My Review of Jill Eichler's "Mellon vs. Churchill"

 Duel over Debt

On the surface it appears that only a history/economics nerd would read Jill Eichler’s book on the inter-Allied debts arising out of World War I. However, Eichler discusses that history through the lens of its two main protagonists, Secretary of the Treasury Andrew Mellon (1921-1932) and Chancellor of the Exchequer Winton Churchill (1925-1929) It is through their eyes we see how complicated the debt duel was. 

At the end of World War I the allies owed the United States something over $10 billion with the bulk of the borrowings coming from Great Britain and France. Simply put, the allied viewed the debt as a cost of winning the war and therefore did not have to be repaid, while the United States viewed the debt a commercial transaction that had to be repaid. Making matters worse was that the United States in 1922 passed the Fordney-McCumber Tariff which made it more difficult for the Europeans to earn the need dollars to repay the debt. 

In the first round Mellon and then Chancellor of the Exchequer Stanly Baldwin renegotiated the $4.6 billion owed to the U.S. at 4.5% interest rate with a 25-year term, down to a phased 3% and 3.5% loan with a 62-year term in 1922. This took quite some doing on Mellon’s part to convince a recalcitrant Congress to accept the new terms. Nevertheless, Britain was very unhappy with the agreement and when Churchill became chancellor, he worked to further ease the burden. Later in 1926 Mellon negotiated a restructuring of the $4 billion French debt on easier terms than what Britain had agreed to. It took until 1929 for France to finally ratify the deal. France received better terms because Mellon viewed that their ability to pay was less than that of Britain.

Hanging in the background was the issue of German reparations. To Britain and France, the reparation was linked to the repayment of debt to the U.S., while the U.S. viewed it a separate issue. The Dawes Plan of 1924 which enabled U.S. loans to Germany which then were used to pay France and Britain who in turn paid the U.S... For full discussion of this and other inter-related issues see Liaquat Ahamed’s “The Lords of Finance” and Straumann’s “1931: Debt Crisis and the Rise of Hitler.” ( https://shulmaven.blogspot.com/2019/07/my-amazon-review-of-tobias-straumanns.html)

My criticism of Eichler is that she views the Dawes Plan in the light of history rather than how contemporaries experienced it. The Dawes Plan set off a boom in Germany and put Europe on the road to recovery in 1925. That along with the Locarno Treaty which established the borders of Western Europe engendered an uptick in confidence. That was true on the continent, but that was not true of Britain where Churchill returned to the gold standard and over-valued the pound at its pre-war level. Thus, Britain missed out on the boom. It was only with the 1929 stock market crash that the inherent flaws of the Dawes Plan became manifest. In the end most of the debts would never be repaid so it would have been much better had the slate were wiped clean in 1921. The world would be a much different place today had that happened.

Further, Eichler gives us a real sense of the high society that Mellon and Churchill moved in from London parties to excursions in Paris and the south of France. Three people in Mellon’s entourage would go on to bigger and better things. Assistant Secretary of the Treasury Russell Leffingwell would chair JP Morgan and the Council on Foreign Relations; Parker Gilbert who succeeded Leffingwell at treasury would go on to chair the Reparations Commission, and later Morgan Stanley (his son would also do that); and his son-in-law David Bruce would be an early hire in the OSS and later become a distinguished diplomat.

To sum up, Jill Eichler has tuned what could have been a nerdy story into an interesting history of some of the financial aspects of diplomacy of the 1920’s. 

My Amazon Review of Frank McDonough's "The Weimar Years: Rise and Fall 1918-1933"

 On the Road to Perdition

 

Third Reich historian Frank McDonough has written a year-by-year tick tock history of the Weimar Republic from its founding in 1918 to its demise on January 30, 1933. It is largely a political history where he sometimes goes into excruciating detail about the various cabinet changes over the years. His hero is Gustav Stresemann, prime minister and for many years foreign minister. He was perhaps Germany’s most influential politician from 1925 -1929 where he negotiated a détente with the West though the Locarno Treaty. Unfortunately, deliberate, or not there was not Locarno for the East where Stresemann had designs on the eastern territories taken away from Germany at Versailles.

 

McDonough rightly notes that the premature deaths of Foreign Minister Walter Rathenau by assassination in 1922 and the deaths by disease of President Friedrich Ebert and Stresemann severely eroded the talent of the regime. I have written elsewhere that Stresemann’s death in 1929 removed the last politician of stature who could have stood up to Hitler.

 

Weimar was plagued from the beginning by a flawed constitution and its lack of legitimacy among the German Right. The two fundamental flaws in the constitution were proportional representation that allowed for the smallest of parties to have a voice in Reichstag and Article 48 which enabled the president to rule by decree. That would haunt the government as the economic crisis of the 1930’s hit.

 

Further, it was this government that signed the Versailles Treaty that established Germany’s sole guilt in starting World War I and placed a severe reparations burden on the economy. It was a tough start and that along with crippling inflation almost brought the government down. However, as Robert Gerwath noted in “November 1918: The Great Revolution” Weimar survived and with Dawes Plan loans in 1925 actually prospered.

 

So why did Weimar collapse? To McDonough the faults lie with the lack of responsible parties on the Right and with President Paul von Hindenburg, the hero of World War I, who in the late 1920’s was supportive of the government, returned to his monarchal roots as a Prussian land baron. It was he, along with the intrigues of Franz von Papen and Kurt von Schleicher who brought down the hapless Heinrich Bruning government in 1932. Bruning’s government was imposed on the Reichstag by Hindenburg. He never had a parliamentary majority and with the lack of foreign currency reserves he was forced to impose a draconian austerity policy on an economy already in depression. To me Bruning did not have much of a choice. By the way, the best tick-tock on the end of Weimar is in Rudiger Barth’s and Hauke Friedrichs’ “The Last Winter of the Weimar Republic.”

 

Indeed, the decay was evident in December 1930 when Nazi goons disrupted the German premier of the anti-war film, “All Quiet on the Western Front.” So great were their disruptions that the film was banned a week after the failed premier. This has a familiar ring today in America where pro-Palestine mobs are canceling Jewish performers and Israeli officials.

 

 

Away from politics McDonough discusses the flowering of culture in art (abstract expressionism), architecture (Bauhaus), and film (Metropolis). Indeed, Berlin was second only to Hollywood in film production in the 1920’s. There was also the very free and licentious culture of Berlin’s nightclub scene. It was not for nothing that the recent German TV series was called “Babylon Berlin.” What McDonough does not mention is that this Avant Garde culture just might have turned off small city and rural Germany who overwhelmingly voted for Hitler in 1932.

 

However, my two primary concerns with McDonough’s otherwise excellent work is that he down plays economics. He should have taken seriously the works of Frederick Taylor’s “The Downfall of Money,” and Tobias Straumann’s “1931: Debt Crisis and the Rise of Hitler.” Simply put, Weimar was not up to the task. However, to his credit, McDonough does not that Hitler’s opposition to the Young Plan in 1930 made him respectable.

 

My second concern is that he failed to emphasize the long-standing division in the Left between the Socialists and the Communists. The split started during World War I and was exacerbated by the Socialist government with the support of the Army and the Free Corps in putting down the communist Spartacist Revolt in early 1920. Later in 1929 a different socialist government put down the “Bloody May” communist demonstration in 1929. McDonough doesn’t even mention this and with the communists calling the socialists “social fascists” it less of a surprise seeing them join forces with the Nazis in bringing down the Bruning government and in supporting a transit strike in Berlin in late 1932. Thus, part of the blame for the rise of Hitler has to fall on the disunity of the Left. As I have written previously the global impact of the Russian Revolution was to split the Left and harden the Right. It certainly played out in 1930 Germany.

 

With my concerns aside, McDonough’s book is important. I learned much from it and there are certainly lessons for today.

For the full amazon URL see: On the Road to Perdition (amazon.com)

My Amazon Review of Nicholas Sargen's "JPMorgan's Fall and Revival: How the Wave of Consolidation Changed America's Premier Bank"

 

A Reflection on the House of Morgan

 

Nick Sargen, longtime Wall Street economist and a friend and former colleague, has written a personal memoir of his working at JPMorgan, a history of the financial markets from 1978-2005 and a too endearing recent history of JP Morgan and the strategic issues it faced in the late 20^th century.* To me it is a misnomer to call JPMorgan “America’s premier bank,” in that as of yearend 1976 Morgan, with $28 billion in assets was the fifth largest bank holding company with roughly one-third the assets of Bank of America and standing behind Citicorp, Chase Manhattan, and Manufacturers Hanover. Simply put JPMorgan’s past was brighter than its future.

 

Sargen arrives at Morgan in early 1978 with an economics Ph.D. from Stanford after a stint at the Federal Reserve Bank of San Francisco where he specialized in international economics. He is thrust into a rapidly inflating global economy and the world of sovereign lending to Asia and Latin America and is taken under the wing of the banks lead international economist, the highly respected Rimmer De Vries. In the early 1980’s Morgan had a virtual murderers row of economists that included Dick Berner (later Morgan Stanley’s chief economist), Bill Dudley (later Goldman Sachs’ chief economist and later President of the NY Fed), and Steven Roach (later Morgan Stanley’s chief economist). It was quite the intellectual hothouse.

 

By 1982 the American banking system and JPMorgan found themselves facing the imminent default of a host of Latin American countries as their scheme to recycle petro-dollars went awry. For all practical purposes the banks were insolvent. Sargen whose early warning system at the San Francisco Fed signaled the crisis, was not heeded at Morgan and elsewhere as the lure of high spreads dazzled the commercial banker of that day. To me, of all banks, Morgan should have stayed away given its experience with the Dawes Plan of the 1920s which recycled German reparations payments. Morgan partner Tommy Lamont was in up to his eyeballs with German loans. Of course, that all came crashing down when the New York call money market sucked money in from all over the world and the Fed’s 1929 tightening brought that episode to an ignominious end. The Volcker tightening of 1979-82 had the same effect. Simply put, Morgan should have known better.

 

Sargen describes a very insular and elite coat and tie “WASP” culture that only hired from the best of schools. There is no way Morgan would have hired me as a Jewish street kid from Queens with a UCLA finance Ph.D.  Although it was somewhat of a culture shock when Sargen was lured away from Morgan to the rough and tumble shirt-sleeve culture of Salomon Brothers. Sargen arrived in 1984 and I arrived there two years later. There Sargen learned the power of Salomon’s trading floor and he was shocked to see the firm’s chairman John Gutfreund sitting at open desk right on the floor. A far cry from JPMorgan. While there Sargen witnessed the collapse of the dollar, the 1987 stock market crash and the Brady Plan for Latin debt and Salomon’s infamous treasury scandal. By 1991 he was looking for greener pastures and ended up running money for Prudential and then in 1995 he returned to Morgan to be the chief strategist for its Private Bank. All the while he keeps up with the fits and starts problems facing Morgan as it enters investment banking.

 

Sargen rightly notes that Morgan’s strategic dilemma was that its core strength of banking for America’s top corporations was being disintermediated by the Wall Street investment banks who picked off its clients by offering better terms and conditions via the short-term commercial paper and long-term capital markets. Morgan under the leadership of Lew Preston and Dennis Weatherstone understood the problem and began to build an investment bank skirting around the requirements of the Glass Steagall Act that limited commercial banks from underwriting securities. They were successful to a degree, but at great cost. According to Sargen, Morgan’s biggest strategic mistake was not buying State Street Bank in 1990 when it had the chance.

 

With the late 1990’s bull market in full swing Morgan is left behind. All the action is in the new economy, while Morgan is wedded to the old economy. Its stock lags and of a sudden Morgan becomes takeover bait. Sargen cites an interesting vignette when Morgan invites twenty something TheGlobe.com CEO to address their annual managing directors meeting. Krizelman addresses the crowd in jeans and a tie-dyed T-shirt. The game was over, and Chase Manhattan Bank would soon acquire Morgan. However, the culture class was enormous with Chase and Morgan people hating each other’s guts. It would only settle down after JPMorgan Chase would acquire Bank One bringing with it a star banker named Jamie Dimon. It would be Dimon who restores the franchise to its past glory, but in a completely unrecognizable incarnation. Sargen would be long gone by then.

 

Because I am a finance and history geek and was involved in many of the big events discussed in the book, I thoroughly enjoyed reading Nick’s account. However, I am not so sure about the general reader. It would have helped if either there was more discussion about all the Morgan executives named in the book, or alternatively dropping a host of names. It was confusing at times. Further it would have helped to have annual data on Morgan’s profitability metrics and stock price. Nevertheless, from my biased perspective it is well worth the read.

 

*-I received the book from Sargen.

For the full Amazon URL see: A Reflection on the House of Morgan (amazon.com)

 

My Amazon Review of Paul Jankowski's "All Against All: The Long Winter of 1933 and the Origins of the Second World War"

 

From Postwar to Prewar

 

Brandeis University history professor has written a very dry academic book about the origins of World War II through the twin lenses of the 1932-34 League of Nations Geneva Disarmament Conference and 1933 London World Economic Conference. He spends most of the book on the disarmament conference. He not only covers the major powers, but he also covers Poland, Hungary, Czechoslovakia, and Yugoslavia.

 

By mid-1932 the Versailles settlement was breaking down. Germany was given the right to rearm and reparations, for all practical purposes, were eliminated at the Lausanne Conference. Thus, before Hitler Germany was free to become a great power once again in Europe.

 

The lynchpins of the postwar era were the notion of collective security via the League of Nations, the Locarno Treaty which formalized borders in the west and the Kellogg-Briand Pact which in principle outlawed war. On the economic side the Dawes and Young plans of 1925 and 1929 established an orderly process, at least temporarily, for German reparations payments and the recycling of capital through American loans. This gives lie to the notion that the United States was isolationist in the 1920’s. Further the U.S. with observer status was an active participant in the disarmament talks in Geneva.

 

Nevertheless in 1931 Japan invaded Manchuria and established the puppet state of Manchukuo. The League sat idly by and allowed it to happen, so much for collective security. With Mussolini’s Italy hellbent to seize Ethiopia and Stalin’s Russia beginning to develop a major armaments industry, the disarmament conference was in major trouble. A rearmed Russia and Germany force the states in between to rearm as well. Simply put everyone is going their own way.

 

The fatal conceit of the disarmament conference was that if Europe could not agree with a Locarno in the east that would confirm the borders there, how could it possibly agree on a general disarmament. The coup de grace, is of course Hitler coming to power with his very aggressive aims towards eastern Europe.

 

The World Economic Conference does not get the attention it deserves. Faced with a global depression the leading countries of the world got together in London in June 1933. Britain left the gold standard in 1931, the U.S. had just left it in May 1933, and under the weight of the economic collapse and worldwide protectionism international trade went into a tailspin. The goal of the conference was to restore trade and some form of the gold standard. It failed miserably when President Roosevelt blew up the conference with a telegram and sent the American delegation home. Keynes applauded Roosevelt’s decision because any return to gold, would have put the global economy into a straitjacket by preventing the needed reflation. From the point of view of economics Keynes was correct, but from the point of view of politics it sent a signal to Hitler and Mussolini that the U.S. had withdrawn from Europe. Collective security was done for with the U.S. withdrawing from the world. America’s true isolation was in the 1930’s, not the 1920’s. As a result, the world moved decisively from a postwar to prewar world.

 

Jankowski’s lessons for today are obvious. America’s withdrawal from the world and Britain’s from Europe contain the same seeds of destruction we witnessed in the early 1930s. An all against all world ends badly. I only wish Jankowski wrote with more drama.

For the full amazon URL see: From Postwar to Prewar (amazon.com)

My Amazon Review of Tobias Straumann's "1931:Debt, Crisis and the Rise of Hitler"

Annus Horribilis

Although most scholars put the focus of the Great Depression on events in the United States, Swiss historian Tobias Straumann turns his keen eye on the role Germany had in making the Great Depression “Great.” In fact the 1932 annual report of the Bank for International Settlements noted “In the circumstance of the German problem- which is largely responsible for the growing financial paralysis of the world – call for concerted action Governments alone can take.” To Straumann there is a straight line from the May 1931 failure of the Credit Anstaltt, to Germany suspending convertibility in the wake of bank runs in July, to Britain abandoning the gold standard in September which was followed in September and October by the Federal Reserve raising its discount rate for 1.5% to 3.5% in the teeth of the depression.

He tells part of his story through the eyes of Viennese economist and Swiss banker Felix Somary. As early as 1926 Somary was warning about the unsustainability of the reparations regime establish after the Dawes Plan and as the 1920s roared on he became even more bearish. Unfortunately to be right early is sometimes viewed as being wrong. Trust me, I have experience with this. As a result his warnings went unheeded, even from Keynes.

Although the title of this book is 1931, it really starts in 1930 with the adoption of the Young Plan which modestly reduced German reparations, but made the payment structure more rigid. The plan was predicated on a growing world economy that was quickly turning into a tailspin. From the outset both Hitler and the Communists became severe critics of the plan.

The man caught in the middle was German Chancellor Heinrich Bruning, a centrist. Straumann is more sympathetic to Bruning than many historians. Simply put he had limited options and was hemmed in by the gold standard which left him only one choice, austerity. As a result in the September 1930 elections the Nazi Party received 19% of the vote and becomes the second largest party in Germany. Although we now think of Hitler with his militaristic racist screeds, in 1930 he was offering very serious criticism of the Young Plan in his speeches. Hitler’s electoral gains terrify foreign investors leading to a run on Germany’s gold reserves. Put bluntly, Bruning was in a box and the countdown began.

By 1931 the downward spiral continued with even more austerity coming from Bruning. To maintain domestic popularity Bruning plays the nationalist card in returning the Rhineland to German control and proposing a customs treaty with Austria. Of course the French go crazy and that limits the availability of banking credits from France. Hence both German and French politicians were prisoners of their own electorates. The lesson here is that international agreements must have domestic support in order to work.

After the July 1931 banking collapse the way was open for Hitler. In the October election the Nazis receive 37% of the vote and become the largest party in Germany. With the Communists achieving 15% of the vote, the two extremist parties work hand in glove to bring down Bruning. And the rest as they say is history.

Straumann has written an important history that should be required reading in the capitals of Europe. Although the EU succeeded in Greece, at least for now, it might not be so lucky with Italy. It should heed the lessons of “1931.”

For the full amazon URL see: https://www.amazon.com/review/R3CO3LP16KVA4M/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv