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ments but also because it had an unusually large amount of foreign borrowing on its
books some $75 million out of a total deposit base of $250 million.
It had grown over the last decade by absorbing a series of failing small banks and, in
1929, had been further persuaded by the Austrian National Bank to take over the Boden-
creditanstalt, its next largest rival, whose losses turned out to be gigantic. In order to com-
pensate Credit Anstalt for saving the Austrian banking system by taking on the burden of a
such a large bankrupt institution, the Austrian central bank had been funneling money secretly
to it through London banks, a fact of which the Bank of England was well aware.
The announcement of the rescue package failed to stabilize the situation, perhaps be-
cause more people knew how deep the problems went than the government realized when
Credit Anstalt was finally wound up two years later, the accumulated losses amounted to
$150 million. Over the next four days a run developed, not only on the Credit Anstalt but on all
Austrian banks, which lost some $50 million in deposits, about 10 percent of the total. In an
attempt to shore up its banking system, the Austrian National Bank followed Bagehot s prin-
ciple and lent freely, injecting an extra $50 million, which caused an overnight jump of 20 per-
cent in the national money supply.
Norman had a soft spot for Austria. After the war, he had provided it with the first loan to
stabilize its currency for his services to the country he had been awarded the Grosse
Goldene Ehrenzeichen (Grand Decoration of Honor in Gold) from the Austrian ambassador to
the Court of Saint James, Baron Georg von und zu Franckenstein. For the next several days,
having now discovered the remarkable advantages of international telephone calls, he was
constantly on the line to Harrison in New York and Luther in Berlin. Fearing that a monetary
breakdown in Austria would spread to neighboring countries, he was determined to mount an
international rescue effort.
None of the central bankers had faced an international financial crisis before; they there-
fore had to make things up as they went along. In so doing they made two mistakes. Given
the scale of the problem, they came up with far too little money; and believing that it was ne-
cessary to put together as international a consortium as possible, they did not act quickly
enough. For all the frantic telephone calls, it took them three weeks to drum up the money,
and then only came up with $15 million.
By the time the loans had been agreed to, the promised money had already been used up
and the run on Austrian banks had become a run on the Austrian currency. The National
Bank lost $40 million of its $110 million of gold reserves. Faced now with both a banking sys-
tem under threat and a currency under siege, it now pleaded for another $20 million.
The crisis was made immeasurably more complicated by the politics of the situation. In
March 1930, Germany and Austria had announced that they would form a customs union.
Germany s neighbors, in particular the French and the Czechs, remembering that the nine-
teenth-century Zollverein, the historic customs union among the states of the German Con-
federation, had been a prelude to German unification, and fearing that this might be the first
step to Anschluss, union between Austria and Germany, had been agitating to block the
move.
The French government now saw its opportunity. Indeed it helped to create it by secretly
encouraging French banks to pull money out of Austria. By June 16, the situation was becom-
ing more desperate by the hour. The cabinet, fearing the breakdown of law and order in Vi-
enna, was on the verge of imposing a bank holiday. Austria was still waiting anxiously for the
second loan when it received word that France had offered to provide it but only if Austria
would abandon the customs union. As if in an ultimatum, the Austrian government was given
three hours to respond.
With its back to the wall, Austria might have accepted. In London, however, Norman was
outraged at this blatant abuse of French monetary power in such a delicate financial situation
and cabled that the Bank of England would provide the loan on its own. But if he thought he
had succeeded in pricking the panic in its bud, he was mistaken.
ON JUNE 5, at 2.30 in the afternoon, Thomas Lamont put a call through to President
Hoover. As soon as the Austrian crisis had broken, Germany had also begun to lose gold re-
serves. The contagion was not so much because Germany had a large amount of capital tied
up in Austria, rather it was largely a matter of psychology. The world, which had never drawn
much of a distinction between the banking situation in Berlin and that in Vienna, jumped to the
conclusion that if the main Austrian bank was in such serious trouble, it was very possible that
a German bank might soon follow. As money started escaping Germany, rumors circulated
that Berlin might soon request a suspension of reparations. Lamont feared that to cope with
the political turmoil and flight of capital that would ensue, Germany might impose exchange
controls. With American institutions holding about a billion dollars in short-term credits to Ger-
many, such a move could threaten the solvency of more than one U.S. bank.
Saying that he was about to make a suggestion that the president would more than likely
throw out of the window, Lamont proposed that Hoover unilaterally declare a holiday on all
payments on war debt and reparations. No European country could advance the idea, for it
would immediately call into question its own credit, signaling to its creditors as he put it that
the jig is up. Only the United States was in a position to take the lead. Hoover was initially
unconvinced. I will think about the matter he told Lamont, but politically it is quite im-
possible. Sitting in New York as you do, you have no idea what the sentiment of the country
at large is on these intergovernmental debts. . . . Congress sees France piling up lots of gold,
increasing armaments. . . .
Lamont tried to convince Hoover that it would actually help him politically. There were a
lot of people whispering about the 1932 convention, he warned, and such a dramatic move
would quiet doubts about the beleaguered president s leadership. He signed off with the casu-
al authority that went with being a senior partner at J. P Morgan & Co: One last thing, Mr.
President, if anything by any chance ever comes out of this suggestion, we should wish to be
forgotten in the matter. This is your plan and nobody else s.
In response to Lamont s call, that same afternoon Hoover summoned his trio of senior ad-
visers Secretary of State Henry Stimson; Secretary of the Treasury Andrew Mellon; and
Mellon s undersecretary, Ogden Mills to work out a moratorium along Lamont s lines. Mellon
declared his unqualified disapproval of such a move but left on vacation the very next day
for Europe.
Stimson, however, was enthusiastic. A true American aristocrat, born into a wealthy New
York family, a graduate of Phillips Academy in Andover, Yale and Harvard Law School, a
member of Skull and Bones, and a partner in the white-shoe Manhattan law firm of Root and
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