New York bankers challenge the City of London

amount and means for Germany to repay its war damages to the Entente powers.

And, being good conservative bankers, Morgan and friends could not let the war loans of the Allied powers simply be forgotten in the euphoria of peace, despite the assumptions of A.J. Balfour and others in the British government that such magnanimity would follow. Morgan & Co. had quietly shifted their private British government loans over to the general debt of the U.S. Treasury as soon as the United States offi cially entered the war, in effect making the British debts the burden of the American taxpayers after the war. Despite this, Morgan interests made sure they had a major stake in the postwar Versailles reparations fi nancing. As the U.S. war debt grew beyond anything known before in her history, the distinction between Morgan’s interests and that of the government became blurred. The U.S. government increasingly made itself simply a useful instrument for the extension of the new power of New York’s international bankers.

NEW YORK BANKERS CHALLENGE THE CITY OF LONDON

During the course of the Versailles talks, a new institution of AngloAmerican coordination in strategic affairs was formed. Lionel Curtis, a longtime member of the secretive Round Table or ‘new empire’ circle of Balfour, Milner and others, proposed organizing a Royal Institute of International Affairs. The proposal was made on May 30, 1919, in the midst of the Versailles deliberations, at a private gathering at the Hotel Majestic. Philip Kerr (Lord Lothian), Lord Robert Cecil and other members of the Round Table circle attended that formative meeting. The fi rst nominal mission of the new institute would be to write the ‘offi cial’ history of the Versailles peace conference. The Royal Institute received an initial endowment of £2,000 from Thomas Lamont of J.P. Morgan. Historian Arnold J. Toynbee was the institute’s fi rst paid staff member.

The same circle at Versailles also decided to establish an American branch of the London Institute, to be named the New York Council on Foreign Relations, so as to obscure its close British ties. The New York Council was initially composed almost entirely of the Morgan men, fi nanced by Morgan money. It was hoped that this tie would serve to weld American interests into harmony with England’s after Versailles. This was not to occur for some years, however.4

It took the entirety of the 1920s, in often bitter, almost military, confl icts over war-debt repayment terms, rubber agreements, naval accords, the parity of a new gold standard and most signifi cantly, control of untapped oil regions of the world, before the AngloAmerican condominium emerged in its present form, and before the policy harmony between the circles of Morgan’s Council on Foreign Relations and London’s Royal Institute could take hold. In 1922, a Wall Street lawyer, John Foster Dulles, a key participant at the Versailles talks, who had authored the Treaty’s Article 231, the infamous German ‘war guilt’ clause, wrote in the Council on Foreign Affairs magazine Foreign Affairs about the thinking of Morgan and his fellow New York bankers. It was quite simple; he stated: ‘There cannot be a war without losses. The resulting losses are measured by debts. The debt assumes varying forms—internal, reparations, Inter-allied, etc.—and is generally represented by bonds or notes.’

Dulles calculated that Britain and the other Allied powers owed the United States $12,500,000,000 at 5 per cent interest. Britain, France, and the other Entente countries, in turn, were owed by Germany, according to the Versailles demands, the sum of $33,000,000,000. The fi gures were beyond the scale of imagination at that time. The sum, 132 billion gold marks, was decided fi nally in May 1921. Germany was offered a six-day ultimatum to accept the terms; if she rejected them, the industrial Ruhr Valley would be militarily occupied. This latter issue was to reemerge soon afterwards with a global fi ght for oil playing a crucial motivating role in the background.

Germany, the main target of Versailles negotiators, had also lost valuable raw material resources, as all her colonial possessions had been taken away at Versailles. Her 25 per cent share of the Turkish Petroleum Gesellschaft was seized, and ultimately given over to France by Britain.

The American Congress refused to sign the Versailles Treaty and the included League of Nations apparatus to enforce it, but Morgan and the New York Federal Reserve axis proceeded to dominate the fi nancial destiny of Europe in the postwar period. The combined burden of the Versailles German reparations debt, as well as the inter-Allied debts of the respective ‘victors’—the war debts of France, Italy and Belgium to Britain, and in turn, of Britain to the United States—overwhelmed world fi nance and monetary policy from 1919 through to the October 1929 Wall Street crash. The entire pyramid of post-Versailles international fi nance was propped up on the edifi ce

of the punitive war-debt structure. Morgan and the newly powerful New York banks refused to compromise on the debt issue.

The scale of the combined war debt burden of Europe was so large that its annual debt service demands on the world fi nancial system were greater than the entire annual foreign trade of the United States during the 1920s. New York’s international banking community redirected world capital fl ows to the service of this staggering debt burden. The debt servicing was carried out at the expense of the desperately needed investment in rebuilding and modernizing the war-torn economies of Europe.

J.P. Morgan & Co. enjoyed the competitive advantages provided by a devastated European economy, in which New York credit could dictate the terms. Profi ts from the new European lending were far greater than gains from investment in the postwar U.S. economic expansion. New York fi nancial interests centered around Morgan and the New York Federal Reserve under Morgan’s Benjamin Strong deliberately kept U.S. interest rates low. As a consequence, American loans fl ooded postwar Europe and the rest of the world, where capital earned a higher risk premium than at home, while London and a new Bank of England governor, Montagu Norman, looked on nervously at the American fi nancial incursion into their traditional markets.

This early postwar Anglo-American rivalry in the vital area of banking reached an alarming level in 1924, when the United States threatened to co-opt the gold and raw materials center of the British Empire, secured only two decades earlier through the bloody Boer War. In late 1924, the South African government invited an international commission headed by American fi nancial expert, Princeton Professor Edwin W. Kemmerer, to give advice on whether South Africa should return to an international gold standard, independently of Britain. As late as 1924, the devastation of the war had still prevented Britain from being able to return to a gold standard without suffering severe economic hardship, at a time when Britain still had one and a half million unemployed.

Kemmerer told the South Africans they should establish direct fi nancial ties with New York banks and bypass their traditional dependence on London. As the powerful fi nancial interests in the City of London well knew, this would open the door for the United States to economically co-opt what Britain had militarily fought to secure, and with it, gain dominant power over the world gold supply, and thereby power over world credit. London acted quickly to preempt this consequence, but the wound did not heal rapidly.5