Lords of Finance

and had only been persuaded when Caillaux, at their initial interview, exclaimed, “You are not going to remain a grammarian for the rest of your life!”

Pierre Quesnay was only thirty-one years old, a former student of Rist’s who, after being demobilized in 1919, had joined the financial service of the League of Nations. Moreau brought him in as his chief of staff, appointing him as the Banque’s director of economic research a month later.34

During the fall, the inflow of money turned into a flood, and as it carried the franc irresistibly upward, breaching 30 to the dollar, Rist and Quesnay began to worry that France might repeat the British mistake: an exchange rate that was too high, making exports chronically overpriced and uncompetitive. In mid-December, as the franc reached 25 francs to the dollar, Moreau’s two colleagues, determined to prevent the French economy from slipping into British-like stagnation, began to agitate for the Banque to intervene to cap its rise. At one point, they even threatened to resign unless Moreau persuaded the prime minister to go along.

While Quesnay and Rist provided the Banque’s intellectual horsepower, Moreau was the political strategist. He recognized that the choice of the exchange rate ultimately determined how the financial burden of the war was to be shared. It was Maynard Keynes who had first articulated the political dimension to exchange rate policy in the Tract, back in 1923: “The level of the franc is going to be settled, not by speculation or the balance of trade, or even the outcome of the Ruhr adventure, but by the proportion of his earned income which the French taxpayer will permit to be taken from him to pay the claims of the French rentier.” The higher the Banque de France let the franc rise, the higher would be the value of the government debt, the better for the French rentier and the worse for the taxpayer. As Moreau put it, fixing the exchange rate was a matter of balancing “the sacrifices demanded of the different social classes in the population.”

Every country in Europe to emerge from the war had faced the same set of issues. Britain had chosen one extreme: to impose most of the burden on its taxpayers and to protect its savers. Germany had chosen the opposite extreme: the way of pathological inflation, which had wiped away its internal debts at the price of annihilating the savings of its middle classes. Moreau was set on finding a middle way.

Poincaré’s natural inclination was to savor the benefits to his reputation of the strengthening currency and let the franc keep rising. He was understandably reluctant to go down in history as the man who had formally acceded to an 80 percent reduction in the value of his nation’s money. But he also recognized that by allowing it to rise too far, he risked driving the economy into recession. Like many with a genius for detail, Poincaré was by nature indecisive and vacillating, one day in favor of capping the rise, the next day against.

The principle of opposition to capping the franc’s recovery did not come from the prime minister but from within Moreau’s very own institution. A faction within the Banque’s directorate, led by the two most powerful regents, Baron Édouard de Rothschild and François de Wendel, saw in the decline of the franc the decline of France. True diehards, they considered it their moral obligation to defend the interests of all those who had invested in French bonds during the war.

No one better symbolized the power of les deux cents familles and le mur d’argent than these two men. Rothschild was the epitome of the French aristocrat. Tall and slender, always fastidiously dressed in his old-fashioned banker’s uniform of frock coat and top hat, he had become the senior partner at Rothschild Frères at the age of thirty-seven. Beneath his haughty demeanor, he was shy, almost withdrawn; cautious and old-fashioned, he was a true conservative. The family bank matched his character, a place where, according to his son Guy, “The past clung to everything and everyone” and whose main purpose was in “gently prolonging the nineteenth century.”

A familiar figure in the best Parisian clubs, Rothschild had been an intimate friend of Edward VII’s, and was known as a great philanthropist, being especially generous to Jewish charities. To the public he was above all famous for his racehorses; during the season he was a fixture at Longchamps. More than just another wealthy breeder and owner of thoroughbreds, he was a skilled equestrian in his own right who had even represented France at polo at the 1900 Olympics.

In the world of banking the Rothschild name and the family’s great wealth evoked both awe and resentment. There was much anti-Semitic innuendo about their political influence. One exaggerated account has it that between 1920 and 1940, “No cabinet was formed without Édouard de Rothschild being consulted.” Édouard had been a young man of twenty-five when the Dreyfus affair broke in 1894. As Dreyfus was being publicly degraded from his rank, an enraged mob had howled, “A Mort les Juifs!”—“Death to the Jews!” He was determined thereafter that the Rothschilds should keep a low profile, keep out of the papers, and guard their privacy—though justly enraged by an anti-Semitic slur, he did once challenge a man to a duel.35

If Édouard de Rothschild was the glamorous face on the “wall of money,” Francois de Wendel was, in the public mind, its more sinister visage. The Wendels were one of the great arms manufacturers of Europe, armorers from Lorraine for more than 250 years, who had supplied weapons to, among others, Napoléon Bonaparte. Under the Second Empire, they had diversified, building one of the largest steel empires in Europe so that by 1914 the Wendel name in France had become as synonymous with steel as that of Carnegie was in the United States.

In the French edition of Who’s Who, François de Wendel listed his profession simply as “Maître de Forges”—ironmaster. He did not look the part. His receding chin gave him the appearance of “a tall friendly duck.” He lived discreetly in a mansion at 10 Rue de Clichy, not the most elegant or fashionable quartier of the capital, and liked to spend his weekends at his private game reserve just outside Paris, where he was said to be an enthusiastic but not very talented shot.

Unusually for a regent of the Banque de France, Wendel was an elected member of the National Assembly, leaving his two brothers to run the vast steel empire. In 1918, he became president of the Comité des Forges, the very powerful industry association of iron, steel, and armament manufacturers.

It required a certain obstinacy and tenacity of purpose for Moreau to take on the most powerful of his own regents. But over a thirty-year career in the higher civil service, he had acquired the remarkable skill in operating within the machinery of government. He certainly did not rely on diplomatic skills or charm—he had neither. Furthermore, after years on the periphery of power and of avoiding the salons of Paris, he had a limited network of political allies. His one great mentor, Caillaux, who might have helped him through the labyrinth of the French power structure, was gone within a few weeks of his appointment. It did not help that Poincaré was a long-standing enemy of Caillaux’s, and from the very start viewed Moreau with some hostility and suspicion as a holdover.

But Moreau proved to be unusually adept at bureaucratic infighting. In his diaries, he displays a natural talent for the give-and-take of policy formulation, knowing when to concede and when to push, when to bluff, when to threaten and when to fold, and considerable insight into the motivations and character of those he was up against.

On December 21, the Banque began to purchase foreign exchange and sell its own currency to prevent the franc from rising above 25 to the dollar. For the next two years, with Poincaré’s blessing, Moreau pursued a policy of intervening in the currency market to keep it pegged there.

Meanwhile, Rothschild and Wendel waged a guerrilla campaign against Moreau within the halls of the Banque and the corridors of power of the finance ministry on the Rue de Rivoli. Few institutions were more riddled with byzantine intrigue than the Banque. Moreau had had his first taste of it soon after joining—in August 1926, to his great surprise, he discovered that all incoming and outgoing calls including those from the governor’s office were being wiretapped. He had the taps dismantled.

Unable to secure a majority within the Council of Regents, Rothschild and Wendel employed every possible tactic to undermine Moreau. They lobbied the prime minister. They breached a long-standing tradition of discretion among the regents by making public pronouncements on currency policy, hoping thereby to lure such a flood of money into the country that Moreau would be forced to remove the cap. At one point, Rothschild ordered the Chemin de Fer du Nord, the largest railway company in France—of which he was president—to buy francs in order to push the exchange rate higher, risking the accusation that a regent of the Banque de France was engaged in inside trading in the currency market.

By the middle of 1927, it was clear that Moreau had won. Waves of French capital that had fled to London or New York had washed back home, allowing the Banque to accumulate a foreign exchange war chest of $500 million dollars, most of it in pounds. Despite the pressure from the diehards among the Regents, Poincaré had been won over. Moreau kept urging him not to look to France’s past but to its future. At 25 francs to the dollar, French goods were among the most competitive in the world; exports were booming, while prices were stable. It seemed as if, thanks to Moreau, France, of all the European countries, had finally hit upon the right recipe for dealing with the financial legacy of the war, avoiding the two extremes of German-style inflation and British-style deflation.

Moreau’s mistake was to assume that the value of the currency of a major economic power such as France, the fourth largest industrial economy, was a matter for that country alone. Exchange rates, by their very nature, involve more than one side and are therefore a reflection of a multilateral system. Though it may have been very difficult in 1926 to know the exact ramifications of the franc’s exchange rate on surrounding countries, Moreau seems to have deliberately closed his eyes to the impact of his decision on the wider system. Perhaps he was irritated at an international regime that he felt had done so little to support

France in its time of trouble. Perhaps he resented that the structure was dominated by an Anglo-American combine led by Norman—or so he believed. Whatever the reason, his decision to fix the franc at an undervalued rate would eventually help to undermine the stability of the very standard to which he had now hitched his currency.

14. THE FIRST SQUALLS

1926-27

Circumstances rule men; men do not rule circumstances.

—HERODOTUS, Histories

ORGY OF SPECULATION

No other issue would create more debate, disagreement, feuds, and confusion within the Federal Reserve System than what to do about the stock market. Wall Street had always loomed large in the American national psyche. Charles Dickens, visiting the United States in 1842, had been struck by the local taste for speculation and the desire “to make a fortune out of nothing.” After the 1884 panic on the New York Stock Exchange, the London magazine The Spectator commented, “The English, however speculative, fear poverty. The Frenchman shoots himself to avoid it. The American with a million speculates to win ten, and if he takes losses takes a clerkship with equanimity. This freedom from sordidness is commendable, but it makes a nation of the most degenerate gamesters in the world.”

Surprisingly, despite this national proclivity for betting on stocks, the U.S. market had never been especially large. In 1913, the total value of common stocks was some $15 billion, roughly the same size as the British stock market, which rested upon an economy about a third the size of that of the United States. From the beginning of the century until the outbreak of war, the stock market had essentially gone nowhere. The “merger” bull market from 1900 to 1902 had been cut short by the “rich man’s panic” of 1903, which was followed by the “Roosevelt” bull market, then the “1907 panic,” and finally the “recovery” bull market. As a consequence, the Dow had fluctuated for a decade and a half in an irregular wavelike movement between 50 and 100 without breaking in either direction.36

When war came, the U.S. economy experienced a boom and profits shot up dramatically for a couple of years as America became the arms supplier and financier to the Allies. But few investors were convinced that European Armageddon could be good for stocks in the long run, and so despite the profit surge, the market remained firmly range bound. Wisely so, for once the United States did enter the fray, labor shortages emerged, the war effort consumed great chunks of the national product, and profits suffered. By the end of 1920, the Dow stood at 72, almost at the midpoint of its range for the last twenty years—though after taking wartime inflation into account, this represented half the 1913 level in real terms.

But once the initial postwar adjustment pains had died away, the market began to take off. From 1922 onward, the Fed, under the leadership of Benjamin Strong, did a remarkable job in stabilizing prices. With inflation thus effectively at zero, it was able to keep interest rates low. This allowed the economy, boosted by the dynamic new industries of automobiles and radios, to surge ahead. While overall economic growth was exceptionally strong, even stronger and more exceptional was the rise in profits. Powered by new forms of organization and by a surge in factory mechanization, productivity accelerated in the 1920s while hourly wages grew only modestly. Most of the benefits, therefore, of the “new era” flowed to the corporatebottom line—by 1925, earnings were double their level in 1913. As a result, the Dow, after hitting a low of 67 in the summer of 1921, more than doubled to above 150 during the subsequent four years. By 1925, after the reelection of Calvin Coolidge as president, this last upward ride even acquired its own moniker: the Coolidge bull market.