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15 percent, which would have caused massive cutbacks in business investment and would
have plunged the economy into depression.
But the New York Fed also happened to be right. All the jawboning about reducing credit
for speculators proved to be pointless. It did in fact succeed in curbing the amount of money
going into brokers loans from banks between early 1928, when the Board first declared war
on brokers loans, and October 1929, banks cut their loans to brokers from $2.6 billion to $1.9
billion. Meanwhile, other sources of credit U.S. corporations with excess cash, British stock-
brokers, European bankers flush with liquidity, even some Oriental potentates more than
made up for the decline by increasing their funding of brokers loans from $1.8 billion to $6.6
billion. It was these players, all of them outside the Fed s control, who were by far the most
important factor supporting leveraged positions in the stock market.
Even Adolph Miller, the most vocal opponent of speculation in general and brokers loans
in particular, could not resist the temptation to earn 12 percent on his own savings. In 1928,
Fed officials discovered that he had invested $300,000 of his own money in the call market
through a New York banker, personally helping to feed the very speculation that he so vocifer-
ously opposed at the Board.
One is led to the inescapable but unsatisfying conclusion that the bull market of 1929 was
so violent and intense and driven by passions so strong that the Fed could do nothing about
it. Every official had tried to talk it down. The president was against it, Congress too; even the
normally reticent secretary of the treasury had spoken out. But it was remarkable how difficult
it was to kill it. All that the Fed could do, it seemed, was to step aside and let the frenzy burn
itself out. By trying to stand up to the market and then failing, it simply made itself look as im-
potent as everybody else.
PERHAPS THE MOST perverse consequence of the bubble was that by the strange
mechanics of international money, it helped to tip Germany over the edge into recession. For
five years, hordes of American bankers had descended on Berlin to press loans upon Ger-
man companies and municipalities. However much Schacht had tried to wean his country
from this dependence on foreign capital, there was little he was able to do about it. Over the
five years between 1924 and 1928, Germany borrowed some $600 million a year, of which
half went to reparations, the remainder to sustain the rebound in consumption after the years
of austerity.
In fact, Germany s appetite for foreign exchange was so great that even the deluge of
long-term loans from U.S. bankers was not enough, and it was forced to supplement this with
short-term borrowings in international markets closer to home. Out of the total of $3 billion for
which German institutions signed up in those years, a little less than $2 billion came in the
form of stable long-term loans. But more than $1 billion was hot money, short-term deposits
attracted to German banks by high interest rates 7 percent in Berlin compared to 5 percent
in New York and subject to being pulled at any time. In late 1928, as the U.S. stock market
kept climbing and call money rates on Wall Street skyrocketed, American bankers mesmer-
ized by the phenomenal returns at home suddenly stopped coming to Berlin.
It was the combination of the drying up of foreign credit due to high interest rates induced
by the U.S. stock bubble and the residual lack of confidence among German businessmen
following Schacht s ill-fated strike against the stock market in 1927 that drove Germany into
recession in early 1929. Moreover, as long-term American loans stopped, Germany was
forced to rely more and more on hot money, some raised from London, but much from by
French banks, then flush with all the excess gold that had been sucked into their country.
Germany therefore found itself slipping into recession just as its foreign position was becom-
ing increasingly vulnerable. A British Treasury official, recalling how much money France had
pumped into Russia before the war, could not help remarking with cynical detachment, The
French have always had a sure instinct for investing in bankrupt countries.
The collapse in foreign loans and the recession could not have come at a worse time for
Germany. Under the Dawes Plan schedule, Germany was to have fully recovered by now,
and was due to ramp up its reparations payments in 1929 to the full $625 million a year, about
5 percent of its GDP. This would not have been an intolerable burden by historical standards.
But Schacht, for that matter most of the German leadership, had always been resolute that
with its new constitution still fragile, its body politic still divided, its people still bitter over the
defeat, and its middle classes decimated by the ravages of the inflation years, Germany
simply could not pay this amount.
As 1929 and the scheduled rise in payments approached, Schacht was of two minds
about what to do. He often spoke about simply waiting for the economic crash that so many
financial experts were predicting. It was a common view in Britain, held, for example, by Fred-
erick Leith-Ross, the top Treasury official responsible for reparations, that the world was
headed for a massive payments crisis in which several European countries would default on
their debts, setting the stage for a general restructuring of all international commitments
arising from the war. Europe could then wipe the slate clean of both reparations and war
debts and start over again. Occasionally, Schacht even talked almost too glibly about provok-
ing such an upheaval himself.
The alternative was to reopen negotiations before the jury-rigged payments system broke
down. During the Long Island central bankers meeting of 1927, Schacht had made enough of
a stir about Germany s foreign debt problem as to convince Strong and Norman that
something had to be done soon, to the point that Strong in turn pressed Agent-General Sey-
mour Parker Gilbert to strike a deal before the whole thing blew up in their faces.
Gilbert, effectively Allied economic proconsul for Germany for the last four years, was
even then all of thirty-six years old. A precocious genius, he had graduated from Rutgers at
the age of nineteen, from Harvard Law School at twenty-two, had become one of the four as-
sistant secretaries at the U.S. Treasury at the age of twenty-five, and been promoted to un-
der-secretary, the second most powerful official in the department at the age of twenty-eight.
In 1924, at the tender age of thirty-two he had been appointed agent-general for reparations,
responsible for managing Germany s payments, and most important, for deciding how much it
could afford to transfer into dollars every year. In the hands of this tall, shy, boyish, sandy-
haired young man from New Jersey lay the immediate fate of the world s third largest eco-
nomy.
There was little doubt that they were very capable hands. Reserved, bookish, and taciturn,
Gilbert was uncomfortable around people, speaking with a mixture of awkwardness and ar-
rogance, mumbling the words so that one could hardly understand his English. But his intel-
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