LORDS OF FINANCE Book Review

Presented by: Pallavi Madaan, Lacey Burnett, Deepika Bajrang and Becca

Parrott

LORDS OF FINANCE: THE BANKERS WHO BROKE THE WORLD

By Liaquat Ahamed The Penguin Press

COUNTRIES OF INTEREST United States

Britain France

Germany

MAIN CHARACTERS Emile Moreau, Head of the Bank of France

Montagu Norman Head of Bank of England

Hjalmar Schacht Head of German Reichsbank

Benjamin Strong Head of New York Fed

JOHN MAYNARD KEYNES ‘The hero of the book” Economic observer before he became the Economist •  No official position to exercise power •  Observations were infallibly right and increased his

popularity •  Came to notice in 1919 when he was 36 •  Strong views drew attention •  Advisor at Paris Peace conference

His two main stands on policy mistakes were: 1.  Imposing reparation on Germany after WWI

was detrimental for the world economy 2.  The gold standard that put the world in a

difficult position after a lot of debt

The Gold Standard Why it was thought as useful?

•  They thought they needed an external discipline to ensure government did not borrow too much

•  Massive inflation after WWI •  Gold standard as cure of hyperinflation

Gold changing hands Run on the banks

Problems with the Gold standard •  Gold supplies had not kept pace with growth in the economy •  Value of gold to goods had diminished as the countries went

back to the same exchange rate •  After the war, most of the gold ended up in the US

Changing from the Gold Standard (1931 )Britain, (1931) Germany, (1933) US, (1936) France

Hindsight : The sooner the country left the gold standard, the sooner it recovered

WORLD WAR I

BRITAIN INFLATION

2x

FRANCE INFLATION

3x

GERMANY INFLATION

4x

UNITED STATES INFLATION

2x

War continued longer than predicted Countries printed notes

GIGANTIC OVERHANG OF INTERNATIONAL DEBTS BRITAIN

WAR DEBT $4 billion

FRANCE WAR DEBT $7 billion

GERMANY UNITED STATES REPARATIONS

$12 billion OWED

$12.5 billion

BACK TO THE GOLD STANDARD

v Less than $150 million in gold reserves remained

v Stopped paying reparations

v 6 governments failed in the past 5 years

v Experiments with currency: Rentenmark

1923

1924

FRANCE JP Morgan

$100 million SCANDAL!

GERMANY

UNITED STATES Gold Standard

Dawes Plan

“A great circular flow of paper”

1925 BRITAIN Churchill appointed chancellor of the exchequer Highest unemployment in Europe Return to the the gold standard

”Because he has no instinctive judgment to prevent him from making mistakes and

because, lacking this instinctive judgment he was deafened by the clamorous voices

of conventional finance” [Referring to Churchill’s decision to return to the gold

standard]

1926-1927 FRANCE War debt cut Banking system dominated by fear BRITAIN FRANCE $200 million drained out of the Bank

of England’s reserves

1928

UNITED STATES – Very low interest rates – Bubble rising – Benjamin Strong dies

UNITED STATES STOCK BUBBLE A bull market

Trading: America’s new pastime

Market is a fantasy, but economy was okay

Hoover’s jawboning “History, which has a painful way of repeating itself, has taught us that speculative overexpansion invariably ends in over-contraction and distress,” - Paul Warburg, 1929

(financier)

1925-1929

FRANCE Large gold reserves & growing (French economy booming too)

GERMANY Short on gold reserves

UNITED STATES Large gold reserves

BRITAIN Short on gold reserves

New York sucking capital from abroad at a time when Europe was very dependent on American money

WHAT WAS DONE

Not enough

WHAT WAS DONE

Conflict between Board and the New York Fed •  Banks would vote to raise rates and be overridden •  Gridlocked •  No leader

Cut financing for broker’s loans & eventually raised rates

“Wall Street has become a colossal suction pump, which is draining the world of capital and the suction is fast producing a vacuum over here. That is why bank rates are rising throughout Europe. That is the reason of the steady withdrawal of gold from the Bank of England.”

– Viscount Rothermore in the Sunday Pictorial

OCTOBER 29th, 1929

1929-1931 Psychological impacts of crash profound •  Drop in demand for expensive items •  In the wake of the crash, banks began carrying larger

cash balances as a precaution

US MONETARY INTERVENTION - Hoover cut income tax rates

•  Not much effect - NY Fed at first injected money and cut rates - Banks failed, but Fed refused to act

ENGLAND & GERMANY INITIALLY RELEAVED -  Suffering from high unemployment -  Cash now leaving the US

1931-1933

BRITAIN LEAVES THE GOLD STANDARD Sterling devalued

US FALLS INTO DEEP DEPRESSION §  Unemployment §  Hoarding §  Bank and business closures §  Banks seen as crooks

Fed tried to inject money, but too late

EMERGENCY BANK ACT •  Gives Roosevelt power over banking

First day in office, closes banks •  Shadow banks form

FIRESIDE CHATS “I want to talk for a few minutes with the people of the United States about banking “

When banks reopened, people deposited money

LEFT THE GOLD STANDARD •  Financial markets rewarded the move

Schacht wanted to rule Germany through Nazi party

Hitler’s goals 1.  Combat unemployment 2.  Rearm

Schacht used public works and printed money

ECONOMY REBOUNDED

During the war, Schacht was arrested by the Nazi party, freed by the Allies, arrested, tried and acquitted

RELEVANCE TODAY

History repeats itself, learn your lessons

Decisions of a few people affect a lot of people

Globalization and international connectedness is

Injection of money can be too late

Jawboning

Shadow banking

Politics