Lords of Finance

James Logan, one of the founders of this dedicated brotherhood, had stayed in the army, rising to the rank of lieutenant colonel, and had been posted to France in 1914 as chief of the American observer military mission. An overweight bon viveur, he had become a fixture in Paris. Once the United States joined the war, he was given a high staff position in the American Expeditionary Force and was now working for Herbert Hoover in the Relief Administration.

With so many fellow members of The Family in Paris in the war’s immediate aftermath, Strong decided that he should see for himself what needed to be done in Europe. But as happened so often over the next few years, his body gave out on him. Worn out by the demands of war finance, he suffered a minor recurrence of tuberculosis and was forced to take another leave of absence during the first few months of 1919.

By the summer, he was back on his feet and ready to go to Europe. The Peace Conference had just finished, and as he left the United States the country was still in the full flush of jubilation and optimism over the signing of the peace treaty. Strong arrived in England on July 21, aboard R.M.S. Baltic, as Britain’s official peace celebrations were winding down. There had been parades and ceremonies across the country from the tiniest villages to the biggest cities. In London a million people had come out to watch a huge parade, including American and French contingents led by General John Joseph “Black Jack” Pershing and Marshal Ferdinand Foch, march past the king and queen and members of the government. The capital was still decked out with flags, and the troops who had taken part were still camped out in Kensington Gardens as Strong’s train rolled into the city.

Although the statesmen in Paris had failed to come up with some grand initiative to reconstruct Europe, he arrived full of great expectations, still convinced, for all the failures of the treaty, that the United States would eventually adopt a “constructive policy towards the restoration of Europe,” by postponing the repayment of war debts and providing direct aid for reconstruction.

For all the celebrations, he found the city’s mood ominously changed. In contrast to America, Britain was only slowly readjusting to peace. Tobacco restrictions had been removed in January and most food rationing in May. But bread was still obtainable only with ration coupons, as was sugar. The initial optimism, which had gripped Britain and all the European victors immediately after the war, was now wearing off as the grim realities of Britain’s underlying position were becoming steadily more apparent. The war had changed the balance of financial power, and Strong kept encountering a festering resentment against the United States, especially over war debts.

Few people in those days thought in terms of a “special relationship” between Britain and the United States—indeed, the phrase was only coined in 1945 by Winston Churchill. Before the war, most London bankers viewed their counterparts in the United States with that superciliousness reserved for unsophisticated kinsmen, too rich for their own good. Within the United States, certain circles—the House of Morgan, the partners at Brown Brothers—were natural Anglophiles. Elsewhere, Britain was generally regarded with suspicion and cynicism. But during the war and after, British arrogance had given way to resentment. London bankers worried that the United States, with its newly acquired financial muscle, was getting ready to elbow its way into the role of banker to the world. During Strong’s visit to London in March 1916, he attended a speech made by Sir Edward Holden, chairman of the London City and Midland Bank, “in which [Sir Edward] referred to efforts of American bankers to undermine Lombard Street’s supremacy and . . . was so overcome by the mere thought that the old man broke down and wept.”

Strong now found British bankers and politicians fervently convinced “that the Allies have made the greatest and most vital sacrifice in the war” while the U.S. sacrifices had “been slight, and our profits immense and that existence of this great debt is a sword of Damocles hanging over their heads.” There was considerable bitterness at how long the United States had sat out the war, many of Strong’s English acquaintances believing that America had deliberately waited for Europe to wear itself out before stepping in to pick up the pieces. Now those same people argued that the U.S. government was morally obliged to forgive part of their European Allies’ war debts. This was especially true in Britain, which had borrowed some $5 billion from the United States but had itself lent $11 billion to France, Russia, and other countries—in effect, simply acting as a conduit for the loans. And though his friend Norman tried to reassure him that people were allowing “their hearts to rule their heads,” that Britain’s credit was still strong, and that it was still good for its debts, Strong was undoubtedly shaken by the pessimism that hung over the City of London.

Not only had Britain’s place in the world changed, but British society had also been transformed by the war. The aristocracy that had ruled Britain for much of the previous century had been badly damaged—as one contemporary author wrote, albeit with some exaggeration, “In the useless slaughter of the Guards on the Somme, or of the Rifle Brigade in Hooge Wood, half the great families, heirs of large estates and wealth, perished without a cry.” After enduring savage losses in the fighting—the casualty rate had been three times heavier among junior officers, many of them aristocrats, than among enlisted men—the old elite had also been hurt by the wartime inflation and was now being decimated by postwar economic dislocations. Land prices had collapsed and many large estates been put up for auction. In place of the old and confident ruling class, a whole new breed—“hard-faced men who had looked as if they had done well out of the war,” as one eminent politician described his new colleagues in the House of Commons—had come to power.

At the end of July, Strong went on to Paris and, for the next few weeks, used the Ritz Hotel on the Place Vendome as his base while traveling around Europe. He visited Brussels—liberated only a few months before—Antwerp, and Amsterdam, establishing connections with the heads of European central banks but also taking a melancholy motoring trip through the giant cemeteries of the Western Front.

The view from Paris was even more foreboding than from London. The city was dark by 10:00 p.m. for want of coal to generate electricity. The Peace Conference was still officially in session, limping through the final negotiations with the smaller Central Powers and successor states: Austria, Hungary, Bulgaria, and Turkey. But the big delegations had all departed and with them the accompanying train of ten thousand other assorted people: the advisers, the wives, the mistresses, the cooks, drivers, messengers, secretaries, and journalists. The hotels had reverted to their normal business—at the end of July, the Majestic, headquarters of the British delegation during the conference, and the Crillon, that of the American delegation, both reopened for commercial business. The radical journalist Lincoln Steffens, who had come to Paris with the American delegation and stayed on after the conference, best captured the city’s bitter mood of disillusionment during those months, “The consequences of the peace were visible from Paris. There were wars, revolutions, distress everywhere.”

Over the summer, the political threats to Europe had actually begun to recede. Though civil war still ravaged Russia, the risk of Bolshevik revolution in Germany had diminished. A Communist uprising in Berlin and an attempted revolution in Bavaria had both been crushed. From Strong’s point of view, the main danger was now economic. The two largest countries, France and Germany, both urgent

ly needed food from abroad. Continental Europe was desperately short of capital to rebuild itself. Most disturbingly, he found a complete “lack of leadership” in Europe, with “people in authority . . . exhausted.”

While Strong was in Paris, it became apparent that the United States was beginning its retreat from European affairs. The peace treaty had run into trouble in the Senate and seemed headed for defeat. Though the president had announced his intention to appeal directly to the people, the mood of the country was clearly turning isolationist.

Strong could not hide his disgust at this betrayal. At the end of August he warned Russell Leffingwell, undersecretary of the treasury and soon to be a Morgan partner, that if the United States were to “desert Europe and leave these new governments to their fate,” this could only result in “prolonged disorder and suffering. It would be an act of cowardice for which we would be despised.” He returned to the United States in late September. A few days before, on September 25, the president had collapsed with a stroke on his western campaign to drum up support for the treaty, and for the next year was to lie incapacitated in the White House. On November 19 the Senate rejected the treaty by a vote of 55 to 39.

As so often seemed to happen when he got back from Europe, Strong suffered yet another relapse of his tuberculosis. The doctors again insisted that he take a leave of absence, and the directors of the New York Fed released him for a year. Initially he went out to Arizona for the elevation and dry climate and by the following spring seemed well on the way to recovery. In March he set off on horseback across the Arizona desert accompanied by an unusual troop of companions: a mule skinner cum cook; a Pima Indian guide cum horse wrangler whose name was either Frank, Francisco, Pancho, or Juan—no one was quite sure which—a Russian wolfhound named Peter; and Strong’s old friend from The Family, Basil Miles. As this entourage trekked across the wilderness, breathing “the most wonderful air,” seeing “the most gorgeous sunsets,” and sleeping under the stars, the problems of European reconstruction and currency chaos must have seemed far away.

After Arizona, Strong decided to take advantage of his year off by traveling around the world. Accompanied by his eldest son, Ben, and his friend Miles, he left San Francisco in early April for Japan. They went on to China, the Philippines, Java, Sumatra, Ceylon, India, finally arriving at Marseilles in winter 1920. There Strong found a letter from Montagu Norman awaiting him. “Whenever you do come to London, let me remind you of your hotel, of which the address is ‘Thorpe Lodge, Campden Hill, W.8.’ The Booking Clerk tells me that an hour’s notice will be enough to get your room ready, or, if you are in a hurry, this can be done after you have arrived.” While Strong had been traveling, Norman had been elevated to the governorship of the Bank of England. It was the beginning of a true partnership.

If REPARATIONS POISONED the relations among European countries, war debts did the same to the relations between the United States and its erstwhile associates, Britain and France. However hard the Americans tried to separate war debts from reparations, in the minds of most Europeans they remained inextricably linked. Indeed, in the middle of 1922, the British government made the connection explicit in a note drafted by Arthur Balfour, then acting foreign secretary, that Britain would collect no more on its loans to its Continental allies and on its share of reparations from Germany than the United States collected from it as payments on its own war debts.

The Balfour Note provoked an outcry in the United States. Balfour, an aristocrat and philosopher of some repute—in 1895 he had published a work of great subtlety entitled The Foundations of Belief—was the elder statesman of British politics, having been prime minister before the war and foreign secretary under Lloyd George. Many were charmed by his urbane gracious manners and his air of bemused detachment—at the Peace Conference a British diplomat remarked that he “makes the whole of Paris seem vulgar.” In the United States, however, he was viewed as a “top-hatted frock-coated personification of British decadence,” and the tone of condescension and moral superiority adopted in the Note infuriated the Americans. “Lord Balfour seems to think that he can call us sheep thieves in language so elegant that we shall not understand it,” wrote one American. According to the Philadelphia Inquirer, “In the Balfour Note John Bull is depicted as the liberal, magnanimous and sympathetic creditor whose heart bleeds for his debtors’ sufferings, and who is willing and anxious to relieve them of a burden which he perceives is beyond their ability to bear; Uncle Sam is portrayed as a ruthless, relentless, hard-hearted Shylock, who is making it impossible for John Bull to follow his altruistic and benevolent instincts by stubbornly insisting upon the letter of his bond.”

To make matters even worse, Congress had decided to get into the act. In March 1922, Congress created the five-man World War Foreign Debt Commission, which was chaired by the secretary of the treasury, Andrew Mellon, and included the secretary of state, Charles Evans Hughes; the secretary of commerce, Herbert Hoover; Senator Reed Smoot of Utah; and Representative Theodore Burton of Ohio. The commission was to negotiate the terms on which American loans were to be repaid. Concerned that the administration might be too lenient on the debtors, Congress imposed a floor on any settlement—the commission would not be permitted to accept anything less than 90 cents on the dollar.

The congressional stipulations on war debts provided the Europeans their turn to express outrage. “Has America which but yesterday we acclaimed for her generosity and her idealism fallen to the role of a Shylock?” exclaimed a French senator in L’Éclair. Throughout Europe, newspapers began referring to Uncle Sam openly as “Uncle Shylock.” Even the Economist, by no stretch a populist newspaper, printed a letter signed “Portia” that accused the United States of attempting to “lay a tribute upon those who saved Kansas and Kentucky from the German peril.”

In October 1922, Lloyd George’s government precipitously fell and a new Conservative government under Andrew Bonar Law took office in Britain. The incoming chancellor of the exchequer, Stanley Baldwin, was a practical and sensible businessman who believed strongly in settling one’s debts—he was so firm an advocate of this principle that in 1919 he had anonymously donated $700,000 of his own money, a fifth of his net worth, to the government as his contribution to paying off the national debt after the war.19

With the rhetoric on both sides of the Atlantic becoming increasingly overheated, Baldwin decided to open negotiations for a settlement with the Americans, telling them he wanted “to approach the discussion as business men seeking a business solution of what fundamentally is a business problem.”

A British delegation, led by Baldwin himself and including as its principal adviser, the governor of the Bank of England, Montagu Norman, set sail for the United States on December 30 aboard the Majestic. Norman was convinced that it was essential to settle with the Americans if Britain was to reestablish its credit, and reclaim London’s position as the world’s premier financial center. He had visited the United States in August 1921 and May 1922 to make the rounds of senior administration officials in Washington with Strong, including a secret meeting with the president, Warren Harding, to convince them that the United States should remain engaged in European finance. As a result of this groundwork, of all the British financial officials, Norman had the best firsthand knowledge of U.S. politics and the situation in Washington.

On the stormy Atlantic crossing, which took twice as long as normal because of rough seas, gale-force winds, and fog, Baldwin and Norman became fast friends. Norman was usually suspicious of politicians, claiming somewhat disingenuously to have no political views himself—he bragged that he had never voted. The stolid uncharismatic Baldwin was the quintessential nonpolitician. They would remain lifelong friends, sharing a common taste for the pleasures of silence, of country walks and string quartets. Sir Percy Grigg, a high Treasury official who knew both well, described how “they seemed to understand each other and to communicate without having to exchange more than a few monosyllables.”

The American negotiating team was led by Secretary Andrew Mellon. Then in his late sixties, Mellon had been born into a wealthy Pittsburgh family and by the age of forty had independently amassed a fortune of some $500 million, making him the third richest man in America, after John D. Rockefeller and Henry Ford. Taciturn, cold, and reclusive—his son Paul would compare him to the money-obsessed Soames Forsythe of John Galsworthy’s Forsyte Saga—Mellon’s riches had brought him little happiness. In his forties, he had married a frivolous young English girl of nineteen, who within a few years left him for a social-climbing con artist, dragging him through a scandalous divorce in the process. He now lived in an opulently furnished six-bedroom apartment at 1785 Massachusetts Avenue, a block east of Dupont Circle, where his daughter Ailsa, a self-involved and sickly young lady prone to all sorts of psychosomatic ailments, acted as hostess.

The discussions were conducted in great secrecy, some sessions even taking place in Mellon’s apartment, surrounded by old masters. There were lunches and dinners—to one such event Vice President Calvin Coolidge, “Silent Cal,” was invited and did not utter a word to either of his neighbors during the entire meal. He would later famously dismiss the problem of war debts by exclaiming, “They hired the money, didn’t they?” Despite Prohibition, the British delegation was surprised to find an abundance of liquor in private homes.

Before leaving London, they had been given to believe by the American ambassador that they should be able to reach an adjustment of 60 cents on the dollar and the cabinet had not given them the authority to go any higher. Arriving in Washington, they discovered that while the U.S. administration was keen to settle, it was limited by what Congress would accept. After two weeks of negotiations, the best that the Americans could offer was 80 cents on the dollar.

While Baldwin was frustrated by America’s lack of generosity—at one point saying that he would like to ship them replicas of the golden calf—Norman pressed him to agree to the terms. In his view, the willingness of the Debt Commission to go beyond the limits set by Congress

reflected “a newly found desire on the part of Americans to come into Europe again,” and even a stiff settlement was a small price to pay for getting the United States back into European affairs.

On the way home, the British team passed through New York. Strong and the Morgan partners advised them that they would not get a better deal by waiting and urged them to settle. Arriving in Southampton on January 27, 1923, Baldwin made the foolish mistake of revealing the terms to the press, even before he had had a chance to present them to the cabinet, and in the belief that his remarks were off the record, declared that he was for acceptance. He then dug himself in deeper by telling the gathered reporters that any deal would have to satisfy Congress, many of whose representatives came from the West, where they “merely sell wheat and other products and take no further interest in the international debt or international trade.” The headlines the next day announced that the British chancellor of the exchequer considered the average senator “a hick from way back.”