Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World (2 page)

The biggest economic threat now came from the collapsing banking system. In December 1930, the Bank of United States, which despite its name was a private bank with no official status, went down in the largest single bank failure in U.S. history, leaving frozen some $200 million in depositors' funds. In May 1931, the biggest bank in Austria, the Creditanstalt, owned by the Rothschilds no less, with $250 million in assets, closed its doors. On June 20, President Herbert Hoover announced a one-year moratorium on all payments of debts and reparations stemming from the war. In July, the Danatbank, the third largest in Germany, foundered, precipitating a run on the whole German banking system and a tidal wave of capital out of the country. The chancellor, Heinrich Brüning, declared a bank holiday, restricted how much German citizens could withdraw from their bank accounts, and suspended payments on Germany's short-term foreign debt. Later that month the crisis spread to the City of London, which, having lent heavily to Germany, found these claims now frozen. Suddenly, faced with the previously unthinkable prospect that Britain itself might be unable to meet its obligations, investors around the world started withdrawing funds from London. The Bank of England was forced to borrow $650 million from banks in France and the United States, including the Banque de France and the New York Federal Reserve Bank, to prevent its gold reserves from being completely depleted.

As the unemployment lines lengthened, banks shut their doors, farm prices collapsed, and factories closed, there was talk of apocalypse. On June 22, the noted economist John Maynard Keynes told a Chicago audience, "
We are today
⁶
in the middle of the greatest catastrophe—the greatest catastrophe due almost to entirely economic causes—of the modern world. I am told that the view is held in Moscow that this is the last, the culminating crisis of capitalism, and that our existing order of society will not survive it." The historian Arnold Toynbee, who knew a thing or two about the rise and fall of civilizations, wrote in his annual review of the year's
events for the Royal Institute of International Affairs, "
In 1931, men and women
⁷
all over the world were seriously contemplating and frankly discussing the possibility that the Western system of Society might break down and cease to work."

During the summer a letter that Montagu Norman had written just a few months before to his counterpart at the Banque de France, Clément Moret, appeared in the press. "
Unless drastic measures are taken
⁸
to save it, the capitalist system throughout the civilized world will be wrecked within a year," declared Norman, adding in the waspish tone that he reserved for the French, "I should like this prediction to be filed for future reference."
It was rumored
⁹
that before he went off to convalesce in Canada, he had insisted that ration books be printed in case the country reverted to barter in the wake of a general currency collapse across Europe.

At times of crisis, central bankers generally believe that it is prudent to obey the admonition that mothers over the centuries have passed on to their children: "If you can't say anything nice, don't say anything at all." It avoids the recurring dilemma that confronts financial officials dealing with a panic—they can be honest in their public statements and thereby feed the frenzy or they can try to be reassuring, which usually entails resorting to outright untruths. That a man in Norman's position was willing to talk quite openly about the collapse of Western civilization signaled loud and clear that, in the face of the "economic blizzard," monetary leaders were running out of ideas and ready to declare defeat.

Not only was Norman the most eminent banker in the world, he was also admired as a man of character and judgment by financiers and officials of every shade of political opinion. Within that bastion of the plutocracy the partnership of the House of Morgan, for example, no one's advice or counsel was more highly valued—the firm's senior partner, Thomas Lamont, would later acclaim him as "
the wisest man
¹⁰
he had ever met." At the other end of the political spectrum, the British chancellor of the exchequer, Philip Snowden, a fervent Socialist who had himself frequently predicted the collapse of capitalism, could write gushingly that Norman "
might have stepped out
¹¹
of the frame of the portrait of the most handsome
courtier who ever graced the court of a queen," that "his sympathy with the suffering of nations is as tender as that of a woman for her child," and that he had "in abundant measure the quality of inspiring confidence."

Norman had acquired his reputation for economic and financial perspicacity because he had been so right on so many things. Ever since the end of the war, he had been a fervent opponent of exacting reparations from Germany. Throughout the 1920s, he had raised the alarm that the world was running short of gold reserves. From an early stage, he had warned about the dangers of the stock market bubble in the United States.

But a few lonely voices insisted that it was he and the policies he espoused, especially his rigid, almost theological, belief in the benefits of the gold standard, that were to blame for the economic catastrophe that was overtaking the West. One of them was that of John Maynard Keynes. Another was that of Winston Churchill. A few days before Norman left for Canada on his enforced holiday, Churchill, who had lost most of his savings in the Wall Street crash two years earlier, wrote from Biarritz to his friend and former secretary Eddie Marsh, "
Everyone I meet
¹²
seems vaguely alarmed that something terrible is going to happen financially. . . . I hope we shall hang Montagu Norman if it does. I will certainly turn King's evidence against him."

THE COLLAPSE OF
the world economy from 1929 to 1933—now justly called the Great Depression—was the seminal economic event of the twentieth century. No country escaped its clutches; for more than ten years the malaise that it brought in its wake hung over the world, poisoning every aspect of social and material life and crippling the future of a whole generation. From it flowed the turmoil of Europe in the "low dishonest decade" of the 1930s, the rise of Hitler and Nazism, and the eventual slide of much of the globe into a Second World War even more terrible than the First.

The story of the descent from the roaring boom of the twenties into
the Great Depression can be told in many different ways. In this book, I have chosen to tell it by looking over the shoulders of the men in charge of the four principal central banks of the world: the Bank of England, the Federal Reserve System, the Reichsbank, and the Banque de France.

When the First World War ended in 1918, among its innumerable casualties was the world's financial system. During the latter half of the nineteenth century, an elaborate machinery of international credit, centered in London, had been built upon the foundations of the gold standard and brought with it a remarkable expansion of trade and prosperity across the globe. In 1919, that machinery lay in ruins. Britain, France, and Germany were close to bankruptcy, their economies saddled with debt, their populations impoverished by rising prices, their currencies collapsing. Only the United States had emerged from the war economically stronger.

Governments then believed matters of finance were best left to bankers; and so the task of restoring the world's finances fell into the hands of the central banks of the four major surviving powers: Britain, France, Germany, and the United States.

This book traces the efforts of these central bankers to reconstruct the system of international finance after the First World War. It describes how, for a brief period in the mid-1920s, they appeared to succeed: the world's currencies were stabilized, capital began flowing freely across the globe, and economic growth resumed once again. But beneath the veneer of boomtown prosperity, cracks began to appear and the gold standard, which all had believed would provide an umbrella of stability, proved to be a straitjacket. The final chapters of the book describe the frantic and eventually futile attempts of central bankers as they struggled to prevent the whole world economy from plunging into the downward spiral of the Great Depression.

The 1920s were an era, like today's, when central bankers were invested with unusual power and extraordinary prestige. Four men in particular dominate this story: at the Bank of England was the neurotic and enigmatic Montagu Norman; at the Banque de France, Émile Moreau, xenophobic and suspicious; at the Reichsbank, the rigid and arrogant but also
brilliant and cunning Hjalmar Schacht; and finally, at the Federal Reserve Bank of New York, Benjamin Strong, whose veneer of energy and drive masked a deeply wounded and overburdened man.

These four characters were, for much of the decade, at the center of events. Their lives and careers provide a distinctive window into this period of economic history, which helps to focus the complex history of the 1920s—the whole sorry and poisonous story of the failed peace, of war debts and reparations, of hyperinflation, of hard times in Europe and bonanza in America, of the boom and then the ensuing bust—to a more human, and manageable, scale.

Each in his own way illuminates the national psyche of his time. Montagu Norman, with his quixotic reliance on his faulty intuition, embodied a Britain stuck in the past and not yet reconciled to its newly diminished standing in the world. Émile Moreau, in his insularity and rancor, reflected all too accurately a France that had turned inward to lick the terrible wounds of war. Benjamin Strong, the man of action, represented a new generation in America, actively engaged in bringing its financial muscle to bear in world affairs. Only Hjalmar Schacht, in his angry arrogance, seemed out of tune with the weak and defeated Germany for which he spoke, although perhaps he was simply expressing a hidden truth about the nation's deeper mood.

There is also something very poignant in the contrast between the power these four men once exerted and their almost complete disappearance from the pages of history. Once styled by newspapers as the "World's Most Exclusive Club," these four once familiar names, lost under the rubble of time, now mean nothing to most people.

The 1920s were a time of transition. The curtain had come down on one age and a new age had yet to begin. Central banks were still privately owned, their key objectives to preserve the value of the currency and douse banking panics. They were only just beginning to espouse the notion that it was their responsibility to stabilize the economy.

During the nineteenth century, the governors of the Bank of England
and the Banque de France were shadowy figures, well known in financial circles but otherwise out of the public eye. By contrast, in the 1920s, very much like today, central bankers became a major focus of public attention. Rumors of their decisions and secret meetings filled the daily press as they confronted many of the same economic issues and problems that their successors do today: dramatic movements in stock markets, volatile currencies, and great tides of capital spilling from one financial center to another.

They had to operate, however, in old-fashioned ways with only primitive tools and sources of information at their disposal. Economic statistics had only just begun to be collected. The bankers communicated by mail—at a time when a letter from New York to London took a week to arrive—or, in situations of real urgency, by cable. It was only in the very last stages of the drama that they could even contact one another on the telephone, and then only with some difficulty.

The tempo of life was also different. No one flew from one city to another. It was the golden age of the ocean liner when a transatlantic crossing took five days, and one traveled with one's manservant, evening dress being de rigueur at dinner. It was an era when Benjamin Strong, head of the New York Federal Reserve, could disappear to Europe for four months without raising too many eyebrows—he would cross the Atlantic in May, spend the summer crisscrossing among the capitals of Europe consulting with his colleagues, take the occasional break at some of the more elegant spas and watering holes, and finally return to New York in September.

The world in which they operated was both cosmopolitan and curiously parochial. It was a society in which racial and national stereotypes were taken for granted as matters of fact rather than prejudice, a world in which Jack Morgan, son of the mighty Pierpont Morgan, might refuse to participate in a loan to Germany on the grounds that Germans were "
second rate people
¹³
" or oppose the appointment of Jews and Catholics to the Harvard Board of Overseers because "the Jew is always a Jew first and an American second, and the Roman Catholic, I fear, too often, a Papist first
and an American second." In finance, during the late nineteenth century and early twentieth century, whether in London or New York, Berlin or Paris, there was one great divide. On one side stood the big Anglo-Saxon banking firms: J. P. Morgan, Brown Brothers, Barings; on the other the Jewish concerns: the four branches of the Rothschilds, Lazards, the great German Jewish banking houses of Warburgs and Kuhn Loeb, and mavericks such as Sir Ernest Cassel. Though the WASPs were, like so many people in those days, casually anti-Semitic, the two groups treated each other with a wary respect. They were all, however, snobs who looked down on interlopers. It was a society that could be smug and complacent, indifferent to the problems of unemployment or poverty. Only in Germany—and that is part of this story—did those undercurrents of prejudice eventually become truly malevolent.

As I began writing of these four central bankers and the role each played in setting the world on the path toward the Great Depression, another figure kept appearing, almost intruding into the scene: John Maynard Keynes, the greatest economist of his generation, though only thirty-six when he first appears in 1919. During every act of the drama so painfully being played out, he refused to keep quiet, insisting on at least one monologue even if it was from offstage. Unlike the others, he was not a decision maker. In those years, he was simply an independent observer, a commentator. But at every twist and turn of the plot, there he was holding forth from the wings, with his irreverent and playful wit, his luminous and constantly questioning intellect, and above all his remarkable ability to be right.