The Treasury’s David Waley had the wit to put himself in the Germans’ place as soon as he had seen the Athens memo outlining the German counterfeit plan. He thought the British might forestall the scheme by publicly announcing they knew all about the plot to undermine sterling and would simply refuse to honor any pound notes held abroad. “Perhaps it is a fairy story,” he wrote Basil Catterns, deputy governor of the Bank of England, “but it certainly seems a good idea from the German point of view.”
Waley was gently tweaking Catterns, because the Treasury had warned him of such plots before the war and had been rebuffed. In May 1939, as war loomed, Sir Frederick Phillips had attempted to arouse the Bank of England from its torpid superiority. Phillips, a laconic, pipe-smoking Treasury mandarin who “could be silent in several languages,” was a brilliant mathematician who consulted with his economists and had long been at odds with the Bank’s hard-money policies. During World War I, the Bank had actually printed up excellent counterfeits of
German
money with the full knowledge of the British government. They were delivered regularly by taxi to the head of naval intelligence, probably for use by spies in Germany. But when it came to fakes, Catterns of the Bank had a short memory. Replying to Phillips, he insisted it would hardly be worth the expense and trouble of printing a special reserve of pounds to defend against “a danger which does not seem very likely to materialise,” and in any case, “[W]e do not believe that notes could be put out which would not be distinguishable from our own issue.”
The Treasury took a while to digest this pompous claim before parrying with its own politely skeptical and canny analysis on June 5. Maybe the Bank could spot a fake, Phillips replied, but would an ordinary Englishman be able to tell the difference between a good counterfeit and a real pound note? And once the rumors started flying, “the average man… would begin to suspect all notes.” What would the Bank do then? Publicize the scheme or try to hush it up? What if the Germans dropped the bills in installments, printing up new versions to keep up with the Bank each time it issued a new design? And, finally, who would compensate the trusting but unfortunate souls who got stuck with the air-dropped fakes?
The Bank retreated to ponder Phillips’s uncomfortable questions and came back on June 9 with its solution: It would print a small reserve stock embedded with a special metal thread in a cellulose strip. The Bank had been experimenting with this for several years but hesitated to stick the strip on a new issue of notes for fear of public embarrassment if the device failed. Phillips nevertheless told the Bank to print 300 million pounds’ worth of notes as a secret reserve to replace slightly more than half of all notes in circulation. New bills, fetchingly lithographed in mauve and rose, were finally issued in May 1940 in denominations of one pound as well as a half-pound, or 10 shillings. The only catch was that the Germans, already working on their counterfeits, had wisely decided to get more punch out of each pound by forging mainly black-and-white fivers, more or less the median weekly wage for an English workingman (and nowadays merely the price of a round of drinks at a pub). Thanks to a typical British muddle, Nazi plans for a financial blitzkrieg were pointing straight at the biggest gap in the enemy’s defense, the five-pound note.
Five-pound notes were imposing certificates measuring eight by five inches, with flowing script. The intricate drawing of Britannia on a throne, the date which was also impressed in the watermark, a serial number for each bill, a system of letters and numbers denoting successive issues — all these, the Bank was certain, made its system virtually inscrutable because each note had to match the Bank’s own records or it would be rejected as a forgery. Further, each new issue was designed with security markings so subtle — a broken line, an off-center dot — that counterfeiters were meant to mistake them for misprints and correct them, thus falsifying the note. Out of tradition and prudence, shopkeepers insisted that their customers sign the notes on the back with name and address as if they were being endorsed like a check. The face of the notes bore the bold signature of the Bank’s chief cashier, Sir Kenneth Oswald Peppiatt — K. O. Peppiatt — who, like the Treasury’s Waley, was a World War I officer decorated with the Military Cross. A racing enthusiast and bridge player, he was a man of tall and imposing bearing, easily displaying his supreme self-confidence whenever cornered by extracting a cigarette from the gold case in his waistcoat pocket, tapping it on the metal, and posing even the most uncomfortable question without raising his voice. Peppiatt was certain no one could get the better of him or his banknotes.
If Phillips, Waley, and Keynes represented the English social conscience of what the playwright George Bernard Shaw once called Heartbreak House, Peppiatt was a doyen of Shaw’s equally symbolic but opposing Horseback Hall. He reported to Sir Montagu (later Lord) Norman, governor of the Bank from 1920 to 1944, whose staff basked in his personal arrogance — a reflection of the institution’s independence of elected governments. Norman never doubted that he alone was the rightful guardian of the nation’s currency. Keynes, also later ennobled and long a denizen of Heartbreak House in his role of financial eminence to the writers and artists of that corner of upper Bohemia which gathered in London’s Bloomsbury, was considered by his social equals, and probably by himself, as the cleverest man in England. Not surprisingly, he disdained Norman as “always absolutely charming, always absolutely wrong.” No wonder the Bank was the first institution to be nationalized when the Labor government came to power at the end of the war and placed it under the governorship of Thomas Catto, a Scottish self-made banker and Keynes’s close wartime associate.
In marked contrast to the mindset of Germany, this dichotomy between brains and character marks all of English life and helps explain why the English would shy away from counterfeit currency as a weapon of war while Germany embraced it. Ideas flicker across the English horizon like summer lightning, from Shakespeare to Francis Crick, but they are generally distrusted even though they eventually turn out to be world-changing. Because of the emphasis on character, breeding plays perhaps an excessive role, but Britain is saved from stagnation by the openness of its aristocracy to new talent. Its great prime ministers come from all classes — Gladstone, Disraeli, Lloyd George, Churchill, Attlee, Thatcher. All had to think on their feet under fire in the House of Commons and dispose of their opponents with wit rather than Nietzschean will. For example, Disraeli’s classic put-down: “There sit the leaders of the opposition like the coast of Chile — a line of extinct volcanoes.”
But the Germans are the great philosophical system-builders of Europe, along with the French, the latter tending to emphasize logic rather than heavy Teutonic ideas about duty, will, and power —
Macht,
as the Germans call it. There is little history of tolerant argument in Germany and a strong component of Martin Luther’s obedience to divine will. (Even that founder of Protestant individuality thought in lockstep terms of “the priesthood of all believers.”) The deep play of imagination does poke into German literature and philosophy during occasional romantic outbursts, but in general, the debasement of human standards, first money and later life itself, was within bounds permitted for the benefit of the
Volk.
Long before its rhetorical capture by Hitler and Goebbels, this word commingled ideas of race, nation, and state. There is no equivalent in English.
Even when the Bank of England issued the low-denomination counterfeit-proof notes in 1940, the British government decided not to warn the public of the real reason, lest a counterfeiting scare cast doubt on Britain’s currency. In 1940 a reporter for the
News of the World,
the most widely circulated paper in the country, telephoned Sir John Simon for the exchequer’s comment on what he had been hearing from various sources, including an unimpeachable High Court judge: that the British government already knew Germany was going to dump huge amounts of counterfeit pounds on Britain. The chancellor recounted the conversation coolly in an internal memo: “I said I did not wish to make any request to the News of the World or any other paper, but that as I was asked whether it was in the best interests of the country to publish such a yarn, I should be disposed to say that it would be better not.” The article never appeared, and both the Treasury and the Bank did their best to kill any other newspaper stories.
Ignorance of counterfeiting plots was cultivated externally and, unfortunately, internally. At the Bank, Peppiatt refused the offer of the French police to lead him to an informer who claimed to know about a “factory” producing five- and ten-pound counterfeits. The chief cashier told British authorities to divert the French to the Metropolitan Police at Scotland Yard and to keep the French treasury out of it entirely. He did not trust or even like foreigners and easily fell into patronizing them, one reason he could not imagine them clever enough to match any piece of paper with
his
signature on it.
In fact, Peppiatt had already passed up what could have been his best source of intelligence about German counterfeits, even though it had been offered to him with the endorsement of Scotland Yard. In May 1938, Sir Norman Kendal, assistant commissioner of the Metropolitan Police and a lawyer who previously had helped command the Yard’s detective force, forwarded a plea from Vienna for help in finding refuge for Hans Adler, a special adviser to the International Criminal Police Commission. Adler, descended from Jews, edited a standard European numismatic handbook and an internationally recognized review,
Counterfeits and Forgeries.
He had rich knowledge and extensive files. Adler had already lost his job, and his life was threatened as the Nazis began integrating Austria into Germany and applying their notorious racial laws. Although Adler had been on first-name terms for years with the master craftsmen at the Bank’s printing plant, Peppiatt callously dismissed his plea in a brief note to Kendal: “I have made many enquiries, but fear I must report that we cannot be of help. I suppose there is no possibility of [Adler’s] carrying on his work in London?” Kendal tried again early in 1939, reporting to Peppiatt that “the wretched Hans Adler has been hounded out of Austria and later hounded out of Italy” and finally given shelter in Holland. Saved by the kindness of strangers, Adler survived the Nazi occupation and returned to work for the ICPC’s counterfeit division when it was reconstituted after the war under Dutch control. But his unique expertise was unavailable to the Bank and to Scotland Yard when they most needed it.
The Bank’s strategy was the gradual withdrawal of all notes worth ten pounds or more, under the guise of restricting large bills to complicate life for black-marketers who dealt mainly in cash. The Bank’s own printing plant on Old Street, located since 1920 in what was once St. Luke’s mental hospital, was evacuated from the City of London in 1940 because of air raids and as part of this antiforgery plan stopped printing large bills altogether in 1943. The only other defense was mounted on August 20, 1940, when the Bank banned the repatriation of its own banknotes — between £10 million and £20 million held abroad. Such an import barrier was virtually unprecedented in modern war; nations generally try to hold their money close rather than allowing bills encashable in their own banks to float freely around the world. Like most unprecedented decisions, this one would have unforeseen consequences. The fake Nazi bills eventually went flying in all directions, surprising even those who had conceived the scheme.
N
OBEL
P
RIZE–WINNING
I
DEAS
N
one of America’s important novelists of the Depression was more politically committed than John Steinbeck, the author of the saga of the great Dust Bowl migration,
The Grapes of Wrath,
and
In Dubious Battle,
a novel about courageous union workers that would be inconceivable among today’s navel-gazing fiction. Steinbeck was a devoted New Deal Democrat as early as June 1940 and had already been received in the Oval Office by Franklin D. Roosevelt with a proposal for a radio and motion picture propaganda office “to get this side of the world together.” Even though the idea had the backing of the Librarian of Congress, the poet Archibald MacLeish, it lay dormant. But the president was always looking for ways to stand alongside the embattled British in that dark year and simultaneously to prepare the ground for America’s inevitable entry into the war. So when Steinbeck wrote again on August 13 that he had a distinguished scientist in hand with an idea for a secret weapon, Roosevelt was all ears. After all, hadn’t some of the nation’s leading physicists brought him a letter just a year earlier from Albert Einstein proposing the ultimate secret weapon?
Steinbeck, of course, knew nothing of plans for the Manhattan Project to develop an atomic bomb and therefore could not have known how open Roosevelt might be to the urging of the future Nobel Prize winner that “our weapons and tactics would have to come not only from military minds but from the laboratories.”
*
The letter continued:
Perhaps you have heard of Dr. Melvin Knisely, who has the chair of Anatomy at the University of Chicago. Several weeks ago Life Magazine carried a series of pictures of his new light which permits microscopic study of capillary circulation of the blood for the first time. He is a remarkable scientist and an old friend of mine. Discussing with him the problem of the growing Nazi power and possibilities for defense against it, he put forth an analysis and a psychological weapon which seem to me so simple and so effective, that I think it should be considered and very soon. I would take it to someone less busy than you if I knew one with imagination and resiliency enough to see its possibilities.
What I ask of you is this — Will you see Dr. Knisely and me within a week or ten days — see us privately and listen to this plan? Within half an hour you will know that we have an easily available weapon more devastating than many battleships or you will not like it at all. Afterwards — if you agree — we will discuss it with any one you may designate on the National Defense Council.
Please forgive this informality, but frankly, I don’t know anyone else in authority whom I can address informally.
That was certainly starting at the top, and next to the last sentence some anonymous aide scribbled in the margin, “Very nice!” James Rowe, a valued White House assistant, forwarded the letter to his boss, attaching a note saying the novelist had a “high reputation as an amateur scientist… certainly he is not a crackpot.” Rowe nevertheless reckoned that the president would send Steinbeck to some subordinate. But the combination of naked flattery and scientific intrigue proved irresistible. The novelist and the anatomy professor were invited to Washington at their own expense for a twenty-minute meeting with Roosevelt.
Just before lunch on September 12, Knisely outlined with high seriousness his plan to scatter large numbers of high-quality counterfeit German marks across Hitler’s Reich. No official account of the White House meeting was kept, so only Steinbeck’s highly dramatized version survives. With his novelist’s eye for detail, he recalled that as they made their terse presentation, Roosevelt’s face was in shadow, with the sun glinting on his forehead “as far down as his closed eyes. His cigarette in the long holder stuck straight up in the air, with curls of blue drifting in the sunstreaks.” The tale continued:
Suddenly the President opened his eyes and banged his chair forward. He was laughing. “This is strictly illegal,” he said, his eyes shining. Then he added in a low voice, “And we can do it.”
“Why, for the cost of one destroyer we could send Italy spinning. For the cost of a cruiser, we could have Hitler on a hot stove lid.”
What happened next is fully recorded in official archives. Roosevelt picked up the telephone and was put through to Henry Morgenthau Jr., his wealthy secretary of the treasury and Hudson River Valley neighbor. They were personally so close that when the Morgenthaus came to dinner, the Roosevelt grandchildren addressed them as Uncle Henry and Aunt Elinor. Like the president, Morgenthau was a landowner, but unlike him he was an honored member of New York City’s German-Jewish aristocracy, which guarded its reputation for probity and propriety against the inevitable slurs of the time. Roosevelt told Steinbeck and Knisely he was sending them right next door to the Treasury; Morgenthau was then to report back. It was not for nothing that Roosevelt was the most celebrated political animal in Washington, so it is hard to believe that FDR did not have a good idea of what would happen next. As the two visitors unveiled their secret weapon for the second time that afternoon, the atmosphere in Morgenthau’s imposing Victorian office, furnished in polished wood and leather, grew “cold and then freezing,” in Steinbeck’s words. Morgenthau, tall, bald, and obviously shocked, peered ominously through his pince-nez at his visitors.
Also at the meeting was Herbert G. Gaston, a former editor of the
New York World
who had come to Washington with Morgenthau in 1933 and been promoted the year before to assistant secretary in charge of the Treasury’s law enforcement agencies. That included the Secret Service, which defended the president against assassins and the dollar against counterfeiters. In a memo to Morgenthau that served as minutes of the meeting, Gaston noted that the secretary had summoned him right after receiving “the most extraordinary telephone call from the President [who]… said Steinbeck had proposed what seemed to him a grand idea — it was to counterfeit German currency in large quantities and arrange to have it introduced into Germany. You [Morgenthau] asked the President to have them come over and see you. You remarked to me that you didn’t think you ought to let these people leave with the idea that the Government would countenance such a scheme.”
It made no difference to Morgenthau that Knisely had studied in Germany and argued that he understood German psychology, that he was certain counterfeits on a large scale would sow great confusion and undermine German finance, or that Knisely went into detail about how best to analyze and manufacture replicas of German reichsmarks that would defy detection. When Morgenthau raised moral and legal objections, Steinbeck replied that they were trumped by the fact that the Nazi war effort was mass murder and must be stopped. The arguments and counterarguments lasted just under half an hour, although on a higher moral plane than the practical wartime discussions that had engaged the British at greater length the year before.
Steinbeck was told flat out by Morgenthau, “It’s against the law, and I will have nothing to do with it.” The secretary dismissed the plan as something he would have expected from the Germans, adding that the United States was not at war with Germany anyway. (Morgenthau would have been truly shocked to learn that a similar argument against counterfeiting American dollars had been attributed to Hitler.) Gaston chimed in that counterfeiting German currency would be just as much an act of war as sending a fleet across the English Channel, and he would prefer that to having British planes dump fake bills on the foe.
In any case, Morgenthau said, the British ambassador would be calling on him later in the afternoon. Steinbeck, obviously expecting support, said he would be pleased to have the plan put to Lord Lothian.
Unbeknownst to the plebeian native of the dusty California farming town of Salinas, Lothian was an even larger landowner than Roosevelt and Morgenthau together — 28,000 acres as he recorded in his
Who’s Who
entry. But he was also a cool and experienced public servant, could be blunt when the occasion called for it, and knew America well from his position as interwar secretary of the trusts administering the Rhodes scholarships. Morgenthau and Lothian went to see Roosevelt, and by late in the day the ambassador had forwarded to Morgenthau an unsigned memorandum prepared by Gerald Pinsent, the British Treasury’s man at the embassy. It was brief, and its salient arguments, totally new to Washington, were probably heightened by Pinsent as he realized that two Americans even as worldly and widely traveled as Steinbeck and Knisely seemed to have no conception of life under the totalitarian regimes of Europe.
MEMORANDUM
The suggestion that counterfeit Reichsmark notes should be dropped from aeroplanes over Germany was exhaustively considered by the British Government some time ago. At that time it was thought that this would be regarded by the world at large as a particularly odious and dishonest method of warfare, and if this argument has to any extent lost its force since then there are other arguments which seem decisive.
The fact that such notes were being dropped would certainly be known without delay to the German authorities. In a country ruled the way Germany is ruled, it would not be difficult for the authorities to organize collection by Party or official organisations of the notes dropped, and to frighten the population so that they would not dare to collect these notes and retain and use them themselves. Precautions have probably been taken already by the German Government.
Even insofar as the population were able to retain and use such notes the effect would probably be disproportionately small. In Germany nearly all goods are either rationed or are simply not obtainable; the holders of these counterfeit notes would not be able to spend them to more than a limited extent and it is probable that they would flow to a considerable extent into savings bank accounts, etc. The German government could increase their borrowing accordingly from these banks, and decrease their borrowing on the markets.
To overcome these objections in such a way as to cause a substantially increased demand for goods which would endanger the German price control, or as to create distrust among the population in the currency, would require a scattering of notes on such a large scale as might be beyond the capacity of the Royal Air Force if it is not to limit its attacks on military objectives to an undesirable degree.
Lastly, if Great Britain started this method of warfare and Germany retaliated in kind, it is not improbable that the effect on Great Britain, where we have not the same totalitarian methods of government, might be greater than the effect on Germany.
12th September, 1940
Morgenthau quickly wrote to thank Lothian: “Mr. John Steinbeck put the proposal up to me. I told him I was absolutely opposed to it as I thought it was crooked and I am delighted to learn that the British government agrees with me.” In a letter to Archibald MacLeish, Steinbeck was contemptuous: “A friend and I took a deadly little plan to Washington and the President liked it but the money men didn’t. That is, Lothian and Morgenthau. It would have worked, too, and would work most particularly in Italy.” This tribune of the oppressed had devised a way to use the capitalists’ own weapons against the fascists, and the capitalists had rebuffed him.
The rejection still rankled years later when Steinbeck’s memory dimmed in retelling the story: he mixed up Lord Lothian with his successor Lord Halifax and dismissed him as a “spluttering” moneybags. Steinbeck also wrote: “Much later, when I sat with the President, he said ruefully, ‘Killing is all right, and you could attack religion with some impunity, but you [Steinbeck] were threatening something dearer than life to many people.’” The author would later encounter the president when he helped draft the passages on minority rights in FDR’s 1944 re-election platform. It would have been characteristic of Roosevelt to utter some sort of emollient remark like this in lieu of thanks, although whether Steinbeck would have remembered it with precision is another matter. Roosevelt’s remark nevertheless passed into the record through a
Collier’s
magazine article Steinbeck wrote twelve years later, where he recycled the idea for use against the Soviet Union — whose leaders hardly believed in money at all! — and wondered why the United States would not dare try it out. (He was wrong. In 1950, the newly organized Central Intelligence Agency had the idea on its secret list of things to think about for the next war.)
While all this was going on, public alarm was sounded about the threat of counterfeit American currency. The U.S. Secret Service, breaking with the tradition embedded in its name, intensified its nationwide “Know Your Money” campaign to inform the public how to recognize fake bills. Anticounterfeiting educational films were prepared in 1940, and when America entered the war the Treasury Department staged exhibits of counterfeit bills, starting in New York’s Rockefeller Center and moving across the country. These inspired an article in
Life
magazine giving the Treasury view that “sometime soon Germany and Japan may try to panic this country by passing out great quantities of counterfeit money.” A front-page article in the
New York Times
of January 25, 1940, reported the Secret Service’s suspicions that the Nazis were counterfeiting dollars and circulating them in Italy, Egypt, and the Balkans. This sent the German chargé d’affaires, Hans Thomsen, to the State Department the very next day to object that his government was doing no such thing. Because the United States and Germany were not yet at war, diplomats tried to mollify Thomsen.
Officials clipped the newspapers for stories on counterfeits and paid particular attention to a report by the Turkish ambassador that counterfeit dollars were being used by the Nazis to buy oil in Romania. This report, almost certainly false, was spread throughout the State Department. Although counterfeit dollars were reported in wide circulation throughout Europe, it was assumed by American officials that they probably did not originate as wartime weapons, but through an underground network of what a
New York Times
reporter called “black bourses.” These usually unscrupulous money changers had been feeding for some years on refugees, exiles, and others hunted by the totalitarian regimes of the era. The fleeing buyers had little recourse after they discovered they had been stung, and likewise every incentive to pass on what was in effect hot money.