Lords of Finance

No one exemplified the new role of banker-statesman better than Thomas Lamont, by 1924 the most senior partner after Jack Morgan. The urbane and ever-charming Lamont seemed to have been born under a lucky star. The son of an austere Methodist minister, young Thomas had spent his youth growing up in New England village parsonages, brought up to believe that dancing, playing cards, and even leisurely Sunday strolls were sinful. He attended Phillips Exeter Academy and Harvard on scholarship, and became a financial reporter for the New York Tribune, but finding it hard to raise a family on a journalist’s s

alary, he entered the food distribution business. Like Benjamin Strong, a resident of Englewood, New Jersey, he had been plucked from obscurity by Henry Davison, whom he encountered one evening on the commuter train from New York and who is supposed to have recruited him then and there as secretary-treasurer at Bankers Trust.

In 1911, following in Davison’s footsteps, Lamont was offered a partnershipby Pierpont Morgan—then the most prestigious and lucrative job on Wall Street. Lamont initially declined, saying that he wished to have the freedom to travel for three months a year. But Mr. Morgan insisted and Lamont unsurprisingly gave way.

His involvement, as a Morgan partner, in the wartime finances of Britain and France brought him a place on the U.S. reparations team at the Peace Conference. After the war, though a Republican, he broke with the isolationist wing of his party and became a committed internationalist. In those early postwar years, he was the financial emissary par excellence. In 1920, he was in China and Japan; in 1921, in Mexico City as chairman of the International Committee of Bankers for Mexico; in early 1923, in Europe planning a loan to Austria and advising the Italian government. Everywhere he went he was received with the pomp and the deference due to a head of state. In May 1922, when Davison suddenly died of cancer, Lamont stepped into his shoes.

His outside activities not only reinforced the impression that here was a man of the new aristocracy, they also added to his aura of effortless grace. He acquired Alexander Hamilton’s old newspaper the New York Evening Post and helped start and finance the Saturday Review of Literature. He had friends who were writers—at his dinner table one might find H. G. Wells or André Maurois or John Masefield.

Just before the conference was to open, Lamont was dispatched to London with a watching brief for the House of Morgan during the negotiations. He quickly fell under the spell of Norman, who seemed to have an uncanny ability to take visiting American bankers under his wing and fashion them to his own ends. Though Norman suddenly collapsed from “nervous exhaustion” just as the conference was about to open and lay bedridden for a week, by July 15, he was back in the thick of the action.

At the invitation of Prime Minister MacDonald, the two bankers set forth the main conditions that investors would demand before lending money under the Dawes Plan. Recognizing that those who would provide the capital had enormous leverage, Norman insisted that neither British nor American bankers touch the loan “until the French are out of the Ruhr bag and baggage”; and to preclude any further such preemptive and unilateral military actions by France, the right to declare Germany in default of its payments was to be vested, not in the Reparations Commission, dominated as it was by the French, but in an independent agency to be run by a neutral American.

For the next four weeks the negotiations centered on these two points. Every time the politicians seemed about to stitch together a compromise, and to paper over their differences, the two bankers—led largely by Norman, although Lamont was the spokesman—would return insistently to these core proposals, which, they kept reiterating, were not political dictates set by some hidden money power but simply the most elementary conditions that any investors would require as security before committing capital to Germany.

Prime Minister MacDonald, a Socialist and erstwhile pacifist, with a jaundiced view of bankers and their motives, tried to bully the pair with denunciations of their meddling in politics. Owen Young tried to browbeat them into softening their conditions, threatening to go around Morgans and arrange a loan though Dillon Read. All to no avail.

The leader of the French delegation, Prime Minister Herriot, by background a historian more at home in the Left Bank literary salons of Paris than laboring over financial minutiae in a conference room, came to the negotiating table radically unprepared and found himself outfoxed at every turn. A passionate and emotional intellectual, he injected a certain operatic quality into the proceedings by more than once publicly bursting into tears of frustration. He was constantly at odds with his forty-man team, a motley crew of cabinet colleagues, Socialist deputies, and provincial Radical committee presidents, a “swarming, gesticulating, vociferous horde” of amateur diplomats, who turned the lobby of the French embassy in London into “a public meeting hall without a chairman to arbitrate disputes and without police to throw out the disorderly.” At one point, Herriot and his minister of war, General Charles Nollet, got into such a long altercation at an evening meeting at 10 Downing Street that MacDonald declared an adjournment and went to bed. Even then, the two Frenchmen continued to harangue each other as they left the building, and stood screaming insults at each other in the middle of Downing Street.

Herriot called upon Lamont at his residence in Audley Square to plead with him, reminding him of the historic ties between France and the House of Morgan, but Lamont refused to make any concessions. Instead, over the next few weeks, Lamont tightened the screws by making it clear that unless the French became more amenable, Morgans might find it extremely difficult to roll over the loan it had raised for them earlier in the year.

The humiliating spectacle of Anglo-Saxon bankers dictating to their politicians infuriated French public opinion. The Parisian paper Le Petit Bleu declared that “Europe shall not become a vast field of exploitation with its only government a vast bankers’ combine.” Edwin James of the New York Times reported that many Frenchmen were convinced that “America’s only purpose is to make some more money out of Europe’s misfortunes, and that instead of helping France get reparations, the Americans are working on Shylock lines for the preliminary loan.” In the United States, as highly respected a newspaper as the Springfield Republican commented, “In the lean years that follow an exhausting war, financiers outrank generals. . . . No loan, no Dawes plan. No Dawes plan, no settlement. No settlement, no peace in Europe. . . .”

By the beginning of August the bankers had won. The only concession the French were able to extract was to delay their withdrawal from the Ruhr by a year. Germany was invited to send a delegation to finalize the arrangements. On August 3, the German delegation, led by Chancellor Marx and including Gustav Stresemann, now foreign minister; Finance Minister Hans Luther; Secretary of State Schubert; and Schacht, arrived at the London Ritz. The first plenary session took place on August 5—the first formal meeting between the respective heads of the German and French governments since the Franco-Prussian war of 1870. For the next ten days, as the interminable wrangling began, the conference staggered from one crisis to another, constantly verging on the edge of collapse.

The procedure for declaring a default specified that sanctions could be imposed only in the event of a “flagrant” failure on the part of Germany to fulfill its obligations. The Germans demanded a definition of flagrant. That bickering consumed a day. The French had agreed to withdraw from the Ruhr after a year. The Germans wanted to know when the year would begin, and further demanded that the evacuation be completed within a year.

Finally, on August 14, the definitive terms were submitted to the German delegation, who were granted the night to accept or reject them. The Germans gathered in one of the rooms at the Ritz for an all-night session. Each of them spoke his mind. As dawn arrived, the chancellor went around the room with a last poll. All voted for acceptance, except for Schacht, who said, in his harsh Frisian accent, “We cannot accept the terms—we can never fulfill them.” He insisted that the Dawes Plan’s failure to reduce the total level of reparations was its fatal flaw. But it was Stresemann who had the final word. “We must get the French out of the Ruhr. We must free the Rhineland. We must accept.”

ON THE SURFACE, the Dawes Plan appeared to be the turning point for Europe. The wrangling over reparations, which had consumed the energy of officials for the last five years, seemed to be over. In September, the loan that formed the basis of the plan was successfully floated in New York and London. It started a boom in lending to Germany by American banks that was to fuel a recovery in its economy for the next several years and bring stability to the new currency.

Young, the true architect of the plan, had believed that in the climate of bitterness and recrimination prevailing in 1924, Europe would be able to improvise its way toward an eventual solution only by avoiding confronting its problems head-on. The plan had therefore very deliberately swept a whole series of issues under the carpet. The total bill for reparations remained unspecified. As a result, resentment within Germany continued to fester just below the surface. Moreover, the new German prosperity depended on what Keynes described as “ a great circular flow of paper” across the Atlantic: “The United States lends money to Germany, Germany transfers its equivalent to the Allies, the Allies pay it back to the United States government. Nothing real passes—no one is a penny the worse. The engravers’ dies, the printers’ forms are busier. But no one eats less, no one works more.” No one was willing to predict what would happen once the music stopped.

Nevertheless, the initial fanfare associated with the plan did catapult Charles Dawes, hitherto a relatively obscure financier, to fame and fortune. In the summer of 1924, Coolidge selected him to be his running mate; Dawes was elected vice president of the United States that autumn. For having bought time for Europe and at least created the illusion that the Continent’s battles over money were finally over, he was awarded the 1925 Nobel Prize for peace.

12. THE GOLDEN CHANCELLOR

Britain: 1925

“I never knew a man who had better motives for all the trouble he caused.”

—GRAHAM GREENE, The Quiet American

By 1924, London had shaken off the grim austerity of the war years and was basking happily and prosperously, as Robert Graves put it, “in the full sunshine of Peace.” The shops were crowded, the theaters and cinemas filled to capacity, the streets jammed with traffic. Regent Street had been made over and transformed into a broad thoroughfare, its refurbished buildings gleaming.

Whereas in Germany, a demobilized army officer might find his calling in a right-wing death squad, his counterpart in Britain had plunged into commercial life—it was said that most of the fleets of motor buses that jammed the streets of London were owned and operated by syndicates of former army officers. There was a new freedom in the air. At night, in the West End, the bright young things who set the pace for London society had discovered dancing: the jog-trot, the vampire, the camel-walk, the shimmy, and most infamous of all, the Charleston. That, and a modest relaxation in the wartime liquor-licensing laws, had fueled an explosion in the number of nightclubs. On Bond Street was the Embassy Club, a favorite haunt of the Prince of Wales and the smart set. In the Haymarket was the fashionable Kit-Kat Club, which boasted a dance floor for four hundred and was where Edwina and Dickie Mountbatten could be found most evenings. At 43 Gerard Street was the more raffish and bohemian “43” Club, frequented by, among others, the crown prince of Sweden, Prince Nicholas of Romania, Tallulah Bankhead, Augustus John, and Joseph Conrad. In April 1924, in a scandal that shook all London society, it was raided by the police and one its members, the well-known London restaurateur “Brilliant” Chang, was arrested for running a cocaine ring.

But while London and the Southeast were celebrating the return of peace and prosperity, not more than a hundred miles north of the capital was another country. The industrial heartland of Britain—the Midlands and the North—was struggling while London danced. The great traditional industries—the cotton mills of Lancashire, the coal mines of Nottinghamshire and South Wales, and the shipbuilding yards along the Tyne—once the engines of the Victorian boom, but now priced out of world markets, had fallen into a severe slump. Textile exports were half of what they had been in 1913, and it was the same with coal. Over a million and a quarter men were unemployed and another million were on part-time work. In some places—the dreary colliery districts of Yorkshire or the blighted ship-building town of Jarrow—one man out of every two was on the dole.

The irony was that Britain’s economic troubles were not the result of ineptitude or the wages of financial sin but the unfortunate side effect of a high degree of financial piety and rectitude. The decision to deflate the economy in 1920 and 1921 to reverse wartime inflation had partially succeeded. Prices came down by 50 percent from their postwar peak and the weakness in the currency was reversed—the pound, which had touched $3.20, had rebounded fitfully and erratically to $4.30. But the price of financial orthodoxy had been stiff. While Britain had recovered from the recession of 1921, the rebound had been muted. The City of London, finding it difficult to compete with New York for funds, had been forced to impose a regime of high interest rates, and unemployment remained stubbornly stuck above 10 percent.

The comparison between Britain and France was striking. Solid conservative Britain had pursued the most orthodox and prudent financial policies of any European power, refusing to inflate its way out of debt or to allow its currency to collapse, and had been rewarded with the highest unemployment rate in Europe and a limping economy. By contrast, France had been invaded during the war, suffered the highest ratio of casualties of any country other than Serbia, and seen large tracts of its most productive land leveled and destroyed. After the war, the French had resorted to inflation to lighten the burden of debt and to a weak franc to steal a march on the British by cheapening their goods. Though the government had continuously staggered on the edge of insolvency since the war, the overall economy had done well; exports had boomed. The number of unemployed in France was a fraction of that in Britain. As one contemporary journalist summarized it, “While England is financially sound and economically sick, France is economically sound and financially sick.”

All of this self-inflicted pain might have been worthwhile if in the process Britain had been able to achieve its overriding postwar economic objective: the restoration of the pound to its prewar pedestal. But even here the rewards of virtue proved to be elusive

By the fall of 1924, the pound was stuck. Having floated at around $4.35 for two years, it seemed unable to rise any further. Despite mass unemployment and high interest rates, prices in Britain still remained stubbornly elevated compared to the United States. Even if by most calculations the discrepancy was only 10 percent, that last 10 percent was proving to be the hardest.