Lords of Finance

Across Europe some 11 million men lay dead, including 2 million Germans, 1.4 million Frenchmen, and 900,000 British. Another 21 million had been wounded, very many maimed for life. Nine million civilians had perished, mostly of hunger, cold, or lowered resistance to the monstrous epidemics. But for all the horrendous human carnage, the actual material destruction of the war was limited to a long but narrow strip of northern France and Belgium. The costs of rebuilding the mines, farms, and factories destroyed on the Western Front amounted to only $7 billion.

Most European economies had contracted—Germany’s and France’s by 30 percent, Britain by less than 5 percent—as men and capital were siphoned off, as factories diverted to producing arms, and livestock slaughtered. The war had been a boon for the United States. Entering late, it had suffered fewer casualties, while the massive expansion in exports of foodstuffs, raw materials, and war supplies to its allies had provided a gigantic boost to its economy. Before the war, its GDP of $40 billion per annum was roughly the equivalent of that of Britain, France, and Germany combined. By 1919, it was more than 50 percent larger.

The most pernicious and insidious economic legacy of the war was the mountain of debt in Europe. In four years of constant and obsessive battle, the governments of Europe had spent some $200 billion, consuming almost half of their nations’ GDP in mutual destruction. To pay for this, they had raised taxes, borrowed gigantic amounts of money both from their own citizens and from the Americans, and simply printed more and more currency. By the end of the war, Europe was awash with the stuff—the money supply in Britain doubled, in France it tripled, and in Germany, the worst culprit, it quadrupled. Though the U.S. money supply also doubled, this was less because of inflationary war finance, which it relied upon to a much smaller extent than the Europeans, and more because of the massive influx of gold. This set the pattern of the next decade: Europe struggling with the legacies and burdens of the past, the United States wrestling with the excess bonuses of its good fortune.

. . .

ON THE DAY the kaiser fled Germany, Schacht was in Berlin. That morning, although the kaiser had not actually abdicated—and would only formally do so two weeks later from his sanctuary in Holland—the chancellor, Prince Max of Baden, a distant cousin of the kaiser’s, announced preemptively that the emperor had gone. The city was like an armed camp, with barbed-wire entanglements and overturned vehicles blocking the streets. Revolution was in the air. A general strike had been declared, and thousands of workers and soldiers paraded through the center of town demanding a republic.

Coming out of the Hotel Esplanade near the Potsdammerplatz at about noon, Schacht was confronted by a convoy of Red soldiers packed in the back of trucks driving across the square. At the station, a machine-gun company was positioned for action. No one seemed to be in charge. To find out what was going on, and to avoid being caught in the mob, Schacht and his companion headed north toward the Reichstag, which they found deserted. A little while before, Philipp Scheidemann, a leader of the Social Democrats, had given history a push by coming out onto the balcony and proclaiming a republic to the crowds below, although no such measure had been passed by the Reichstag. Thus was born the new Republic of Germany. The mobs had then headed off to the emperor’s abandoned palace, the Berliner Schloss.

Schacht would remark later that there was a certain distinctively German order amid all the chaos o

f that dramatic day. The imperial dynasty might have fallen and the political system of Germany overturned, but ordinary people went about their everyday business, trying to ignore the demonstrations. The trams did not stop running; electricity, water, and gas supplies were not interrupted; and almost no one was killed—the casualties that day amounted to fewer than fifteen dead. Even when shots were randomly fired near the palace, the fleeing crowds remained so instinctively law abiding that they obeyed the signs to keep off the grass.

Across the country, workers’ and soldiers’ councils sprang up and took over the functions of the local authorities. On November 10, Schacht was elected, much to his amusement, to his local community council. After issuing a proclamation welcoming the revolution, it met precisely once more.

The next few weeks were a time of terrible turmoil. Although the November revolution was largely peaceful, by the first weeks of January, violence had broken out and Berlin was wracked by strikes, demonstrations, and fierce street fighting between the Spartacist revolutionaries and the army. It seemed to Schacht then, as to very many others, that Germany was the front line in a grand battle across Europe against the forces of Bolshevism. Going home through the darkened city, he could hear the rattle of machine guns. On one occasion, he was stuck in the Hotel Kaiserhof as a gang of Spartacist demonstrators clashed with a group of government supporters outside. A hand grenade burst among the crowd, scattering it in all directions and leaving one man dead in the street below. The “fate of Germany hung by a thread,” he recalled many years later.

It was also, however, a time of opportunity for middle-class men of talent like Schacht. The collapse of empire and an army in defeat shattered the old order. Within forty-eight hours of the kaiser’s flight, twenty-five dynasties had abdicated within Germany. The Junkers who had dominated the country were discredited, their power swept away.

Initially Schacht thought he might find his opportunity in politics. Before the war, he had been a member of the Young Liberal Association, an arm of the National Liberals, a nationalistic though not very liberal party, which had enthusiastically supported the kaiser’s expansionist policies. In 1901, he had even declined an offer from the party to stand for election to the Reichstag, knowing that power in the Kaiserreich was reserved for the nobility, especially the Prussian nobility, and that a man of his background could not aspire to political office of any consequence. But with the new president of the republic himself a former saddler and the new chancellor a former journalist, it seemed that the old caste system had now disintegrated.

On November 10, the republic only a day old, Schacht was invited to a meeting and asked to help found a new moderate party, the Deutsche Demokratische Partei (DDP), which would oppose alike the socialism of the left and the nationalism of the right. The DDP itself would briefly do very well, becoming a party of academics, journalists, and businessmen, many of them Jewish, and attracting such luminaries as Max Weber and Albert Einstein. In the 1919 election, it vaulted into third place in the Reichstag, after the Socialists and the Catholic Centrum Party.

But Schacht’s brief flirtation with democratic politics was not destined to be very successful. With his financial and business connections, he played an important role in raising funds for the DDP, and helped write the party platform. But lacking the common touch that appealed to voters and too proud to forge the necessary personal alliances, he was never able to persuade a constituency to select him as a candidate. He was also viewed with some suspicion within the leadership, whose leading light, Theodor Woolf, editor of the Berliner Tageblatt, regarded him as just one more opportunist trying to hitch a ride on the cause of democracy, with little commitment to the new republic.

For his part, Schacht would become steadily disillusioned with the party, formally breaking with it in 1925, when it voted to support the elimination of privy purses to the deposed ruling families. In the late 1920s, the DDP, like all German centrist parties, would shrink into insignificance, squeezed from both ends of the political spectrum, particularly from the right. By then, though, Schacht had moved on to bigger things.

It was perhaps not surprising that he had such little success in electoral politics. He was simply a hard man to like. People found him cold and unemotional, overly calculating and shrewd. By his own admission, he came across as “hard . . . callous . . . and buttoned down.” It was partly his appearance. One acquaintance remarked, “He managed to look like a compound of a Prussian reserve officer and a budding Prussian judge who is trying to copy the officer.” His physically distinctive characteristics—the crew cut, the rigid bearing, the stiffly upright posture, the perpetual aggressive scowl—would, after he had become famous, make him a popular target for cartoonists.13 But more than his appearance, it was his character traits—his extreme vanity, his tendency to talk about himself and his achievements, his inflexibility, his caustic wit laced with cynicism—that put people off.

He displayed an astounding self-confidence. This was not a façade, but a reflection of his astonishing sense of innate superiority. He was in many ways a classic lower-middle-class overachiever. Having grown up poor, in a society where class and family background were still overwhelming factors, he had learned the hard way that in a hostile world he could rely only on himself. Whatever success he had achieved, he owed to himself alone—his own formidable intelligence and impressive capacity for hard work. “Nothing seems sacred to him except his belief in himself, and this is so overwhelming as no longer to seem personal. He makes the most exaggeratedly egotistical statements without his hearer being aware of any personal boasting,” wrote one observer. And unlike some men on the make, who cloak their cynicism behind a veneer of charm, he displayed no particular desire to be liked. Much later, when his true colors had been revealed, one politician would write, “He was a man apart, unique, solitary, without followers or any coterie of partisans. He had no friends, only enemies.” But no one could dispute his self-discipline, energy, and unrelenting drive.

THE problem of German reparations—that is, how much of the cost of the war the victors, particularly Britain and France, could demand from Germany—was to haunt the financial landscape of Europe for the next twenty years. The war may have ended, but the conflicts did not stop. At the Paris Peace Conference, which opened in January 1919, no other issue “caused more trouble, contention, hard feeling, and delay,” recalled Thomas Lamont, one of the American negotiators.

Everyone arrived in Paris expecting France, which had suffered the worst civilian damage and heaviest casualties, to be the strongest advocate of punitive reparations against Germany. Instead, it turned out to be Britain. A strong liberal contingent within the British Treasury had developed peace plans based on a moderate settlement. But in the months leading up to the Peace Conference, the press, led by the Times and the Daily Mail, launched a cheap jingoistic campaign in favor of a harsh settlement and, during the December 1918 election campaign, the slogan that the Allies should “squeeze Germany until the pips squeak”14 struck a chord with the electorate.

The British prime minister, David Lloyd George, pandering to public opinion, appointed to the British delegation to the Reparations Commission in Paris three of the most hard-line advocates of a punitive settlement: William Hughes, the doggedly aggressive prime minister of Australia; Lord Sumner, a law lord with a reputation for being “stony-hearted”; and Lord Cunliffe, the boorish and irascible former governor of the Bank of England.

Cunliffe was supposed to be the financial brains of this trio. Although he had been a successful banker and even governor of the Bank of England, he retained his ignorance of the most basic rudiments of economics. In the weeks before departing for Paris, he recommended that Germany be required to pay $100 billion in reparations. It was an astounding figure. Germany’s annual GDP before the war had been around $12 billion. To burden it with a debt eight times its annual income would have been the height of madness. The interest on that debt alone would have consumed 40 percent of its GDP. Though Cunliffe was willing to admit that the basis for the calculation was “little more than a shot in the dark,” which he had been pressed to arrive at “between a Saturday and a Monday,” he speculated that perhaps he had even underestimated Germany’s capacity to pay, and that if anyone argued that Germany could pay $200 billion, he “would not disbelieve him.”

France’s desire for reparations arose from its own sense of vulnerability. Twice invaded by Germany in the last fifty years, France was consumed by the fear of a German revival. Germany was more aggressive, more successful, younger, richer, and more dynamic. It was also 50 percent larger—sixty million Germans versus forty million Frenchmen. Though the French prime minister, George Clemenceau, never actually made the statement attributed to him by German propaganda, that the fundamental problem was that there were twenty million too many Germans, it was clearly in his mind. France was therefore determined to weaken Germany by every means possible—by disarmament, by slicing off as many parts of its neighbor as it could, and by extracting reparations.

During the negotiations in Paris, it became apparent that to the French, money was subsidiary to security. While the French finance minister, Lucien Klotz, kept pushing for high reparations, Clemenceau, the head of the French delegation, treated him with contempt, calling him “the only Jew who knows nothing about money” and marginalizing him along with all the other French cabinet members in the negotiations.15 Clemenceau tried to be flexible on reparations as a bargaining chip with the Americans in return for security guarantees along their bo

rder with Germany. Only when the guarantees proved to be inadequate did he revert to demanding high reparations.

It fell to the American delegation, which included the famous stock market speculator Bernard Baruch; Thomas Lamont of J. P. Morgan and Co.; and a young aide, the thirty-one-year-old John Foster Dulles, to act as the advocates for moderation. They adopted the position that a large reparations bill was incompatible with the initial terms of the armistice agreement under which Germany had laid down its arms. Moreover, they argued that punitive reparations would act as a millstone, not simply around Germany’s neck but around that of all Europe.

The negotiations over reparations dragged on for ten weeks. By the end of March, they were still at an impasse. The British delegation on the Reparations Commission, led by Lord Cunliffe and Lord Sumner, who were by then nicknamed “The Heavenly Twins” because they were always together and insisted on such outrageously high figures, would not agree to a settlement of less than $55 billion.

The Americans preferred a settlement in the region of $10 to $12 billion and would go no higher than $24 billion. Although President Wilson was, for the most part, outnegotiated and outfoxed by the other leaders in Paris, on this point the American delegation stuck to their guns and refused to agree to reparations that exceeded these limits.

Several attempts were made to break the deadlock. Lloyd George himself applied his considerable political skills, but Cunliffe and Sumner refused to budge. Lloyd George’s maxim was never to enter into “costly frontal attacks, either in war or politics, if there was a way round” and he had originally appointed them in the hopes of bamboozling them into endorsing a moderate settlement. Now he found himself captive to their intransigence. His solution was to do an end run around them by proposing, at the last minute, that the Peace Conference defer the assessing of reparations to a later date, delegating it to a specially appointed body, which would be required to make its recommendation no later than May 31, 1921. He hoped that by that time, passions would have cooled, the political climate in Britain would have changed, and a more reasonable settlement could be arranged.

IN THE FIRST few months of 1919, as the Peace Conference was getting under way, Schacht, lulled like many other Germans by the high-minded pronouncements of Woodrow Wilson, still expected a generous peace. He believed that the real problem would be the overhang of debt after the war, which would lead to a general European bankruptcy. He talked naively of a grand plan for reconstruction. The great natural resources of Russia would be opened up for exploitation by a unique partnership between Great Britain and Germany, Britain providing the leadership and capital, Germany the manpower and engineering skills.

In May 1919, when the terms of the peace treaty were finally unveiled to Germany, the whole country exploded in shock and anger. It was to lose one-eighth of its territory. Alsace and Lorraine were to revert to France; the Saar coal mines were also ceded to France; North Schleswig was to be subject to a plebiscite as to whether it wished to become part of Denmark; Upper Silesia, Posen, and West Prussia went to Poland. Both banks of the Rhine were to be permanently demilitarized; the army was to be cut to no more than one hundred thousand men, the navy was to be dismantled, and the merchant marine distributed to the Allies. Though the Allies had delayed fixing the size of reparations, it was widely known that the amounts being mooted were gigantic. In the interim, Germany was required to pay an initial $5 billion before May 1, 1921. A new Reparations Commission, to be based in Paris, was created specifically to determine Germany’s liability and to supervise its collection. The worst humiliation was Article 231, the “article of shame,” which branded Germany as solely responsible for the war.