Lords of Finance

Norman’s immediate concern in those first few days was simply to make sure that Brown Shipley would survive. Otherwise, he would have no hope of getting his capital out. Over the weekend, hundreds of the firm’s American clients, stranded in Europe, gathered at the Pall Mall offices, trying to cash their letters of credit. But as the dust began to settle, it became apparent that with so much of the firm’s business concentrated in the United States, which remained happily neutral, it would emerge relatively unscathed. As a member of the Court of the Bank of England, however, Norman found himself having to spend most of his time on the business of the Bank, particularly in trying to disentangle the labyrinth of unpaid trade debts.

Strangely, the enormous tensions of the time, the burden of the workload, which left him little time to brood, actually seemed to alleviate his mental incapacities. As he wrote to a friend in the United States, “I have been at work morning and night, and not an ache or pain have

I had, nor even been better for years past.” In an odd but very real way, the war was to be good for him.

Hjalmar Schacht

3. THE YOUNG WIZARD

Germany: 1914

’Tis a common proof That lowliness is young ambition’s ladder

—WILLIAM SHAKESPEARE, Julius Caesar

Across Europe that week, people were left stunned by the speed of events. The crisis seemed to have come from nowhere. And even though most of the Continent had been half expecting a war for the last decade, few could have imagined, at the end of June, that it would be the assassination of an Austrian archduke that would set off the avalanche.

The continued complacency of most Germans during the month of July 1914, even after the assassination in Sarajevo, was very much the result of a deliberate campaign by their own government to project a surface of calm. Behind the scenes, Austria was being goaded on by the highest circles in Berlin to use the assassination as an excuse to bring Serbia to heel once and for all. Meanwhile, both the Austrian and German leaders took great pains in public to keep their intentions well disguised. All put on a great show of maintaining their usual summer holiday schedules. The emperor Franz Joseph made a point of staying at his hunting lodge at Bad Ischl for all of July. The kaiser departed on July 6 for his annual three-week holiday, aboard his yacht, Hohenzollern, in the Norwegian fjords. The chancellor, Theobald von Bethmann-Hollweg, came to Berlin for some emergency meetings in early July but rapidly resumed his holiday on his 7,500-acre estate at Hohenfinow, some thirty miles away, while the chief of the General Staff, General Helmuth von Moltke, remained in Karlsbad taking the waters, and Secretary of State Gottlieb von Jagow departed on his honeymoon.

Among those whom the crisis took by surprise was a thirty-six-year-old banker in Berlin with the uniquely improbable name of Horace Greeley Hjalmar Schacht. In spite of the authorities’ elaborate charade, rumors of war had already begun to percolate early in July within the highest banking circles in Germany. One of those who seemed to take a particularly pessimistic view of the situation from the start was Max Warburg, scion of the prominent Hamburg banking family, who significantly was known to be close to the imperial court. The famously indiscreet kaiser himself contributed to the gossip from those circles by insisting that his friend Albert Ballin, head of the Hamburg-America Line, be informed in advance of a general mobilization. There was also talk that the crown prince had been breaking the strictest confidences to warn his friends in financial circles, including the managing director of the Dresdner Bank, Eugen Guttmann, that for all the surface calm, the optimism of the Berlin Stock Exchange was misplaced and war between Germany and Russia very likely.

But Hjalmar Schacht, only an assistant director and branch manager at Guttmann’s Dresdner Bank, was still too far down the Berlin banking hierarchy to be party to these exalted hints from court. From his lowly point of view, he found it hard to believe that the situation had been allowed to spiral so far out of control—it seemed so profoundly irrational to let international rivalries threaten the German economic miracle.

THOUGH SCHACHT’S POSITION at the Dresdner, one of Germany’s two largest banks, was still modest, for a young man in imperial Germany with no family connections, he had come a long way. He was certainly being noticed. In the months before the crisis began, he had been working on a loan for the city of Budapest, financed by a consortium of German, Swiss, and Dutch banks. The Swiss banker Felix Somary would later recount how Schacht even then “considerably outshone his fellow directors, all sons of rich fathers or mere time-servers.”

With his clipped military mustache and brush-cut hair parted very precisely down the center, Schacht could easily have passed for a Prussian officer. He walked very erectly with a “curiously stiff gait,” his rigid bearing, exaggerated by the starched, high, gleaming white celluloid collars that he favored. But he was neither a Prussian nor in any way connected to the military. He came from a lower-middle-class family, originating from the area of Germany bordering on Denmark, and had been brought up in Hamburg, the most cosmopolitan city in the whole empire.

Schacht would one day become famous for his boundless ambition and ferocious will to succeed. They were in part a reaction against a father with a long history of failure. Wilhelm Ludwig Leonhard Maximillian Schacht had been born on the western coast of North Schleswig, a narrow neck of land connecting Denmark to Germany. The Dithmarschen is a region of salt marshes and small isolated dairy farms, a bleak and wind-swept country protected by large dykes against the constantly encroaching North Sea. The people are reputedly independent and tough, laconic to the point of rudeness. Schleswig and the neighboring duchy of Holstein had historically been ruled by the Danish crown, although the population was split between German- and Danish-speakers and throughout the nineteenth century, sovereignty over the two states had been subject to a dispute between Prussia and the Kingdom of Denmark.3 In 1866, following two short wars, Bismarck annexed Schleswig and Holstein, incorporating them into the Prussian empire. After the war, in 1920, the northern parts of Schleswig, including the region from which the Schacht family had come, reverted to Denmark as a result of a plebiscite.

Wilhelm Schacht was one of the eleven children of a country doctor. In 1869, unhappy at the prospect of having become a Prussian subject liable to the Prussian military draft, five of the Schacht brothers emigrated to the United States, where Wilhelm spent seven years. But although he became a U.S. citizen, he never quite managed to find his feet, drifting from one job to another, working for a while in a German brewery in Brooklyn and in a typewriter factory in upstate New York. Finally, in 1876, he decided to return to Germany.

Arriving back just as the economic boom unleashed by the Franco-Prussian War was ending and a depression setting in, he continued to be plagued by the same bad luck. During the next six years, he tried his hand at various professions—schoolteacher, editor of a provincial newspaper, manager of a soap factory, bookkeeper for a firm of coffee importers—all unsuccessfully. Eventually he found a job as a clerk with the Equitable Insurance Company, where he would remain for the next thirty years. While Schacht was always a little defensive about his father, claiming that he was simply “a restless wanderer unable to remain for long in one place,” the contrast between the father’s fecklessness and the gigantic ambitions of the son could not have been greater. Even Schacht could not help observing in his autobiography that by the age of twenty-five, he was already earning more than his father.

In contrast to his awkward and retiring father, his mother, “sentimental, gay and full of feeling,” always cheerful despite years of hardship, provided the center of affection for the family. Born the Honorable Constanze Justine Sophie von Eggers, the daughter of a Danish baron whose family had a long history of service to the crown, she had taken a large step down the social ladder by marrying Wilhelm Schacht. Her grandfather, a counselor to the king, had worked for the emancipation of serfs and had been responsible for a currency reform in Denmark in the late eighteenth century. But the family fortunes had declined over the years, leaving young Constanze von Eggers without any inheritance. She had met Wilhelm Schacht, then a penniless student, in 1869 and followed him to the United States, where they were married three years later.

Hjalmar Schacht himself was born in 1877, a few months after his family returned to Germany, in the small town of Tingleff in North Schleswig. He was christened with the unusual names Horace Greeley Hjalmar—in a typically impractical gesture, his father had chosen his first two names as a tribute to the founder and editor of the New York Tribune, whom he had admired while living in Brooklyn. His grandmother had insisted, however, that he have at least one conventional German or Danish name, and the young Schacht grew up as Hjalmar. Later in his life, though, some of his English friends and associates would use the name Horace.

During his early childhood, the family moved frequently as Wilhelm Schacht bounced from job to job, but in 1883, they finally settled in Hamburg. Germany in th

e last few years of the nineteenth century was a country of contradictions. Gripped by the most rigid class system in Europe—in fact almost a caste system—and governed by an autocratic constitution that still vested most of the power in the monarch and in the Junker military cadre surrounding him, it simultaneously offered Europe’s most meritocratic educational system. But for that, Schacht might have been condemned to the narrow confines of lower-middle-class existence as a clerk or perhaps a teacher. Instead, in 1886, at the age of nine, he was accepted into the Johanneum, one of the finest gymnasia in Hamburg, where he received a rigorous classical education, emphasizing Latin, Greek, and mathematics.

He could not completely escape the constrictions of his class-ridden society. Life at school was full of petty humiliations stemming from his family’s poverty: taunts at his living in a ratty tenement district, mockery of the cheap cloth of his trousers, sharing a graduation gown because he could not afford to buy one for himself. Cold-shouldered by the richer students, he was solitary, obsessively hardworking, and conscientious.

In 1895, Schacht graduated from the Johanneum and entered a university. Finally liberated, over the next few years he actually seemed to enjoy himself. He wrote poetry; joined a literary society; worked as a stringer for the Kleines Journal, a gossipy Berlin tabloid; and even composed the libretto for an operetta.4 While he initially enrolled at the University of Kiel, he followed the German practice of transferring from one university to another, spending semesters in Berlin, Munich, Leipzig, and in 1897, the winter semester in Paris. He began as a medical student, tried his hand at literature and philology, and eventually graduated with a major in political economy, going on to write a doctoral thesis on the foundations of English mercantilism in the eighteenth century.

Doctorate in hand, Schacht began a career in public relations, initially at an export trade association, writing economic commentary for a Prussian journal on the side. Diligent and reliable, eager to impress the bankers and business magnates whom he was now beginning to meet, in 1902, he finally caught the attention of a board member of the Dresdner Bank and was offered a job. He rose quickly and, by 1914, was a well-established middle-level officer of one of the powerful banks in Berlin.

In imperial Germany, a man of Schacht’s background would have found his opportunities for advancement in the military or the civil service limited. But in the years leading up to the war, Germany had gone from being an agrarian backwater at the edge of Western Europe, to becoming its leading industrial power, overtaking even Britain—an economic surge that had thrown open enormous opportunities in business to ambitious men. It was a particularly good time to be a banker, for in no other European country were banks quite so powerful. While Berlin still could not compete with either London or even Paris as an international financial center, the large German houses dominated the domestic economic landscape as the main suppliers of long-term capital to industry.

Disguising his social insecurities behind a stiffly formal exterior, Schacht seemed to possess a natural ability to get himself noticed. In 1905, his fluency in English got him sent with a member of the Dresdner’s board to the United States, where they met with President Theodore Roosevelt, and more important for a young banker, were invited to lunch in the partners’ dining room at J. P. Morgan & Co.

He also married well—to the daughter of a Prussian police officer who had been assigned to the imperial court. By 1914, they had two children, the eleven-year-old Lisa and the four-year-old Jens, and were living in a small villa in the western garden suburb of Zehlendorf, from which Schacht commuted to and from work into the Potsdammerplatz station on one of the modern electric trains that now linked all of Berlin.

As SCHACHT WATCHED the international crisis grow, he continued to hope, even until the end of July, for a last-minute diplomatic solution. Though he insisted that it would never come to war, this assertion stemmed primarily from wishful thinking. He had done well for himself in imperial Germany, had much to lose, and found it difficult to look at his own country dispassionately. For despite his liberal family background, he was a typical product of the Kaiserreich—conformist, unquestioningly nationalistic, and fiercely proud of his country and its material and intellectual achievements.

Like most other German bankers and businessmen, he believed that the villain of the piece was a fading Britain conspiring to deny Germany its rightful place among the Great Powers. As he later wrote, “Germany’s steady advance in the world’s markets had aroused the antagonism of those older industrial countries, who felt their chances in the markets were being threatened.” England in particular had “engaged in creating a strong network of alliances and agreements directed against Germany,” designed to encircle it.

That last few days of July 1914 constituted a whispering gallery of rumors and counterrumors. Berlin was gripped by alternating waves of war hysteria and anxiety. From the Dresdner Bank’s headquarters next to the Opera House on the Bebelplatz, Schacht had a ringside seat at the epic drama being enacted in the streets below. Daily, huge crowds of people paraded under the great limes of Unter den Linden, singing “Deutschland, Deutschland, Über Alles” and other patriotic songs. Several times that week angry mobs attempted to storm the Russian embassy, only a few blocks away from his office.