Currency Wars_ The Making of the Next Global Crisis - James Rickards [28]
History has its echoes. Decades after the Jekyll Island meeting, Frank Vanderlip’s National City Bank and Charles Norton’s First National Bank merged to become the First National City Bank of New York, which later shortened its name to Citibank. In 2008, Citibank was the recipient of the largest bank bailout in history, conducted by the U.S. Federal Reserve. The foundation laid by Vanderlip and Norton and their associates on Jekyll Island in 1910 would prove durable enough to bail out their respective banks almost one hundred years later exactly as intended.
World War I and the Treaty of Versailles—1914 to 1919
The last of the antecedents of Currency War I was the sequence of the Great War, the Paris Peace Conference and the Treaty of Versailles.
World War I ended not with surrender but with an armistice, an agreement to stop fighting. With any armistice, the expectation is that the cessation of hostilities will allow the parties to negotiate a peace treaty, but in some cases the negotiations break down and fighting resumes. Negotiation of a lasting peace was the objective of the Paris Peace Conference of 1919. England and France were well aware that the financial bill for the war was about to be presented. They saw the Paris Peace Conference as an opportunity to impose these adjustment costs on the defeated Germans and Austrians.
However, a successful negotiation in Paris was by no means a foregone conclusion. Although the German army and navy were definitely beaten by November 1918, as of the spring of 1919 no peace treaty had been concluded and it seemed increasingly unlikely that the Allies would be willing or able to resume the war. Therefore the reparations negotiations were just that: negotiations. The Allied ability to dictate terms had withered between November 1918 and March 1919, when the subject was taken up. Now Germany would have to be prevailed upon to agree to any plan the Allies devised.
The size and nature of German reparations were among the most vexing questions facing the Paris Peace Conference. On the one hand, Germany would be asked to cede territory and some industrial capacity. On the other hand, the more Germany gave up, the less able it would be to pay financial reparations that were also being demanded. France had its eye on German gold, which in 1915 had amounted to over 876 metric tons, the fourth largest hoard in the world after the United States, Russia and France.
While these reparations are often thought of solely in terms of how much Germany could afford to pay the Allies, the picture was considerably more complicated, as both the winners and the losers were in debt. As Margaret MacMillan writes in her book Paris 1919, both Britain and France had loaned vast amounts to Russia, which defaulted in the wake of the Russian Revolution. Other debtors, such as Italy, were unable to repay. Yet Britain owed $4.7 billion to the United States, while France owed $4 billion to the United States and another $3 billion to Britain. Virtually none of the debtor nations could afford to repay. The entire mechanism of credit and trade was frozen.
The issue was not just one of German reparations to the Allies but of a complex web of inter-Allied loans. Something was needed to reprime the pump and get credit, commerce and trade moving again. The optimal approach was to have the strongest financial power, the United States, begin the process with new loans and guarantees on top of those already provided. This new liquidity, combined with a free trade area, might have encouraged the growth needed to deal with the debt burdens. Another approach, also with much to recommend it, was to forgive all the debts and start the game over. While it would be difficult for France to forgive Germany, it would be a relief for France to be forgiven by the United States: the net effect