‘Generally speaking the position of the world is getting worse.’
Montagu Norman to George Harrison
1 July 1931
i
The looming world financial crisis had now arrived. As the Austrian financial situation continued to descend into chaos, rumours were already circulating that Germany would request a reduction in reparations during the month of June.[1] Not only was the German financial situation precarious per se but it was exacerbated both by domestic popular opinion and internal political events. In a democratic age the views and reactions, political and financial, of the home population must be considered when contemplating the form and substance of financial plans. In the case of Germany the increasing political strength of the Nazis led the Brüning government to search for a victory to weaken the appeal of National Socialists and their allies. The first two ideas, the Austro-German customs union and the construction of further pocket battleships, were wrecked on the shoals of French opposition. This caused a greater emphasis to be placed on the third German venture into the use of foreign success for domestic ends - the endeavour to end reparations. The Germans began manouevring for changes in the current scheme, newly revised by the Young Plan of 1930, in early 1931. While their efforts in large measure helped to motivate the Hoover Moratorium, they also had the effect of frightening holders of marks both within and without the country away from the currency, thus in part causing the financial crisis. This domestic factor was also to play a large role in determining the response of the British government and the Bank of England to their own financial time of trial, the difference being that while in Germany the government and central bank were at one, in Britain the Bank of England held a philosophy different from most of the governing party. Thus part of the story to be told involves the way in which the Bank of England attempted to manouevre the Labour Government into accepting its views on what should be done to ameliorate the British predicament.
The possibility of a German initiative on reparations thus occupied the British Treasury and Foreign Office staff who were preparing for the visit to Britain by Chancellor Heinrich BrUning and Foreign Minister Dr. Julius Curtius. The British had to consider not only what their attitude was on the issue of reparations revision but whether, in the event of a reduction in German payments, they should follow what would surely be the French approach and demand a corresponding reduction in respect of their war debts to the U.S.[2] These questions came to the fore at a time when the effect of years of financial strain on the British was becoming apparent to interested observers. American economist Dr. Walter Stewart, sometime advisor to Governor Norman, commented to the American Counsul in Basle that:
While before the war the British occupied such a position in world finance and power that Great Britain could always be depended upon to assume a cold but righteous standard on any international financial question, its position has changed since the war and with the rise of American prominence in international finance. That is, when a question arises in an international meeting or body, the English representative is more likely to be found leaning towards that which is truly for the benefit of Great Britain than heretofore. As a result the American representatives at international financial meetings are usually the only ones who are truly independent and neutral and must finally bear the responsibility for many decisions.[3]
Although for different reasons, during the summer of 1931 it would become obvious that neither the British nor, after the London Conference, the Americans were able to take an international point of view.
The credit granted to the Austrian National Bank in May having proved insufficient, the BIS enquired of the Bank of England if it would be willing to extend another credit. Norman informed McGarrah that his aid and probably that of the FRBNY was contingent on the appointment of a strong willed outsider to clean up the Augean stables of the Austrian National Bank and the Credit Anstalt. Norman’s candidates for this position were Hjalmar Schacht, who having resigned as head of the Reichs-bank, was occupying himself campaigning for an end to reparations, or Gijsbert Bruins. This immediately led to difficulties with the French who had never liked Schacht. Norman, in turn, became angry at McGarrah, blaming the latter’s lack of discretion for the commotion.[4] The question of a new Austrian credit was thus held in abeyance as during the end of the first week of June, attention shifted to Germany on both sides of the Atlantic.
On 5 June Lamont called President Hoover in Washington in order to urge him to declare a holiday on debt payments which would be contingent on a postponement by European countries of the debts and reparation payments due to them for the same period. That Lamont made this move shows that Morgan’s (N.Y.) believed that matters were desperate. For the President was not a partisan of Wall Street bankers in general nor of Morgan’s (N.Y.) in particular. In the U.S. as opposed to Great Britain, France, Germany and other major nations, the financial and political capitals were in different locations which, inter alia, created in the U.S. a division between New York bankers and the rest of the nation. Hoover’s pre-existing bias against New York bankers had been greatly exacerbated by the malignant effect of the Wall Street crash on his administration and it was in that connection that an encounter with Lamont had occurred which left the President with a rather low opinion of the banker. In October 1929 Hoover sent his unofficial advisor on banking and finance, Henry L. Robinson, head of the California-based Security National Bank to Lamont, as doyen of Wall Street, to discuss the speculative boom and its possible economic effects on the country. In an eighteen page letter written just ten days before the crash, Lamont dismissed the President’s worries, concluding that no corrective intervention needed even to be contemplated at that time. Hoover’s sardonic comment that ‘this document is fairly amazing’ scrawled on the top of the letter in 1931 summed up his view of Lamont’s acumen.[5]
However, Lamont, perhaps realizing Hoover’s feelings, constructed his appeal cleverly. He began by pointing out that under the debt agreements the European countries had the right under certain circumstances unilaterally to declare moratoria and, if Germany stopped paying reparations, this was the response the President could expect. Lamont countered Hoover’s comment that Germany could always summon the Committee of Review provided for by the Young Plan with the observation that such an action would cause foreign lenders to pull out of Germany, almost certainly triggering a German collapse. Then Hoover made a remark important both in the context but also indicative of the concerns which would guide his actions throughout the months ahead:
I will think about the matter, but politically it is quite impossible. Sitting in New York, as you do, you have no idea what the sentiment of the country at large is on these intergovernmental debts. Added to this, Congress sees France piling up loads of gold, increasing armaments and encouraging other European armaments among her Allies. I could not make any headway.
Yet Lamont persevered, replying that something had to be done and if the President took a courageous step, it would only help his chances in the 1932 Presidential election. Hoover ended the conversation in a non-committal fashion, agreeing to read the memorandum Lamont offered to send and acquiescing in Lamont’s suggestion that their conversation should be kept confidential.[6]
Lamont’s plea, however, had been addressed to a willing listener. Since early May when Frederick Sackett, U.S. Ambassador to Germany, had called Hoover to say that the German situation was deteriorating rapidly, Hoover had been considering a reduction in war debts.[7] Therefore it is not surprising that immediately after his conversation with Lamont he summoned Stimson, Secretary of the Treasury Andrew Mellon and Undersecretary of the Treasury Ogden Mills to the White House and discussed Lamont’s ideas with them. Stimson was very impressed by Hoover’s attitude and the way in which he ignored Mellon’s lack of enthusiasm.[8]
The next day Stimson, upon hearing a rumour that Germany had declared a moratorium, called Sir Ronald Lindsay, British Ambassador to Washington, and asked that he tell MacDonald, at that moment meeting with the Germans at Chequers, that any such move would be disastrous because it would trigger a withdrawal of Germany’s short-term bank credits.[9] Against this backdrop, the Chequers meetings of 4 to 6 June were played. The results unfortunately were equivocal. True, a large gesture towards the return to normal diplomatic status for Germany had been made (this was the first visit of German statesmen to Britain since the war) but Brüning, having come looking for new money and the revision of reparations, returned empty-handed. MacDonald, after recounting this to the American diplomat Ray Atherton, told the latter that he had two worries: the spectre of a revolution in Germany triggered by the economic stringency imposed by the financial crisis and the increasing shadow of French domination over Europe. MacDonald ended the conversation by quoting Norman’s observation that matters were not as bad in Germany as the Germans had indicated and urging the Americans to consider, with the French, the idea of lending gold to Germany.[10]
The American President and his advisors, however, during the next ten days were too busy debating what would come to be known as the Hoover Plan to consider any new initiatives as the President alternatively blew hot and cold on this scheme. His big stumbling block was that the Plan involved making an explicit connection between debts and reparations, something American governments had scrupulously avoided for 13 years. Stimson tirelessly urged Hoover forward, pointing out that his action would, among other things, help Great Britain stay on the gold standard.[11] Experienced hands such as Dwight Morrow, now Senator from New Jersey, and Garrard Winston, Wall Street lawyer and former secretary of the various Debt Funding Commissions, were consulted as the Plan was debated in government circles.[12]
In the meantime Norman fought other fires. Hungary, not surprisingly, was affected by the Austrian crisis and appeared on the verge of collapse, while halfway across the world the problem of Indian finance was so acute that the Governor predicted that the outcome might well be insolvency.[13] Yet Norman fought on, working to convince British bankers not to withdraw credits from Germany and keeping in close touch with Reichsbank officials in order to monitor the situation.[14] The news was not encouraging. Withdrawals of gold and foreign exchange were clearly continuing.[15] Worse; there were now rumours that German’s second largest bank, the Darmstadter und National (‘Danat’), was in trouble and, while the Reichsbank dismissed this, the situation remained disquieting, especially taken in conjunction with the news that Rumania, Poland and Spain were verging on collapse.[16] In the light of this information, Norman decided that a German crisis was becoming more imminent, telling Charles Whigham on 13 June that the German position was becoming dangerous. Yet the Governor still believed that it was the Austrian debacle which was largely responsible for German problems and therefore urged Whigham to use Morgan Grenfell’s French connections to obtain French participation in a loan of 150 m Schillings (£4.5 m) for the Austrians which Norman believed was urgently needed.[17] It is interesting that Norman, having admitted to a German problem, erroneously attributed it to Austria; it would seem he was very reluctant to criticize the handling of the German economy over the past few years, perhaps because that would mean impugning the actions of his close friend, former Reichsbank Governor Schacht.
On the same 13 June, the Reichsbank, now under the leadership of Dr. Hans Luther, followed classical banking theory by raising its discount rate, on this occasion from 5% to 7%. Meanwhile Norman, together with Sir Frederick Leith-Ross, arrived at Chequers to discuss the German situation which, according to Leith-Ross was getting steadily worse, so much so as to require the Young Plan to be revised.[18]
As Morgan Grenfell, attempting to comply with the Governor’s requests, negotiated with the French Banque National de Paris et de Pays-Bas to organize an Austrian loan, the Hoover Plan continued to be at the center of American discussions.[19] Harrison’s opinion was that a two year moratorium would be best while MacDonald called Stimson (with whom he had a fairly close relationship[20]) and told him that Norman had said this was the time for the President to move.[21] The Americans began to consider talking to the French so as not to present them with a fait accompli and drew up lists of influential Senators and Congressmen whose approval ought to be sought. (The moratorium was proposed as a Presidential action which would need to be ratified by Congress when it reassembled the following December.)
Attention in London, New York and Washington thus continued to oscillate between a German and Austrian focus. By 14 June Norman was convinced that Austria needed the new loan within 24 hours. Since Morgan’s efforts to arrange French participation had so far failed, Norman decided unilaterally to lend the entire 150 m Schillings.[22] This was accomplished on 16 June. Austria thus received a much needed respite at the price of incurring for Norman and the British the enmity of the French who had delayed the loan in the hope of being able to extract political concessions from the situation.[23] Norman, according to Atherton, believed that there would have been a complete collapse were it not for his loan. Further the Governor said that he had gone ahead with this credit although it was not within the power of the Bank of England because he believed, and the British government concurred, that the rescue of Austria had to be accomplished, come what may.[24] Norman’s action marked two turning points. It was the last time the Bank of England would be in a position to intervene alone in a major crisis and it was the last time a Governor of the Bank would have the power to take such an important decision during a crisis of this dimension himself and then consult the Government.
Norman and MacDonald now turned their attention to entertaining Secretary Mellon who had arrived in London en route to his planned Riviera holiday. MacDonald shared with Mellon his view that the Austrian loan was a splendid move but would be bound to bring French revenge on Britain.[25] Norman reported to Harrison that he had told Mellon that the world faced not only a financial crisis but also a political and social one.[26] The British Governor had apparently also tried to get Mellon to talk to the French but the latter refused, determined to go straight to Cap Ferrat. MacDonald believed that Norman’s loan to the Austrian National Bank had allowed Britain to score heavily in American eyes and that Mellon was impressed by the Governor’s arguments in favour of a moratorium.[27] Actually the Hoover Plan was about to be made public: leaks had already appeared in the press and thus the President, convinced of the need for surprise, decided to announce the plan on 20 June. Unfortunately this meant that the French received a mere twelve hours’ official notice. While in Washington the French ambassador professed satisfaction at this proposal for a one year suspension of all intergovernmental claims and obligations, his government was not to take so sanguine a view.[28]
British feelings on the Moratorium were mixed. As the situation in Germany appeared now to be, according to Norman, a matter of hours not days, any move was welcomed.[29] But the British received a shock when they saw the text of the Hoover Plan which was circulated on 20 June. They had planned a postponement of European reparations and American and European war debts not, as it turned out, of all intergovernmental debts. In the case of Britain the actual plan thus encompassed payments from the dominions and various colonies, which would cost the Exchequer far more than it had calculated, about £11 m ($55 m) as compared with $250 m for the Americans and $92 m for the French.[30] Still the British felt it imperative to go along with the American move; MacDonald wrote that he was very pleased about the Moratorium, and went so far as to take credit for it. The Prime Minister further made the observation that the form of the announcement showed the American lack of knowledge of European details, something which would indeed be borne out in the months to come.[31]
As the drain on German resources continued with the Reichsbank losing between $12 m and $14 m in gold and foreign exchange on 20 June, the focus was on France and the question of her attitude towards the Hoover Plan.[32] Hoover had been warned by Morrow that the French should be privately approached well in advance of any public announcement and, in the event, it was unfortunate that this step had not been taken.[33] Too, the present French government was a weak one which felt keenly the difficulty of obtaining the approval of the Chamber of Deputies for the Moratorium.[34] Still smarting under the blow to their foreign policy dealt by Norman’s Austrian coup, the French were more determined than ever not to yield on Germany, a resolution bolstered by a belief that Germany was in large part responsible for its own problems and by the fact that at this point French banks had very little German exposure. Mellon, persuaded it was vital finally agreed to go to Paris to discuss the Moratorium with Premier Pierre Laval and Finance Minister Pierre-Etienne Flandin[35] and Morgan’s attempted to do what it could to speed the process of French acceptance. Morgan’s (N.Y.) cabled Morgan at Cie. that:
…we are arguing not as a matter of principle but purely on the practical question of what is really going to happen. It seems to us to boil down to this. That if France is to gain her share of the benefit accruing to the whole world through this proposed action she must respond in turn by being ‘equally generous’…. Otherwise, the repercussions from the world disappointment will bring about again the very crisis which the world was facing last week and it might be gravely intensified by reason of the disappointment itself.[36]
The unconditional portion of the Young Plan annuities proved a stumbling block, as all through the last week of June, the Americans and French attempted to resolve their differences while German difficulties continued to grow in magnitude. Recent historical research indicates that Harrison’s view that the crisis was triggered by domestic not foreign flight from the mark was correct, but by the second half of June American and British lenders were clearly trying to disengage from Germany.[37] With withdrawals of foreign currency continuing day after day, it became very clear that the Reichsbank needed a large credit. The problem was that the theory of support credits developed largely by the Bank of England during the previous decade called for any such credit to be as international as possible which meant including not only the FRBNY and the Bank of England but the Bank of France as well. Yet the Germans as well as Norman were loath to approach the French.[38] To tide the Reichsbank over Norman agreed on 23 June to advance it sufficient funds to maintain its required currency cover of 40%, and then he set about trying to arrange the necessary credit whose amount it was decided ought to be £20 m ($100 m)[39] The Governor contacted McGarrah who said the BIS would participate even though he was clearly annoyed that the Germans had turned to Norman and not to him.[40] Harrison was willing to lend money but it remained necessary to approach the French. (Norman was willing to depart from his theory and split the credit with the FRBNY, thus showing laudable generosity given the parlous times but Harrison remained adamant that the French be included.[41]) By 26 June the credit was arranged; to run three weeks, it provided for each of the B.I.S., FRBNY, Bank of England and Bank of France to lend £5 M ($25 m).[42] To Norman, French cooperation simply meant that the credit would be more difficult to arrange and administer but the Americans hoped that the French attitude represented a signal that they would accept the Hoover Plan.[43] However, according to the French financial attaché in Washington the two situations were fundamentally different although they both concerned Germany; it was one thing to aid a central bank with cash flow problems but quite another to expect the French to deprive themselves voluntarily of their well deserved reparations.[44] This view was clearly in evidence as the Franco-American negotiations dragged on. MacDonald called Stimson to urge him to stand firm, stating that he viewed the possibility of any departure from the Hoover Plan as alarming. The French had in fact put forth a counter proposal involving the continued payment by Germany of the unconditional annuities and their subsequent relending to Germany through the BIS, which would preserve the form of the Young Plan but MacDonald, quoting Norman, informed the Americans that such a compromise would ruin Germany’s credit and cause a collapse by 15 July, a prescient prediction.[45] The Americans struggled on with the French to produce an agreement - Mellon labouring together with Ambassador Edge to achieve common ground with Laval and Flandin. Each night Mellon called Hoover, Stimson and Mills; these conversations, together with those between Stimson and MacDonald mark the first time the telephone was regularly used as a medium of diplomatic communication in a political crisis. This leap in communications technology further signalled an alteration in the pace of world events in which governments had hitherto lagged behind private institutions. Herbert Hoover was the first President to have a telephone on his desk yet investors and financiers had long been aware that the telephone gave them the ability to take instant advantage of news regarding financial and political events.[46] However, though Hoover and MacDonald were now constantly using the telephone they, their Governments and related central banks had not yet come to terms with the fact that a major change in the tempo of world financial relations had occurred.
In the meantime Morgan’s continued their attempts to rescue the now floundering Hoover Plan. According to Morgan et Cie., the French Treasury thought it was doing all it could to negotiate a settlement but was discouraged by what it perceived as Washington’s lack of recognition of its conciliatory attitude.[47] Morgan’s (N.Y.) replied that Washington’s attitude was really quite simple; if the U.S. could give up $250 m, the French should be willing to forego $92 m.[48] In the hope of breaking the stalemate it was decided that Secretary Stimson who had previously scheduled a European holiday would join the Paris negotiations. Stimson sailed 26 June and in his absence the acting Secretary of State, Undersecretary William Castle, received a note from the British Treasury to the effect that London was now financing the Reichsbank but would be forced to withdraw its money if a complete suspension of reparations was not immediately accomplished.[49] The motivation behind the British message was, to quote Norman: ‘to apply pepper to the French and starch to the Americans in order to maintain the sanctity of the Hoover announcement.’[50] Norman, however, was continuing to attempt to exert his influence behind the scenes. Although he returned the telephone call he received from Ogden Mills on 28 June, he told Leith-Ross that the British Government should use Lindsay to communicate with the Americans, not him.[51] The Governor’s rather out of character modus operandi would continue in evidence as Norman faced what was probably the most difficult time of his career.
ii
In Norman’s colourful words; as the French and Americans negotiated Berlin was being bled to death.[52] The Governor continued to see the Prime Minister almost every day as the Americans out of frustration began to contemplate withdrawing their offer from the French.[53] Matters were such that Luther cabled Harrison and Norman on 4 July that the delay in Paris had caused the Reichsbank to be in the same position as if the Hoover Plan had not been proposed nor the credit to the Reichsbank granted.[54] Thus that the French and Americans reached a compromise on 5 July was almost anti-climatic, coming as it did too late to stop a German debacle.[55] On 8 July Luther telephoned Norman to say that ‘the position was so critical that he intended to come to London at once.’[56] His crisis approach was echoed by Ambassador Sackett, an example of an envoy who had begun to identify very strongly with his host country, who urged the U.S. to do more to stop the withdrawal of foreign credits.[57] In response Castle called Harrison for his reading of the situation. The latter stated that the principal New York bankers were not withdrawing short term credits which led Castle to conclude that the remedy for German problems would seem to lie in Berlin rather than in New York.[58] The Germans had formulated a self-help plan based on the creation of a large guarantee fund but on 8 July Norman called Harrison to say that Germany might need a credit of £l00-£200 m ($500 m - $1,000 m) and the British Governor stated he would be willing to participate providing the FRBNY and the Bank of France did the same.[59] Harrison was aghast, cabling Norman that it would be difficult if not impossible for him to consider lending more money to Germany until there was proof that the Reichsbank had done everything it could to protect its position.[60] On the same day, however, immediately before leaving for Basle and the monthly BIS meeting, Norman called Harrison to discuss the German situation and curiously revealed that he had apparently changed his mind on the question of a credit; he told Harrison that no credit should be granted because it would facilitate continued payments of reparations to France, something Norman (and also Harrison) wanted to avoid.[61] This vacillation, a symptom perhaps of Norman’s approaching nervous collapse, would be in evidence all month, serving not only to confuse the politicians and financiers with whom Norman worked but also contributing, at July’s end, to the dimensions of the British crisis itself.
Harrison continued to fight against a credit, pointing out, among other things, that it made no sense to provide central bank credits to enable private banks to withdraw funds and Sackett’s steady stream of SOS messages did not alter his view.[62] Morgan’s (N.Y.) shared Harrison’s opinion; the New York house cabled Grenfell (for his own information and for transmission to Norman at Basle) that they did not see where the money was to come from as neither private banks nor the FRBNY would participate in a proposal which was ‘thoroughly unsound and full of dangerous complications for the future, not merely financial but also political.’[63]
The BIS board meeting was scheduled for Monday, 13 July but as usual the preliminary Sunday night dinner was equally important. There Dr. Luther presented Germany’s case, saying that the German economy was essentially sound, the budget balanced and thus the present situation fundamentally different from that which obtained in 1929.[64] His speech illustrated that the Governor of the Reichsbank at least had realized that brinksmanship had perhaps gone too far, a rather untimely discovery. His listeners were not encouraged particularly as he also said that the Reichsbank’s cover based on its own funds was only 20% and further that unless unexpected events transpired, a German moratorium would have to be declared within forty-eight hours. In that event, McGarrah predicted, Austria, Hungary, Rumania and Yugoslavia (all of whom were in dire straits and receiving money from the Bank of England and the BIS) would follow suit.[65]
Norman left Basle, having concluded along with other central bankers that the world’s problems were too big for the central banks and must be handled by the governments as there was nothing central banks could do now. He was also, according to Harrison, tired, disgruntled and discouraged, which is not surprising given the magnitude of the disasters of 13 July.[66] On that day, the Danat Bank closed its doors, triggering a general collapse of the German financial system as all German banks were closed and normal life ground to a halt.
On the same day the Macmillan Report (among whose witnesses had been Jacob Goldschmidt, head of the Danat Bank) was published. While the Report advocated the retention of the gold standard, it did so in such a half-hearted way that many observers were convinced that the British no longer possessed the necessary will to fight unflinchingly for the gold standard if such action were required. Just as damaging was the disclosure that Britain’s short term debits exceeded credits by £267 m. This was especially worrying when a large percentage of British loans were frozen in Germany which meant that the imbalance was even worse than it appeared. These revelations together with the German crisis and the general apprehension prevalent during the summer brought on the same 13 July a realization that a run on sterling had begun the previous Friday sparked by withdrawals of French funds from London. Whether this was in anticipation of a prospective loan to Germany which would bring a higher rate of return than offered in London or whether, as Chancellor Snowden charged, it represented a French attempt to exert pressure on London to toe the French line on reparations (a charge the French denied), it was not a good portent of things to come.[67]
The central banks having thrown the German problem into the laps of the politicians, the latter began to try to find a solution or at least a path to one. The obvious answer was to have a meeting but that led to the further questions of who would attend, where it would be held and, most important, what would be discussed - the immediate crisis, as the Americans desired, or the entire framework of international payments, the goal of both Norman and the British Treasury.[68] By 15 July, MacDonald decided that he should go to Berlin to try to solve the German problems before the position of London was undermined beyond salvage. His apprehensions had not been lessened by a visit from a distraught Norman who informed MacDonald that Britain might have to declare a moratorium on its payments.[69] That Norman would even broach this possibility is a mark both of how seriously he was taking the yet nascent drain of gold and how much he had suffered from the strain he had been under for the past few years. In January he had talked of ‘the steady drip of the unseen pressure on us’ and, like water on a rock, the result was a wearing away of the Governor’s powers of resistance.[70] Norman, always of nervous temperament, was thus not in a position to handle smoothly the traumatic events of July. This proved most unfortunate for Britain because banking is to a large extent a matter of perception. A determined face presented to the world by a nation under threat will positively affect its chances of withstanding a financial onslaught. The two major symptoms Norman displayed during the next two weeks, resort to dramatic overstatement and a vacillating attitude towards possible courses of action, would cause the drain of gold to continue to accelerate.
Secretary of State Stimson, now in Paris, met with Foreign Secretary Henderson who was there to discuss German problems with the French. When Stimson called Hoover on 15 July he reported that both Henderson and the French were considering a joint loan to Germany guaranteed by the governments of Britain, France and the United States. The President said this was impossible for, among other reasons, it would require Congressional approval which would be unobtainable. A private loan, however, appeared an option only if it received priority over reparations, an improbability. Henderson had told Stimson that Norman was overextended and was trying to withdraw Bank of England commitments abroad. Hoover added that, according to Henderson, Norman, believing the whole German question was political, was advocating a conference which would discuss the Treaty of Versailles, reparations and debts, an approach unacceptable to both Hoover and Stimson. Stimson then informed the President that the French proposed to hold a conference in Paris and it was left that the Americans (Stimson and Mellon) might attend if the agenda was sufficiently narrow.[71]
As the Germans raised their discount rate from 7% to 10%, in Paris the British, French and Americans debated courses of action. To the Americans and British the French were the villains. MacDonald said, ‘France has been playing its usual small-minded and selfish games … Its methods are those of the worst Jews.’ while Ogden Mills castigated them for behaving with incredible stupidity.[72] However, the freedom of action of both countries to deal with the Laval government was circumscribed, in the case of Britain by the fear of a continued gold drain to Paris and on the part of the U.S., by its determination not to be saddled by the Europeans with the cost of German reconstruction.[73] The three-party discussions continued with their foci the questions of whether France would attend the Seven Power Conference which MacDonald with Hoover’s encouragement had organized for Monday, 20 July in London, and the French proposal for a $500 m (£125 m) credit to Germany. Norman told Harrison that his government could not be a party to such a credit. His resistance was certainly influenced by his belief that the French were trying to box the Germans into a corner where they would have no recourse other than to agree to the credit although the French envisioned security provisions and political conditions which the Governor thought were demeaning.[74] When the Americans heard Norman’s opinion they were unsure of how to interpret it because, knowing that Norman wanted a full blown reordering of the international financial structure, they were not sure if his views represented a realistic reading of the situation or an attempt to exacerbate the extant problems to force the more wide-ranging discussions they sought to avoid. Stimson and Mellon further resented what they saw as a British attempt to make them bear the onus of turning down the French plan when they knew the British were equally reluctant to lend new money.[75]
At this point Morgan’s became involved in the imbroglio. Former Governor of the Bank of France Emile Moreau was in touch with Morgan et Cie. and, in order to advise their sometime clients the French Government and the Bank of France, the Paris house asked Morgan’s (N.Y.) for their assessment. In response the New York partners stated on 17 July that ‘the present German crisis must be solved without reliance upon getting fresh money from America to Germany.’[76] By the same day, the British and Americans had accepted that the French were determined to have a full blown conference of their own in Paris prior to the London conclave; thus the thus the schedule agreed upon was that the Germans would arrive in Paris on 17 July for talks with the French that day and for talks with anyone else who wished to participate the next day. Later on 19 July everyone would depart for London in order to reassemble on Monday, 20 July. This somewhat pointless jockeying for position exacerbated already wounded sensibilities but at least it ensured the French presence in London. During the period preceding the London Conference MacDonald and Stimson continued their telephone conversations, the Prime Minister revealing that Britain had had what he termed a financial crisis on the previous Wednesday, a reference to Norman’s panicky 15 July. MacDonald also told the American that he had summoned Henderson back early Sunday so as to ensure the Sunday discussions were not lengthy.[77] At the same time Norman and MacDonald met daily as they prepared a proper agenda for Monday.[78] Sterling had shown a slight recovery but Norman was worried as he believed that the London Conference would be useless because it would not produce new money for Germany.[79] Again Norman had changed his mind on the necessity for a new credit.
As the transatlantic and transoceanic telephoning and cabling continued, it was becoming apparent that having called in their governments, the central banks of Britain and France were unable to agree with the politicians they respectively worked with on the proper approach to take towards the Germans and their problems. Norman, according to Lord Tyrell, British Ambassador to France, was determined to hold up any progress until the whole of European finance was reformed, an aim MacDonald did not share.[80] In the same way the Bank of France was apparently opposed to the plan which the French government had originated to grant Germany a credit. At this point, two equal power centres existed in both London and Paris but such marked disagreements would seem to indicate that in the not too distant future either the central banks would regain sovereignty over monetary issues or would yield it to their governments.
During the Paris negotiations the most upsetting revelation to Stimson came from an unexpected quarter. At a party held at the American Embassy on 17 July Stimson talked with N. Dean Jay, senior partner of Morgan et Cie. Jay showed him the Morgan’s (N.Y.) cable which stated that no new American loans to Germany could be made. Notwithstanding that Morgan’s (N.Y.) position was both reasonable and realistic, Stimson became furious because he felt that the Bank of France was holding back their support for the London Conference and that if they learned from Morgan’s (N.Y.) that no American loan was possible, this could give the French an excuse to renege on their pledge to go to London.[81] Stimson, in fact, was so angry that when Hoover next called he said that if the President wished to contribute to the success of the London Conference he should call Lamont and tell him to stop interfering. Then the Secretary returned to Jay and told him, ‘You have hit the London Conference right plumb in the eye and I want you to know it.’[82]
On Sunday, as Stimson prepared to leave for London, he called Hoover to discuss the American position at Monday’s meeting. Conscious no doubt of the historic nature of his role as the first American governmental representative to participate in a conference on European financial matters since Versailles, Stimson’s chief concern was that Morgan’s had given the French the feeling that as the only nation to suggest a concrete plan to aid Germany, they held the trump card. The Secretary was still so upset at Morgan’s that he took the opportunity to tell the President that Harrison and Federal Reserve Board Governor Meyer received their information from Morgan’s implying it was therefore unreliable. Hoover told Stimson that the chief point to bear in mind was that as no American money could be forthcoming the American line should be that what was necessary was the stabilization of foreign credits in Germany, that is to say an agreement by the creditor nations that their banks would not withdraw their money from Germany.[83]
Prior to the opening of the London Conference, termed by The Times the most important gathering of its kind since the war, Stimson and Mellon met with Norman who reiterated his lack of optimism as to the outcome of the meeting.[84] Once the meeting began Stimson, at least, felt all participants were cordial although he was worried about the hostility of the French press. Stimson and Mellon pressed for agreement on the stabilization of German non-governmental credits which Hoover had wanted and which would come to be known as the Stillhaltung or standstill as they also tried to get the British to take responsibility for the defeat of the French plan.[85] Hoover continued to be much involved behind the scenes. During one of his talks he said that not only he but Harrison and Morgan partner Parker Gilbert believed it was vital for Germany herself to take further measures, that is to say the maintenance of a high discount rate and exchange controls to stop the outflow of foreign exchange and gold.[86] Mills, a close ally of Hoover as well as Undersecretary of the Treasury, also called frequently and it was during one of his conversations with Mellon that the latter revealed that MacDonald had questioned whether Great Britain could maintain the present volume of its foreign credits, which illustrated that the Prime Minister shared the doubts of the world’s investment community. During this same conversation Mills revealed that to ascertain the technical requirements of possible solutions he had called Norman for advice. Norman, however, said that the only way to make a stabilization program work would be to grant a suspension of reparations and war debt payments for three years.[87]
Norman was also the subject of a later phone call between Stimson and Hoover. Apparently MacDonald had suggested bringing Norman to the Conference sessions. Stimson, obviously horrified by this given Norman’s depressed view of matters and his anti-French, pro-German bias, spiked MacDonald’s guns by pointing out that if Norman attended it would only be fair that Clement Moret should as well. To the latter suggestion the French delegates revealingly objected with the result that the Conference was spared the presence of both central bankers. But before the meeting Norman had convinced MacDonald that the American approach would not work. Stimson, a shrewd observer, pointed out that not only was the Bank of England in a weak position but the Labour party, numbering few financial men among its members, had to rely very heavily on Norman. Yet the Secretary of State at this time reserved his strongest words for the British Treasury which had prepared a position paper based on the assumption that a full suspension of intergovernmental payments was a prerequisite to the solution of the German crisis.[88]
Stimson’s gloom was not relieved the next morning when he met with MacDonald and Norman prior to the day’s sessions and was informed that the British financial situation was worsening; according to MacDonald, Norman was ‘frightened to death and scared.’[89] That Snowden continued to display his previous obstreperous attitude did not augur well for a speedy conclusion but finally a draft set of recommendations was arrived at. Adopted the next day, 23 July, they embodied the Hoover approach and called for a renewal of the existing $100m (£20 m) central bank credit to the Reichsbank for a period of three months, the maintenance of foreign credits in Germany and the convening by the BIS of a committee of experts designated by central banks to enquire into the credit needs of Germany and the transformation of her short term credits into long term ones.
As the diplomats enjoyed themselves at a Buckingham Palace garden party and were presented to the King and Queen, Norman occupied himself with less pleasant matters.[90] The Conference had not accomplished the goals he had had in mind and the fact that Norman had to a great extent controlled the British politicians who were ostensibly in charge had not altered the outcome in the slightest. Furthermore the gold drain over the past ten days had taken £20m ($100m) from the Bank of England, which was equal to the total amount of gold gained by the Bank from April to mid-July. MacDonald on 23 July viewed the outlook as ‘unpleasant’.[91] Carl Melchior, German financier and diplomat was even more pessimistic. Speaking to fellow negotiator Hans Schäffer about the proceedings of the London Conference he said:
What I have just experienced means the end of a way of life, certainly for Germany and perhaps other countries as well. We have repealed the rules of the game that have regulated commerce between the nations of the world. The common vision of the future has been destroyed.[92]
NOTES
1. The New York Times, 28 May 1931, p. 1.
2. PRO, T188/16, Leith-Ross to Hopkins and Snowden, undated.
3. NA, RG39, Box 104, Cochran to Castle, 1 June 1931.
4. Harrison Papers, Box 20, Norman to Harrison, 31/155, 2 June 1931.
5. HHPL, Presidential - Personal Files - 1097, Lamont to Hoover, 19 October 1929.
6. Lamont Papers, 98–18, Lamont Memorandum, undated.
7. J.H. Wilson, American Business and Foreign Policy: 1920–1933 (Beacon Press, Boston, 1971), pp. 136–7.
8. Stimson Diaries, Reel 3, Vol. 16, 5 June 1931.
9. Stimson Diaries, Reel 3, Vol. 16, 6 June 1931; PRO 30/69/1753, MacDonald Diaries, 7 June 1931.
10. HHPL, Presidential Papers - Foreign Affairs - Financial (‘FA-F’), Atherton to Stimson, 175, 8 June 1931; PRO 30/69/289, Memorandum: ‘Meeting With the Germans At Chequers’, 6 June 1931.
11. Stimson Diaries, Reel 3, Vol. 16, 8 June 1931.
12. HHPL, Presidential Papers, FA-F, Lamont to Hoover, 5 June 1931; Stimson Diaries, Reel 3, Vol. 16, 10 June and 11 June 1931.
13. B/E, G3/198, Norman to Hopkins, 8 June 1931; Harrison Papers, Binder 3, BIS to FRBNY, 477, 3 June 1931.
14. B/E, ADM 20/20, Norman Diaries, 10 June 1931.
15. See, e.g., B/E, OV 34/3, unsigned Memorandum concerning telephone conversation, 12 June 1931.
16. B/E, OV 34/3, E.R. Peacock to H.A. Siepmann, 12 June 1931.
17. Morgan Grenfell, Credit Anstalt 2, Morgan Grenfell to Morgan’s (N.Y.), 31/4809, 13 June 1931.
18. B/E, ADM 20/20, Norman Diaries, 13 June 1931; PRO, T188/24, Leith-Ross to Sir R. Vansittart, 13 June 1931; B/E, OV 34/80, Reichsbank to Norman, 13 June 1931.
19. Morgan Grenfell, Austrian Crisis 1931, Morgan Grenfell to Morgan’s (N.Y.), 31/2254, 14 June 1931.
20. MacDonald and Stimson shared an interest in disarmament and at the 1930 naval negotiations had begun to develop what both men believed was a good relationship.
21. Stimson Diaries, Reel 3, Vol. 16, 13 June 1931; FRBNY, 2013.1, Harrison to Mills, 10 June 1931.
22. Stimson Diaries, Reel 3, Vol. 16, 14 June 1931; Morgan Grenfell, Austrian Crisis 1931, Morgan’s (N.Y.) to Morgan Grenfell, 31/2255, 15 June 1931; Morgan Grenfell to Morgan’s (N.Y.), 31/4811, 15 June 1931; Morgan Grenfell, Austrian Negotiations 1931 - Documents, C.F. Whigham Memoranda I and II, 15 June 1931; B/E, ADM 20/20, Norman Diaries, 15 June 1931.
23. Morgan Grenfell, Austrian Crisis 1931, unsigned Memorandum (also circulated to Norman), 15 June 1931; Morgan Grenfell to Morgan’s (N.Y.), 31/4815, 15 June 1931.
24. HHPL, Presidential Papers, FA-F, Atherton to Stimson, 196, 18 June 1931.
25. PRO, 30/69/1753, MacDonald Diaries, 17 June 1931; B/E, ADM 20/20, Norman Diaries, 18 June 1931.
26. NA, RG59, 462.00/R296/4040, Mills to Stimson, 18 June 1931.
27. PRO 30/69/1753, MacDonald Diaries, 18 June 1931.
28. Stimson Diaries, Reel 3, Vol. 16, 18 and 19 June 1931; The New York Times, 20 June 1931, p. 1.
29. FRBNY, 3115.2, Harrison Memorandum, 20 June 1931, concerning telephone conversation with Norman, 20 June 1931.
30. B/E, ADM 20/20, Norman Diaries, 20 June 1931; PRO, Cab35 (31), 24 June 1931.
31. PRO 30/69/1753, MacDonald Diaries, 14 June and 21 June 1931.
32. The New York Times, 20 June 1931, p. 1.
33. Stimson Diaries, Reel 3, Vol. 16, 10 June 1931.
34. PRO 30/69/288, Memorandum of Conversation between Vansittart and A. de Fleuriau, 22 June 1931.
35. HHPL Presidential Papers, FA-F, Stimson to Mellon, 179, 22 June 1931.
36. HHPL, Presidential Papers, FA-F, Morgan’s (N.Y.) to Morgan & Cie., 87514, 22 June 1931.
37. For the most comprehensive analysis of the German situation in 1931 see H. James, The Reichsbank and _Public Finance in Germany 1924–1933: A Study of the Politics of Economics During the Great Depression (Fritz Knapp Verlag, Frankfurt Am Main, 1985), pp. 173–261.
38. B/E, OV 34/3, W. Layton to H.A. Siepmann, 23 June 1931.
39. B/E, MB53, C/T Minutes, 23 June 1931.
40. B/E, OV 34/3, Siepmann Memorandum concerning telephone conversation with McGarrah, 24 June 1931.
41. FRBNY, Harrison Papers, 3115.2, Harrison Memoranda concerning telephone conversations with Norman at 10:45 a.m. and 12:30, 24 June 1931.
42. Following the convention used at the time, all pound to dollar conversions have been computed at £1 = $5.
43. B/E, MB53, C/T Minutes, 24 June 1931.
44. NA, RG59, 462.00/R296/4323, Mills to Stimson, 23 June 1931.
45. PRO 30/69/1753, MacDonald Diaries, 25 June 1931; Stimson Diaries, Reel 3, Vol. 16, 25 June 1931.
46. G. Perrett, America in the Twenties, (Touchstone, Simon & Schuster, Inc., New York, 1982), p. 317.
47. HHPL, Presidential Papers, FA-F, Morgan & Cie., to Morgan’s (N.Y.), 87540, 29 June 1931.
48. HHPL, Presidential Papers, FA-F, Morgan’s (N.Y.), to Morgan & Cie., 66983, 29 June 1931.
49. HHPL, Presidential Papers, FA-F, Castle to Edge, 301, 28 June 1931.
50. B/E, G3/198, Norman to Vansittart, 26 June 1931.
51. B/E, ADM 20/20, Norman Diaries, 28 June 1931; PRO, T188/266, Leith-Ross to Hopkins, 29 June 1931.
52. FRBNY, Harrison Papers, 3115.2, Harrison Memorandum, 1 July 1931, concerning telephone conversation with Norman, 1 July 1931.
53. NA, RG59, 462.00/R296/4234, Stimson to Castle, 1 July 1931.
54. B/E, OV 34/3, Luther to Harrison, c.c. Norman, 4 July 1931.
55. The Franco-American agreement, signed on 6 July 1931, accepted the recycling of the unconditional annuities which would continue to be paid by Germany but would now be given to the BIS which would invest the monies in German railway bonds guaranteed by the German government. Thus a major part of the Hoover Moratorium had indeed been compromised for reparations would remain a first lien on a significant portion of German assets.
56. B/E, MB53, C/T Minutes, 9 July 1931.
57. Sackett had sent a continual stream of messages to Hoover and Stimson beginning in April. By July it was clear the President and Secretary were losing patience.
58. NA, RG59, 462.00/R296/4290, Castle to Sackett, 8 July 1931.
59. FRBNY, Harrison Papers, 3111.2, Harrison Memorandum, 9 July 1931, concerning telephone conversation with Norman, 8 July 1931.
60. Harrison Papers, Vol. 2, Harrison to McGarrah, 266, 8 July 1931, transmitting copy of cable sent to Norman, 8 July 1931.
61. FRBNY, Harrison Papers, 3115.2, Harrison Memorandum, 9 July 1931, concerning conversation with Norman, 9 July 1931.
62. Harrison Papers, Vol. 2, Harrison to McGarrah, 269, 10 July 1931; HHPL, Presidential Papers, FA-F, Castle to Sackett, 120, 11 July 1931.
63. Morgan Grenfell, German Crisis 1931, Morgan’s (N.Y.) to Morgan Grenfell, 31/2312, 10 July 1931.
64. B/E, MB53, C/T Minutes, 15 July 1931.
65. NA, RG59, 462.00/R296/4436, Cochran to Castle, 12 July 1931.
66. FRBNY, Harrison Papers, 3115.2, Harrison Memorandum, 14 July 1931, concerning telephone conversation with Norman, 13 July 1931.
67. The New York Times, 12 July 1931, p. 1.
68. PRO, T188/26, Lindsay to Foreign Office, 14 July 1931.
69. PRO 30/69/1753, MacDonald Diaries, 15 July 1931; H. Dalton, Call Back Yesterday (Frederick Muller, London, 1953), p. 255.
70. B/E, G3/198, Norman to D. Fergusson, 27 January 1931.
71. Stimson Diaries, Reel 3, Vol. 17, 15 July 1931; HHPL, Presidential Papers, FA-F, Castle to Stimson, 15 July 1931.
72. PRO 30/69/1753, MacDonald Diaries, 5 July 1931; Library of Congress, Washington, D.C., Ogden L. Mills Papers, Container 109, Mills to G. Winston, 15 July 1931.
73. NA, RG59, 462.00/R296/4469, Castle to Stimson, 15 July 1931.
74. HHPL Presidential Papers, FA-F, Castle to Stimson, 362, 16 July 1931.
75. Stimson Diaries, Reel 3, Vol. 17, 15 July 1931.
76. Morgan Grenfell, German Crisis - 1931, Morgan et Cie. to Morgan’s (N.Y.) 87572, 15 July 1931; Morgan’s (N.Y.) to Morgan Grenfell, 31/2337, 17 July 1931.
77. Stimson Diaries, Reel 3, Vol. 17, 17 July 1931: Memorandum concerning telephone conversation with MacDonald, 17 July 1931.
78. B/E, ADM 20/20, Norman Diaries, 17, 18 and 20 July 1931; Morgan Grenfell, German Crisis 1931, Grenfell to Morgan, 20 July 1931.
79. Stimson Diaries, Reel 3, Vol. 17, 17 July 1931: Memorandum of Conference at the Ministry of the Interior at Office of Prime Minister Laval, 17 July 1931; Morgan Grenfell, German Crisis - 1931, Morgan Grenfell to Morgan’s (N.Y.), 31/4880, 18 July 1931; Lamont Papers, 111–11, Grenfell to Lamont, 18 July 1931.
80. Stimson Diaries, Reel 3, Vol. 17, 17 July 1931: Memorandum concerning telephone conversation with Hoover, 17 July 1931.
81. NA, RG59, 462.00/R296/4600, Edge to Castle, 19 July 1931.
82. HHPL, Presidential Papers, FA-F, Transcript of telephone conversation between Stimson and Hoover, 17 July 1931; Stimson Diaries, Reel 3, Vol. 17, 17 July 1931.
83. Stimson Diaries, Reel 3, Vol. 17, 20 July 1931.
84. B/E, ADM 20/20, Norman Diaries, 20 July 1931; The Times, 20 July 1931, p. 13.
85. HHPL, Presidential Papers - FA-F, Transcript of telephone conversation between Stimson and Hoover, 20 July 1931.
86. HHPL, Presidential Papers - FA-F, Transcript of telephone conversation between Stimson and Hoover, 21 July 1931.
87. HHPL, Presidential Papers - FA-F, Transcript of telephone conversation between Mellon and Mills, 21 July 1931.
88. HHPL, Presidential Papers - FA-F, Transcript of telephone conversation between Stimson and Hoover, 21 July 1931.
89. HHPL, Presidential Papers - FA-F, Transcript of telephone conversation between Castle and Stimson, 22 July 1931; Stimson Diaries, Reel 3, Vol. 17 22 July 1931.
90. Stimson Diaries, Reel 3, Vol. 17, 23 July 1931.
91. PRO 30/69/1753, MacDonald Diaries, 23 July 1931.
92. Bundesarchiv, NL Dietrich/303, Hans Schäffer Erinnerungen an Melchior (Supplied by Dr. William C. McNeil).