Lords of Finance
Jan 8th 2009 The central bankers of the Great Depression were obsessed with a single idea, rather like their successors today
CENTRAL bankers were compelling figures in the 1920s, not least because they preferred to operate in secret. The cloak was peculiarly attractive to Sir Montagu Norman, governor of the Bank of England (pictured above, right), who adopted a false identity when he travelled, though this sometimes attracted attention rather than deflecting it. Asked for his reasons for promoting a policy, Norman replied: “I don’t have reasons. I have instincts.” Benjamin Strong, Norman’s principal collaborator, ran the Federal Reserve Bank of New York, which was responsible for America’s international financial relationships. In the mid-1920s, Strong decided the American economy was sufficiently prosperous that he could widen his brief to promote economic stability. Liaquat Ahamed suggests that Strong more than anyone else “invented the modern central banker”.
Norman and Strong were wedded to the gold standard. Emile Moreau, the less clubable governor of the Banque de France, was an obsessive hoarder of gold and tended to do his nation’s own thing. The arrogant Hjalmar Schacht (above left), a spiky German nationalist who headed the Reichsbank, had, by a remarkable sleight of hand, ended Germany’s hyperinflation in 1923, but he was unable to persuade his fellow central bankers to forget reparations, even though they all appreciated that heavy post-war payments were “bleeding Germany white”.
The quartet, united by a belief that they knew best, had persuaded the great powers to leave the fate of their economies to the antique workings of the gold standard—“a barbarous relic” in the view of John Maynard Keynes. They had the power, in a legendary phrase, to “crucify mankind upon a cross of gold”, and they did so. The problem was that there was not enough gold to finance world trade. Stocks were concentrated in America and France, and countries like Britain, where it was scarce, had to borrow heavily, and to adjust interest rates and government spending at the expense of employment in order to replenish gold reserves.
A loan organised by Strong enabled Norman to get Britain back onto the gold standard in 1926 (it had slipped off during the first world war). Norman’s advice helped persuade Strong to lower interest rates in 1927, which only increased irrational exuberance on Wall Street.
These early central bankers were an odd lot. Norman, who dabbled with spiritualism, apparently informed a colleague that he could walk through walls. He suffered regular nervous breakdowns, and was actually on sick leave when Britain left the gold standard again in 1931. Strong suffered from permanent ill health and was often affected by the generous use of morphine to control pain. He died in October 1928 before the Wall Street Crash and the Great Depression, but Mr Ahamed does not appear to believe that things would have turned out any differently had he lived: in a crushing conclusion, he writes that the Great Depression was “the direct result of a series of misjudgments by economic policymakers…by any measure the most dramatic series of collective blunders ever made by financial officials.” Looking back in 1948, Norman’s judgment was no less harsh. “We achieved absolutely nothing,” he said, “except that we collected a lot of money from a lot of poor devils and gave it to the four winds.”
Politicians were left to clear up the mess they left. One of them was Hitler, who readily instigated a series of measures to combat German unemployment which were similar to those Gordon Brown is adopting today. (Schacht later joined the anti-Hitler resistance.) Britain’s prospects brightened as soon as the gold standard was dropped. The French, less troubled, remained loyal to gold until 1936.
But the most original solution was that of President Franklin Roosevelt, soon after his inauguration in 1933. Mr Ahamed resurrects a 59-year-old agricultural economist from Cornell University by the name of George Warren, whose study of long-term trends in commodity prices led him to believe that, since falling prices were associated with depression, recovery ought to be encouraged by rising prices. The president liked the idea and decided to devalue the dollar—despite vigorous opposition from the gold bugs—simply by increasing the gold price. One of his own economic advisers lamented: “This is the end of Western civilisation.” For a number of weeks, the president would consult his advisers over boiled eggs at breakfast and randomly drive up the gold price, beginning at $31.36 an ounce until it settled at $35. By then a recovery was under way.
This absorbing study of the first collective of central bankers is provocative, not least because it is still relevant. Mr Ahamed, who was a World Bank economist and now manages investments in America, likens central bankers to Sisyphus. This was the man whom the gods condemned to roll a large stone up a steep hill only for it to roll down again when it reached the peak. These great central bankers were so wedded to a dogma that they were incapable of imagining its failure.
Perhaps this kind of single-mindedness is endemic to central bankers; since the early 1990s the idea of controlling inflation at all costs has been so compelling that central bankers have ignored such unintended consequences as bubbles in the housing and stock markets. But these were big enough, when they burst, to trigger a worldwide slump. Not lords of finance surely; more like high priests.
Jan 8th 2009 The central bankers of the Great Depression were obsessed with a single idea, rather like their successors today
CENTRAL bankers were compelling figures in the 1920s, not least because they preferred to operate in secret. The cloak was peculiarly attractive to Sir Montagu Norman, governor of the Bank of England (pictured above, right), who adopted a false identity when he travelled, though this sometimes attracted attention rather than deflecting it. Asked for his reasons for promoting a policy, Norman replied: “I don’t have reasons. I have instincts.” Benjamin Strong, Norman’s principal collaborator, ran the Federal Reserve Bank of New York, which was responsible for America’s international financial relationships. In the mid-1920s, Strong decided the American economy was sufficiently prosperous that he could widen his brief to promote economic stability. Liaquat Ahamed suggests that Strong more than anyone else “invented the modern central banker”.
Norman and Strong were wedded to the gold standard. Emile Moreau, the less clubable governor of the Banque de France, was an obsessive hoarder of gold and tended to do his nation’s own thing. The arrogant Hjalmar Schacht (above left), a spiky German nationalist who headed the Reichsbank, had, by a remarkable sleight of hand, ended Germany’s hyperinflation in 1923, but he was unable to persuade his fellow central bankers to forget reparations, even though they all appreciated that heavy post-war payments were “bleeding Germany white”.
The quartet, united by a belief that they knew best, had persuaded the great powers to leave the fate of their economies to the antique workings of the gold standard—“a barbarous relic” in the view of John Maynard Keynes. They had the power, in a legendary phrase, to “crucify mankind upon a cross of gold”, and they did so. The problem was that there was not enough gold to finance world trade. Stocks were concentrated in America and France, and countries like Britain, where it was scarce, had to borrow heavily, and to adjust interest rates and government spending at the expense of employment in order to replenish gold reserves.
A loan organised by Strong enabled Norman to get Britain back onto the gold standard in 1926 (it had slipped off during the first world war). Norman’s advice helped persuade Strong to lower interest rates in 1927, which only increased irrational exuberance on Wall Street.
These early central bankers were an odd lot. Norman, who dabbled with spiritualism, apparently informed a colleague that he could walk through walls. He suffered regular nervous breakdowns, and was actually on sick leave when Britain left the gold standard again in 1931. Strong suffered from permanent ill health and was often affected by the generous use of morphine to control pain. He died in October 1928 before the Wall Street Crash and the Great Depression, but Mr Ahamed does not appear to believe that things would have turned out any differently had he lived: in a crushing conclusion, he writes that the Great Depression was “the direct result of a series of misjudgments by economic policymakers…by any measure the most dramatic series of collective blunders ever made by financial officials.” Looking back in 1948, Norman’s judgment was no less harsh. “We achieved absolutely nothing,” he said, “except that we collected a lot of money from a lot of poor devils and gave it to the four winds.”
Politicians were left to clear up the mess they left. One of them was Hitler, who readily instigated a series of measures to combat German unemployment which were similar to those Gordon Brown is adopting today. (Schacht later joined the anti-Hitler resistance.) Britain’s prospects brightened as soon as the gold standard was dropped. The French, less troubled, remained loyal to gold until 1936.
But the most original solution was that of President Franklin Roosevelt, soon after his inauguration in 1933. Mr Ahamed resurrects a 59-year-old agricultural economist from Cornell University by the name of George Warren, whose study of long-term trends in commodity prices led him to believe that, since falling prices were associated with depression, recovery ought to be encouraged by rising prices. The president liked the idea and decided to devalue the dollar—despite vigorous opposition from the gold bugs—simply by increasing the gold price. One of his own economic advisers lamented: “This is the end of Western civilisation.” For a number of weeks, the president would consult his advisers over boiled eggs at breakfast and randomly drive up the gold price, beginning at $31.36 an ounce until it settled at $35. By then a recovery was under way.
This absorbing study of the first collective of central bankers is provocative, not least because it is still relevant. Mr Ahamed, who was a World Bank economist and now manages investments in America, likens central bankers to Sisyphus. This was the man whom the gods condemned to roll a large stone up a steep hill only for it to roll down again when it reached the peak. These great central bankers were so wedded to a dogma that they were incapable of imagining its failure.
Perhaps this kind of single-mindedness is endemic to central bankers; since the early 1990s the idea of controlling inflation at all costs has been so compelling that central bankers have ignored such unintended consequences as bubbles in the housing and stock markets. But these were big enough, when they burst, to trigger a worldwide slump. Not lords of finance surely; more like high priests.
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