FDR: International Speculator
Franklin D. Roosevelt was organizer and president of several speculative international financial enterprises linking Germany and the United States, and in particular one enterprise to profit from the ruinous German hyperinflation of 1922-23. In 1922 FDR became president and was one of the organizers of United European Investors, Ltd., with a Canadian charter, but based at 160 Broadway, New York. In 1927 FDR was also organizer of the International Germanic Trust Company, Inc. and the Federal International Investment Trust, which never got off the ground. By far the most important of these speculative enterprises in the world of international finance was United European Investors, Ltd., formed to accumulate German marks deposited in the United States and to reinvest these marks in Germany by purchasing property from destitute Germans. Fully to understand the scope and meaning of United European and to follow the activities of International Germanic Trust Company, we need to make a brief review of German financial conditions in the early 1920s.
THE GERMAN HYPERINFLATION OF 1922-23
Lionel Robbins, the prominent British economist, has described the German inflation of 1922-23:
Treaty of Versailles imposed a massive reparations burden upon a defeated
Germany, a country already financially weak from fighting World War I
with deficit spending and postwar territorial reduction, with consequently
reduced natural resources. Reparations have an effect on the balance of
payments similar to imports. They require either taxation or deficit spending
to offset the drain. If the course of deficit spending is followed, the
result will be inflationary, and this was the course followed in Germany.
What is extraordinary about the reparations program is the identity of the so-called experts engaged in making the reparations arrangements, incidentally creating the monetary and social chaos alluded to by Lionel Robbins. The 1923 Reparations Committee had as its U.S. members Brigadier General Charles G. Dawes and Owen D. Young of the General Electric Company.
In brief, the General Electric-Morgan elements prominent in the Bolshevik Revolution, and as we shall see also prominent in the New Deal, were the negotiators of a scheme generally regarded as one of the prime causes of World War II—and incidentally a scheme in which these same financiers, as well as Franklin Delano Roosevelt, were to profit.
It is also worthy of note that businessmen on the German side of the reparations negotiations were associated with the rise of National Socialism in Germany. Witness Hallgarten in his essay "Adolf Hitler and German Heavy Industry:"
pertinent point is that the Felix Deutsche mentioned was a director of
German General Electric and the American reparations representatives included
Owen D. Young of General Electric, while the Albert Voegler mentioned
by Hallgarten was the German representative in the Young-Plan negotiations.
The German Mark in Terms of3
The inflation accelerated following the formation of United European Investors, Ltd., with Franklin D. Roosevelt as President and John von Berenberg Gossler as a member of the German advisory board:
The inflation went entirely out of control following the dismissal of Chancellor Wilhelm Cuno, who returned as president of HAPAG, and co directors John von Berenberg Gossler and Max Warburg:
The policies that led to the ruinous German inflation were initiated under Chancellor Wilhelm Cuno, who was, immediately prior to becoming Chancellor, the president of Hamburg-America Line (HAPAG). Two of Cuno's co directors at HAPAG were Max Warburg, Hamburg banker and brother of Paul Warburg, member of the Federal Reserve System Advisory Board in the United States, and John von Berenberg Gossler, a member of the German advisory board of Franklin D. Roosevelt's United European Investors, Ltd.
was dismissed as German Chancellor in August 1923, but it will be noted
from the table that inflation was already out of hand, and in November
of that year the mark had depreciated to zero. The point to be made is
that Wilhelm Cuno was Chancellor in 1922-23, when the mark was rapidly
depreciating, and that Cuno came from a business circle that was able
and willing to take pecuniary and personal advantage of the German inflation.
This terrifying monetary inflation and the ultimate collapse of the German mark in 1923 ruined the German middle class and benefited three groups: a few German big businessmen, a few foreign businessmen who were in a position to gain advantage from the inflation, and the rising Hitler movement. As president of United European Investors, Ltd., Franklin D. Roosevelt was among those foreign businessmen who took advantage of Germany's misery for their own gain.
THE BACKGROUND OF WILLIAM SCHALL
Unfortunately, there is a deeper perspective to this question of what could be called an élitist group preying on the world's misfortune. In the previous volume in this series, Wall Street and the Bolshevik Revolution, we identified personal links between Wall Street financiers and Bolshevik revolutionaries. Some of these same personal links can be extended to FDR and United European Investors. The precisely established links previously implicated the then German Ambassador to the United States, Count von Bernstorff, and his friend Adolph von Pavenstedt, senior partner in Amsinck & Co., who was "for many years a chief paymaster of the German spy system in this country."4 Amsinck & Co. was controlled by the J.P. Morgan, John D. Rockefeller, and other New York financial interests through American International Corporation. With Guaranty Trust Company, the American International Corporation constituted the central points for financing German and Bolshevik espionage in the United States and North America during World War I. Adolph von Pavenstedt and Edmund Pavenstedt, the two Amsinck partners, were also members of another financial house, Müller, Schall & Company. And it is at Müller, Schall that in 1922 we find Franklin D. Roosevelt and his United European Investors, Ltd.
After the public disclosures in 1918 of the connection between Amsinck & Co. and German espionage, the German interests in Müller, Schall & Co. were represented by Edmund S. Payne, a New York attorney. Müller, Schall & Co. was formally liquidated, and a "new" firm—William Schall & Co.—took its place at the same address, 45 William Street, New York City. The new firm, formed in January 1918, included the two original partners, William Schall and Carl Müller, who were now joined by John Hanway of Harris, Forbes & Co., Frank M. Welty, vice president of the American Colonial Bank of Puerto Rico, and attorney Edmund S. Payne, a partner in the law firm of Rounds, Hatch, Dillingham & Debevoise, who represented the German interests of the former Müller, Schall & Co.
The Pavenstedts were also "heavily interested in Puerto Rican sugar properties and owned and controlled the Central Los Canos."5 William Schall was president of the Colonial Bank of Puerto Rico and president of the South Puerto Rico Sugar Company. Similarly, the Roosevelt family had interests in the Caribbean sugar industry going back to the late 18th century, and George Emlen Roosevelt was in 1918 a director of Cuban Cane Products Co. in New York. It is therefore conceivable that through this common interest in Caribbean sugar the Pavenstedts and Roosevelts became known to each other. In any event, it was the Schall-Pavenstedt group, previously part of the German espionage operation in the United States, that in 1921-22 merged with Franklin D. Roosevelt and several dubious financial entrepreneurs to form United European Investors, Ltd. to profit from the crushing burden of German inflation.
UNITED EUROPEAN INVESTORS, LTD.
original organizing group for United European Investors, Ltd. comprised
the aforementioned William Schall and Franklin D. Roosevelt, joined by
A. R. Roberts, Charles L. Gould, and Harvey Fisk & Sons. The 60,000
preferred shares issued were held by Harvey Fisk & Sons ($25,000),
Franklin D. Roosevelt ($10,000) and Schall, Roberts, and Gould ($5,000
each). In brief, FDR was the largest individual preferred shareholder
of the incorporating group.
The capital stock was divided into two segments: Canadian $60,000 divided into 60,000 preference shares and 60,000 ordinary shares, denominated in 10,000 German marks. The objective of the company as noted in the contemporary press was to invest the many billions of German marks then held in the United States and Canada in German real property:
Once marks are invested in property in Germany, the funds should begin to earn money immediately and the funds cannot disappear, since they are represented by the ownership of tangible property, and the advantage may still be taken of a possible rise in exchange value. Compared with this, the holding of mark currency or drafts is a most hazardous operation and the funds are either idle or earning very little. Besides if the exchange quotation should approach the vanishing point, there would be nothing tangible left for the holders of marks or drafts. The capital of the company will be invested in improved real estate, mortgages, financing of goods in transit and participation in profitable industrial and commercial enterprises.7
Reference to the preceding table recording depreciation of the German mark (page 39) confirms the remarkable timeliness of United European Investors, Ltd. In July 1922 the mark, with 1913 as a base of 100, was at 117 in foreign exchange. This reflects a heavy rate of inflation of the mark, but nothing to distinguish it from inflation in many other countries. Yet the U.E.I. brochure specifically mentions the possibility of the mark's "approaching the vanishing point," which it did achieve a year later in November 1923.
The actual investment of U.E.I. was carried out in Germany by a German advisory board that occupied an office in Hamburg headed by Senator August Lattman, formerly a partner in G. Amsinck & Company of New York (see page 41). The second member of this German board was Senator John von Berenberg Gossler, head of the Hamburg banking firm Berenberg, Gossler & Co. Berenberg, Gossler was also a member of the management board of the Hamburg-America Line (HAPAG); other members were Wilhelm Cuno, at that time Chancellor of Germany and responsible for his country's economic policy, and Max Warburg, brother of Paul Warburg, member of the Federal Reserve Board in the United States.
In a letter dated November 11, 1922 to U.E.I., the German Advisory Board recorded its initial investments: "All the investments so far made are of first class industrial shares." However, the prospectus issued in the U.S. emphasized investment in real estate, and on this point the German board wrote:
There is no mention anywhere in the United European Investors file of the purchase of real property or any other of the tangibles mentioned in the company charter and the public announcements.
The investments made by the board during the next few years were stocks of German companies. Further, the investment prices were cited in an unusual manner, not in German marks or absolute figures of any kind, but as a percentage increase, presumably from a 1913 base, which enabled the German Board to write to New York, "the shares which you so far bought have risen considerably with the depreciation of the mark."
The German Board did not mention the fact that the depreciation of the mark in terms of the U.S. dollar had been greater than the advance in the prices of the shares they bought as quoted in German marks. In effect, the claims of rising share prices made were illusory. One earlier writer has described it this way: "untrue and pure bunco steering, evidently intended to gull other holders of German marks to invest them with a company that could perform such miracles."8
This was not, however, of concern to the New York board of directors. At the regular meeting of the board held January 15, 1923 Franklin D. Roosevelt called the meeting to order, and George W. Muller acted as secretary. It was then recorded that the mark value of the German stock investments so far made by the company was more or less 73 million marks, and this investment was currently quoted at 420 million marks.
There is an interesting letter in FDR's files from Professor Homer B. Vanderblue, Professor of Business Economics at Harvard University, asking for explanations about the U.E.I. investment program. The letter was addressed to FDR, as president of the company, but replied to by Edmund S. Paine, who stated that the original idea of investing in tangible property, such as real estate, had proven impracticable as it "would entail a very heavy overhead owing to the necessity of supervision and operation," and so it was decided to invest only in German stocks "representing the indirect ownership in tangible assets." Paine added that the theory justified itself to a "remarkable degree:"
However, Paine to the contrary, a "Statement of Conditions as of January 31st 1923" located in FDR's files records that the book value per share of common stock at that time was $2.62 per share, while the average book value at the time of investment was $2.64—in other words, a slight decline.
At the directors meeting of September 19, 1923 it was confirmed that the total dollar value of investment was about $120,000, and in May 1925 this was still approximately the amount recorded in the treasury. However, in the intervening years following stabilization of the mark, conditions improved and a statement dated May 12, 1926 shows a net worth of $147,098.07, with 17,275 shares outstanding, and then equal to $8.50 per share. On May 21st, 1926 the company offered to buy all stock offered within 90 days at $7.50 a share. In May 1926 FDR resigned as president and accepted the offer of $7.50 per unit for his 1005 common stock shares.
Did the American holders of German marks who invested in United European investors gain or lose on their investment? If we suppose they held their stock to 1926 and accepted the company offer at $7.50 per common share unit, then buying at the issue price of 10,000 German marks in September 1922 (the date offered) they would have lost considerably. In September 1922 the dollar-mark exchange rate was $1.00 to 764 German marks. Thus a 10,000 mark share would be equivalent to $13.00 per share, and a share held from 1922 to 1926 would have realized a loss of approximately $5.50 per share; on the other hand, a shareholder would have avoided total depreciation and a loss of all his funds from holding on.
INVESTIGATION OF UNITED EUROPEAN INVESTORS, LTD.
The Roberts-Gould element that joined FDR and Schall on the Board of U.E.I. had a poor reputation on "the Street". In fact, Roberts and Gould were under investigation for suspected criminal activities. In July 1922, when United European was in the early stages of incorporation, a Mr. Crary, an old-time investigator for Proudfoot's Mercantile Agency—the top ranking investigation agency used by prestigious Wall Street firms—approached FDR's secretary, Miss Le Hand. Crary conveyed to "Missy" information about what he termed a "band of crooks with offices at 7 Pine Street" and with a nameplate on the door inscribed "United European Investors, Ltd." Missy Le Hand carried the information to FDR's right-hand man Louis Howe, who in turn raised the problem with Schall's earlier partner Müller. From Müller and other sources, Howe learned that Roberts and Gould were a part of this alleged "band of crooks" who, according to Crary, were "engaged in all manner of disreputable promoting and ... he is certain that they have as a member of their force an ex-convict under an assumed name with a most unsavory reputation."9 When the name United European Investors, Ltd. was posted on their office door at 7 Pine Street, investigator Crary, who had been routinely watching the office for a year, began quietly probing Roberts and Gould. Although Roberts was never in the 7 Pine Street office, Crary found that Gould "had been in the habit of using that office for at least a year, and was considered one of their (i.e., the crooks') tried and true friends." Gould's association with "the crooks" made Crary suspicious because, while the Proudfoot Agency had previously given Gould "a clean enough record," it had also put him in "the professional promoter class."
Crary's investigation was undertaken on behalf of the owners of the building at 7 Pine Street, "who intend to dispossess the whole bunch in a short time." It was during the investigation that the Proudfoot Agency came upon a circular listing the name of Franklin D. Roosevelt as president of United European Investors, Ltd. and William Schall as its banker. The evidence unearthed by the Proudfoot Agency was substantiated to Louis Howe by a Mr. Hanway, a member of the stock brokerage firm of Harris, Forbes. Hanway said he had "been familiar with Mr. Gould's activities for a number of years, and that he so thoroughly distrusted him as to lead him to make every effort to prevent from meeting Schall originally."
Even further, the Proudfoot Agency suspected that Gould had attempted to acquire confidential information from them and that Gould was acting as "a spy for the crooks to find out what knowledge Proudfoot & Company had of their crooked deals."
All this information was duly reported by Howe in a letter ("Dear Boss") to FDR (July 29, 1922). Probably most businessmen faced with this caliber of partner would abandon any proposed operation such as United European Investors, but Howe's memorandum to FDR recommends nothing of the kind. It reads in part:
My recommendations are as follows: That Gould and Roberts be directed to immediately find new offices, preferably in a church or some other respectable place. That we get rid of Roberts, who is a wild man on publicity anyway, and who has no important function in this game, and that closest watch be kept of Gould. If Mr. Crary actually turns up the circular I would tear off the roof over it and make sure that its use is stopped until we are ready to make a formal announcement. I think it would be wise to insist that during the summer I be made a member of the Board of Directors, particularly as both Jenks and Rogers will be away most of the time and some one wants to watch every action taken.
In other words, Howe suggests that precautions against double-dealing will be sufficient and that the best way to do this is to put Louis Howe on the board of directors.
In any event, the enterprise went forward as planned; Roberts became Secretary of the U.E.I., and Gould, alleged spy for the crooks, retained his role as active promoter and continued to report periodically to FDR by letter on the progress of their fund-raising efforts. On July 20, before Howe reported to FDR the substance of the Proudfoot investigation, Gould had written FDR from the Southern Hotel, Baltimore about his talks with Edward Clark & Co., the Baltimore bankers, whose partner Herbert Clark had known FDR from their Harvard days. Then on August 13, 1923 Gould wrote FDR from the Canadian Club of New York to relay telegrams received from William Schall in Europe and concluded:
is no clue that FDR communicated in any way with Gould, and the next letter
in the files is from Gould to FDR, dated September 14, 1923 and also written
from the Canadian Club of New York. This letter criticized the "jealous
bankers whose scheme we hurt, and whose plans were upset. Had we not issued
today we would have failed."
On the basis of these letters, we must conclude that FDR knowingly entered a business arrangement with persons whose reputation was, to say the least, dubious, and that this business arrangement was continued after evidence of impropriety was brought to FDR's attention by Missy Le Hand and Louis Howe.
There is only superficial evidence that the whole United European Investors operation was designed by Roosevelt. When Gould tells FDR that his "name was applauded as being the master mind," it is reasonable to assume that Gould was flattering Roosevelt for his own purposes. There is really no evidence either way in the files or elsewhere that Roosevelt's background and financial knowledge were sufficient to originate a plan as ingenious as U.E.I.
CHANCELLOR WILHELM CUNO AND HAPAG
The disastrous depreciation of the German mark that was the raison d'être of United European Investors was concentrated in the period mid-1922 to November 1923. The table indicates how inflation got completely out of hand after mid-1922. The German Chancellor between mid-1922 and August 1923 was Wilhelm Cuno (1876-1933). Cuno was originally a civil servant, always active in politics, and in November 1917 was elected a director of the Hamburg-America Line (HAPAG). When Ballin, the president of HAPAG, committed suicide in 1918, Cuno became its president. After May 10, 1921 Karl Wirth was German Chancellor, and Walter Rathenau, the president of German General Electric (A.E.G.), was Minister for Reparations. Then followed a series of dramatic events. The German Minister of Finance Matthias Erzberger was assassinated August 26, 1921. In January 1922 Rathenau became Foreign Minister and on June 24, 1922 was also assassinated. In October of 1922 Friedrich Ebert was Reich Chancellor and Wilhelm Cuno of HAPAG was appointed German Chancellor. The depreciation of the mark occurred under Cuno and culminated in the financial crisis and his dismissal in August 1923. Cuno returned to the presidency of the Hamburg-America Line. We might note in passing the prevalence of corporate presidents in contemporary politics: e.g., German General Electric's Rathenau and HAPAG's Cuno. Owen D. Young of General Electric in the U.S. was also creator of the Young Plan for German Reparations, and German General Electric (A.E.G.) president Rathenau was German Reparations Minister in 1922. These appointments are usually explained on the basis of "the best man for the job" but, given the evidence presented in the last chapter on politics in the bonding business, we can justifiably express skepticism about this explanation. It is much more likely that the Youngs, Cunos, Rathenaus—and the Roosevelts—were mixing business and politics for their own pecuniary gain. Unfortunately, while we must leave unanswered the key question of how far these elitist groups used the state apparatus for their own ends, it is clear that, when we probe the background of Wilhelm Cuno, we arrive back at Franklin D. Roosevelt and the formation of United European Investors, Ltd. Cuno, under whose auspices the great German inflation raged, was a director of the Hamburg-America Line; John von Berenberg Gossler, the United European Investors adviser in Germany, was also a member of the board of that company. In sum, Cuno and Gossler were on the same board of directors at HAPAG. Cuno's policies were essentially responsible for the German inflation of 1922-23 while his co director Gossler, in cooperation with Franklin D. Roosevelt, was making profit out of the very same inflation policies. It makes one ponder.
THE INTERNATIONAL GERMANIC TRUST COMPANY
The International Germanic Trust Company, founded in 1927, was prompted, according to its promoters, by a demand for American banking institutions in central Europe. Among the organizers of the trust as approved by the Banking Department of the State of New York were Franklin D. Roosevelt; Herman A. Metz, a director of I. G. Farben; James A. Beha, Superintendent of Insurance for the State of New York; and E. Roland Harriman of the international banking firm of W. A. Harriman & Co. The president of the associated International Germanic Company and chairman of the executive committee of the trust company was Harold G. Aron, who had had more than his share of law suits involving stock promotion. The main offices of the International Germanic Trust were on the ground floor of 26 Broadway, the Standard Oil Building in New York. The authorized capital consisted of 30,000 shares to provide a capital of $3 million and a surplus of $2 million. In its application to the banking department the company was represented by Senator Robert F. Wagner; although not listed among the organizers, FDR's old friend, James A. Beha, Superintendent of Insurance for the State of New York, became a member of the board of directors.
The objectives of the company as stated by its president, Harold G. Aron, were:
Roosevelt was involved in the flotation of the proposed company. A telegram dated April 7, 1927 from Julian Gerrard, president of the trust company, to FDR requested him to telegraph Frank Warder, Superintendent of Banks in the State of New York, to the effect that he (Roosevelt) was interested in the trust company. It was anticipated that this intervention would clear the delay in granting the charter. Board meetings were held in the Standard Oil Building, in FDR's office, and in the Bankers Club, the latter both located at 120 Broadway. The first meeting of the organization committee was held at the Bankers Club Friday May 27, 1927; although FDR was unable to attend, he wrote Julian M. Gerrard, "What is the news of the trust company?" Again on August 15, 1927 FDR asked Gerrard, "How is the organization work proceeding and what is being done in regard to the stock subscriptions?"
A considerable part of the FDR letter files of this promotion consists of requests for employment, stock in the proposed company, or related favors. For example, the National Park Bank of New York wrote FDR July 26, 1927 that it was interested in the creation of the International Germanic Trust Company and would be pleased to "have one of our officers address that body, going into detail regarding our facilities." In other words, the National Park Bank was looking for deposit business. FDR promised to take up the matter with the organization committee of the new trust company. Then on August 12, 1927 Roosevelt's partner Basil O'Connor dropped him a note: "Dear Franklin, On the Germanic Bank, see if you can get me 100 shares." The stock issue itself was heavily oversubscribed. It was planned to issue 30,000 shares, but total requests by September 12 were in excess of 109,000 shares, and by September 20 applications exceeded 200,000 shares from approximately 1900 individuals. The trust notified FDR on October 3, 1927 that his allotment was 120 shares at $170 per share and must be taken up by October 5. The telegram added that the issue was heavily oversubscribed and quoted at 187 bid, 192 asked, which would give FDR a profit on an immediate resale. This telegram from Howe added, "Would like ten of your shares for Grace if you are willing."
FDR was duly elected a member of the board of directors and notified on November 4, 1927 that the first meeting of the board would be held Friday, November 11 at the Bankers Club at 120 Broadway. However, Basil O'Connor, Roosevelt's law partner, apparently had cold feet or received adverse information on the promotion because he wrote FDR on November 14:
O'Connor suggested that FDR should resign from the board because "heretofore I have been able to say we have no banking affiliations, that was wrong. I can't say that now." Apparently, FDR did not immediately take this advice, because on January 19, 1928 he was notified of reelection as director for the coming year, but in a letter dated January 27, 1928 FDR wrote Gerrard as follows:
Whereupon FDR offered his resignation. It is notable that the reasons for resigning were "I am accomplishing little either for myself or for the trust company." In view of the rather unsavory reputation of the promoters, this explanation is a little weak.
1. Constantino Bresciani-Turroni, The Economics of Inflation: a Study of Currency Depreciation in Post War Germany, 1914-1923 (London: Allen & Unwin, 1937), "Foreword," p. 5.
W. F. Hallgarten, "Adolf Hitler and German Heavy Industry" in
Journal of Economic History, Summer 1952, p. 224.
4. See Sutton, Bolshevik Revolution, op. cit., pp. 64-67, and Johann-Heinrich von Bernstorff, My Three Years in America (New York: Scribner's, 1920), p. 261.
5. Paul Haber, The House of Roosevelt (New York: Authors Publishing Co., 1936), p. 71.
6. The copy of the U.E.I. charter in FDR's files carries an amendment by A. B. Copp, Canadian Secretary of State, that prohibits building of railways and issue of paper money.
7. This is taken from a press release marked "From Hon. Franklin D. Roosevelt" in the FDR files.
8. Haber, The House of Roosevelt, op. cit., pp. 81-2.
taken from letter Howe-FDR, June 29, 1922 in United European Investors,