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NEW SOLIDARITY June 23, 1980 Page 4

Ivar Kreuger's Grand Design

by Kerstin Tegin-Gaddy and Clifford Gaddy

Above, a portrait of Kreuger shortly before his death.

March 8, 1980 was the 100th anniversary of the birth of the Swedish industrialist and financier Ivar Kreuger. Kreuger was without question the greatest industrialist in modern Sweden. His reputation was linked most directly to his worldwide match trust, but in fact he built up a broad range of Sweden's biggest manufacturing and mining concerns.

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Internationally, Kreuger was one of the major figures in business and finance in the late 1920s and early years of the 1930s. In 1924-25 he was involved in negotiations with the Soviet Union on economic deals which the Soviets regarded as the most important opportunity for cooperation with the West since the Rapallo Treaty with Germany in 1922.

In the late 1920s Kreuger emerged as the single largest lender of capital to European states in the world. In the years of 1928-30 alone, Kreuger lent a total of $375 million to European nations, a staggering figure relative to the size of total global industrial output at the time—roughly equivalent to $7-8 billion today.

After the U.S. stock market crash of 1929. Ivar Kreuger advanced a proposal for a reform of the international monetary system, centered on the need to create an international development bank for industrial construction. Not least among Kreuger's concerns in this connection was to save the German economy—efforts which, had they succeeded during the crucial 1928-32 period, could have prevented the Nazi seizure of power in 1933.

Yet, despite these credentials as a national and international pioneer in industry and finance, the 100th anniversary of Ivar Kreuger's birth went virtually unnoticed in the Swedish press and other media. To the uninform-ed observer, such neglect of an obvious national hero in Sweden might seem unexplainable. However, for the small circle of people who still know some of the facts about the end of Kreuger's career, today's press blackout is lawful. It is merely the continuation of a campaign that had been started during Kreuger's lifetime.

For, precisely because of his accomplishments during the 1920s and—even more important—his plans for the 1930s, Ivar Kreuger was singled out as a leading enemy of British-allied financial circles throughout the world and as the personal foe of three men in particular: the American financier J.P. Morgan, the German Reichsbank (Central Bank) president and later Nazi economics minister, Hjalmar Schacht, and the man whom Schacht called "my spiritual father," Bank of England head Montagu Norman. By 1931 at the latest, Norman, Schacht, and Morgan had decided that Kreuger had to be removed from the scene. Their efforts succeeded on March 12, 1932, when Kreuger was assassinated in a hotel in Paris.

From that point on, a campaign was set in motion to eliminate even the memory of Ivar Kreuger, not only in Sweden, but internationally. Kreuger's

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murder was arranged to look like a suicide, and all attempts at a judicial inquiry were squelched. His corporate empire was "exposed" as a fiction, something that had existed only on paper. His international lending operations were "revealed" to be nothing but the machinations of a genial swindler. Within only a few years after his murder, these new "facts" were all that remained of Kreuger in the public consciousness. Today, among the younger generation in Sweden, the name of Ivar Kreuger is practically unknown.

It was partly in order to restore Kreuger to his true place in Swedish history that Ny Solidaritet, the Swedish-language sister publication of this newspaper, published a series of articles on Kreuger in March. But there was another, more important purpose as well. Kreuger's murder was a key element in a political fight which in many ways is directly comparable to the present strategic situation. Then—in the years around 1930—as today, the central determining strategic issue internationally was the global economic crisis. Then, as today, there was essentially two factions fighting for control of the world economy, two factions with diametrically opposed notions of how the crisis was to be solved.

Thus, the background to the murder of Ivar Kreuger is directly relevant to today’s fight, and it is for this reason that we also present for American readers an edited version of the articles in the Swedish paper.

The 1920s and Today

One of the basic parameters in the fight over the international economy in both the 1920s and the 1970s was the volume of "surplus capital" in the world economy and the related questions of where it came from, who would control it, and how it would be used.

For most of the 1970s (and continuing into the 1980s) the source of that surplus has, of course, been the pool of so-called petrodollars collected by the OPEC nations. In the 1920s the dollar surplus was generated by the U.S. economy itself. The diagrams below present a rough comparison of the volume of capital involved during the two periods. The bars indicate the amounts actually held in the form of foreign loans and other investments abroad by the United States in the 1920s and by OPEC in the 1970s.

For the sake of comparison, keep in mind that the gross national product of the United States is today about 20 times what it was in 1929. In other

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words, the U.S. capital surplus in the 1920s was bigger, in relative terms, than the entire OPEC surplus today.

However, the really interesting feature of the diagrams is not the mere size of the surpluses involved, but rather the radical growth of the surpluses in each case. In both cases, the emergence of these sources of surplus capital represented a radical shift in international finance—and, consequently, a potential shift in political power, depending on who controlled the new sources.

Prior to 1914 and 1973, all international capital flows were solidly in the hands of the City of London and its allies, and had been so for several decades in each case. But World War I and the 1973 oil price hikes threatened to change that situation drastically. World War I had economic-ally devastated Europe and left every European nation heavily in debt to the United States. From having previously been a borrower nation, the United States suddenly became the only country in the world which was generating a capital surplus. Similarly, after 1973, nearly the entire net surplus of the world economy became concentrated in the OPEC nations.

Thus, in both cases, if the City of London was to retain its control of the world's financial flows, it would have to control lending from the new centers of capital concentration. And conversely, any other forces in the world attempting to break British control of the world economy would have to "capture" the new capital surpluses.

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Today, precisely this issue—how the OPEC surplus will be used—has been the motivation for French and West German efforts to establish cooperation with the OPEC countries and to integrate them into the second phase of the European Monetary System. In the 1920s the problem was in many respects more difficult for those forces who wished to use the American capital surplus for productive investments in the "underdeveloped nations" of that time (a category which, because of the devastation of the war, included not only today's "Third World," but also nearly the whole of continental Europe and the Soviet Union). The difficulty was that the U.S. surplus was split up among so many different small and medium-size investors, while the potential borrowers were entire states with huge capital needs.

It was in solving this technical problem of finance in the 1920s that Ivar Kreuger first established himself on an international scale.

Kreuger's Lending Operations

On the one hand, Kreuger showed himself to be uniquely successful in raising funds on the complicated U.S. securities market, characteristically by offering convertible debentures of low denominations to small investors.

On the other hand, Kreuger developed a similarly unique vehicle for relending that money to European and other nations sorely in need of funds in the mid-1920s.

The instrument Kreuger used was his international match trust. Kreuger had entered the business world in Sweden as the founder of a large and successful construction company (he himself had been educated as a civil engineer). But by the beginning of the 1920s, the nucleus of his industrial interests was the Swedish Match Corporation, a multinational enterprise with subsidiaries throughout the world.

Kreuger's method, in brief, was to arrange long-term loans to entire nations in exchange for being given the concession for a monopoly of that country's match industry. In other words, Swedish Match went in and built up—or modernized—the borrower nation's match industry, with a percentage of the profits on the match business being used to service the loan.

As Kreuger saw it, this method offered optimal advantages to both lender and borrower. The match trust, of course, benefited directly from the new monopoly. But the country in question also came out ahead: not only did it get a major loan, but it also acquired a new modern industry which could

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service the debt out of new real profit created. But, most important of all, as Kreuger explicitly recognized, his method meant that international lending would not be used as a tool for political control of credit-hungry nations. In one memorandum to his employees working in the foreign lending sector, Kreuger put it this way:

It has always been a difficult problem to establish effective contact between foreign lending institutions which have made loans to a government and the government itself. When formal control measures are introduced, people in the borrower country can easily develop feelings of hatred. In the system used by the Kreuger concern, the collateral for the loan lies in the con-cession (the match monopoly) and is hence in the hands of the lender. The issue of control from the outside will therefore never arise.

Starting off at a modest rate around 1925. Kreuger's holding company. Kreuger & Toll, rapidly became one of the largest lending institutions in the world of any category. The list of the major loans he made to states between 1925 and 1931 shows the scope and the accelerating pace of his operations.

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With a volume of lending this size, and with an approach which explicitly violated the British financiers" principle of using lending as an instrument of political control, it was inevitable that Kreuger's activity would sooner or later collide with vital interests of the City of London and its allies.

One of the best documented such cases was that of Poland. By the mid-1920s Poland was one of the many countries that the British had singled out for special treatment. The head of the Bank of England, Montagu Norman, considered it his personal responsibility to enforce a boycott on all lending to Poland until the country met certain political conditions posed by the British. In a document from 1926, the German ambassador to London reported on a conversation he had had with Norman in which the latter did not mince words in describing the Polish question:

[Norman] is of the opinion that the current deplorable financial situation of Poland represents not only an economic worry for all Europe, but a political danger as well. He would very much like, if at all possible, to take measures to put Poland back on a sound financial basis, and I believe, as he later told the president of the Reichsbank [Schacht], he counts on the cooperation of the Reichsbank in this matter. . . .

It is generally known that the Polish government has made, and continues to make, every imaginable effort, not only in London, but also in Milan, Paris, Rome and the United States, to obtain loans and large credits in order to straighten out its national finances.

According to this same report, Norman admitted that Poland was actually quite creditworthy in a business sense, but nevertheless for political reasons he was going "to do everything in his power to prevent Poland from obtaining funds." Norman also assured the German ambassador that he had won the full backing of the City of London in this matter, "just as he also had exerted his influence in the United States with, for example, the Federal Reserve Bank, Morgans, Kuhn, Loeb & Co., etc."

Yet, despite this massive mobilization of Anglophile financial circles against Poland, Kreuger granted Poland loans totaling $38 million.

The same thing happened in Lithuania. The London bankers had decided that since the City of Riga had previously defaulted on its loans, the country

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of Lithuania was also to be denied any funds. Kreuger broke the blockade with his $6 million loan in 1930.

When the bankrupt nation of Greece needed a loan, it turned to the British-controlled League of Nations. The League sent an entire delegation to Greece to negotiate the "conditions" for the loan. In the meantime, Ivar Kreuger's own representatives in Athens offered Greece a very attractive loan under the "Kreuger system." It was reported that the League's delegation stormed out of Athens in rage when they received word that Greece had accepted the Kreuger offer.

The enemies of Swedish financier Ivar Kreuger and his international development policy: Nazi Finance Minister Hjalmar Schacht; Bank of England Chairman Montagu Norman, and anglophile American financier J.P. Morgan.

A similar example, and the one which perhaps more than any other made an impression on the international public, was Kreuger's loan to France in 1927. Several years before, France had received a loan from J.P. Morgan. However, the nation's financial situation had continued to deteriorate, and France applied to Morgan for an emergency loan of $75 million. Morgan refused the French request, demanding instead that France pay back the old loan. Morgan's refusal to lend was broadly interpreted as a declaration that the entire nation was non-creditworthy.

At precisely this point, Kreuger stepped in and offered France the full $75 million—and at 5 percent interest rather than the 8 percent they had asked from Morgan! Morgan was furious. Not only did France use part of the Kreuger loan to pay back the old loan to Morgan in advance (causing Morgan a loss of several million dollars), but France effectively escaped from the worst British political pressure.

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The Germany Loan

Important as they were for the countries in question, Kreuger's loans to Poland, Greece and the other smaller nations of Europe and Latin America— and even the loan to France—were mere slaps in the face of the British compared to the challenge represented by his $125 million loan to Germany in 1929.

Financial control of Germany was the bottom line for the British in their efforts to retain political control of the entire world. Germany was the key to the continent, and it was England's intended weapon for use against the Soviet Union.

On one occasion already in the 1920s the British had nearly lost control of Germany. In the 1922-23 period German and French industrial circles had joined with the Soviet Union to revive an anti-British "Continental System" for the economic and industrial development of all of Europe. By mobilizing every form of political manipulation, terror, and blackmail at their disposal, the British had managed to prevent the incipient continental alliance from consolidating itself. By late 1924 they had regained control over the situation.

This period of security for the British with regard to Germany was short-lived, however. With Kreuger's string of state loans at lower interest rates than London's during 1928 and the first part of 1929, it was only a matter of time before Kreuger would move to directly oppose the British with a major loan to the most credit-hungry nation of all.

Kreuger did indeed enter into negotiations with Germany in the fall of 1929, for a gigantic loan of $125 million.

The announcement of the Germany loan was the "last straw" for the City of London. If a private financier like Kreuger was able to move into the American capital market and raise $125 million to be lent to Germany against the explicit wishes of the City of London, then—the British reasoned—something had to be done. It was at precisely this point that the British decided to go ahead with a program which they had been considering for several months: a drastic contraction of all international lending. The means to achieve that goal was a sudden increase in the American interest rates, similar to measures taken over the past few months by the Federal Reserve today.

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Only a few days after Kreuger's announcement of the Germany loan, the new Federal Reserve policy had resulted in the collapse of the U.S. stock market. Kreuger himself was hit hard in the crash, but by no means out of the picture, Kreuger paper fell only half as much as other shares, and he was able to successfully raise the funds he needed for the first portion of the loan.

A broader effect of the crash as far as Kreuger was concerned, however, was that it impelled him to begin a public discussion on how to solve the crisis of the world economy.

Kreuger's Proposals

One of Kreuger's first major statements on the international monetary system after the 1929 crash came in April 1930. In the annual report of his company, Kreuger & Toll, for 1929, Kreuger presented a plan to make that company into a new international financial institution capable of lending funds for development on a global scale. His idea was that in the absence of any other viable institution for that purpose, Kreuger & Toll would have to serve as the seed crystal for a total reform of the international monetary system.

Kreuger motivated his proposal by first giving a survey of international finance after the crash:

It is probable that the total sum of all long-term loans granted by all lender nations in 1929 was less than half of the average amount in 1926, 1927 and 1928.

The immediate result of this sharp cutback in lending to other nations has been a strong tendency towards gold exports to the two countries which show the most positive balance of payments—France and the United States—as well as a general replacement of long-term foreign loans by short-term credits. Such a development has necessarily had a disruptive effect on the international financial situation. In all those countries that are normally dependent on loans from abroad, i.e. the great majority of the countries of the world, the result has been an acute shortage of money with high interest rates and the emergence of general signs of incipient inflation. Although the immediate adverse effects of such a state of affairs are undoubtedly most tangible for the borrower nations, in the long

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run the consequences must be highly injurious to the lender nations as well.

The key to international economic recovery, wrote Kreuger, was to put the American capital market back on its feet:

In order to avoid severe declines in American foreign lending, it would appear to be of vital interest that the machinery for international financing be made more flexible and efficient. . . . It has been the goal of Kreuger & Toll to shape itself into an instrument for international financing operations designed to meet those special demands.

In connection with his efforts to set up this "instrument for international financing," Kreuger organized intensively throughout 1930 in both the United States and in Europe. At the same time, however, events soon forced Kreuger back into a political fight over the immediate necessity of arranging another large loan for Germany. This time Kreuger found himself in a direct confrontation with Hjalmar Schacht.

Kreuger vs Schacht: the Second German Loan

In the fall of 1930 Germany was again in acute need of a new loan to stabil-ize its economy. Again, Kreuger stepped in to help arrange the necessary credit. Negotiations between the German government and Kreuger's American banking house, Lee, Higginson & Co., began on October 1, 1930.

On October 2, 1930 Hjalmar Schacht arrived in New York. The purpose of his visit was to see to it that no American money be lent to Germany. During his eight-week stay in the United States, the former Reichsbank president (he had resigned the previous April) toured the entire country, giving over 40 lectures, beginning at the New York Council on Foreign Relations. The theme of Schacht's lectures, dutifully publicized in the New York Times, was that Germany was not going to pay back its loans, that the country was in fact already preparing a moratorium and that, therefore, to lend to Germany would be suicidal.

In his desperation to stop the Kreuger loan, Schacht even went so far as to meet with one of the directors of Lee, Higginson & Co., Donald Durant, telling him that he would never see his money again if he lent it to Germany. Needless to say, Durant—a de facto Kreuger employee—declined to follow Schacht's advice. The German government issued official denunciations of

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Schacht's lies, and Lee, Higginson raised the necessary funds—a staggering $125 million.

The British plans for total financial control over Germany were again temporarily thwarted, a fact which Schacht later bitterly recalled in his book. Das Ende der Reparationen (The End of Reparations):

In October 1030 $125 million in short-term foreign credit was granted to help cover Germany's budget deficit. In January 1931 negotiations were conducted on a second credit of $35 million. Both credits met with the approval of the Reichsbank. It is deplorable that the knowledge of the monetary policy danger which lurks in these credits could be lost in such a short time. . . . When will the German people find the strength to finance its tasks through austerity of its own?

The 'Norman Plan'

Hjalmar Schacht had resigned from the post of president of the Reichsbank on April 2, 1930. One of the main reasons for his resignation was undoubtedly to gain the extra freedom of movement he required for such missions as the one in the fall of 1930 to the United States. A more direct reason, however, may have been his failure to achieve his assigned goals in the negotiations on the so-called Young Plan.

The Young Plan was a new attempt by the British to rally French and U.S. support for a scheme to impose severe demands on Germany in order to refinance German reparations debt. The most important element of the Young Plan, however, was the British proposal to establish a new institution, the Bank for International Settlements (BIS). The British counted heavily on being able to establish the BIS as a world central bank—under their control. It was therefore no little shock to London when it turned out that a Frenchman, Pierre Quesnay, was elected managing director of the BIS. According to the New York Times of April 5, 1930, it was in fact this event which had forced Schacht's retirement from the Reichsbank.

Whatever the direct consequences for Schacht, the failure of the BIS project was a major setback to the British, especially since Kreuger's organizing for a pro-development international lending institution was growing in both popularity and conceptual depth as time went by. In the spring of 1931, Kreuger published his annual report for Kreuger & Toll for 1930. Once

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again, his president's statement contained a programmatic proposal for the world economic crisis, this time even more explicit than the year before.

Kreuger now attempted to give a theoretical explanation of why techno-logical progress was essential to solve the crisis. He pointed out that the American economy had to invest in new industries at home at the same time that it continued to lend to foreign countries. Kreuger called for "low interest rates as an effective remedy for a crisis such as the present one" and appealed this time to governments and central banks to assist him in setting up the required international lending institutions.

The Kreuger & Toll report with Kreuger's statement was made available to the international press on April 8, 1931. By April 13, the British had their reply: the "Norman Plan"—or the "Bank of England's financial blood transfusion," as the Manchester Guardian called it. Bank of England head Montagu Norman was proposing an international corporation or bank with a capital of $500 million which would finance long-term credits to "Germany, Eastern Europe and the overseas raw-material producing countries.'' The capital would be subscribed by governments and/or large private industrial corporations.

Despite the pretty rhetoric about increasing world trade and financing development—strikingly reminiscent of today's World Bank or "Brandt Commission" reports—the real motivation for the "Norman Plan" was clear. A New York Times report from Geneva on April 24, 1931, for instance, admitted that the British wanted to set up an institution that could "finance loans to smaller governments on a much larger scale than Kreuger & Toll has already done alone."

The Anglophile press was equally blunt about the plagiaristic nature of the "Norman Plan." The New York Times wrote that Montagu Norman's plan for an industrial financing consortium was not his own idea at all, but that it

really came a few months ago from Dr. Hjalmar Schacht, former Governor of the Reichsbank, who was apparently inspired by the plan for an investment trust which Ivar Kreuger broached a year or so ago. . . . The Kreuger scheme sought to (convert short-term into long-term funds) by having an international group of private banks guarantee bonds. . . .

Needless to say, the idea of a British "financial dictatorship of the world' (as the Manchester Guardian called the scheme in an almost unbelievable

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display of frankness) did not exactly capture the hearts of the French. The Guardian admitted that the French were "distant and skeptical"' of the plan, and the newspaper grumpily complained that:

an international league of financiers dominating the world by a sinister concentration of power has often been the horrid dream of imaginative people, and in France especially public opinion is easily roused against "this menace."

But not only the French saw through the British plan. The New York Times cited a German newspaper which it said "suspects that the English move does not primarily aim so much at remedying existing gaps in credit facilities as at reinforcing Britain's influence on world capital.

Predictably, with this type of reception, the "Norman Plan" was soon dropped from the agenda at every forum of discussion. Not a single European country had bought the British scheme, and despite a special trip by Montagu Norman personally to the United States, not even the Americans could be persuaded to give it their backing.

The failure of the "Norman Plan" in April 1931 was a watershed event for British economic policy in the 1928-32 period. From that point on, all pretense of pursuing a "soft-line" policy in order to gain control of the world economy was abandoned. The British program now called for complete disintegration of the world economy—destruction of the international banking system and a collapse of world trade. In the context of such a program, one which was actually implemented over the following six months, it was obvious that there was no room for an independent financial power of the stature of Ivar Kreuger.

By April 1931, the "insiders" in British financial circles had decided Kreuger's fate. Lutz Graf Schwerin von Krosigk, a German finance ministry official during this period, related the following episode in his memoir book, Es geschah in Deutschland (It Happened in Germany):

In the spring of 1931 the Finance Ministry in Berlin was visited by the Swiss banker Somary, who had also made a name for himself as an economic theoretician. When asked how long the world market crisis was going to last, Somary replied that three events would have to take place first before a recovery would be possible: the banking system in Vienna and Berlin would have to be financially reorganized by means of a crisis, the

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British pound would have to be detached from gold, and the Swede Ivar Kreuger's match concern would have to collapse.

Early in the summer of 1931 the banks crashed [the Creditan-stalt collapse of May 11, 1931]. Late in the summer the pound was devalued [the British abandonment of the gold standard in September 1931]. When Somary once again came to Berlin in the spring of 1932, he was asked whether it was really necess-ary to wait for the third event. Somary refused to take back what he had said. Rather, he assured us that the Kreuger concern would soon be finished. Four weeks later, Kreuger shot himself in Paris; his worldwide concern went into liquidation.

Ivar Kreuger was murdered on March 12, 1932. In the German presidential elections on March 13, Adolf Hitler—running with the public endorsement of Hjalmar Schacht—received 11 million votes, 30 percent of the votes cast.