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ritories that Germany, late to the scramble for empire, had accumulated, including most of
Samoa, part of New Guinea, Togoland, German South-West Africa, the Cameroons, and Tan-
ganyika which Schacht implausibly claimed had been worth $20 billion to Germany, an
amount that overshadowed even the bill for reparations. He now argued that Germany would
be unable to meet the victors demands unless its former colonies were restored. Even more
provocatively, he demanded that the Danzig corridor, the most contentious strip of land in all
Europe, taken from Germany to give Poland access to the sea, should also be returned.
In seeking to tack what amounted to a territorial revision of Versailles upon what was sup-
posed to have been a purely financial negotiation, Schacht had gone out on a limb, and
without the permission, or even the knowledge, of his own government. The détente between
Germany and the Allies, so painstakingly achieved since the withdrawal from the Ruhr five
years before, had rested on the principle that Germany would not seek to overturn the political
or territorial clauses of the 1919 settlement. Here was Schacht in one stroke trying to under-
mine the whole fragile basis of European peace.
It has always been something of a mystery what Schacht was hoping to achieve. He did
have a habit of shaking things up without quite knowing where it would all end. But he must
have known that no one at the Young Conference had the authority to renegotiate crucial
parts of the Treaty of Versailles, that the gambit was bound to end in failure. Some thought he
was just grandstanding for domestic consumption to prepare for a political career on his re-
turn to Germany, others that he was just trying to provoke a crisis to give himself a smoke
screen to avoid taking the blame for the poor deal for Germany.
Schacht s proposal was initially received in stunned silence. Once the other delegates had
had time to absorb his demands and he had made them sound like an ultimatum the table
dissolved into an uproar, with cries of astonishment and outrage. Moreau was so furious that
he pounded the table and, in a rage, flung his ink blotter across the room.
With the conference now close to collapse, Pierre Quesnay of the Banque de France told
one of the Americans that evening that French depositors would withdraw $200 million from
German banks by noon the next day. It was unclear whether this was intended as a threat or
a prediction. In any case, Germany suddenly began to lose gold at an accelerating
pace $100 million over the next ten days, forcing the Reichsbank to raise rates to 7.5 per-
cent, despite Germany s being deep in recession, with two million unemployed.
Seeing this as the first salvo in an economic war, Schacht accused the Banque de France
of having secretly orchestrated the withdrawals to force his hand and threatened that if Ger-
many s reserves continued to fall, he would have no option but to invoke the transfer clause of
the Dawes Plan to default on all further reparations. At that moment, such a move would
have set off a global financial meltdown. German banks, municipalities, and corporations
owed money to everybody $500 million to British banks, several hundred million to French
banks, and some $1.5 billion to American lenders. Had it defaulted on reparations at that
point, every financial institution with exposure to Germany would have tried to pull what
money it could out of the country. Germany would have had to suspend payments on all its
commercial loans, creating a domino effect across the globe. Half the London banks would
have gone under. Britain, its reserves already depleted, would have been flung off the gold
standard. The financial chaos would have been catastrophic.
The Banque de France had in fact considered launching such a preemptive financial strike
against Germany but rejected the idea as too risky. Moreau did not want to be blamed for a
world economic collapse. Some French banks undoubtedly did pull some deposits home but
this was mere commercial prudence in the light of the deteriorating turn of events. Meanwhile,
in an effort to forestall a breakdown in world finances, Norman and George Harrison of the
New York Fed had begun mobilizing money to support the Reichsbank.
At this point, with a financial crisis looming, Lord Revelstoke saved the day by suddenly
dropping dead. The consequent suspension of the proceedings forced the parties to catch
their breath for a few days and step away from the brink. Schacht left with the German deleg-
ation for consultations in Berlin. There he found the cabinet up in arms. He had clearly over-
reached. The foreign minister, Stresemann, who had repeatedly tried to warn Schacht not to
overstep his authority, feared that he might have jeopardized Germany s still very delicate
political position. Other ministers were alarmed about the domestic economic ramifications.
Not only had unemployment already reached two million, but a wave of strikes was now
threatening to put another million men out of work. Schacht s gamble threatened to plunge
Germany into even deeper recession.
Schacht fought back. He blamed Gilbert for having misled him. He even turned on his
erstwhile patron Stresemann, whom he accused of having undercut him by caving in to the
Allies behind his back even before the conference had started and of now making him the
scapegoat for the political fallout at home.
While Schacht, even at this stage, would have been willing to go for broke and risk a glob-
al banking crisis, his government was not. Fearing that Germany would once again become a
pariah nation, the cabinet disavowed his position, forced him to recant, and insisted that he
return to Paris and resume negotiations on the basis of the last Allied proposal. He reluctantly
agreed, provided the cabinet gave him political cover by publicly accepting final responsibility
for any settlement. Schacht had no intention of ending up as the fall guy for what nationalists
were bound to see as a sellout.
The German delegation returned to the table. In the middle of May, negotiations were
again suspended for few days though this time it was so that Moreau could return to fight
the mayoral elections in his tiny hamlet of Saint Léomer. A few weeks later a compromise was
reached. Germany would pay a little under $500 million for the next thirty-six years and $375
million a year for the twenty-two after that to cover the Allies debt to the United States. A new
bank, the Bank of International Settlements (BIS), jointly owned by all the major central
banks, would be set up to administer and where possible to commercialize the modern
term is securitize these future payments, that is, to issue bonds against them. Any profits
generated by the Bank were to accrue to Germany to help defray the burden. All foreign con-
trol over German economic policy was to be removed Gilbert could pack his bags and join
Morgans. The transfer protection clause was eliminated, although a small safety valve was re-
tained whereby should Germany get into economic trouble, it could postpone two-thirds of its
payments for two years.
In the circumstances, this was truly the best deal that Schacht could get. As the delegates
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