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TRANSCRIPT
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