Jill Eicher - Mellon vs. Churchill: The Untold Story of Treasury Titans at War

31:58Are we going to hurt our credit standing in the world? And yet, if we can't pay off this money, maybe does it matter what our credit standing is because this is our primary creditor? Right. Churchill was strong form on this point. He had no fear of pushing the United States as hard and as long as possible to shame the United States into doing what he believed in his heart was the right thing, was to cancel all indebtedness related to the war. Churchill passionately believed that. He never wavered on the point. He wrote the Will America article. While in government, he wrote that piece, Will America Fail Us?

32:51That really was how Churchill felt about it. His resolve on the point only strengthened as the years went on, that that was the right thing to do. And that the important thing for Britain was to just keep pressing the United States to come to realize that in every way that they can, by shaping public opinion, by British policy, by influencing the allies. Churchill decided, we'll just play the long game until they figure out this is the right thing to do. To your point, I mean, isn't that kind of the question being asked by our own allies now is like, you know, as uncomfortable as it is. And you're talking to like your classic right wing conservative evangelical who voted for Trump.

33:44Isn't that kind of the awkward question is like, what are our allies going to think about us in the aftermath of this? And that's really what the tension of this book is, is, you know, very tough economic terms with your allies. That is the question that this story, what I took away from studying the language and the arguments back and forth was it came down to the question of what nations owe to one another. And the recognition that we live in an interdependent world, like it or not. Sure. And how can we have discussions to tackle these tough questions? If you think of, Mellon and Churchill were two brilliant men.

34:40They had extraordinary work ethics. They were both patriotic. They both wanted to do good things for their country. And they could not figure out how to come together and represent their two points of view and and perhaps give the world a blueprint of how to answer this question. We're still struggling with it today. Sure. So France is causing a lot of pressure. They're going to occupy the Ruhr, which is going to create a whole other problem and chain of reactions. In late 22, Churchill loses his seat in parliament, and parliament is taken over by the conservatives, which funny enough, Churchill helped found the conservative party originally.

35:28At this time, he wasn't a conservative. How does this really lead to the Mellon-Baldwin agreement? Because you have new government coming in, and you have Mellon that, to your point, he's a banker. He looks at this as a restructuring. And the Mellon-Baldwin agreement is really just a debt restructuring. It is. You're exactly right. It was a debt restructuring. Stanley Baldwin, who was chancellor of the Exchequer at the time, was sent over by Boner Law to negotiate with Mellon. And the two of them had very productive conversations. A lot of the negotiations took place at Mellon's home. And Baldwin was then, unfortunately, Boner Law did not like the terms.

36:18He thought that they were not fair. But Mellon had faith that Baldwin would be able to persuade Boner Law that this was the right thing to do. And of course, from Mellon's point of view, Britain was really the only solvent debtor that the United States has. And so this was the most important settlement. And he wanted it to be completed first. He was then going to use it as a model for all others. and Mellon sent Baldwin on his way with confidence that Baldwin would be able to persuade Boner Law that this was the best deal that Mellon would be capable of getting congressional approval for because it was far more generous than the terms that had been dictated to the Mellon and his commission by Congress.

37:15And so Mellon was going to have to use his political capital, if you will, and the support of Coolidge to persuade Congress to agree to these terms. Yeah. And let's see, I was just going through my notes here. The other, I'll put this out as a, you know, a little tidbit for listeners and viewers. Let's see, Boner Law penned an anonymous op-ed in the papers. And so I just thought like, what if a major world leader penned an anonymous op-ed? I mean, you'd be called out on the carpet for effectively, you know, lying and hiding things and whatnot. And at this time it was like, this is the way I got to like go out and explain to the public versus now people just go out on social media and tell them how they think.

38:01And you have to have a lot more transparency. So I thought a lot about the inner workings of societies in that piece. You know, when you turn to Churchill at this time, I mean, he's out of politics. He's about to publish a book. He is, you know, hanging out at his home. He's remodeling, you know, working on in the Mediterranean. He's hopping a train back and forth between Britain and the South of France. I mean, he's jet-setting, but he's still as important to this issue, even though he really is almost superfluous from a political perspective. to the central dialogue, he is still one of the central figures.

38:39And I think there's a magnet around these two gentlemen. The whole time, it doesn't matter what their role is. Well, I came to think of Churchill as wanting to be recognized as Britain's foremost expert on American foreign policy. And, well, actually, America in general. Okay. I would agree, but I want you to explain your view first. I really felt that he knew that he had a lot to contribute to British policy because he made it his, he could see that the United States was going to be a great power, a great force. And he realized that Britain needed to partner with that, needed to not try to resist, but join forces.

39:36And Churchill had, of course, great political ambitions. And so therefore, he took on the mantle of being the best thinker on American foreign policy, on America in general. and of course, during this period, how to influence American public opinion. Yeah. We hope you're enjoying the podcast. You know, we work hard putting together this show, but we work even harder for our investors at Smead Capital Management. At Smead, we believe in discipline investing, which is why the Smead funds have a proven track record of long-term outperformance. If you're an investor who plays the long game and want to invest in wonderful companies and build wealth, We invite you to visit SmeadCap.com.

40:22Past performance is not indicative of future results. Investing involves risks, including loss of principle. Please refer to the prospectus for important information about the investment company, including objectives, risks, charges, and expenses. Read and consider it carefully before investing. Smead Funds distributed by Smead Funds Distributors, LLC, not affiliated. I think, you know, after reading your book, of what I've known of Churchill prior and other books I've read and then reading this, I think Churchill was more American than most Americans. I think he understood the vision of America.

40:56And I would think he really understood what Pax Americana was far before it entered the lexicon. In other words, he just had such an optimistic vision of America and it was like he knew what was right for America and he was eventually gonna push it to that rightness or that right place. And I think your book argues that He wasn't going to force them to do that. He was going to use his humanity and his prose and his logic and his ability to connect with others to draw them towards their position of greatness. Is that a fair way of putting it? Absolutely. And his tours, when he would be selling his book, he would pack auditoriums, interviews.

41:42Everyone wanted to talk to this British writer who was traveling on private trains across Canada and then coming across the United States, having dinner with the Hearsts and the Astors. everyone wanted to hear what he had to say and he was he was one of the greatest orators of ever but he could he could change hearts and minds and he knew it and he wanted to use that that gift for the good but it also was a way for him to learn about the United States he was captivated by all that he saw on his tours. He admired the United States, whether it be Hollywood or the leaders of business or just the woman who was taking care of his hotel room who was talking about what stock she was buying.

42:41He found that all fabulous. Yeah. Well, yeah, to your point, when he did his visit, it was in the late 20s, right near the top of the stock market. So he thought the gambling going on the stock market was quite an interesting thing. and it was gambling to call a spade a spade. He also, he loved Banff. He talked a lot about Lake Louise and the Banff Springs Hotel. And I love Banff. So this is not like sponsored by visitbanff.com or something like that. But I totally understand that the Canadian Rockies are a totally beautiful place. Coolidge obviously becomes president, you know, because Harding unexpectedly dies in 23.

43:18You know, things change. how does the Dawes plan come about? The Dawes plan came about because the United States realized that they would not be able to reach any settlement agreements on the war debts until the issue of reparations was resolved. It was just this elephant in the room and everyone knew it. And the allies could not come together and resolve it, which was what the United States was hoping. They decided they would leave reparations to the allies to resolve. But that was just not possible. They needed some type of intervention. And the Coolidge administration realized that the United States was perhaps best suited.

44:15But of course, the Quillage administration didn't want to have the government be involved in this. And so this was part of the way that foreign policy worked in these years was to bring in the best minds from the private sector who would work on behalf of the government and go to the meetings so that it wouldn't be as though the U.S. government was officially participating in these discussions, but brilliant American bankers, businessmen, were there representing the government. And so Charles Dawes, who chaired the Dawes Commission and helped with the drafting of the Dawes plan, which was meant to be a temporary plan, And the idea was to find some way to structure a way for Germany to start to recover as well as the Allies.

45:17And then also, of course, for everyone to be able to repay the United States. And so that was the goal of the Dawes Plan. Yeah. And in the Dawes Plan, you mentioned that Parker Gilbert ran the Dawes Plan and the Germans called him the emperor of Europe. up, which I just love. It's like, hey, you want to be the person in that chair? Great. We hate you too. Yes, exactly. So there's a couple of things I want to jump into here. I consider this a tautological argument. When the US said they didn't have any stake in reparations, that's tautological because we all know that they do, just not directly.

46:02They were not a party to the Treaty of Versailles. It's not uncommon for the United States to not sign agreements that the other parts of the world make. That's actually pretty common. We write our own rules in a lot of cases. But to say that we're not a part of the Treaty of Versailles, that's for Germany and the allies to deal with. When we have the allies owing us money that they're getting from Germany, it means we are collecting reparations. Isn't that what's really going on is we were trying to build a structure to benefit from payments that were ultimately at their core. It's like, what was the underlying payment for the bond?

46:32Well, it was German reparations. Actually, no. No. The United States was trying to collect on its debts to the allies. And so that was the real intent. As far as reparations, the United States did not want to claim any reparations. Congress did push Mellon at one point, though, to put a bid in to be repaid for monies related to the direct costs of the U.S. military contribution to the war. But the United States did not want it didn't want to claim any territory. It was not interested in the money coming back from Germany had to do with the loans. And most of the money lent to Germany came from private American banks.

47:37And they, of course, wanted to be repaid for that money. But as far as reparations, Germany was to make no reparations to the United States. Well, correct, directly. But everybody else that wanted to get reparations from Germany were the same people that couldn't pay back the United States. Yes. So essentially what happened with the Dawes plan, it did create this circular movement of money where the money going to rebuild Germany, whether it be its central bank, its railroads, all of that was allowing Germany to make reparation payments to the allies. The allies then were able to make payments on their war debts to the United States.

48:20So, yes, it was a circular system that people finally realized. Sorry. Yeah, Mellon made a very interesting – again, I just put this as a footnote that I just found really interesting. So under the first Trump administration, Keith Kroc was the undersecretary of state, and he had to deal on the China issue in technology. So like think of Huawei and all that kind of stuff. And I'll never forget, I was at a talk he was giving at a tech conference called Cosm, and he said, oh, we looked at our allies on the technology issue with China as our customers. Well, then I'm reading your book, and what did Mellon call the allies on these – ultimately these debt payments?

49:02And he used the same term. He said these are our customers. Do you just look at that as his practical, pragmatic business sense saying, hey, how do I address and meet your needs? And that's part of what really caused him to be pretty pragmatic in his work. Well, that was his way of responding to the chart. There started to develop groups. There were people who believed that the loans needed some type of revision, that they needed to be restructured. Some people believed they should just be totally forgiven, primarily Wall Street bankers, of course. And on the other side, there are people that there should be, every penny should be repaid.

49:49And Mellon was trying to forge a middle road between these groups. And this was part of the education. It was Leffingwell who first put this idea forward, resonated completely with Mellon. And so Mellon tried to get people to see that the United States needed Europe to recover just as much as Europe itself needed to recover. And that's those were the interdependencies. And that's what he meant, that the American farmers wanted to sell their goods to Europe. Well, the Europeans had to recover economically in order for that to happen. And so to have them seen not as debtors, but instead of as customers.

50:37Yeah. Elsa comes up again later in the book. She obviously gets married to David Bruce in May of 1925. He is dispatched as the vice consul of the American consulate in Rome. And so here's her father back in the grind of these discussions. And he's got the ultimate social cover to go visit for, you know, not state reasons, which is go to see his daughter in Rome. And obviously at the time, Mussolini is in power in Italy, which obviously we now think it was like a really bad name. But that's who the power was post-World War II was, you know, in Mussolini's hands. You know, isn't just, again, she's the right daughter for the right person at the right time.

51:22And she's so important to his ability to get things kind of pushed forward while he really is using as a reason to go see his daughter. Well, there are two parts to that. First of all, it's 1926. Oh, it's 1926. Pardon me. And this is at the height of just the worst possible point in the battle between Churchill and Mellon. And Britain has launched this campaign, casting the United States as Shylock. The American press is casting Britain as spongers. and of course the face of this discussion is Churchill and Mellon. And Mellon, he was not a man who could express emotions. You have to think of Mellon through what he does.

52:22And he was devoted to his children. Elsa was in particularly important to him because she had played such a large role in seeing him evolve. But she also understood the pressures he was under. And the truth was, he missed her. She got married and David Bruce wanted to be a great diplomat. He was very well suited for it. But it took Elsa away from A.W. And so Mellon missed her greatly. And in those days, people took summer vacations of, you know, one or two months. And the other side was that Mellon really wanted to see how Europe was recovering through his with his own eyes and talk to people, trusted bankers that he knew.

53:23and so he was doing I came to believe that he was doing research which is what Mellon always did but he was also visiting genuinely wanted to see his daughter yeah let's see so on this trip that's when they visit obviously famously at the Ritz in 26 Mellon realized at this point the Allies were not good for the debts he's really coming around to the idea that this is almost pointless Um, Keynes has a quote in your book. He pointed out that, uh, that he said this after the meeting, if I remember correctly, he said at that meeting that on the current structure, quote, nothing really passes and nobody is a penny worse, end quote.

54:07Um, the bonds were getting bought by American investors at its origin, or again, when they restructured, they still had to go out and sell these. So it was really, as long as their liquidity was present in the American bond market, you could restructure and these kind of stayed all up. Obviously, if that scheme collapses, if there's no investors, none of the debt matters because the market's effectively voting with their feet saying these debts are worthless. The realization that summer that when there would be no appetite for those bonds in the United States, that would be when this whole debt restructuring and reparations, all of it would collapse.

54:55That's when that awareness was starting to grow from just bankers and certain people in Europe. That is when Mellon realized that, oh my goodness, this is not going to be workable going forward. Mellon's response to this was, of course, never articulated. But Mellon realized that two things could happen. One, for some reason, Congress could actually forgive the debts, if for whatever reasons. And also that Europe could default. And Mellon's goal was to build what Jamie called, Diamond calls the fortress balance sheet. Mellon was a great believer in that. He wanted to protect the economic strength of the United States.

55:51And so those two risks were huge in Mellon's mind. And so that's why he was aggressively running surpluses and using every penny to pay down the debt to protect the credit of the United States. And his intent was to pay off the entire national debt in, say, 20 years so that the loans from the allies wouldn't matter, wouldn't harm the U.S. taxpayer, because, of course, the government had promised U.S. taxpayers that there would never be any economic consequence to them because of the loans. And Mel was intent on honoring that promise.

56:59for funds with a proven track record give the smeed funds a look or better yet reach out at smeedcap.com and don't forget to mention your fan of the podcast past performance is not indicative of future results investing involves risks including loss of principle please refer to the prospectus for important information about the investment company including objectives risks charges and expenses read and consider it carefully before investing smeed funds distributed by smeed Funds Distributors, LLC, not affiliated. Let's take what you just said about Mellon, and then let's put our Churchill lens over the top of that, okay?

57:36Because I think it's kind of like those two views put together. So let's just say I look at the world today through those two lenses, okay? To your point, you know, we have to be fiscally responsible. We obviously have not been, okay? That's like case in point. But if you look at from the Churchill lens on top of that, Isn't it interesting that our past commitments, we are not holding, we're trying to renegotiate those, our willingness to stick our neck out there for the rest of the world is going away. Okay. In other words, we're retrenching back to our own shores on some level in some way. so am I surprised that like the goodwill we typically get through the treasury markets is somehow eroding when Pax Americana and our willingness to step in and do the right thing is also coming at the time where we're in the worst fiscal position we've been really in my lifetime since I was born in 1983.

58:29And yet we don't look at those lenses together and say, wait, what if they're actually tied to each other? Is that a fair, you know, kind of two lens view of what Mellon was saying and at the same time what Churchill thought to be right for America in its purpose in the world. Absolutely. Churchill believed that because the United States had become the greatest power in the world, with that came responsibility. That was at the core of Churchill's, all of Churchill's arguments to get the United States to see, well, great, you can be the supreme power. We, Britain, used to be the supreme power. But with that comes a responsibility.

59:18And part of that responsibility is making the world prosperous and bringing peace to the world. That's part of the responsibility that Churchill saw. That's what he was hoping the United States would realize. OK, you're a great power, but it does come with responsibility. Yeah. The stock market crashes after Churchill's visit, not long after. Two years later, Hoover passes in 1931 a moratorium on debt for France. And this was like, hey, you don't have to make any payments. But Congress, shockingly, still has this hope that they're going to get the money at some point. Funny enough, so I think you said in your book they put a provision that it was not a cancellation.

1:00:09So like they're being ideological on this, right? We're not canceling your debt. We're just not making you pay for the foreseeable future. Is there any difference? Well, it was a one-year moratorium for all war debts that was extended by the Hoover administration. And so it did have a time. He did set a time limit of one year. But Mellon and all the bankers knew that once you issue a moratorium on a, you know, to a debtor, the likelihood of resuming payments is very low. And so that was the opportunity for the Allies and Germany to get together and come up with a plan of, okay, so how do we get the United States to cancel their debts?

1:01:11And they thought for sure this was the opportunity to do so. Unfortunately, they were wrong. But they then put forward that plan that they created saying, we're going to walk away from all our debts. All is forgiven if the United States will. And that was their proposal. The United States declined. Yeah. And I mean, just them even throwing the idea out that this is not a cancellation of debts. This is like a paper tiger. I mean, that's what this is. It's a paper tiger. You're putting something on paper. It's absolutely worthless in meaning or consequence. The other thing, too, is with the stock market crash, it exposed exactly what Keynes got at, which was that these were worthless if they couldn't be financed.

1:02:02And once liquidity disappeared, it showed you how uneconomic this was because without liquidity, no one's going to pay anybody. And so it makes me think as an investor, how often schemes like this go on for quite a long time and then liquidity goes away and everyone says, oh, wait, that doesn't work anymore. Yeah, we're just going to forget that happened. And, you know, to quote Charlie Munger, he says, you know, why do we create new ways to lose money? I think the old ways work just fine. OK. And that's what I was thinking of as I was kind of going through this part of your book.

1:02:34Because at the time, you know, Mellon goes from Treasury secretary to ambassador to the UK. So, again, it's not that they disliked Mellon and didn't think he was a nice guy. He goes on to work directly, you know, with the British government on many things. Mellon was very respected in Europe because he was very honest always with them. And he had, Churchill got under his skin. They did have this epic battle, but both men, And there was merit to what both of them were arguing. And people knew that. And so when Mellon came as ambassador, of course, he was totally disgraced in the United States. But he was welcome in Europe.

1:03:27They wanted his financial expertise. They thought this was a wonderful thing to have him on their shore so he could see what they needed and how they could partner with the United States. So they welcomed him with open arms. Yeah, because the other book that I've read with a U.K. ambassador, British ambassador, is actually Joe Kennedy, who ended up there during the FDR years. It was very different. Very different, but again, like, you know, had political ambitions. It was a very different character, but, you know, also played a very social role, I would call it, not dissimilar to Mellon. Let's see, Churchill, you know, compared to Mellon, you know, again, I think he just he holds a very unique space, more in the American, you know, thought and lexicon.

1:04:18lexicon. You know, Mellon's kind of an afterthought, which that's what I really thought your book did such a good job of, was taking Mellon and, you know, really elevating him as an American, as a statesman, as a leading, you know, official in the financial world on behalf of the United States. But Churchill, he ended up playing a silent war. I think a lot of the book, later in the book, You talk about how once public opinion rose up against the United States, he just was mum because he knew he didn't have to say anything. The wheels of time were, you know, propounding or expounding to where he wanted them to go.

1:04:57Is that right? It is. And Churchill's attention had turned. He was very concerned what was happening in Germany. And he was focused on, he understood that the ill will, the bitterness that had played out for the last 10 years, that it was still percolating there. And he was very intent on keeping an eye on what he saw as warning signs. And so his focus had turned to monitoring what was happening policy-wise in Europe and in particular in Germany. Where can our listeners and viewers follow you going forward so that you're going to tell us what your next book is? I'm teasing. I'm just kidding. Oh, you're so kind.

1:05:54That's so kind of you, Cole. I'm sorry, I don't have a website. Okay. This is my first book. I apologize. I don't have anywhere to tell you. Well, I was going to say also, do you expect to write more on the subject as you come across more with the Churchill Society or anything like that? Well, there's a part of the research that I did for this book that doesn't fit into this story because I really wanted to keep the focus on Mellon and Churchill and Wardetz. but there's a wonderful story uh that i'm i'm trying to summon my courage uh this is my first book it took four years um i had to negotiate see if my husband be okay with this but i would i would love for that story uh to be told it is the it's a piece of uh american uh history it has to do with the National Gallery of Art.

1:06:54And I very much would like to have the privilege to do it if the fates allow. Well, I think you had that at the very end of the book because they, you know, kind of pushed Mellon for tax evasion. And he ended up giving his art collection to the National, you know, went to the, you know, National, now part of the National Mall and went there. And I could tell it was just like a little, a little breadcrumb you left at the end of the story? Because it's such a, it's an important story and it's also beautiful. I mean, there's all kinds of intrigue and this is Melon. So of course there's intrigue and that's, I, I, I appreciate your kind words and encouragement.

1:07:36Thank you. Well, Jill, thank you for your time. Your book argues that learning and pragmatism as we saw through Melon are the inescapable values that we need in business and politics. You'll further gain life lessons out of the people that Churchill and Mellon were with. Mellon has defined what I believe is the new American century in the centrality of work and its value. He said, quote, the purpose of life is to be occupied and serve in the most useful capacity, provided it is an honest endeavor. The question is to find where one can give the most service. My main pleasure in work is being able to accomplish results, end quote.

1:08:20I love that quote. You have to read that. You should go out and buy a copy of Mellon versus Churchill today. If you've enjoyed this podcast, go to Apple, Spotify, YouTube, wherever you listen to a book with legs. Give us a review. Tell others about the books and great authors like Jill Eicher that we have the opportunity to understand and study the world with and through. For our tribe, if you have a great book that you'd like to recommend, email podcast at smeedcap.com. That's podcast at smeedcap.com. You can also send your suggestions to us on X. Our handle is at smeedcap. Thank you for joining us for A Book With Legs podcast.

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