Luther was received at the Gare du Nord by Governor Moret of the Banque de France. On Friday, July 10, he lunched at the Banque with the regents, the two most powerful of whom, François de Wendel and Baron Edmond de Rothschild, both resolutely anti-German, turned down the idea of a credit from the Banque and told Luther that his only hope was a loan from the government. That afternoon and into the evening, the Reichsbank president shuttled back and forth from ministry to ministry, missing one train after another for Berlin. The French government informed him that it might be prepared to lend as much as $300 million, provided that Germany abandon the customs union with Austria, suspend the construction of two new pocket battleships, raise interest rates sharply to halt the flight of capital abroad, and “orient itself definitely towards a policy of democracy and pacifism” by banning public demonstrations by Nationalist organizations.
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nbsp; Merely president of the Reichsbank, Luther did not have the authority to agree to these terms. On Saturday, July 11, he boarded an airplane at Le Bourget for Berlin. “Not since those days of July 1914 when the World War was brewing have potent rumors been so thick,” wrote Time magazine of that weekend. The German cabinet convened at 8:00 p.m. and debated into the early hours of the morning. Every major German newspaper fulminated against French “political blackmail” and warned that this would only increase the “bitterness of the German people” toward France. Rumors circulated that President Hindenburg would resign if the government knuckled under. An even more startling rumor came over the wires. The cabinet was considering nationalizing all private industry, banks, shipping, and trade.
That Sunday, the German cabinet announced that it was rejecting the French offer. The French cabinet, which had dispersed for the long Bastille Day weekend—Laval to his country cottage, Foreign Minister Briand fishing on his farm at Cocherel, Finance Minister Flandin at the beach in Brittany—was summoned back to Paris. They heard an impassioned plea for reconsideration from the German ambassador, Dr. Leopold von Hoesch. Did they really want to provoke a revolution in Germany? Though Laval agreed that “they had come to a decisive point in world history,” he was unwilling to offer anything new.49 Paul Einzig captured the view of many in Europe at that point when he later wrote, “On the ruins of the wealth, prosperity, and stability of other nations, France has succeeded in establishing her much desired politico-financial hegemony over Europe.”
The American ambassador in Berlin, Frederick Sackett, cabled to Washington that unless Germany received $300 million immediately, it would declare national bankruptcy and default on the $3 billion it owed American banks and investors. George Harrison convened an emergency meeting at the New York Fed with Under Secretary Mills and the two most knowledgeable men on Germany, Owen Young and Parker Gilbert. They concluded it would be throwing good money after bad, when the United States had already contributed $300 million by its moratorium on war debts.
Another long Cabinet meeting in Berlin ensued that evening. To the surprise of most attending, Schacht was invited and seated next to the chancellor. By a strange quirk of fate, the English and American editions of his book The End of Reparations were to be published in London and New York the very next day. The book was a long assault on reparations, the policy as Schacht described it of “bleeding Germany white” and “destroying Germany’s credit.” One excerpt in particular was heavily quoted in British and American newspapers: “Never has the incapacity of the economic leaders of the capitalist world so glaringly demonstrated as today. . . . A capitalism which cannot feed the workers of the world has no right to exist. The guilt of the capitalist system lies in its alliance with the violent policies of imperialism and militarism. . . . The ruling classes of the world today have as completely failed in political leadership as in economic.” Such criticism from “the head of one of the world’s most powerful capitalist organizations” was somewhat unusual, commented the New York Times.
Speaking with his usual self-assurance, Schacht urged the cabinet to suspend payments to the foreign creditors of Danatbank, forcing them to bear the consequences of their foolhardy and unsound lending practices. The government, believing that this would completely destroy any hope of a rescue from abroad, decided not to take his advice.
The cabinet meeting finished at 2:00 a.m. Later that morning Luther boarded yet another plane, this time for Basel, to make one last desperate plea to the central bankers gathered at the BIS. After being closeted in conference for twelve hours, they emerged to announce that no new credits would be forthcoming. At 11:20 p.m. Basel time, Harrison got through to Norman. The Englishman sounded “tired, disgruntled and discouraged.” The problem was just “too big for the central banks,” he reported. The only solution was for the whole structure of war debts and reparations that had weighed down the world for the last dozen years to be swept away.
On the morning of Monday, July 13, as Luther was setting off for Basel, the Danatbank had failed to open. On the locked doors of all its branches was posted a government decree guaranteeing its deposits. At a press conference, Jacob Goldschmidt revealed that the bank had lost 40 percent, some $240 million, in deposits over the last three months, about half of which were to foreigners. He blamed the run on wild rumors fueled by anti-Semitic agitation in the Nationalist press.
The Reichsbank, hoping that the impact might be contained, kept the rest of the banking system open that day. By lunchtime, branches of every bank in the country were besieged. The leading banks restricted withdrawals to no more than 10 percent of a depositor’s balance. In the Berlin suburbs, savings banks were so overwhelmed that that they closed under heavy police guard. In Hamburg, sporadic riots were blamed on Communist agitators. That evening President Hindenburg proclaimed a two-day bank holiday. The authorities hoped that a short breathing space would allow people to come to their senses. In the event, banks throughout Germany remained closed—except for the most essential business of paying wages and taxes—for another two weeks, during which commercial life in the country was brought to a virtual standstill.
All the banks in Hungary were closed for three days. In Vienna, another of the large banks shut its doors. In Danzig and Riga, in Poland, Yugoslavia, and Czechoslovakia, banks were suspended. German tourists across Europe, even in fashionable sophisticated cure resorts like Marienbad and Carlsbad, were stranded when no hotels or shops would accept their marks. The German government issued one decree after another. Despite the massive unemployment, interest rates were hiked to 15 percent just to keep money in the country. All payments on Germany’s short-term foreign debt were suspended. All foreign exchange had to be turned over to the Reichsbank and all movements of money out of Germany were tightly regulated, the practical equivalent to going off gold.
For the second time in less than eight years, Germany faced economic disaster. Despite the chaos, the country remained surprisingly peaceful, save for a few small riots in Leipzig and Dresden, Düsseldorf and Koblenz. There was an atmosphere of “resigned passivity born of a weary submission to the inevitable,” wrote the New York Times, the consequence of a decade of economic turmoil. The British ambassador, returning after a few weeks’ absence, noted that he was “much struck by the emptiness of the streets and the unnatural silence hanging over the city, and particularly by an atmosphere of extreme tension similar in many respects to that which I observed in Berlin in the critical days immediately preceding the war . . . an almost oriental lethargy and fatalism.”
“In such circumstances,” he continued, “Dr Schacht’s financial reputation has revived and he has reappeared on the stage . . . there are small but widening circles which feel that Dr. Schacht, if only he could overcome his unpopularity abroad, and especially in the U.S.A. and with Social Democrats at home, might yet be the man to save Germany.” The government did try to induce Schacht to return to power, offering him the position of the banking czar with responsibility for sorting out the whole mess caused by the meltdown. Fearing he was being offered a poisoned chalice, he refused and returned to his country estate to wait upon events.
The collapse of the German banking system in the summer of 1931 sent the economy lurching downward once again. Over the next six months production fell by another 20 percent. By early 1932, the industrial production index reached 60 percent of its 1928 level. Nearly six million men—a third of the labor force—were without work.
In October 1931, the parties of the right collectively staged a rally in the little mountain spa of Bad Harzburg, one of the few places where the wearing of brownshirt Nazi uniforms had not been banned. It was a reunion of everyone who was or had ever been against democracy in Germany. The town was festooned with banners in the old imperial colors. Aged generals and admirals from the previous war turned out, as did two of the sons of the ex-kaiser, the princes Eitel Friedrich and August Wilhelm, rubbing shoulders with an assorted collection of industrialists, politicians, and five thousand goose-stepping paramilitary militia and storm troopers from various factions. The event was kicked off by an invocation for divine guidance by a Lutheran pastor and a Catholic priest. The star of the occasion was Hitler, who hogged the spotlight with his impromptu speeches.
An equally big stir occurred, however, when Schacht, in his first public appearance as an associate of the Nazis, ascended the stage to speak. He accused the government of misleading the country on the amount of foreign debts and gold reserves. As to the economic policies of the opposition, he was obscurely vague, saying only that “the program to be executed by a national government rests on a very few fundamental ideas identical to those of Frederick the Great after the Seven Years War.”
The speech provoked outrage in the Reichstag and within the government. For the ex-president of the Reichsbank to declare publicly that the country was bankrupt—though this was essentially true—was viewed as an act of vindictive irresponsibility and betrayal that could only add to the economic turmoil. That most of the foreign debt had been amassed on Schacht’s watch only added to the anger. There were even calls in parliament and in the press for his prosecution on a charge of high treason. Schacht had long since broken with the left. He had now estranged himself from the democratic center. His only home was with the Nazis. And though the struggle against reparations was now essentially over, the fight for the future of Germany was still to enter its last act.
20. GOLD FETTERS
1931-33
Lo! thy dread empire Chaos! is restored:
Light dies before thy uncreating word;
Thy hand, great Anarch! lets the curtain fall,
And universal darkness buries all.
—ALEXANDER Pope, The Dunciad
ON July 14, Norman returned from Basel to find the crisis now spreading to Britain. That evening Robert Kindersley, a director of the Bank of England and head of the London arm of the great investment house of Lazards, asked to see him in private and told him that Lazards itself was in ser
ious trouble. Ironically enough it had little to do with the crisis ravaging Central and Eastern Europe. In the midtwenties, a rogue trader in the Brussels branch of the bank had made a wild bet on the collapse of the French franc and lost $30 million, almost double the bank’s capital. He had managed to cover up the loss for years with the connivance of several members of the Brussels office, by issuing IOUs on behalf of Lazards to its counterparts. The extent of the problem had only recently come to light when these obligations were finally presented. When confronted with the evidence, the trader in question, a Czech, confessed, then suddenly pulled out a gun in the office and shot himself. Fearing that the failure of a merchant bank of Lazards’ standing would set off a panic in the City, the Bank of England agreed to bail it out. The following week two other British merchant banks, Kleinworts and Schroders, informed Norman that they, too, were in trouble. Unable to prop up everyone, the Bank arranged for them to be rescued by loans from the commercial banks.
Meanwhile, on the heels of the closure of banks in Germany, a “blizzard” swept through the world’s financial system. A bank holiday was imposed in Hungary, major financial institutions failed in Romania, Latvia, and Poland. In Cairo and Alexandria, a run began on the German-owned Deustche Orientbank and police had to be called in to protect the management. Istanbul saw runs on the local branches of the Deutsche Bank, and the Banque Turque pour le Commerce et l’Industrie was closed.
The world economic crisis had already engulfed large tracts of South America—Bolivia had defaulted in January and Peru in March. In the last two weeks of July, the contagion extended to other Latin countries. On July 16, the government of Chile suspended payments on its foreign debt. Five days later, it fell and the head of the central bank took over as premier. He lasted barely three days. Over the next twenty-four hours, three different premiers were sworn in, until, fed up with the turmoil, the military took over. On July 25, the Mexican government announced that gold was no longer legal tender and that instead it was shifting to silver. The currency dropped 36 percent and after days of confusion a leading bank, the Credito Español de Mexico, was forced to close its doors.
As the world financial system ground to halt, the City of London, with tentacles that stretched into every corner of the globe, found itself especially vulnerable. On July 13, as the German crisis reached its denouement, the Macmillan Committee on the workings of the British banking system issued its report. Considering all that was going on in Europe, the press paid little attention to it. Nevertheless, hidden in the report was a set of figures that shook the City.
During London’s heyday as a financial center, British industry and British banking had complemented each other. The large export surpluses generated by what was then “the workshop of the world” had provided the funds to finance Britain’s long-term global investments and underpinned London’s status as banker to the world. After the war and the return to the gold standard, Britain’s manufacturing capacity had stagnated. Throughout the 1920s, however, London, determined to maintain its primacy in global finance, continued to lend $500 million a year to foreign governments and companies. But because Britain was unable to generate the same export surpluses as before the war, the City had to finance its long-term loans by relying more and more on short-term deposits. While everyone was dimly aware of this growing mismatch between liabilities and assets, no one had any idea of its magnitude.