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overspeculation, they had fallen into the first trap of financial officials dealing with complex
markets an excessive level of confidence in their own judgments. Miller, the academic eco-
nomist, and Hoover, the engineer, were both insulated from doubt by their ignorance of the
way markets operate. In their zeal to burst a bubble that did not exist, they would have dam-
aged the economy without any tangible benefit.
There is no better way to understand the stock market of those years than to return to the
story of General Motors. Between 1925 and 1927 the profits of General Motors went up al-
most two and a half times. With earnings of almost $250 million a year, it overtook U.S. Steel
to become the most profitable company in America. Though its stock price quadrupled in
those two years, and by the middle of 1927 the company was valued at close to $2 billion,
with a price-earnings ratio of less than 9, it was still considered to be reasonably priced.
What of Billy Durant? If General Motors was the emblematic story of the 1920s boom, its
founder came to symbolize the other face of that frenetic decade. Although the company he
had started had gone on to become the most successful corporation in America, he refused to
look back after losing control of it for the second time in 1920. At his peak, he had been worth
$100 million. In 1920, the roughly $40 million he received for his stock in General Motors had
largely gone to pay off his personal loans, and he had emerged with barely a couple of million
dollars.
He was, however, obsessed with the stock market. He formed a consortium of multimil-
lionaires many of whom were also from Detroit and had made their money in the automobile
industry to play the market. Within four years, he had rebuilt his fortune. By 1927, he was
running a fund of over $1 billion, and had indirect control of another $2 to $3 billion that
friends would invest alongside him. It was as if Bill Gates had been forced out of Microsoft,
only to reappear on Wall Street as one of the largest hedge fund managers.
THIS CHIMERA
Central bankers can be likened to the Greek mythological character Sisyphus. He was
condemned by the gods to roll a huge boulder up a steep hill, only to watch it roll down again
and have to repeat the task for all eternity. The men in charge of central banks seem to face
a similar unfortunate fate although not for eternity of watching their successes dissolve in
failure. Their goal is a strong economy and stable prices. This is, however, the very environ-
ment that breeds the sort of overoptimism and speculation that eventually ends up destabiliz-
ing the economy. In the United States during the second half of the 1920s, the destabilizing
force was to be the soaring stock market. In Germany it was to be foreign borrowing.
By the beginning of 1927, Germany seemed to have fully recovered from the nightmare
years of hyperinflation. Schacht was in a position of unassailable power at the Reichsbank.
After the Dawes Plan, he had been appointed to a four-year term during which, by the new
bank law, he enjoyed complete security of tenure and independence of the government. He
had consolidated his position within the Reichsbank by getting rid of the old guard from the
Von Havenstein era, who had opposed his appointment, and putting his own people in
charge. Moreover, though a General Council consisting of six German bankers and seven for-
eigners was supposed to oversee him, it met only quarterly, leaving him to operate un-
hampered. As one senior German politician of the time remembered, he employed the tactic
of consulting everyone and then doing exactly what he pleases.
By virtue of position and personality, he dominated most discussions of economic policy
within Germany. The liberal economist Moritz Bonn, an adviser to the Reichsbank, wrote of
Schacht in those years, He looked upon the world as Hjalmar Schacht s particular oyster,
and was very sensitive to public criticism. Having clashed with many strong and ambitious
personalities in the German banking and business world, he was full of resentment against
colleagues who had at some time outdistanced him. Once he arrived at the head of the cent-
ral bank, he gloried in being their boss.
To the public, Schacht remained the Wizard, the savior of the mark. The visit by Strong
and Norman in June 1925, his own trip to the United States that fall, and his acceptance as
the third member of the central banking triumvirate running the world s finances had enorm-
ously enhanced his prestige. In the three years since their first meeting, he had developed a
very strong personal bond with Norman they met five times in 1924, three times in 1925,
and four times in 1926. Norman admitted that Schacht could be difficult to work with, that
among his peculiarities was a love of publicity and the habit of making too many speeches.
But it was a joy to talk finance with Schacht, he used to say. His admiration for the German
was so great that Sir Robert Vansittart, later head of the British diplomatic service, com-
plained that Norman was infatuated by Dr. Schacht.
Strong, however, had not taken to Schacht to the same degree. He is undoubtedly an ex-
ceedingly vain man. This does not so much take the form of boastfulness as it does a certain
naïve self assurance, wrote the American. Nevertheless, he was impressed by the way
Schacht handled the Reichsbank. He runs his part of the show with an iron hand. He does it
openly, frankly, and courageously, and seems to have the support of his Government but it
certainly would not do in America. . . . He doesn t gloss things over; he seems actually to rel-
ish the difficulties. . . .
Power seemed to suit Schacht. The family had moved out of their villa in Zehlendorf into
the official residence of the Reichsbank president on the top floor of its headquarters on
Jägerstrasse. Financially he had little to worry about his salary was the equivalent of
$50,000 and he drew a further $75,000 from the pension that he had wrung from the Danat-
bank. To show he had arrived, he bought a grand country house some forty miles north of
Berlin, which had been the hunting lodge and estate of Count Friedrich Eulenberg.
When in town, the Schachts entertained frequently. With his ugly clown mask of a face,
curiously alive and attractive, Schacht, always sporting a big cigar and accompanied by his
matronly wife, Luise, who kept a vigilant watch on him he was said to have a wandering
eye became something of a fixture on the social circuit. He had a pompous habit of wearing
his culture conspicuously on his sleeve, which some found irritating, while others ridiculed him
behind his back for his arriviste pretensions one acquaintance remarked that he dresses
with the taste of a socially ambitious clerk. Nevertheless, he was a popular guest, something
of a catch celebrated for his cutting and devastating humor. The Aga Khan remembered the
Schacht of those years as one of the most charming of dinner companions, who could hold a
whole table enthralled with his sparkling conversation. Priding himself as something of a
poet, he would compose amusing little pieces of doggerel to entertain his fellow guests.
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