: Williams,A Pattern of Rulers, 221.

488 “Hitler and Schacht”: Memo from Leff-ingwell to Lamont, July 25, 1934, quoted inChernow, The House of Morgan, 398.

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488 “If this struggle goes on”: Goodwin, TheFitzgeralds and the Kennedys, 687.

489 “As I look back”: Boyle, Montagu Nor-man, 327-28.

490 During the 1930s, Keynes’s speculativeactivities: Skousen, “Keynes as a Speculator,”162, and Moggridge, Maynard Keynes, 585.

491 “I do enjoy these lunches”: Sayers, TheBank of England, 602.

492 “the unpleasantest man in Washington”:Skidelsky, John Maynard Keynes: Fightingfor Britain, p. 260.

492 “he has not the faintest conception”:Keynes, Letter to Wilfrid Eady, October 3,1943, in Collected Writings, Vol. XXV, pp.352-57.

494 “The flow of alcohol is appalling”:Cassidy, John .“The New World Disorder,”New Yorker, October 26, 1998, p 198.

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494 “madhouse with most people”: Skidel-sky, John Maynard Keynes: Fighting forBritain, p. 347.

495 “If we can so continue”: Skidelsky, JohnMaynard Keynes: Fighting for Britain, p355.

23: EPILOGUE

497 I have yet to see any problem: PoulAnderson quote from The Yale Book of Quo-tations, 19.

503 “his policies died with him”: U.S. Houseof Representatives, Banking Act of 1935,Committee on Banking and Currency, 74Congress, Ist Sess. 1935.

503 “problems of life”: Keynes, “Preface” inCollected Writings: Essays in Persuasion. 9:xviii.

503 “trustees, not of civilization”: Harrod,The Life of John Maynard Keynes, 193-94.

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Soule, George. Prosperity Decade: FromWar to Depression: 1917-1929. New York:Rinehart, 1947.

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TOYNBEE, ARNOLD. Survey of Interna-tional Affairs 1931. Oxford: OxfordUniversity Press, 1932.

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_______________ “With a Bang, not aWhimper: Pricking Germany’s Stock Market

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INDEX

Page numbers in boldface indicatephotographs.

Abernon, Edgar Vincent d’Acheson, DeanAgadir crisis (1911)Agricultural Adjustment ActAlbert, Arthur William Patrick, Duke ofConnaughtAldrich, NelsonAldrich PlanAngell, NormanAsian crisis (1997-98)atomic bomb, development ofAustralia

Austriabank holiday inand British departure from goldCredit Anstalt failure inand customs uniondeclaration of war against Serbia byGerman capital ingold standard ininterest rates inoptimism on duration of war inpounds/sterling reserves in

Austrian National Bankautomobile industryAutonomy Law (Germany, 1922, 1922

Babson, RogerBagehot, WalterBaldwin, StanleyBalfour, Arthur

1358/1471

Bank Act (Great Britain, 1844)Bank of England

and Banque de Franceand blame for Great Depressionas center of international financeChurchill comments aboutand commercial/merchant banksCommittee of Daily Waiting ofCommittee of the Treasury ofcontrol of

Court/directors ofcreation ofand Credit Anstalt problemcurrency issuance byand deflationand devaluation of poundembargo on foreign loans byand events leading to World WarFederal Reserve relations withFrench gold reserves inand French-British relations

1359/1471

functions ofand funding for warand German recoverygold reserves ofand gold standardgovernment’s relationship withgovernorship ofand Hatry caseheadquarters ofimpact of Great Depression onimportance ofindependence ofand interest ratesand J.P. Morganand Keynesand Macmillan Committeeand moratorium on reparations and wardebtNorman as governor ofas Norman “mistress,”Norman portrait at

1360/1471

and Polish loanpowers ofreaction to Great Crash byand “real bills” theory of creditand Reichsbankand Romania fundingrun on/withdrawals fromspecial privileges ofand stock market bubbleBank of England (cont.)

Strong visit tosuspension of gold payments byand U.S. loans to BritainU.S./New York Fed loans toand war debts

Bank for International Settlements (BIS)Bank of United States (BUS)Bankers Trust CompanyBanking Commission (Occupied Belgium)banks/bankers, U.S.

and bank holidays

1361/1471

closings ofconfidence incongressional study ofas consortium for loan to Great Britainas consortium to rescue stock marketcredit fromand Dawes Planfailures ofand German economygold reserves ofimage ofpanics inreopening ofRoosevelt rescue package forrun on/withdrawals fromstabilization of

banks/banking systemand British departure from goldand characteristics of Great Depressionand devaluation of dollardivisions within

1362/1471

first panic inand lending to foreign governmentsoptimism about duration of war by

Banque d’Algérie et TunisieBanque de France

Annual General Assembly ofand Bank of EnglandBanque d’Algérie compared withand blame for Great Depressionand British departure from gold standardand British-French relationsand Caillauxconservatism ofand Council of Regentscreation ofcredibility ofand currency policydivisiveness withinand exchange ratefaux bilans scandal involvingand foreign exchange

1363/1471

foreign loans forand French economic recoveryand French-German relationsfunding for war byand German economyand German invasion of Francegold reserves ofand gold standardgovernment’s relationship withgovernorship ofheadquarters ofimportance ofindependence ofand interest ratesLe Circulaire Bleu ofMoreau named head ofMoreau resignation fromMoret appointed head ofMoret resignation fromand Napoleonic warsand New York Fed

1364/1471

and Norman pessimism about economyNorman visit toand Polish loanpounds/sterling atas private institutionreaction to Great Crash byand Romania fundingrun on/withdrawals fromStrong visit toand war debtduring World Warand Young conference

Banque de Paris et Pays-BasBanque Turque pour le Commerce etl’IndustrieBaring familyBaruch, BernardBeaverbrook, LordBeer Hall PutschBelgium

banking crisis in

1365/1471

and Dawes Committee/Plandestruction inand French-British relationsGerman invasion/occupation ofgold reserves ofinterest rates inKeynes study ofand Paris Conference (1929)reconstruction of

Berlin, Germanycommunists inDawes Committee meeting inat end of World Warmilitary control ofNazis ininreactions to events leading to World War I

inriots/violence insocial life in

Bernanke, Ben

1366/1471

Bethmann-Hollweg, Theobald vonBirkenhead, Lord (F.E. Smith)Bismarck, Otto vonBlack Friday (1869)“Black Friday” (Germany, 1927)Black Monday (October 28, 1929)Black Thursday (October 24, 1929)Black Tuesday (October 29, 1929)Bloomsbury circleBoer WarBonaparte, NapoléonBonar Law, AndrewBonnet, GeorgesBracken, BrendanBradbury, JohnBrett, Reginald (Lord Esher)Bretton Woods ConferenceBriand, Aristidebroker loansBrown BrothersBrown Shipley

1367/1471

Brüning, HeinrichBullion Committee (Great Britain)

Caillaux, Henriette ClaretieCaillaux, JosephCanadacentral banks/bankers

and attempts to rescue German economybeginning of meetings ofand blame for Great Depressionand British departure from gold standardand Credit Anstalt problemand credit systemdistrust offoreign lending byfunctions/role ofand funding for wargoals ofgold reserves of

1368/1471

and gold standardgovernment’s relationship withholding of pounds byimpact ofand interest ratesKeynes’s views aboutand leadershipLong Island meeting ofneed for U.S. coordination with Europeanpower and prestige ofand printing currencyprivate ownership ofproposed league ofpublic statements byreaction to Great Crash byreputation ofresponse to panics byrole during Great Depression ofrole in World War I ofsisyphian nature ofand stock market

1369/1471

Strong as inventor of modernCentral Europe

assassination of Archduke Ferdinand inbanking system inand blame for Great Depressioncurrency collapse indefault on debts ingold standard inimpact of Great Crash onimpact of stock market bubble onand Keynes’s personal financespounds/sterling reserves ofrecession in

Chamberlain, AustenChamberlain, NevilleChambers, WhittakerChase National BankChurchill, Winston

Baruch dinner forand Beaverbrookblunders/mistakes of

1370/1471

as chancellor of exchequerChaplin visit withand French war debtand gold standardas “golden Chancellor”and Keyneslifestyle ofand Lloyd George

Churchill, Winston (cont.)and NormanNorman profile byand The Other Clubparliamentary speeches ofpolitical affiliations ofreputation ofSnowden as replacement forand U.S.-British relations

Clemenceau, Georgecoal industrycommercial/merchant banks

gold reserves of

1371/1471

in Great Britainin U.S.

commoditiesCommunistsComptroller of the Currency, U.S.confidence, publicCongress, U.S.

and bank rescue packagebanking system study bycauses of Great Crash hearings inand creation/reform of Federal Reserve

Boardand creditand early years of Depressionand French-U.S. relationsand gold standardHarrison’s views aboutand monetary policyand moratorium on reparations and war

debtand prices

1372/1471

reaction to Great Crash byand RFCand Roosevelt administrationstock market concerns inand war debts

Converse, EdmundCoolidge, CalvinCox, James M.credit

and characteristics of Great Depressioncollapse ofcongressional hearings aboutand gold standardand impact of Great Crashand role of central bankersand stock market bubbleStrong’s views about

Credit Anstalt, failure ofCrissinger, DanielCunliffe, Walter, LordCunliffe Committee (1918)

1373/1471

currencyamount ofattempts to stabilizecollapse of Europeancontraction ofand covering of U.S. debtdevaluation ofand funding for warand gold standardand interest ratesin post-World War I yearsand role of central bank

Curzon, George Nathanielcustoms union

DanatbankDavillier, MauriceDavison, Henry

and central bank plan

1374/1471

death ofand Jekyll Island meetingLamont’s relationship withlifestyle ofand meeting at J.P. Morgan & Co.and Panic of 1907personal background ofpersonality ofreputation ofand Strong as governor of New York FedStrong relationship withas trustee of Bankers Trust

Dawes, Charles GatesDawes, RufusDawes CommitteeDawes Plan . See also specific nationde Gaulle, Charlesdeflation

and blame for Great Depressionand gold standardand initiatives to revive economy

1375/1471

Keynes’s views aboutNorman’s concern about

Deutsche OrientbankDeutsche BankDeutsche Demokratische Partei (DDP)devaluation views aboutDillon ReadDouglas, Lewis W.Dresdner BankDreyfus, AlfredDu Pont familyDufour-Feronce, AlbertDulles, John FosterDurant, William Crapo “Billy,”

Eastern EuropeThe Economic Consequences of Mr.Churchill (Keynes)

1376/1471

The Economic Consequences of the Peace(Keynes)Economy Act (U.S., 1933)Edge, WalterEinzig, Paulelections of 1932, U.S.Emergency Banking Act (U.S., 1933)Emergency Relief Act (U.S., 1933)emerging marketsThe End of Reparations (Schacht)Esher, Lord (Reginald Brett)Europe

American tourists inanti-Americanism inand comparison of Great Depression and

modern eventsexchange rates ingold reserves ofgold standard inimpact of Great Crash onimpact of U.S. stock market bubble on

1377/1471

Keynes’s plan for financial reconstructionof

loans to U.S. fromreconstruction ofU.S. foreign investment in

Europe’s Optical Illusion (Angell)

“The Family,”Federal Reserve Act (1913)Federal Reserve Bank of ChicagoFederal Reserve Bank of ClevelandFederal Reserve Bank of New York

British loans fromand BUS rescuecentral bankers meeting atand divisiveness within Federal Systemand Franceand funding for warand German economy

1378/1471

gold reserves ofHarrison named head ofheadquarters ofand impact of Great Crashand interest ratesand international bank proposaland Jewish-owned banksand Liberty bondsNorman meeting withpower ofand reform of Federal SystemReichsbank gold atrun onsize ofand stock marketStrong named governor of

Federal Reserve Board/Systemappointments toand Bank of Englandand banking crisisand blame for Great Depression

1379/1471

Board of Governors ofand British economyBritish views aboutas central bank of industrial worldcharter/rules ofclosing ofcomparison of modern andcongressional hearings aboutcreation ofcredibility ofand creditcriticisms ofand devaluation of dollardissension/divisiveness withinEccles named head ofand economic recovery in U.S.functions/goals ofand funding for wargold reserves ofand gold standardgovernors of

1380/1471

and Hoover-Roosevelt negotiationsimportance ofimpotency ofand inflationand initiatives to revive economy

Federal Reserve Board/System (cont.)and interest ratesKeynes’s views aboutand Long Island meetingand Mellon impeachment hearingsmembers ofMeyer named chairman ofMeyer resignation fromNew York Fed relations withNorman’s views aboutopen market operations ofoperations and character ofand Polish loanreaction to Great Crash byreform ofand Reichsbank

1381/1471

and Roosevelt administrationand stock marketStrong as leader ofand Strong’s deathStrong’s relations withduring war yearsYoung (Roy) as chairman ofYoung (Roy) resignation from

financial crises, characteristics offinancial mediaFirst Bank of the United States“First Name Club”First National BankFisher, IrvingFisher, WarrenFlorida, real estate boom inFord, HenryFord Motor CompanyFort KnoxFrance

anti-Americanism in

1382/1471

banking system inand blame for Great DepressionBritain compared withBritish relations withcollapse of government incorruption/scandals inand cost of World War Iand Credit Anstalt problemcredit incurrency inand customs unionand Dawes Committee/Planand devaluation of the dollareconomy inand exchange ratesfailure of economic policies infinancial problems ofand foreign exchangeforeign loans forfunding for World War I inGDP of

1383/1471

and German economyGerman loans fromGerman relations withGerman war againstGermany compared withgold reserves ofgold standard inimpact of Great Crash onimpact of Great Depression onimpact of World War I onindustrial production ininflation ininterest rates inand international bank proposaland London Economic ConferenceMellon negotiations withmobilization inmoney supply inand moratorium on reparations and war

debtMorgan loans to

1384/1471

and Napoleonic Warsin 19261930 economy inNorman’s views aboutoptimism on duration of war inprices inreaction to Versailles Treaty inreconstruction inand reparationsriots inRoyalists inin Ruhr valleyand Russiasources of funding inspending for World War I byand stereotypes of Frenchstock market intaxes inunemployment inU.S. loans toU.S. relations with

1385/1471

war debts ofand Young Conference/Plan

Franco-Prussian WarFranz Ferdinand (archduke of Austria)Frazier-Sinclair-Patman billfulfillment policyFunk, Walter

Galbraith, J. K.General MotorsThe General Theory of Employment, In-terest, and Money (Keynes)Genoa Economic Conference (1922)Germany

attempts to rescue economy ofausterity program inbanking system inand beginnings of World War Iand blame for Great Depression

1386/1471

and Britainand characteristics of Great Depressionclass structure incollapse in lending tocolonies ofCommunists inconfidence incorruption inand cost of World War Icredit incurrency inand customs unionand Dawes Committee/Plandefault on debts bydevaluation indomestic policy ineconomy ofand events leading to World War Iforeign borrowing by

foreign exchange inforeigners in

1387/1471

French relations withfunding/financing of World War I inGDP ofgold reserves ofgold standard inand images of Germansimpact of Great Crash onimpact of Great Depression onindustrial production ininflation inand interest rates inJews inMexico compared withmobilization inmoney supply inand moratorium on reparations and wardebtnationalization inbetween 1919during 1923during 1924

1388/1471

in 1930sNorman’s views aboutoptimism on duration of war inprices inproclamation of republic ofpublic works programs inpurchasing power inreaction to Versailles Treaty inrearming ofrecession inreconstruction ofand reparationsresistance movement inriots/violence inRussian relations withand stereotypes of Germansand stock marketStrong’s views aboutGermany (cont.)

taxes inthreats of bankruptcy in

1389/1471

trade withtraditional values inand Treaty of Versaillesunemployment inU.S. concerns about economyU.S. loans toU.S. relations withand Young Conference/Plan

Gilbert, Seymour ParkerGladstone, WilliamGlass, CarterGlass PlanGlass-Steagall Actgold

and Agadir crisisand American tourists in Europeand amount of currencyand Bank of England-commercial banks

relationshipand blame for Great DepressionBritish exports of

1390/1471

and British funding of warand commoditiesand covering of U.S. debtdistribution ofand events leading to World War Iand German invasion of Belgiumhoarding ofand “hunt for gold cars”and interest ratesKeynes’s views aboutas means for funding warobsession withand pricespurchasing power ofand “real bills” theory of creditand stock market bubblesupply ofU.S. buying of

gold coinsgold standard

benefits of

1391/1471

and blame for Great Depressionand central banksand credit systemcriticisms ofand currencyand deflationand devaluation of dollaras dollar standardand Federal Reserve Systemimpact of Great Crash onand inflationand interest rateas key to economic revivalKeynes’s views aboutand Macmillan Committeeand money supplyand Moreau-Norman disagreementsNorman’s views aboutobstacles to return toand paper currencyand pound/sterling

1392/1471

and pricesand reconstruction of financial systemand Roosevelt bank rescue packagerules concerningand stock marketsuspension of

Goldschmidt, JacobGreat Britain

anti-Americanism inand Austrian-Serbian relationsbanking system inand blame for Great DepressionCanada as custodian of gold reserves ofchange of governments incredit incurrency indeflation indevaluation inearly years of Depression ineconomy inand events leading to World War I

1393/1471

and exchange ratefinancing/funding for World war I inforeign borrowing byFrance compared withFrench image inFrench relations withGDP inand German invasion of Belgiumand GermanyGlorious Revolution ingold reserves ofgold standard inHoover administration as source of help forimpact of Great Crash onimpact of World War I onindustry/manufacturing ininflation inand interest ratesloans to France fromloans to Germany fromloans to Russia from

1394/1471

and London Economic ConferenceMacmillan Committee inmanufacturing/industry inmoney supply inand moratorium on reparations and war

debtMorgan loans toin 1925optimism on duration of war inprices inand reparationsrestoration of pound to prewar pedestal inSchacht’s views aboutsocietal transformation inspeculation instock market instrikes intaxes inunemployment inU.S. loans toU.S. relations with

1395/1471

war debts ofand Young conference/Plan

Great Crashand blame for Great Depressionand characteristics of Great Depressioncongressional hearings aboutearly impact ofimpact on Europe of

Great Depressionblame forcauses ofearly years ofLong Island meeting as turning point that

lead tomodern events compared withprice stability as central to recovery fromrole of central bankers duringas sequence of crisis

The Great Illusion (Angell)“The Great Slump of 1930” (Keynes)Greenspan, Alan

1396/1471

Grenfell, TeddyGrey, EdwardGuaranty Trust CompanyGuardian Trust CompanyGuggenheim, DanielGulbenkian, Calouste

The HagueGerman-Allied negotiations inYoung Plan conference at

HambrosHamilton, AlexanderHamlin, GeorgeHanau (Marthe) affairHarding, WarrenHarrison, George L.

and atomic bomband banking consortium to rescue stock

market

1397/1471

and banking crisisand blame for Great Depressionand British banking problemsand BUS rescuebuying of gold byand Central European crisiscriticisms ofand currency stabilizationdeath ofand devaluation of dollarand divisiveness within Fedand German economyand gold standardand impact of Great Crashand initiatives to revive economyand interest ratesas intermediary between bankers and

Rooseveltinternationalism ofand London Economic Conference

1398/1471

and moratorium on reparations and wardebt

named New York Fed governorin 1940sand Normanpersonal life of

Harrison, George L. (cont.)personal/professional background ofpersonality ofand reform of Federal Reserve Boardand RooseveltStrong as protégé ofviews about Congress of

Harvey, ErnestHatry, ClarenceHavenstein, Rudolph vonHearst, William RandolphHelfferich, KarlHepburn, A. BartonHerriot, EdouardHill, A. V.

1399/1471

Hindenburg, Paul vonHitler, Adolf

Beer Hall Putsch ofas chancellorconspiracies againstand impact of Great DepressionNorman’s views aboutrise ofand Schacht

hoardingHongkong and Shanghai BankHoover, Herbert

and banking crisisand British banking problemsDurant meeting withand elections of 1932and initiatives to revive economyand interest rate cutsinternationalism ofKeynes’s comments aboutLamont letter to

1400/1471

letter to Roosevelt fromand MellonMeyer appointed to Fed byMeyer’s letter toand moratorium on reparations and war

debton origins of Depressionpersonal and professional background ofreaction to Great Crash byand Rooseveltas secretary of commerceand speculationand stock marketand Strongand war debts

House of Morgan. See J.P. Morgan & Co.Hugenberg, AlfredHughes, Charles EvansHull, CordellHungary

1401/1471

inflationand funding for warand gold standardKeynes’s views aboutand “real bills” theory of credit

Inspectorat des Finances (France)Inter-Allied Financial Delegatesinterest rates

and goldand Keynesand role of central bankersand stock market bubble

international central bank, proposals forInternational Monetary Fund (IMF)International Trust CompanyItaly

James, George Roosa

1402/1471

Jay Cooke and CompanyJekyll Island ClubJews

and divisions in international bankingcommunity

in Francein Germanyas owners of banksin U.S.

J.P. Morgan & Co.and Bank of Englandbombing ofBritish loans fromand consortium for rescue of stock marketand divisions within international financial

communityand early years of Depressionforeign government loans byand FranceGilbert offered partnership withand gold standard

1403/1471

income taxes ofand Kidder Peabody rescuemeeting (1914) atNorman meetings withand Panic of 1907and pound on gold standardpower/reputation ofand Roosevelt administrationSchacht visit toand stock market panic

Kennedy, JosephKeynes, John Maynard

appearance and personality ofawards and honors forand Bank of Englandbasic beliefs ofBloomsbury friends ofand Bretton Woods Conference

1404/1471

at Cambridgeand Churchilland coal industryand credit systemand Cunliffe affairand currencyand Dawes Plandeath ofand debasement of German currencyand devaluation of dollaron duration of warearly career ofon economy in 1930European financial reconstruction plan ofand exchange rate policyon Federal Reserve Boardfinancial affairs ofand French speculation concernsand gold standardand gold supplyon Great Depression

1405/1471

health ofon impact of Great Depressionand impact of World War Iand inflationand interest ratesand international financial systemlegacy ofand Lloyd Georgeand Macmillan Committeeand May Reportand Normanand The Other Clubat Paris Peace Conferenceand paying for the warpersonal background ofpersonal life ofplanning for post-World War II world byand public works programsreaction to Great Crash byand reparationsreputation of

1406/1471

role in international financial affairs ofon Roosevelton Royal Commisson on Indian Currency

and Financeand stock marketand Strongand translating sums of moneyat Treasuryand unemploymentU.S. criticisms byand U.S.-British relationsand war debtsworld economy plan ofduring World War IIwritings ofon Young Plan

Keynes, LydiaKidder PeabodyKnickerbocker Trust CompanyKohler, HeinrichKreuger, Ivar

1407/1471

Krupp, GustavKuhn Loeb

L’Affaire CaillauxLamont, Thomas

as banker-statesmanand banking crisisand BUS rescueand Davisonand Dawes Planand Germany economyand initiatives to revive economyinternationalism oflifestyle ofand meeting at J.P. Morgan & Co.and moratorium on reparations and war

debtand Normanoffered partnership with Morgan

1408/1471

optimism about economy ofand Paris Peace Conferencepersonal/professional background ofand reparationsand Rooseveltand stock marketand Young Conference (1929)

Lansing, RobertLaval, PierreLazard FrèresLe Circulaire Bleu (Banque de France)Le Couteulx de Canteleu, Jean-Barthélémyleadership, and blame for Great DepressionLeague of NationsLeffingwell, RussellLehman, HerbertLehman BrothersLend-LeaseLiberty BondsLitvinov, Maxim MaximovitchLivermore, Jesse

1409/1471

Lloyd George, Davidand Bank of England meetingand Bank of England-government relationsand Churchilland events leading to World War Ifall ofand Keynesand Paris Peace Conferencepost-war promises ofand reparationsand Versailles Treaty

Logan, JamesLondon, England

as center of international financeDawes Plan meetings inin mid-1920sin post-World War I yearsStrong visits to

London Stock ExchangeLong Island (Mills house), central bankersmeeting on

1410/1471

Luther, Hans

McAdoo, WilliamMacDonald, RamsayMcFadden bill (U.S.)McKenna, ReginaldMacmillan Committee (Great Britain)Macmillan, Hugh, LordMcReynolds, Samuel D.Manufacturers Trust BankMarcus, BernardMartin’s BankMarx, KarlMarx, WilhelmMay Committee (Great Britain)Mellon, Andrew

appointed ambassador to Great Britainart collection ofcriticisms of

1411/1471

and Dawes PlanEuropean travels ofand Fed rate cutsand Fed System tensionsand French economyFrench negotiations of“gentlemen prefer bonds” admonition ofand Hooverimpeachment hearings concerningand initiatives to revive economyJustice Department indictment againstand moratorium on reparations and war

debtand MoreauNorman meeting withpersonal life ofreaction to Great Crash byas secretary of the Treasuryand stock marketand war debts

Mellon, Paul

1412/1471

Mendelssohn (Paris banking house)merchant banks. See commercial/merchantbanksMexicoMeyer, EugeneMidland BankMiles, BasilMiller, AdolphMiller, JamesMillerand, AlexandreMills, Ogden L.Ministry of Finance (France)Mitchell, Charles E.M.J. Meehan and CompanyM.M. Warburg and CompanyMoley, Raymondmoratorium, on reparations and war debtsMoreau, Aimé Hilaire Émile

ambitions ofappearance ofawards and honors for

1413/1471

at Banque d’Algérie et TunisieBanque de France appointment ofand BISand blame for Great Depressionand Caillauxand currency problemsdeath ofdisillusionment ofand divisiveness at Banque de Franceearly career ofand exchange rateand France as world financial centerand French-British relationsand French-German relationsand gold reservesand gold standardand Harrisonand interest ratesat La Frissonaireand Mellonand Norman

1414/1471

personal life ofpersonality/character ofand Poincaréand politicspower and prestige ofand Quesnayreaction to Great Crash byas reflection of national psycheand reparationsresignation ofretirement ofand Romania fundingand Rouvieras Royalistand speculationand Strongduring World War IIand Young Conference/Plan

MoretémentMorgan GrenfellMorgan, J. Pierpont

1415/1471

Morgan, JackMorgenthau, HenryMoroccoMorrow, Dwight

Napoleonic WarsNational Assembly (France)

and Banque de France scandaland Banque de France-government

relationshipand Caillauxand collapse of French governmentand U.S.-French relationsand war debts

National Bank of BelgiumNational Bureau of Economic ResearchNational Business ConferenceNational City BankNational Defense Bonds

1416/1471

National Industrial Recovery ActNational Monetary CommissionNational Mutual Insurance CompanyNational Reserve AssociationNationalbank (Germany)Nazis

and conspiracies against Hitlerand German economic recoveryrise ofand Schacht

Netherlands BankNeuflize, Jean deNew Deal programNew York Life Insurance CompanyNew York Stock ExchangeNiemeyer, OttoNorddeutsche HandelsbankNorddeutsche Wolkkammerei “DerNordwolle”Norman, George WardeNorman, Montagu Collet

1417/1471

appearance and personality ofand appeasementAsquith letter toawards and honors forand Baldwinas Bank of England board memberBank of England as “mistress” ofand blame for Great Depressionin Boer Waras Brown Shipley partnerCanadian trip ofand Churchillconcerns about Great Depression ofand Credit Anstalt problemcriticisms ofand currency stabilizationand Dawes Plandeath ofand deflationand devaluationand early years of British Depression

1418/1471

and events leading to World War Iand exchange ratesand Federal Reserve Boardfinancial affairs offirst joins Bank of Englandand French economy/relations

Norman, Montagu Collet (cont.)and German economyand gold reservesand gold standardas governor of Bank of Englandand Harrisonand Hatry casehealth ofimage ofand impact of Great Crash“imperialist dreams” ofand interest ratesinternational bank proposal ofand Keynesand Lamont

1419/1471

and London Economic Conferenceand Long Island meetingand Macmillan Committeeand mediaas member of Court of Bank of Englandand moratorium on reparations and war

debtand Moreaupersonal background ofpersonal/social life ofpersonality ofpessimism about world economy ofphilosophy/worldview ofand pricesprofessional background ofand proposed league of central bankerspseudonyms ofas reflection of national psycheand reparationsreputation/power ofand Romania funding

1420/1471

and Schachtself-image ofand Snowdenand speculationand stock marketand Strongand Strong-French relationshipTime cover story onand U.S. buying of goldU.S. visits ofand U.S.-British relationsand war debtsand Young conference

Noyes, Alexander Dana

open market operationsd’Orléans, Henrid’Orléans, JeanThe Other Club

1421/1471

Page, ArthurPainlevé, PaulPanic of 1907Papen, Franz vonParis, France

Americans inDawes Committee meetings inand German invasion ofNorman’s visits toriots inStrong’s visits toas world financial center

Paris Peace ConferenceAllied-German relations atand blame for Great DepressionBritish delegation toeconomic consequences ofand Keynes-Wilson relationsnegotiations ofreparations negotiations at

1422/1471

and war debtsPinchot, GiffordPittman, KeyPlesch, JanosPoincaré, RaymondPolandpost-World War II world, Keynes’s planningforPotter, Williamprices

as cause of Great Depressionof commoditiesand Fed role in European problemsand goals of central banksand goldin 1930Strong’s views aboutand unemployment

protectionismPublic National BankPujo Committee

1423/1471

Quesnay, Pierre

Raskob, John J.Rathenau, WalterRCA (Radio Corporation of America)“real bills” theory of creditreal estate boom, U.S.Reconstruction Finance Corporation (RFC)Reichsbank

and Agadir crisisand attempts to rescue German economyand Autonomy Lawand Bank of Englandand blame for Great Depressionboard ofcreation ofand creditand Danatbank bail out

1424/1471

and Dawes Committeeand debasement of German currencydirectors ofdivisiveness withinand financing of warforeign borrowing byforeign deposits inand foreign exchangeGeneral Council forand German domestic policyand German economygold reserves ofgovernment’s relationship withHarrison’s support forHavenstein as president ofheadquarters ofimportance ofand interest ratesLuther named head ofNew York Fed holding of gold fromNorman’s support for

1425/1471

and Polish loanand politicsprinting of money byreaction to Great Crash byrecapitalization ofand reparationsSchacht named president ofSchacht removed fromSchacht return toand stock marketU.S./Federal Reserve loan towithdrawals fromand Young Plan

ReichstagDDP indissolution ofmembers ofNazis inreaction to Schacht speech by

Rentenmark, German, introduction ofreparations

1426/1471

and attempts to rescue German economyand blame for Great Depressioncancellation of“capacity to pay” concept forand disillusionment in Europeforgiveness ofand French-German relationsGerman default on payment ofand German domestic economic policyGerman obsession aboutin GermanyHague conference (1930) aboutas heart of Dawes Planand impact of Great Crashinternational conferences concerningKeynes’s views aboutand Long Island meetingMellon’s views aboutmoratorium onneed for restructuring ofopposition to

1427/1471

and Paris Peace Conferenceas political issuereduction in amount ofsize/total figure forsuspension of payments onand transfer protection clauseand Treaty of Versaillesand war debtsSee also Dawes Committee; Young Confer-

ence; Young Plan; specific nationReparations Commission. See DawesCommitteeRéveil National movementRevelstoke, Edward Baring, LordRhinelandRist, CharlesRobineau, GeorgesRockefeller, John D. Jr.Rockefeller, John D. Sr.Rogers, WillRomania

1428/1471

Roosevelt, Franklinbank closings bybank rescue package ofand banking crisisdevaluation of dollar byand elections of 1932and Federal Reserve Boardfireside chats of“first hundred days” forand gold priceand gold standardand Harrisonand Hooverimage ofinauguration inKeynes’s views aboutknowledge of economic policies ofand London Economic Conferenceand prices

Roosevelt, Theodore

1429/1471

Rothermere, Harold Harmsworth, ViscountRothschild, Alfred de; Alphonse de; Edmondde; Edouard de ; Guy; Louis de; Maurice ;Mayer AmschelRothschild familyRouvier, MauriceRoyal Commission on Indian Currency andFinanceRoyal Institute of International AffairsRubin, RobertRuhr valley

coal production inFrench invasion/occupation ofFrench withdrawal from

RussiaBritish loans tocivil war indanger fromdefault in (1998)French relations withGerman declaration of war againstGerman relations with

1430/1471

mobilization inoptimism on duration of war insale of art works bySchacht views aboutwar debts of

Sabin, CharlesSchacht, Horace Greeley Hjalmar

ambitions ofappearance ofarrest and imprisonment ofattempts to induce return ofand attempts to rescue German economy-

18on Banking Commissionand Belgium affairbetween 1919and blame for Great Depressionand British loans to Germany

1431/1471

and Brüning austerity planand conspiracies against Hitlerand creditand Credit Anstalt problemas currency commissionerat Danatbankand Dawes Committee/Plandeath ofand Dresdner Bankand events leading up to World War Iand exchange ratefinancial affairs ofand foreign borrowingand French economyGerman cabinet disavowal of position ofand German economic recoveryand German national psycheon Germanyand Gilberton global financial systemand gold reserves

1432/1471

and gold standardgovernment relations withon Great Britainand Havensteinand Hitler/Nazisimage ofand Long Island meetingnamed Reichsbank presidentat Nationalbankand Normanat Nurembergopposition topersonal background ofpersonal life ofpersonality/character ofand politicspost-war optimism ofin post-World War II yearsprofessional background ofreaction to Great Crash byand Reichsbank gold at New York Fed

1433/1471

Reichsbank resignation ofReichsbank return ofand reparationsreputation ofand stock marketStresemann meeting withand StrongThompson interview ofand translating sums of moneyon U.S.U.S. visits ofwar service ofon World War Iwritings ofand Young Conference/Plan

Schacht, JensSchacht, Wilhelm Ludwig L.M.Scheidemann, PhilippSchrodersSecond Bank of the United States

1434/1471

Second Dawes Conference. See Young(Owen) Conference (Paris, 1929)Senate, U.S.

and central bank planCommittee on Banking and Currency ofMeyer confirmation byand Treaty of Versailles

Serbia, Austrian declaration of war against1718 ClubSiepmann, Harrysilver, remonetization ofSkinner, ClarenceSmoot-Hawley Act (1930)Snowden, PhilipSocial DemocratsSocialistsSomary, FelixSouth AmericaSoviet Union. See also Russiaspeculation

and British economy

1435/1471

currencyand Dawes Committeeas destabilizing economyin Englandand French economyin GermanyHoover’s concerns aboutand “real bills” theorystock marketand U.S. gold reserve

Sprague, OliverStamp, JosiahState Department, U.S.Steffeck, FräuleinSteffens, LincolnStimson, Henrystock exchanges, European

closure ofsuspension of trading in

stock marketbankers’ consortium to rescue

1436/1471

bifurcation in 1920sand blame for Great Depressionas bubble/maniacentral bankers concerns aboutand characteristics of Great Depressioncollapse (2000) ofand creditas destabilizing forceand devaluation of dollarand divisions with Federal Reserve Systemand European central banksand Federal Reserve Board/Systemand financial pressfolk heroes offorecasts/predictions aboutas gamblingand gold standardimpact on Europe ofand interest ratesKeynes’s views aboutlosses in

1437/1471

and monetary policyNorman’s views about

stock market (cont.)October 1929 crash ofpanic inreopening ofand Roosevelt bank rescue packageand selling by large stock traderssize of U.S.speculation inStrong’s concerns about“un petit coup de whisky” foras U.S. national pasttime

Strachey, LyttonStraight, WillardStresemann, GustavStrong, Benjamin

achievements ofon American characterand American tourists in Europeappearance of

1438/1471

at Bankers Trust Companyand blame for Great Depressionand British economyand British-French relationsand British-U.S. relationsas celebrityand central bank planand creditcriticisms ofDavison relationship withand Dawes Plandeath ofand divisions within Federal Reserve

Systemon EuropeEuropean travels ofand events leading to World War Iand “The Family”financial affairs ofand French economyand French-British relations

1439/1471

and German economyand gold standardHarrison as protégé ofhealth ofand Hooverimportance ofand inflationand interest ratesinternationalism ofas inventor of modern central bankerand isolationismand Jekyll Island meetingand J.P. Morgan & Co. meetingand Keynesleadership abilities ofand Long Island meetingand Mellonmonetary policy guidelines ofand Moreauand Moreau-Norman disagreements

1440/1471

named governor of Federal Reserve Bank ofNew York

and need for coordination among centralbanks

and Normanand Panic of 1907personal background ofpersonal life ofpersonality/character ofprofessional background ofas reflection of national psycheand reparationsresignation from New York Fed ofand role of Federal Reserve Systemround-the-world trip ofand Schachtand speculationand stock marketand translating sums of moneyon Treaty of Versaillesand war debts

1441/1471

Strong, Benjamin Jr. (son)Sumner, Grayson Maximillian II, LordSwiss National Bank

Taft, RobertTaft, WilliamTardieu, Andrétaxes

in Francein Germanyas source of funding for World War I

Tennessee Valley Authority (TVA)Thomas amendmentThyssen, FritzTime magazineToynbee, ArnoldA Tract on Monetary Reform (Keynes)Trading with the Enemy Act (1917)transfer protection clause (Dawes Plan)

1442/1471

Treasury, U.K.Treasury, U.S.Treaty of Versailles

disillusionment aboutGerman reactions toand Germany domestic policyproposed modifications toand reparationsStrong’s views aboutterms ofU.S. rejection ofand Young conference

Trichet, Jean-ClaudeTruman, Harry S.Truth-in-Securities Act (U.S. 1933)

unemploymentas characteristic of Great Depressionand impact of Great Crash

1443/1471

Keynes’s book aboutUnion of London and Smith’s BankUnited States

and American characterand anti-Americanismand balance of world financial poweras center of international financecredit incurrency stabilization inand Dawes Plandeflation indevaluation of dollar indollar decline ofearly years of Depression ineconomic growth ofelections of 1932 inentry into World War I ofEuropean loans toforeign investment in Europe byFrench image infunding for war in

1444/1471

GDP ingold buying bygold reserves ofgold standard inimpact of Great Crash onimpact of Great Depression onimpact of war years oninflation ininterest rates inand international bank proposalisolationism inJews inmanufacturing/industry inmoney supply inand moratorium on reparations and war

debtoptimism about 1930 economy inprices inprotectionism inpublic confidence inrecession in

1445/1471

and reparationsShylock image ofas source for funding of World War Ispending for war intaxes inunemployment inand Versailles Treatyand war debtsworld mission of

United Steel LimitedUnited Steel WorksU.S. Steel

Vandenberg, ArthurVanderlip, FrankVansitartt, RobertVissering, GerardVon Lumm, Karl

1446/1471

Wallace, Henrywar

Angell’s views abouteconomic benefits of

war debtsand anti-Americanismand attempts to rescue German economyand blame for Great Depressioncongressional stipulations on

war debts (cont.)defaults onHoover declares moratorium onas legacy of World War Iand Liberty bondsand London Economic Conferencemoratorium on payments forand Paris Peace Conferenceand reparationsrestructuring ofand translating sums of money

1447/1471

See also specific person or nationWar Guilt clauseWar of the League of AugsburgWarburg BankWarburg, JamesWarburg, MaxWarburg, PaulWarren, GeorgeWednesday Society (BerlinerMittwochgesellschaft)Wells, H. G.Wendel, François deWhalen, GroverWhite and CaseWhite, Harry DexterWhite, William AllenWhitney, GeorgeWhitney, RichardWiggin, AlbertWilhelm II (kaiser of Germany)Wilson, Daniel

1448/1471

Wilson, Woodrowand Federal Reserve Boardhealth ofand isolationismand KeynesMeyer on staff ofat Paris Peace Conferenceand plan for financial reconstruction of

Europeand reparationsand Strong’s internationalismand Treaty of Versailles

Woodin, WilliamWorld BankWorld Economic Conference (London, 1933)World War I

and balance of financial powerborrowing to pay forcasualties incentral banks role incosts of

1449/1471

early months ofending offinancial system as casualty offunding forlegacy ofmaterial destruction duringoptimism about duration ofspending onU.S. entry into

World War IIWorld War Foreign Debt Commission

Young Liberal AssociationYoung, Owen D.

appearance ofand Dawes Committee/Planand divisiveness within Fed Systemand French-German relationsand German economy

1450/1471

and Norman-Lamont agreementpersonal and professional background ofselling of stock positions bystrategy of

Young, RoyYoung Conference (Paris, 1929)Young Plan

Zaharoff, Basil

1451/1471

1

The monopoly need not be complete. In Bri-tain, while the Bank of England was granteda monopoly of currency in 1844, Scottishbanks continued to issue currency and exist-ing English banks with the authority to issuecurrency were grandfathered. The lastprivate English banknotes were issued in1921 by Fox, Fowler and Company, a Somer-set bank.

2

Eventually the government would end up as-suming the risk on all this unpaid trade debtuntil the end of the war.

3

The origins of the dispute were so arcanethat Lord Palmerston famously remarkedthat only three men in the world fully under-stood them: Prince Albert, who was dead; aclerk in the Foreign Office, whom it had

driven mad; and Palmerston himself, whohad forgotten.

4

Many years later, when he was a prominentofficial, the libretto was much to his embar-rassment made public. Schacht sued the manresponsible.

5

On September 22, 1914, Captain vonRomberg was killed in action, one of the firstGerman officers to die in the war. See “BaronVon Romberg Killed,” New York Times,September 30, 1914.

6

Pierpont Morgan died in 1913 without everoccupying the apartment. It was until veryrecently a restaurant.

7

1453/1471

By the mid-1920s, the New York Fed was twoand a half times as large as its nearest rival,Chicago, and some ten times greater than thesmallest Federal Reserve bank, that ofMinneapolis.

8

Then the equivalent of $400, 2,000 francswas well below the wage of a typical skilledAmerican worker.

9

The gold standard was officially suspendedin Germany and France in August 1914. InBritain, the government maintained the legalfiction that the gold standard was still in op-eration. Theoretically, British citizens coulddemand gold for their Bank of England notesand were, until May 1917, free to export gold.In reality the threat posed by German sub-marines made insurance prohibitively highand gold exports were never feasible.

1454/1471

10

That same ethos seems to have extended tothe senior employees. Kenneth Grahame, thechildren’s author, joined the Bank of Eng-land in 1879 and rose through the ranks,eventually becoming secretary. In 1895, hepublished The Golden Age, a book not aboutbullion but childhood. In 1907 he retired,after having been shot during an unsuccess-ful robbery attempt at the Bank, and the fol-lowing year published The Wind in theWillows.

11

By comparison, the Bank of the UnitedStates, the primary bank of issue for a coun-try with one-sixth of France’s population,was capitalized at $10 million.

12

By comparison, Britain, with an economyabout a third that of the United States, spent

1455/1471

a total of $50 billion over a period of fouryears.

13

He was sufficiently flattered by the attentionfrom cartoonists that, in 1937, he had a col-lection of cartoons privately published tocommemorate his sixtieth birthday.

14

The actual phrase was coined by Sir EricGeddes, first lord of the admiralty, who whilecampaigning in Cambridge on December 9,announced that “Germany was going to payrestitution, reparation and indemnity and . . .they would get everything out of her that youcould squeeze from a lemon, and a bit more.”

15

In July 1929, he was jailed for passing dudchecks and died in prison a year later.

16

1456/1471

Hill, a physiologist and a fellow of TrinityCollege, would win a Nobel Prize before hewas forty.

17

There have been other bad episodes of infla-tion. Hungary in 1945-46 was worse. TheZimbabwean inflation is as of the writing ofthis book equally bad—on July 31, 2008, theFinancial Times reported that the exchangerate of the Zimbabwean dollar reached 500billion to the U.S. dollar. But Hungary in1945 and Zimbabwe in 2008 were tiny eco-nomies. Germany in the 1920s was the thirdlargest economy in the world.

18

The Family eventually acquired the house at1718 H Street and established a tradition thatonly bachelors could stay the night on thepremises.

19

1457/1471

This is roughly equivalent to $9 milliontoday.

20

Fort Knox, where the Treasury gold is nowheld, was not constructed until 1936.

21

His premonition would eventually prove tobe right. In 1931, as the Depression in Ger-many reached its nadir, the Danatbankwould collapse, a victim of Goldschmidt’srisky business strategy. Goldschmidt himselfwould become a favorite target of Nazi pro-paganda about the “unwarranted power” and“sinister influence” of Jewish bankers.

22

There was, in addition, a highly potent sym-bolism to the rate selected. The Rentenmarkwould now have an exchange rate of 4.2 tothe dollar, the rate that had prevailed underthe gold standard before the war. This was

1458/1471

designed to send a signal to the public, andto the world, that the new currency was to beas stable as the mark had been before thewar.

23

He was also a self-taught composer. In 1911,he composed a piece entitled “Melody in AMajor,” which, set to words in the 1950s, be-came the popular hit song “It’s All in theGame.”

24

In 1940, during the German occupation ofParis, the Astoria would be commandeeredby the occupation forces. Subsequently,when the city was liberated in 1944 by theAllies, it would be taken over as General Eis-enhower’s Paris headquarters. Torn down inthe 1950s, its successor building becamefamous to visitors to Paris in the 1960s as LeDrugstore.

1459/1471

25

Between 1894 and 1914, six heads of statewere assassinated by terrorists. See BarbaraTuchman, The Proud Tower (New York:Bantam Books, 1966), p. 72.

26

According to his wife, Clementine, the firsttime Churchill ever resorted to public trans-port was when he took the Undergroundduring the 1926 general strike.

27

In old age, Churchill would remark that theonly great issue on which they had agreedhad been in support of Edward VIII duringthe abdication crisis and that perhaps theywere both wrong that time.

28

Gladstone held the record for the longestspeech at four hours and forty-five minutes,in 1853.

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29

Like so many politicians from the left, Pain-levé was an intellectual, a brilliant mathem-atician from the Sorbonne with a particularexpertise in nonlinear second-order differen-tial equations.

30

Gerald and Sara Murphy were the models forDick and Nicole Diver in F. Scott Fitzgerald’sbook Tender Is the Night. They were intro-duced to the south of France in 1922 by theirfriends Cole and Linda Porter.

31

The mansion belonged to the family of theFrench politician Daniel Wilson, the son-in-law of President Grévy, who had been ac-cused in 1887 of selling decorations, includ-ing nominations to the Légion d’Honneur,from his office in the Elysée Palace.

32

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When the royal family was imprisoned at theTemple, the princess de Lamballe had ac-companied them. She met a gruesome end inSeptember 1791, when she was handed overto a lynch mob, who stripped her naked,gang-raped her in the streets, then mutilatedher body before finally impaling her headupon a pike and parading it in front of MarieAntoinette’s prison window.

33

He made up for his apparent coldness by anobsessive love of animals. He and his wife,Henriette, had no children and lavished theiraffection on their pet cats and dogs. Poincaréis supposed to have been heartbroken bothwhen his sheepdog Nino died in 1926 andwhen his favorite Siamese cat, Gris-gris,passed away in 1929.

34

Pierre Quesnay became a close friend ofMoreau’s. He drowned in 1937 in a

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swimming accident in a lake on the groundsof La Frissonaire while staying with Moreau.

35

Édouard’s efforts to keep his family firmlyout of the papers except for the societycolumns were not helped when his cousinMaurice, a flamboyant womanizer and theblack sheep of the family, took it into hishead to enter politics, ran for the NationalAssembly, and in early 1926, was foundguilty of having bought his seat by offeringhis constituents cash handouts, ranging fromtwenty to a thousand francs. Expelled fromparliament, he insisted on running again andwon.

36

In this book I have chosen to use the DowJones Industrial Average as a measure of theaverage level of the stock market, for all itsmany deficiencies, the oldest and best knownstock average. Introduced by the founder of

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the Wall Street Journal, Charles Dow, in1896, it then comprised the average of twelveindustrial stocks. The list was expanded totwenty in 1916 and to thirty in 1928. Theonly index of comparable repute is the S&P,but that was not introduced until 1923 andremained relatively obscure until after thewar.

37

By comparison, during the great boom yearsfrom 1890 to 1910, it oscillated between 15and 20. In 1929, it reached a peak of 32; atthe height of the Internet bubble, it soared to45.

38

He also argued that while the franc had beenstabilized de facto but not de jure at 25francs to the dollar, speculators could stillharbor the hope that the franc would eventu-ally be fixed at a higher exchange rate,providing those who held francs with

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windfall gains. Norman insisted that the onlyway to combat this form of destabilizingspeculation was for the French governmentto fix its rate de jure. It finally did so in June1928.

39

The Banco d’Italia, which had stabilized thelira in December 1926, only six months afterthe franc, somehow got the impression thatit, too, would be asked to attend, and wasmuch disappointed when no invitationarrived.

40

With his sister, Gladys Livingstone MillsPhipps and his polo-playing brother-in-law,Henry Carnegie Phipps, he owned theWheatley Stable, which bred the legendaryrace-horse Seabiscuit.

41

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For most goods, when a shortage emergesand demand exceeds supply, the price rises.Because under the gold standard, the price ofgold was fixed in dollar terms, the firstsymptom of a gold shortage was not a rise inits price—that by definition could not hap-pen—but a fall in the price of all othercommodities.

42

Livermore’s own career belied his own state-ment. Sensing that the boom in 1907 was go-ing to turn into a spectacular bust, he madehis first millions by shorting the market justbefore the panic of that year. He reputedlymade another fortune the same way in1929—he would make and lose several suchfortunes in his lifetime. In 1940, he shothimself in the cloakroom of the Sherry Neth-erlands Hotel in New York City. He had $5million in his bank account.

43

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She went on a hunger strike in jail, became anational folk heroine when she escaped theprison hospital by climbing down a ropemade of bedsheets, was recaptured, and ather trial revealed the names of politiciansshe had bribed. She committed suicide inprison in 1935.

44

He was the founder of no less than threebusiness colleges: Babson College in Mas-sachusetts, Webber College in Florida, andthe now defunct Utopia College in Eureka,Kansas. In 1940, he ran for president of theUnited States as the Prohibition Party’s can-didate, receiving 57,800 votes In 1948, heformed the Gravity Research Foundation, anorganization dedicated to combating the ef-fects of gravity, including the quest for anti-gravity matter.

45

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Meyer remained a Washington figure ofsome repute. After he retired from the Fed in1933, he bought the near bankrupt Washing-ton Post, which he successfully turnedaround. He was the father of the late Kathar-ine Graham.

46

Many popular accounts of the Great Depres-sion attribute a large weight to theprotectionist Smoot-Hawley Act as a cause ofthe economic collapse. Tariffs shift demandfrom imports to domestic goods, so if any-thing, it should have had an expansionary ef-fect. Retaliation by foreigners did hurt theU.S. economy, but exports were a small per-centage of GDP—less than 4 percent—so thetotal effect would have been small. Changesin capital flows dwarfed the impact of trade.

47

Schacht liked to tell the story of how when hecame to New York in the mid-1920s, Strong

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had taken him down into the vaults of theNew York Fed to show him where theReichsbank’s gold was stored. Much toStrong’s embarrassment, Fed officials wereunable to find the pallet of bullion that hadbeen specifically earmarked for the Reichs-bank. See Hjalmar Schacht, My FirstSeventy-six Years (London: Allan Wingate,1955), page 264.

48

See page 5 above.

49

It was a turning point with especially tragicconsequences for Laval himself. Followingthe defeat of France in 1940, he joined theVichy government and became one of themost active French collaborators with theNazis. He was tried for treason after the war,and following a botched suicide attempt withcyanide, he was executed by firing squad,

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half conscious and vomiting, in October1945.

50

The accusations of tax dodging resurfaced in1934 when the Justice Department indictedhim for having falsified his 1931 tax returnsand sought more than $3 million in backtaxes and penalties. He was cleared on ap-peal, but his estate eventually paid some$600,000 as a settlement.

51

German GDP in the 1920s was $15 billion,one-sixth the size of the U.S. economy. Bycomparison, Mexico in 1994 had a GDP of$450 billion, a little more than one-eight-eenth that of a U.S. economy then of $7.5trillion.

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