Volume V, Number 2, Fall 2009 · Special Issue: Proceedings of the 2008 HAAS Conference


"Private American Help in the Financial Reconstruction of Central Europe in the 1920s" by Zoltán Peterecz

Zoltán Peterecz is Assistant Professor at the Eszterházy Károly College Eger, Hungary. E-mail:

This study wishes to introduce the role that the United States played in helping to achieve a successful launch of both the Austrian and Hungarian financial reconstructions in 1923 and 1924, respectively. In both cases, the programs were introduced and carried out by the League of Nations. Since the United States was not a member of the organization, it was even more significant what contributions the League could secure from the new No. 1 power. Obviously, any such participation was mainly imaginable in the private sphere. (Works concerning the subject include Soule; Hemmig Meyer; Joan Wilson; Costigliola; Péteri; Wueschner; and Rosenberg). The center focus of this study is how great a role the League wanted the US to play in the reconstruction programs, and in the end how much America indeed took part in them.

The American foreign policy took an interesting turn after the First World War. Although in the beginning the United States tried to remain neutral, it was only a question of time when it entered the carnage raging on in Europe. The American participation would have made it possible for the US to influence postwar Europe, and President Woodrow Wilson was an ardent advocate of committing its country to the task of spreading democracy. However, blunders both at the Versailles Peace Conference and back in the United States made the new number one country stay away from the old continent. America again chose an isolationist behavior in the realm of politics, which was the official line of policy all the way to the Second World War.

It does not mean that America was not closely following the European landscape. Although it did not become a member of the League of Nations, it was monitoring what the body was doing and on rare occasions, American delegates took part in the League’s work. Still, the most common form of collaboration was unofficial or semi-official at best. The United States did not want to take responsibility for Europe and concentrated instead on Latin America and the Far East. But Europe needed American financial help for the restoration of the war-ravaged continent. As a solution, American private capital was active in Europe and American loans were a typical feature of the 1920s.

The presence of American capital had a dual significance. On the one hand, financial reserves in Europe were depleted and Great Britain, which remained the most intact from that point of view on the continent, was not rich enough and willing to pay every rehabilitation effort. Without American capital it was unimaginable to find all the money that was needed to make Europe healthy again. On the other hand, the presence of American private money meant political repercussions. If American money was involved, suddenly the political circumstances around an issue became less complicated. Simply, the United States carried so much political weight that the presence of an American banking house in a loan automatically meant that the success was guaranteed.

Although the US government distanced itself from any such loans officially and it believed that it should be for the private sphere to take up the initiative, in the background it carefully monitored American loans and their political underpinnings. Washington let the financial and economic interests define American foreign policy in the 1920s. A new kind of dollar diplomacy meant the presence of American private money everywhere across the globe. Obviously, where American private financial interests were at stake, political involvement was also a factor. This is exactly why it is of great importance to take a look at the American contribution in the Central European reconstruction efforts, namely in the cases of Austria and Hungary.

Austria was the first country to undergo the financial reconstruction as drawn up by the League of Nations. On the one hand, the League very much wanted an American person to fulfill the position of Commissioner-General, a League official who was supposed to stay in Vienna and provide control over the period of the reconstruction and to be the link between Austria and the organization. As a starting point, he was not to represent any of the neighboring countries or powers that were guaranteeing the proposed international loan. Therefore a person was needed with good credentials from a possibly detached country with the ability to work with the political tension prevailing between the two main parties in Austria.

With the narrow possibilities of suitable countries, it was soon clear that the person was to be either an American or a Dutch, both belonging to the neutral zone. The search quickly settled on an American, Roland William Boyden, who quickly became a very serious candidate. He had been an unofficial delegate on the Reparation Committee since 1920, meaning that he had no right to vote, but in effect, his ideas and opinions counted as much as that of any official delegates. He also represented his country unofficially at the Brussels Conference in 1920 and his name was well known all over the continent. When Eric Drummond, Secretary-General of the League, broached the idea of securing Boyden as Commissioner-General to Lord Balfour, “the idea of appointing an American, intimately acquainted with the problems at issue, greatly appealed” to the latter (Monnet to Hankey, November 2, 1922, League of Nations Archives (LNA)). It is quite clear that, due to the political underpinning, the first option of the men trying to recruit a real candidate was to be an American.

Boyden seemed to hold the qualities needed from the political point of view. Aside from his being an American, he had “the required temperament and political aptitude for this task” (Salter 1961, 179). He had already proven on the Reparation Commission that he well understood both British and French policies, and he showed capability of conciliatory persuasion (Salter 1947, 164). In a politically divided country, the personal qualities of the League’s Commissioner might have meant the key to allaying the intensity of political controversy. Boyden was willing to accept the job and wrote to the State Department and asked whether they had any objection if he held such a position.

The US State Department, however, did not come to the rescue. It seemed to misunderstand the message of Boyden about the job, and after a quick and short answer came giving the State Department’s consent, in a later telegram he was asked not to accept it (Boyden to Monnet and Salter, November 8, 1922, LNA). What really happened was a fatal twist of history. Someone in the State Department saw the first, consenting message and found it too curt in light of the service Boyden had given his country. So, in another telegram, they expressed their reluctance at losing Boyden to another post. It was not meant to prevent him from taking the new post, but he interpreted it that way (Salter 1947, 167). The League officials had no other choice but start at once to proceed with Alfred Zimmerman. Since there was not much time left and Zimmerman seemed to possess the technical qualities needed for the execution of the job, the League started serious negotiations with him. Since, in Arthur Salter’s words, he regarded “opposition to Socialism as a kind of crusade,” he was quite “unsuited for a task of political conciliation” (Salter 1947, 166; Salter 1961, 180). But to a large degree, exactly his experiences with Socialists in Rotterdam made Zimmerman seem so likely a candidate. All in all, Boyden out, the League was satisfied with the Dutchman.

From a political point of view, it was even more crucial that American private capital be involved in the launch of the international long-term loan to Austria. The League saw in an American participation a possible “precedent involving far-reaching consequences,” even if the money raised in the United States was a small one (De Bordes’ memorandum, April 27, 1923, LNA). The winter and early spring, however, indicated that the American market would not be interested in the Austrian loan (Strakosch to Norman, December 30, 1922, and J. P. Morgan to Morgan, Grenfell & Co., January 17, 1923, Norman to Bark, April 25, 1923, Bank of England Archives (BoE)). This was despite the facts that the Reparation Commission suspended the liens for reparation charges on any revenues pledged as security for the loan for twenty years, and the US Congress in a Joint Resolution on March 16, 1922, postponed the relief credits for twenty years as well, which bill the President approved and signed into law on April 6th (Congressional Record, 67th Cong., 2nd Session, 3997). Still, contrary to its earlier views, J. P. Morgan & Co. decided in the end to take up the Austrian case. This was despite the efforts of the banking house to secure American governmental assistance in the loan (Hogan, 65). In May, Thomas Lamont, a leading and influential partner in the firm, came over to Europe to deal with a tranche to be floated later in New York. The sheer weight of his presence meant that now the scheme had a realistic chance of becoming a reality.

To help convince American bankers and public opinion, Lamont prepared the ground for Zimmerman, who made a speech on June 4th in London to a group of American press people with the aim to advertise the Austrian reconstruction in the hope that the American tranche of the long-term loan would be realized. Montagu Norman, the Governor of the Bank of England, took the lion’s share of doing the background work. He had almost daily conversations with Lamont, and Norman himself gave an interview to American reporters, despite the fact that he avoided publicity as much as he could (Norman’s Diary Entries, May 30, June 1, June 4, and June 8, 1923, BoE).

The effort paid off and the London issue was made on June 11, the American tranche was launched on the same day. By 10:15, only fifteen minutes after opening, the American subscription totaled five times the $25 million the banks were committed to (Hogan, 66). Jack Morgan was surprised at the success and found the “oversubscription almost bewildering”( J. P. Morgan to Morgan, Grenfell & Co., June 11, 1923, BoE ). Now that the two heavyweights had gone along, the rest was formality. Throughout the summer the long-term loan of a net total of 611,000,000 gold crowns was floated in several countries. Great Britain stood out with subscribing more than 300,000,000 gold crowns (£14,000,000), while the United States’ share was about 123,000,000 gold crowns ($25,000,000) (League of Nations, 41). The American part was roughly equal to what had been missing in the spring. In this sense, American private capital came to the rescue.

In the case of Hungary, where the reconstruction plan was a close replica of the Austrian scheme, the American participation was again in focus for the same reasons. The League of Nations once more hoped to secure an American citizen for the post of Commissioner-General of Hungary, and right from the beginning, the prospects of a loan was thought good because of the assumption that American private capital would take part to one third of the total amount of 250 million gold crowns. Hungary, just like the League of Nations, was also in favor of having a person from overseas. From all possible angles, it seemed that there had to be an American Commissioner in Hungary.

The first target person was Warren P. Gould Harding, ex-Governor of the Federal Reserve Bank of Boston, 1916-1922. Without question, such a figure was very prominent and the news that Harding might accept the post was met with general enthusiasm, but in the end, Harding refused to take the post on account of his chronic illness. The next candidate was Roland Boyden, but the chances that he would accept were not great. He had the stinging memory of what had happened one and a half years earlier, when he was virtually assured to get the job of the Austrian Commissioner-General only to lose it in the last moment. Besides, his wife was very sick, which would have made it also very difficult for him to accept the position (Hevesy to Daruváry, March 15, 1924, Hungarian National Archives (HNA). As was expected, Boyden did indeed refuse to take on the job, but he recommended Jeremiah Smith (Telephone message from Drummond to Walters, March 24, 1924, LNA)). Even more momentous, Drummond informed the Hungarian Committee that the “highest financial circles [in] America strongly take same view” (Drummond to Members, March 24, 1924, The National Archives of Great Britain (TNA )). This was very significant, because as the case of the possible loan stood, it was “clearly of greatest importance obtaining person acceptable [to] financial circles best qualified” (Ibid.) The League needed someone for the post that was enjoying the sympathy of the American financial circles. Both the British Foreign Office and the Treasury were of the opinion that the main point was that the person should be an American citizen (Lampson’s notes, March 24, 1924, TNA). By April it was clear that Smith’s backing had grown irresistible. In addition to Boyden and Davis, both Pierre Jay of the Federal Reserve Bank of New York and Thomas Lamont of J. P. Morgan & Co. stood behind him (Memorandum, April 2, 1924, LNA). Most probably, it was Lamont’s opinion that made all the difference. As he wrote to Salter confidentially, “quite aside from personal liking for the two men last mentioned [I] would regard neither one as fully equipped for the job; Smith would be better than either” (Lamont to Salter, March 22, 1924, quoted in Salter to Bethlen, April 11, 1924, Ibid.). Since it was Lamont who arranged the American part of the Austrian loan, it was understandable that the League had a sensitive ear for his recommendation.

Jeremiah Smith, Jr. was the last son of a prestigious New England family. He had been Thomas Lamont’s schoolmate both at Exeter and Harvard, and thanks to his friend’s support, Smith had an international career. Upon the Morgan heavyweight’s request, Smith took part in the Paris Peace Conference as a counselor to the Treasury Department representatives and financial advisers to the American Commission. Because of Lamont’s unwavering help, Smith had gained immense experience in international negotiations pertaining to financial questions and problems. The international expertise Smith could boast of was a key aspect in accepting him, but naturally Lamont’s recommendation was the decisive factor. Although Smith remained an enigma, those who knew him described him in positive terms and absolutely as the right man for the job. Although there was some distrust toward Smith in the beginning from the Hungarian government, the League invited Smith to take the post. He accepted and took up his duties in Budapest on May 1, 1924.

The private capital of the United States was supposed to play a significant role in the international loan to Hungary. With or without a substantial London participation, it was crucial that the American market take up as big a part as possible. Both financially and politically, the presence of American banking houses in the Hungarian reconstruction would boost its chances for a successful outcome. When things started to heat up, the League tried to use every tool possible to convince J. P. Morgan & Co. to come in. Smith was asked to write to Morgan, where his advice was supposed to matter, and get “urging support” (Niemeyer to Smith, May 15, 1924, LNA). Accordingly, Smith, who many saw as the link to a successful American participation in the Hungarian reconstruction, cabled Lamont and provided him with his favorable impressions of the Hungarian situation (Smith to Strakosch, May 17, 1924, LNA). However, Morgan finally decided not to come in (Strakosch to Smith, May 23, 1924, BoE). As Lamont informed Smith, the Dutch and Czechoslovak issues had been poor and the American public was not ready for a new bond issue (Lamont to Smith, May 22, 1924, TNA). To be sure, J. P. Morgan & Co. was already busy preparing the ground for the big prize, the German loan in the upcoming fall (Costigliola, 490-2).

The main figures tried to find another banking house that would be willing to issue the Hungarian loan. There were a few American names out there. One of them was Speyer & Co. This investment house had signaled more than once that they wanted to come in for the Hungarian loan (Norman to Strong, April 9, 1923, BoE). The main London house, Rothschild, would have been willing to work in cooperation with other American houses but not with Speyer & Co. (Szapáry to Daruváry, May 28, 1924, HNA). The problem originated from J. P. Morgan’s dislike for James Speyer. Aside from the fact that the aristocratic American banker was, in his own words, “not very enthusiastic about Jews” and did not want to see business in their hands, business incidents had burdened their relation (Lamont, 210-1; Chernow, 74). Smith also thought that the Speyer house, though not insignificant, was speculative and its participation was to be avoided (Korányi to Teleszky, May 17, 1924, HNA). Still, negotiations with Speyer & Co. resumed. Although the offer was two percent worse than the English one, the Hungarian loan delegation was in favor of accepting it and asked quick consent from Budapest, which duly arrived (Strakosch to Smith, June 24, 1924, LNA). Finally, Speyers took up $7.5 million, and in the early days of July subscriptions started in the countries issuing the Hungarian loan. The major part was taken by Great Britain (almost 60% of the total), while the United States’ participation was only 12% of the total amount of $60 million.

In Hungary’s case thus the financial role the private American sphere played was negligible. Still, the psychological significance of even that smaller sum was huge. It was a proof of trust both in the reconstruction program initiated by the League of Nations and in Hungary, which was now hopefully set on the path of recovery. The little sum undertook by American bankers notwithstanding, the person in charge of the Hungarian finances for more than two years being an American was a notable issue. He was the link not only between the League of Nations and the Hungarian government, but also, although not in an official capacity and not always in a tangible form, between the United States and Hungary. He left Hungary amid praises and was looked upon in Hungary as a savior.

Still, the United States looked to Central Europe as a region of second or third importance. The most important issue was to stem an imagined Bolshevist tide from the East. Together with the economic and financial implications, this “crusade” was the centerpiece of the post-World War I American foreign policy, both in the official and private sphere. The big price for America, therefore, was, from all points of view, naturally Germany. This was the country around which the American foreign and financial policy was really built in the postwar years. It was little wonder then that when the Dawes Plan was introduced in 1924 to try to rehabilitate the German financial picture, both American private capital and personnel were heavily involved. From the $200 million that was issued under the plan, the United States, with the conspicuous leadership of J. P. Morgan & Co., took $110 million, far the largest portion. It really showed where the American interest lay in the 1920s as far as Europe went.

Works Cited

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