Lords of Finance

By virtue of position and personality, he dominated most discussions of economic policy within Germany. The liberal economist Moritz Bonn, an adviser to the Reichsbank, wrote of Schacht in those years, “He looked upon the world as Hjalmar Schacht’s particular oyster, and was very sensitive to public criticism. Having clashed with many strong and ambitious personalities in the German banking and business world, he was full of resentment against colleagues who had at some time outdistanced him. Once he arrived at the head of the central bank, he gloried in being their boss.”

To the public, Schacht remained “the Wizard,” the savior of the mark. The visit by Strong and Norman in June 1925, his own trip to the United States that fall, and his acceptance as the third member of the central banking triumvirate running the world’s finances had enormously enhanced his prestige. In the three years since their first meeting, he had developed a very strong personal bond with Norman—they met five times in 1924, three times in 1925, and four times in 1926. Norman admitted that Schacht could be difficult to work with, that among his peculiarities was a love of publicity and the habit of making too many speeches. But it was “a joy to talk finance” with Schacht, he used to say. His admiration for the German was so great that Sir Robert Vansittart, later head of the British diplomatic service, complained that Norman was “infatuated by Dr. Schacht.”

Strong, however, had not taken to Schacht to the same degree. “He is undoubtedly an exceedingly vain man. This does not so much take the form of boastfulness as it does a certain naïve self assurance,” wrote the American. Nevertheless, he was impressed by the way Schacht handled the Reichsbank. “He runs his part of the show with an iron hand. He does it openly, frankly, and courageously, and seems to have the support of his Government but it certainly would not do in America. . . . He doesn’t gloss things over; he seems actually to relish the difficulties. . . .”

Power seemed to suit Schacht. The family had moved out of their villa in Zehlendorf into the official residence of the Reichsbank president on the top floor of its headquarters on Jägerstrasse. Financially he had little to worry about—his salary was the equivalent of $50,000 and he drew a further $75,000 from the pension that he had wrung from the Danatbank. To show he had arrived, he bought a grand country house some forty miles north of Berlin, which had been the hunting lodge and estate of Count Friedrich Eulenberg.

When in town, the Schachts entertained frequently. With his “ugly clown mask of a face, curiously alive and attractive,” Schacht, always sporting a big cigar and accompanied by his matronly wife, Luise, who kept a “vigilant watch” on him—he was said to have a wandering eye—became something of a fixture on the social circuit. He had a pompous habit of wearing his culture conspicuously on his sleeve, which some found irritating, while others ridiculed him behind his back for his arriviste pretensions—one acquaintance remarked that “he dresses with the taste of a socially ambitious clerk.” Nevertheless, he was a popular guest, something of a catch celebrated for his “cutting and devastating humor.” The Aga Khan remembered the Schacht of those years as one of the most charming of dinner companions, who could hold “a whole table enthralled” with his sparkling conversation. Priding himself as something of a poet, he would compose amusing little pieces of doggerel to entertain his fellow guests.

Before the war, social life in Berlin had been especially stultifying. Under the oppressive hierarchy imposed by the Junker elite around the court, there had been little interaction between the various circles in the city. However, the overthrow of the old Prussian nobility and the destruction of the middle class by inflation had transformed Berlin into a rootless society of politicians and profiteers, former aristocrats and foreign diplomats. It would have been an arid soulless sort of place but for its demi-monde of artists. With its past swept away, the city had an unhinged nervous energy, an edge to it, that no other city in Europe could match, and it had attracted the best of the European avant-garde: writers, painters, architects, musicians, and playwrights. William Shirer, the journalist who would chronicle the rise of Nazism, first came to Berlin during those years and was captivated. “Life seemed more free, more modern and more exciting than in any place I had ever seen.”

But for all its “jewel-like sparkle,” the city was wrapped in an atmosphere of impending doom. Norman sensed it when visiting Schacht in late 1926: “You feel all the time that politically as well as economically Germany is still not far from a precipice.” After the fiasco of the Beer Hall Putsch, most people treated Hitler as a laughingstock. Nevertheless, there were ominous undercurrents of the convulsions to come. On March 21, 1927, a band of six hundred Nazi brownshirt storm troopers of the Sturmabteilung , the SA, beat up a group of Communists in eastern Berlin and marched into the center of the city, attacking anyone on the Kurfürstendamm who looked Jewish. The city authorities responded by banning Nazi activity from Berlin for a year.

But the economy was booming. Over the three years since the mark had been stabilized, output rose close to 50 percent and exports by over 75 percent. The GDP had surpassed its prewar level by a good 20 percent, unemployment was now at a modest 6 percent, and prices were steady. The recovery was reflected in the stock market. During the hyperinflation, few people had believed that capitalism would even survive in Germany and equities had become dirt cheap, having fallen to less than 15 percent of their 1913 inflation-adjusted value—the whole of the Daimler-Benz motor company, for example, could have been bought for the price of 227 of its cars. By 1927, however, the market had quadrupled in value from its low point in 1922.

The Dawes Plan had been an enormous success. In fact it had worked almost too well. American bankers, assured under the plan of being repaid first ahead of reparations owed to France and Britain, had fallen over one another in their enthusiasm to lend to Germany. In the two years since the plan, $1.5 billion flowed into the country, giving Germany the $500 million due for reparations and still leaving it an enormous surplus of foreign cash. Some of this money had gone to finance the reconstruction of industry; but a very large amount had been taken up by the newly empowered states, cities, and municipalities of the budding democracy to build swimming pools, theaters, sports stadiums, and even opera houses. The zeal with which foreign bankers promoted their wares led to a great many imprudent investments and a lot of waste—one small town in Bavaria, having decided to borrow $125,000, was persuaded by its investment banks to increase the amount to $3 million.

r /> With so much foreign money coming in, imports ballooned and the pressure on the government to lighten up on the austerity of 1924 and 1925 became irresistible. By 1926, the national government itself was back to running deficits. These were, however, modest—only $200 million, or less than 1.5 percent of GDP—compared to the giant shortfalls of the hyperinflation years, and financed as they were by hard currency from abroad, did not lead to inflation.

By every indication, Schacht, as one of the architects of this authentic economic miracle, should have been a happy man. Instead, he continued to be obsessed with reparations. Even at the time of the Dawes Plan, he had never been fully convinced that Germany could or even should pay the amounts envisaged. Nevertheless, he had grudgingly supported the plan and the foreign loans that came with it. He had hoped that as the credits from the United States built up and began to rival reparations as a claim on Germany’s foreign exchange, they would create a powerful lobby of American bankers, who would share a common interest with the German authorities in getting future payments to the Allies reduced.

But Germany was now borrowing too much abroad. Schacht worried that the foreign debt buildup was becoming so large that when the day came for it to be repaid, it would precipitate a gigantic payments crisis and national bankruptcy. It made no sense to him for Germany to be borrowing dollars to build wonderfully modern urban amenities, such as opera houses, which could never generate the foreign currency to repay the loans. Moreover, Germany was so awash with foreign capital, and was being driven by so conspicuous a boom, that it was getting progressively harder for him to argue that the republic could not afford to meet its reparations obligations. The artificial boom was giving everyone at home and abroad a false sense of prosperity—a “chimera,” as he called it.

His problem was that there was very little he could do about the situation. If he tried to tighten credit to curb the domestic boom, he would simply end up encouraging borrowers to look abroad for cheaper loans and thus exacerbate the already excessive foreign borrowing.

He was not a man to agonize too long over dilemmas. In many ways, for someone with the reputation of being a calculating opportunist, he was oddly impulsive. On Thursday, May 12, 1927, he made his move. The Reichsbank instructed every bank in Germany to cut its loans for stock trading by 25 percent immediately. The next day, nicknamed “Black Friday” by the Berlin press, stock prices fell by over 10 percent. Over the next six months, they would slide by another 20 percent.

By going after the stock speculators, Schacht was hoping to crack the atmosphere of overconfidence and curb inflows of foreign money into Germany. This proved to be a serious miscalculation. Even though stocks had gone up a lot in the last five years, this represented a recovery from the brink of disaster. The market was by no means overpriced—in early 1927, its total capitalization was only around $7 billion, less than 50 percent of GDP, still only 60 percent of its prewar level. More important, German municipalities, which were immune to stock market fluctuations, kept on borrowing abroad. All that Schacht had achieved with this hasty maneuver was unnecessary damage to business confidence.

Having thus failed to dam the inflow of foreign loans with his broadside against the stock market, Schacht now began to talk about doing something dramatic over reparations. A New York Fed official, Pierre Jay, passing through Berlin in June 1927, remarked that Schacht did “not wish to have things seem too good in Germany for fear that it will help the execution of the [Dawes] Plan,” and speculated that he might take some other action deliberately to undermine Germany’s fragile prosperity in order to prove that reparations were too burdensome. Parker Gilbert, the American agent-general for reparations, who was as close to Schacht as anyone, observed that he had begun “openly and actively working for a breakdown” of the Dawes agreement, and described him during this period as “changeable and moody,” “temperamental and mercurial.”

No one was quite sure what he had in mind. Berlin was rife with rumors that he might deliberately engineer a new crisis. It was the beginning of what one historian has described as Schacht’s descent into “irresponsibility and unpredictability.” His tendency to “extreme and erratic” behavior seemed to be a deliberate ploy to keep friends and enemies alike guessing. It certainly unnerved his counterparts, Norman and Strong. They feared that consumed as he was by reparations, he might try some reckless and foolhardy gamble to sabotage the Dawes settlement, which would not only plunge Germany into chaos and undermine its fragile new democracy, but might capsize the international monetary structure, which they had so painstakingly put together over the last few years.

They had always worried about Schacht’s tendency to embroil himself in highly visible political conflicts. Never much of a diplomat, he had always been very open in his criticisms of government budgetary policy, particularly of the states and municipalities borrowing so much abroad. Back in 1925 during the central bankers’ visit to Berlin, Strong had remarked on Schacht’s tendency to “get into political matters which would be [better] left alone by the head of the Reichsbank,” and Norman had gently tried to warn him to be more discreet. But it always seemed that Schacht had enough of an instinct for survival to avoid rocking the political boat too hard. Now, however, he became increasingly indiscreet and strident in his remarks.

One episode in particular brought his confrontation with the government to a head. At a cabinet meeting in June, Schacht launched into a vituperative attack, which left the ministers speechless with outrage. It was typical of the man that having insulted the cabinet, he was not content to leave ill enough alone. He was overhead bragging to the other guests at a private dinner that evening about how he had taken on the politicians. He revealed confidential details of the whole cabinet debate, made insulting comments about individual ministers, dismissed the finance minister as incompetent, and called for his resignation. Even his old supporter Stresemann agreed that Schacht’s behavior was a problem and that his constant and naked self-aggrandizement was becoming intolerable. It was but a small harbinger of things to come.

IMPERIALIST DREAMS

The miracle of the franc’s recovery may have been good for France but imposed its own financial strains upon Europe. The money drawn back to the franc on Poincaré’s coattails continued to flow in throughout the spring and early summer of 1927, mostly out of sterling. The Banque de France, in an effort to prevent this flood from pushing the franc to uncompetitive levels, kept buying foreign currencies, and by the end of May, had accumulated a foreign exchange war chest totaling $700 million, half of which was in pounds.

The rebound in the financial position of the Banque took Norman completely by surprise. He had never made a secret of his disdain for the French and their way of doing things—the constant intrigue and infighting, the chronic instability of governments, the overweening role of the state. During 1924, and especially 1925 after Britain had gone back to the gold standard, he had indulged in a certain schadenfreude at France’s financial travails. As the franc plunged, he confessed to Strong that the position of France, held up since the war as an example of the advantages of unorthodox financial management, made him “smile.”

Moreau, for his part, reciprocated the enmity. From his very first few days in office, he had been irritated by the presumption of Anglo-Saxon bankers that the French would be unable to stabilize the franc without their help. Much of his animosity was specifically directed against Norman, a reflection of a wider and more pervasive suspicion toward the governor of the Bank of England throughout Europe, except in Germany. Strong had picked up on it in the summer of 1926, noting that Continental financial officials “seem to be afraid of him and somewhat distrust him.”

With the Banque flush with hard currency and the franc stable, Moreau was determined to use his newfound independence to reestablish French financial prestige. He had not forgotten that before the war Paris had been the second most important money center in the world.

His first opportunity to assert himself on the international stage came in connection with a loan to Poland, which had regained its independence after the war and was historically seen as a partner of France in containing German power. In late 1926, a consortium of central banks, including the Federal Reserve, the Bank of England, the Reichsbank, and now the Banque de France, put together a financial package to help stabilize the Polish zloty. When Norman tried to grab the lead role, the French objected strongly to what they saw as a British attempt to muscle in on France’s traditional sphere of influence in Eastern Europe. For Moreau it was one more example of Norman’s “imperialist dreams.”

In February 1927, the Banque also tried to renegotiate terms on a loan from the Bank of England dating back to 1916 and secured by French gold. As usual when it came to the French, Norman was unhelpful, putting numerous obstacles in the way. Frustrated by Norman’s obstructionism, the Banque surprised the Bank of England in May by announcing that it would pay off the loan and take back the $90 million of gold reserves pledged as security. The next month, without even consulting the British, the Banque issued instructions that $100 million of its sterling balances be converted into gold. The effect would have been to drain almost $200 million of gold out of the Bank of England’s reserves. Both actions came as a shock to Norman. Moreau’s demands were “capricious” and would “menace the gold standard,” he complained to Strong.

Norman and Moreau met repeatedly during the first few months of 1927—in Paris in February, in London in March, and at the Terminus Hotel in Calais in early April—to try to resolve some of these issues. Though the tensions between them never quite broke into open conflict—they were careful to maintain a frosty politeness in all their dealings—their mutual dislike and mistrust were apparent. Moreau had clearly not forgotten how unwill

ing Norman had been to come to the aid of France at the height of the previous year’s crisis, a sharp contrast to the way the Englishman had bent over backward to help Schacht and the Germans in 1924.

The gold standard did offer a traditional safety valve for dealing with shifts in gold holdings. The shrinkage of reserves in the country losing bullion was supposed to lead to an automatic contraction in credit and a rise in interest rates, which would thereby shrink its buying power, while attracting money from abroad. Meanwhile, the country gaining gold would find its credit expanding and its capacity to spend increasing. These “rules of the game,” as Keynes called them, were designed to set in train automatic gyroscopic forces to balance out the shifting tides of gold among countries.

But in early 1927, the Bank of England and the Banque de France could not agree how to apply these rules. A conference was arranged and on May 27, Norman revisited the Banque. It was a very different meeting from that first disastrous encounter a year earlier. Now it was Norman’s turn to plead for help. He claimed that it would be politically impossible to tighten credit in Britain, that “he could not do so without provoking a riot.” Arguing that most of the money flowing into France came from speculators betting that the franc would have to appreciate, he pressed Moreau to cut interest rates.38