Lords of Finance

In the last few days of the war, his only son, Jens, had been captured by the Russians and was never heard of again, one of the countless German soldiers who disappeared in the death march of prisoners on the Eastern front. Destitute at the age of seventy-three, Schacht started a new life and a new career as an independent economic consultant and became an adviser to the governments of Indonesia, Egypt, and Iran. He died, substantially prosperous, in 1970, aged ninety-three. To the end he refused to concede that he had ever done anything wrong.

THE WAR MADE for strange bedfellows. The other member of the quartet, Émile Moreau, had become president of the Banque de Paris et des Pay-Bas after retiring as governor of the Banque de France in October 1930. In 1940, after the fall of France and the German occupation, Moreau was forced out by the Vichy regime for being too sympathetic to Britain—the ultimate irony for a man who at the peak of his career had done his best to undermine British dominance in finance.

Horrified at the social and ideological conflicts by which France was riven in the 1930s, Moreau became progressively more disillusioned with French republican politics and parliamentary democracy. He could not support the left, and the right was becoming more fascist by the day. Instead, he became a royalist—a quixotic commitment. Royalists were a fringe group—one poll found less than 6 percent of the French believed that the monarchy had any role whatever to play in the politics of the country.

In 1935, he took on the position of secretary to the pretender to the throne, Jean d’Orléans, duc de Guise, great-grandson of Louis Philippe, the liberally inclined king of France from 1830 to 1848. The law of exile passed in 1886 prohibited the heirs of former French dynasties from entering France, and Moreau acted as the duke’s liaison in France. In 1940, when Jean d’Orléans died, his son Henri, comte de Paris, succeeded as pretender. After the fall of France that year, Henri tried to provide a bridge between the Free French and the collaborators at Vichy and for a brief moment there was even talk that the monarchy might return. Though Moreau did his best to promote the idea, nothing came of it and the comte de Paris returned to his place on the social pages of Paris Match.

In 1950, the law of exile was finally repealed and the comte de Paris was allowed back to France. Moreau lived long enough to receive his beloved sovereign at his home in Paris, which subsequently became the secretariat for the comte’s activities. Moreau died that November.

WHILE HJALMAR SCHACHT was propelled back into power during the 1930s, his friend Montagu Norman had to content himself with a much diminished role in British and international financial affairs. In October 1933, he crowned his annual Mansion House speech by quoting an old Arab proverb: “I console myself with this thought, that the dogs bark but the caravan moves on.” In the old days it would have been viewed as one of those enigmatic Zen-like pronouncements that evidenced the governor’s superior wisdom. Instead, it now provoked an outcry. The implication that his critics were no more than barking dogs unleashed a torrent of indignation directed against the entire banking and financial establishment. “They were wrong about reparations from Germany and its effects. They were wrong when they advised Mr. Churchill about the gold standard, and wrong when they pled in 1931 that the resuspension of the standard would knock the bottom out of civilization.” He was increasingly viewed as an “old gentleman complaining that things were not what they were.” Despite all this, he was reappointed governor for an additional eleven years—perhaps because with his authority so diminished there was little damage he could do.

In the late 1930s, he became associated with the party of appeasement. Though he was not part of the whole Cliveden set around Nancy Astor, finding the whole atmosphere of political gossip and scandal distasteful, he shared their belief that another war would just be too catastrophic to contemplate and was willing to do almost anything to avoid it. Appeasement was still then a respectable word—it had not yet come to imply cowardice or self-deception. Indeed, it was considered to be not simply a pragmatic policy but a moral one as well. In the wake of the carnage of the First World War, pacifism was much in vogue, and German anger and bitterness at the Treaty of Versailles were viewed as justified. In Norman’s case this was reinforced by his preference for the diligent Germans over the treacherous French and for his admiration of Schacht, and during the early years of Nazi rule, even the achievements of Hitler—he is said to have told a Morgan partner that “Hitler and Schacht are the bulwarks of civilization in Germany.”

In the last months of 1939, as war seemed increasingly likely, he lamented to the U.S. ambassador in London, Joseph Kennedy, “If this struggle goes on, England as we have known her is through. . . . Without gold or foreign assets, England’s trade is going to be forced to narrow itself more and more. . . . The end is likely to be that . . . the Empire will contract in power and size to that of other nations.”

During the 1930s, he and Schacht maintained their close friendship—they would meet regularly at the monthly BIS meetings in Basel. In January 1939, he visited Berlin to attend the christening of Schacht’s grandson, who was named Norman in his honor. The Foreign Office tried to con

vince him that, in the circumstances, such a visit was undesirable, but Norman insisted on going. It was to be their last meeting. Once their two countries were at war, they could not communicate, though there were constant rumors even in official circles that they stayed in touch. After the war, while Schacht was in prison, Norman sent him food parcels. But when the German tried to come to Britain in 1950 to visit his old friend, he was denied a visa.

In 1944, during a bad fog, Norman tripped over a large granite stone at his country cottage, and after grazing his leg, developed an infection that spread to his brain. Though he recovered after an operation, his health was now seriously impaired and he was finally persuaded at the age of seventy-three to retire as governor. He was elevated to the peerage that year as Lord Norman of St. Clere, the name of the village in Kent where his grandfather’s house was located and which he had inherited from his uncle. He spent most of his last years there as an invalid. He died in 1950.

Norman himself provided the most poignant assessment of his own career. In 1948, he wrote: “As I look back, it now seems that, with all the thought and work and good intentions, which we provided, we achieved absolutely nothing . . . nothing that I did, and very little that old Ben did, internationally produced any good effect—or indeed any effect at all except that we collected money from a lot of poor devils and gave it over to the four winds.”

AFTER 1931, As Norman’s star fell, that of Maynard Keynes rose. Before the breakup of the gold standard Keynes had been the maverick. After the rupture he was increasingly acknowledged to have been right not simply about the gold standard but about almost every one of the battles in which he had been engaged during the previous decade. German reparations had now been canceled; France and Britain had defaulted on war debts; and the two major central banks, the Bank of England and the Fed, had embraced a policy of keeping money deliberately cheap.

With the world economy still stuck in the Depression, Keynes took a step back from public life and began work on a new theoretical book—an attempt to understand the causes of mass unemployment. Some of the driving forces behind the Depression, such as the collapse in Germany, could be explained by country-specific factors, for example, reparations and the overhang of foreign debt. But the United States had suffered none of these problems—it was a creditor country and had ample gold reserves. That it too had been hit by a downturn as deep, in some respects deeper, as that in Europe remained a mystery. Keynes wanted to understand how an economy could get stuck in such a severe slump and what might prevent conventional corrective forces—cuts in interest rates, for example—from working.

He drew on many of the same themes that had informed much of his previous work—the pervasive effects of uncertainty, the ways in which the financial system could short-circuit the normal operations of the economy, the inherent instability caused by fluctuations in confidence. The book was not completed until late 1935, and was published, in February 1936, as The General Theory of Employment, Interest, and Money. By the time it came out, Britain, the United States, and Germany were all on the road to recovery and the book itself did not have much impact on immediate government policy. Nevertheless, it was to be Keynes’s masterpiece. While it was not universally accepted and indeed remained bitterly disputed for many years, it transformed the understanding of the modern monetary economy and still today provides the foundation for much of the government and central banks’ management of the system.

A year after The General Theory was published, in the spring of 1937, Keynes suffered the first of his many “heart attacks.” He was diagnosed with a chronic cardiac condition caused by a bacterial infection of the heart valves. For the next three years he was almost an invalid. In 1939, he fell into the hands of a Dr. Janos Plesch, a Hungarian Jewish émigré, who, according to Keynes, was a cross between a “genius” and a “quack.” In addition to some highly unorthodox protocols—three-hour sessions of ice packs placed on the chest or Dr. Plesch jumping up and down on his patient as he lay in bed—the doctor put Keynes on a course of the newly discovered and much in vogue sulfa drugs, the first and only effective antibiotic in the years before the large-scale use of penicillin. Though his heart condition was not completely cured, under the care of the eccentric Dr. Plesch—whom Lydia nicknamed “The Ogre”—Keynes was at least able to return to work.

During the 1930s, Keynes’s speculative activities made him a rich man. After losing 80 percent of his money when commodity prices collapsed after 1928, he had ended 1929 with a portfolio of under $40,000. He shifted his strategy from short-term speculation to long-term investment and at the lows of the Depression put together a concentrated portfolio of a select number of British and American equities. Convinced that Roosevelt would succeed in reviving the U.S. economy, Keynes used margin to leverage his portfolio by as much as two to one. By 1936, his net worth was close to $2.5 million—the equivalent today of $30 million. Though the bear market of 1937 more than halved this, by 1943 it had recovered to $2 million.

By the late 1930s, Keynes was the most famous economist in the world and a pillar of the British establishment. He was elevated to the peerage in 1941, as Lord Keynes of Tilton, and much to the amusement of his bohemian Bloomsbury friends, was to be found regularly in attendance at the House of Lords. He was even invited to be a director of the Bank of England by his old opponent, Montagu Norman. While they continued to disagree—“I do enjoy these lunches at the Bank: Montagu Norman, always absolutely charming, always absolutely wrong,” he remarked after one of his regular weekly meetings—it was now Keynes’s ideas that were in the ascendancy.

When the Second World War broke out in Europe, Keynes became an unpaid economic adviser to the chancellor of the exchequer. Within a short time he was Britain’s principal wartime economic strategist. Determined to avoid a repeat of the mistakes of the First World War, which had largely been financed by printing money, Keynes designed the framework for paying for this war without as much recourse to inflation. He also acted as the principal negotiator for Britain with the Americans over the scope, terms, and conditions of Lend-Lease.

In 1942, he turned his attention to planning for the postwar world. After the First World War, central bankers had tried to re-create the golden age before 1914, to which they looked back so nostalgically. Keynes, in putting together his plan for a new international monetary system, had no such illusions—no one, least of all him, looked back except with horror to the chaos of the twenties and thirties.

In developing his ideas for the postwar world, Keynes sought to create an international financial system based like the gold standard on rules while tempering its rigidity. His plan called for currencies to be “pegged but adjustable.” In contrast to the gold standard, under which currency values were supposed to be immutable fixed points, countries would be allowed to alter the value of their currencies when their economic circumstances changed. He was determined to avoid the need for the sort of straitjacket policies of the twenties and thirties when Germany and Britain had been forced to hike interest rates and create mass unemployment to protect currency values that were in any case unsuitable.

A second element of the plan was an international central bank. In order to avoid the chronic shortage of gold reserves that had prevented the global financial system from functioning smoothly between the wars, Keynes proposed creating an institution that would lend money to countries in need on a temporary basis, rather like an overdraft facility at a bank.

Luckily for Keynes, the Americans began working independently on a similar conception. The architect of the U.S. plan was Harry Dexter White, the assistant secretary for international affairs at the U.S. Treasury. White had been born in Boston in 1892 of Lithuanian parents who had fled the czarist pogroms. Educated at Stanford and Harvard, he had eventually joined the Treasury in 1934 as a New Dealer and enjoyed a meteoric rise within the department through a combination of hard work, intelligence, and flattery in the right places.

Short and stocky with a round fac

e, rimless glasses, and fleshy lips topped by a trim mustache, White was an unprepossessing man with few friends. He seemed unable to resist being overbearing and rude in his professional dealings, even to his colleagues, and he has variously been described by those who knew him as “the unpleasantest man in Washington,” “a son-of-a bitch,” and “an intolerable human being.” Keynes, who was remarkably able to put up with people’s foibles and idiosyncrasies, wrote that “he has not the faintest conception of how to behave or observe the rules of civilized discourse.” But even though White was often overtly anti-British, Keynes grew to develop great respect for his incisive intelligence, his single-mindedness, and his drive.

White also happened to be a Soviet agent, originally recruited in 1935 to the same spy ring that included Whittaker Chambers and Alger Hiss. During the war, along with several colleagues at the Treasury’s Division of Monetary Research, whom he talked into the cause, he did much to support the Soviet war effort and beyond. As the principal Treasury representative on interagency committees dealing with international affairs, White handled more pieces of classified information than any other single official in the administration, including the president, and passed on secrets about the whole range of U.S. financial policies to Soviet intelligence, including U.S. strategy on financial aid to the USSR. He helped the Communist cause in China by delaying payments of American aid to Chiang Kai-shek, and arranged for the U.S. government to furnish the Soviets with a duplicate set of printing plates of the currency to be issued under the Allied occupation of Germany—thereby allowing the Soviets to finance their share by printing American money with American-supplied plates. When these activities eventually came to light after the war, he insisted that he had not been a Soviet agent—he was neither a member of the Communist Party nor had he accepted any money from the Soviets—but had only been acting in the best interests of the United States, believing that the United States and the Soviet Union, allies at that time, had closely aligned objectives. But in 1942, no one was yet aware of White’s secret life.

As originally conceived, the British and American plans did differ in emphasis. Keynes’s plan was more ambitious in size and scope. Remembering the acute lack of liquidity during the 1920s, he wanted something closer to a world central bank with the power to create an international currency; White wanted an institution more like an international credit cooperative that would give countries access to loans, the size of which would be constrained by the amounts paid in by the other member countries. Keynes wanted the fund to be $26 billion, while White, conscious that the United States would be paying much of the bill, wanted to limit it to $5 billion; they finally compromised on $8.5 billion. Keynes also wanted to introduce a mechanism for disciplining countries that unfairly cheapened their currencies and accumulated excessive amounts of the world’s reserves without recycling them, as France had done in the twenties and thirties. But the United States, fearing that in the aftermath of the war it might find itself flooded with gold, and thus be accused of underpricing its currency, would not agree.

After two years of negotiations between Keynes and White, the differences were ironed out—largely in favor of the more powerful Americans. By 1944, with much of the design work done and with the two principal Western Allies in a position to present a united front, the United States felt ready to invite some forty-four countries to a conference to discuss reconstructing the postwar international monetary system.

The United States chose to host the gathering at the Mount Washington Hotel at Bretton Woods in the White Mountains of New Hampshire. With its rural seclusion, mild summer weather, and cool high-country air, it was a perfect site for such a meeting. Built in 1902 to cater to rich Bostonians and New Yorkers escaping the summer heat of the East Coast, the hotel looked like a great Spanish castle, with white stucco walls, two large castellated turrets, and a red roof. The interior was decorated in a rich Victorian style with Tiffany stained-glass windows. Though the hotel had fallen upon hard times in the 1930s, a victim of the Depression, it had recently been bought and refurbished by a syndicate of Boston-based investors. Moreover, unlike most large hotels in the White Mountains, which did not allow Jews—inconvenient for a conference hosted by Treasury Secretary Morgenthau, himself Jewish—the Mount Washington had no such restrictions on guests.

The conference opened on June 30, 1944. In contrast to the many international summits of the interwar period, which had been characterized by a corrosive atmosphere of mistrust, Bretton Woods was a collegial, almost jovial, affair. “The flow of alcohol is appalling,” wrote Keynes. With 750 delegates, and even more assistants, it was, according to Lydia Keynes, a “madhouse with most people . . . working more than humanly possible.” Committees met all day, broke for evening cocktails and rounds of dinner parties, reconvening thereafter till 3:00 a.m., only to resume at 9:30 the next morning.