Montagu Norman and the Bulwarks of Civilization: Today’s Economic History

Morgan partner Russell C. Leffingwell (1934): “Monty [Norman] says that Hitler and Schacht are the bulwarks of civilization in Germany and the only friends we have. They are fighting the war of our system of society against communism. If they fail, communism will follow in Germany, and anything may follow in Europe.”

Ron Chernow (1990): The House of Morgan: “When [Morgan partner Thomas W.] Lamont learned that [Reichsbank President Hjalmar Horace Greeley] Schacht was contemplating selective repudiation in 1934…

…he reminded him that Morgans had supplied over half the Dawes funds and a third of the Young funds. With pardonable overstatement, he said the bank had always advocated moderation toward Germany. Most of all, Lamont appealed loftily to international law, promises made to investors that these loans superseded all others and enjoyed special political protection. Lamont was speaking reasonably to a man already hip-deep in diabolic machinations: “Of course, we expect to see the Reich obligations on [the Young Loan], as on the Dawes loan, carried out. Otherwise all international agreements might as well be torn up…”
From Dr. Schacht’s reply, it was clear that the usual norms of business behavior no longer applied in Germany. Written in an extravagant, hysterical style, it was not the sort of letter people usually sent to the sedate precincts of 23 Wall. Schacht began by saying Germany’s problem was not default but a transfer difficulty resulting from a lack of foreign exchange. Then he veered off into bombast and mad whimsy: “Whether you may threaten me with death or not will not alter the situation because here is the plain fact that I have no foreign valuta [foreign exchange], and whether you may call me immoral or stupid or whatever you like it is beyond my power to create dollars and pounds because you would not like falsified banknotes but good currency…. I would be willing to sell my brain and my body if any foreigner would pay for it and would place the proceeds into the hands of the Loan Trustees, but I am afraid that even the proceeds of such a sale would not be sufficient to cover the existing liabilities…”
Schacht may have wanted to drive a wedge between England and America, perpetuating tensions over war debts and reparations. By threatening to strike a separate bargain by which British bondholders received some payments (albeit at lower interest rates) and Americans didn’t, he delivered a blow to Anglo-American amity. (Schacht argued that Germany’s trade surplus with England allowed it to make the interest payments.) The fight over unequal treatment, first with German, then with Austrian, debt, would prove the most divisive issue ever between J. P. Morgan and Company and Morgan Grenfell. There had always been a latent contradiction at the heart of the Anglo-American Morgan empire. So long as U.S. and British interests coincided, it could be straddled. When those interests diverged, however, British and American partners were obliged to follow the wishes of their respective governments. They were too deep in politics to do otherwise. With J. P. Morgan and Company now a minority stockholder rather than a partner in Morgan Grenfell, there was also a new structural distance between the two firms. For more than twenty years, Teddy Grenfell had been the Morgan ambassador to the British government. Now, somewhat unwillingly, he conveyed stiff protests from his New York partners to Whitehall….
Lamont followed this up by meeting with Neville Chamberlain, then chancellor of the Exchequer. It was a vintage Lamont performance — tough resolve beneath suave civility. He said Morgans had become involved with Germany only because the Bank of England wanted to put Weimar Germany back on its feet and enable it to make reparations. Affable and noncommittal, Chamberlain asked what he would recommend. Lamont asked whether Chamberlain would scuttle a separate accord with Germany if no justice were done to American investors…. The British never rode to the rescue. What made this so galling to Lamont was that he always believed Britain had initiated the side deal with Schacht. Morgan partners were thunderstruck by what they saw as British cynicism and the end of financial leadership they had always associated with the City. Schacht himself didn’t seem to dispute Lamont’s version of events… professed dismay over discrimination against American bondholders. He said the British had blackmailed him into their deal and kept telling Harrison “God bless you!” for protesting to the foreign minister….
Jack Morgan appealed to Monty Norman, whom he believed to be the one person outside Germany with any influence over Schacht. Norman wasn’t so upset by the German actions and was willing to make allowances for the Nazis. He continued to harbor more hostility toward France than toward Germany. In July 1934, he arrived in New York looking sickly and dispirited. He immediately telephoned Russell Leffingwell and took a cab down to 23 Wall. Leffingwell summarized their meeting for Lamont: “Monty says that Hitler and Schacht are the bulwarks of civilization in Germany and the only friends we have. They are fighting the war of our system of society against communism. If they fail, communism will follow in Germany, and anything may follow in Europe.”
This high regard for German culture had led Norman to back the 1924 Dawes loan in the first place. But the admiration now persisted under altered circumstances. As we shall see, most Morgan partners took a relatively benign view of German intentions, although there were skeptics from the start. The cynically acute Grenfell first penetrated Schacht’s disguises, already believing in 1934 that he was building up stocks of raw materials with which to prepare Germany for war.
Meeting with Schacht at Baden-Baden in 1935, Lamont worked out a debt settlement that provided about 70 percent of the interest due on the two large German loans. After this meeting, Lamont and Schacht continued to perform a strange duet by mail. They pretended to be normal bankers in normal times, although Schacht’s behavior seemed increasingly erratic. In 1936, Morgan Grenfell partner Francis Rodd visited Schacht in Berlin and found him in a crazily jocular mood. He rather giddily instructed Rodd to “send his love” to Lamont and praised Morgans as the world’s premier bank. Schacht even invited Lamont to attend the Olympic Games, held that year in Berlin.
In a power struggle, Schacht finally lost out to his arch rival, Göring. His downfall began when he balked at buying foreign exchange for Nazi propaganda efforts abroad and tried to limit military imports of raw materials to what could be obtained by barter arrangements. In the last analysis, Schacht was too orthodox a banker, favoring slower growth and civilian production rather than a permanent war economy. In 1936, sitting on the terrace at Berchtesgaden, Albert Speer overheard Schacht arguing with Hitler in his office. As Speer recalled:
Some time around 1936 Schacht had come to the salon of the Berghof to report…. Hitler was shouting at his Finance Minister, evidently in extreme excitement. We heard Schacht replying firmly in a loud voice. The dialogue grew increasingly heated on both sides and then ceased abruptly. Furious, Hitler came out on the terrace and ranted on about this disobliging, limited minister who was holding up the rearmament program:
“Some time around 1936 Schacht had come to the salon of the Berghof to report…. Hitler was shouting at his Finance Minister, evidently in extreme excitement. We heard Schacht replying firmly in a loud voice. The dialogue grew increasingly heated on both sides and then ceased abruptly. Furious, Hitler came out on the terrace and ranted on about this disobliging, limited minister who was holding up the rearmament program.”
Göring was put in charge of raw materials and foreign exchange. Although Schacht soon relinquished the economics ministry to Göring, he retained the Reichsbank presidency until January 1939.
Source: RCL, Group 1030, Series I, Box 4, Folder 96: memorandum to Thomas W. Lamont, July 25, 1934.

Originally published at www.bradford-delong.com.