Saturday, March 10, 2012

Lords of Finance: The Bankers Who Broke The World by Liaquat Ahamed

  • "Each in his own way illuminates the national psyche of his time. Montagu Norman, with his quixotic reliance on his fault intuition, embodied a Britain stuck in the past and not yet reconciled to its newly diminished standing in the world. Emile Moreau, in his insularity and rancor, reflected all too accurately a France that had turned inward to lick the terrible wounds of war. Benjamin Strong, the man of action, represented a new generation in America, actively engaged in bringing its financial muscle to bear in world affairs. Only Hjalmar Schacht, in his angry arrogance seemed out of tune with the weak and defeated Germany for which he spoke, although perhaps he was simply expressing a hidden truth about the nation's deeper mood." - 8
  • "Boiled down to its essentials, a central bank is a bank that has been granted a monopoly over the issuance of currency." - 11
  • 1914: 59 countries "had bound their currencies to gold" - 13
  • "Shaken by the crisis [of 1907], the U.S. Congress decided to act. In 1908, it created the National Monetary undertake a comprehensive study of the banking system...Memories of how close the system had come to imploding progressively dimmed and the momentum for reform stalled." - 54
  • December 23, 1913: Woodrow Wilson signs the Federal Reserve Act; "the Glass Plan called for a number of autonomous regional institutions: Federal Reserve Banks...While these individual entities were to be controlled and run by local bankers, a capstone -- the Federal Reserve Board, a public agency whose members were to be appointed by the president -- was placed in an oversight role over the whole structure." - 56-7
  • "Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency." - 99, J.M. Keynes
  • "Only on reparations did Germany seem able to fight back. It discovered what every large debtor at some point discovers: that when one owes a large amount of money, threatening to default can give one the upper hand." - 109
  • "Germany experienced the single greatest destruction of monetary value in human history. By August 1923, a dollar was worth 620,000 marks and by early November 1923, 630 billion." - 121
  • "the really pernicious effect of war debts was that they made it hard, if not impossible, for Britain to forgo collecting its own debts from France and Germany, made France all the more obstinate in its efforts to collect reparations from Germany, and led Europe into a self-defeating vicious cycle of financial claims and counterclaims." - 144
  • "Whether to deflate or devalue became the central economic decision for every country after the [First World] war. The burden of deflation fell on workers, businesses, and borrowers, that of devaluation on savers...The United States and Britain took the route of deflation, Germany and France that of devaluation." - 157
  • "The bigger concern among bankers after the war was not so much that the world was short of gold, but that too much of the gold was concentrated in the United States." - 163
  • "The world of the international gold standard had become like a poker table at which one player has accumulated all the chips, and the game simply cannot get back into play." - 164, emphasis mine
  • "the Federal Reserve was so flush with gold that it had gone from being the central bank of the United States to being the central bank of the entire industrial world." - 172
  • "the new German prosperity depended on what Keynes described as 'a great circular flow of paper' across the Atlantic: 'The United States lends money to Germany, Germany transfers its equivalents to the Allies, the Allies pay it back to the United States government. Nothing real passes -- no one is a penny the worse. The engravers' dies, the printers' forms are busier. But no one eats less, no one works more.'" - 215-6
  • "During [Montagu] Norman's visit to New York in January 1925, [Benjamin] Strong had warned him, 'In a new country such as ours with an enthusiastic, energetic and optimistic population,...there would be times when speculative tendencies would make it necessary for the Federal Reserve Banks to exercise restraint by increased discount rates, and possibly higher money rates in the market. Should such times arise, domestic considerations would likely outweigh foreign sympathies.'" - 240
  • "In the fall of 1925, Hoover, not shy about interfering in his cabinet colleagues' business -- Parker Gilbert called him the 'Secretary of Commerce and the Under-Secretary of all other departments' -- decided to launch a campaign against the pervasive atmosphere of speculation that he claimed was infecting the country, from Florida real estate to the stock market." - 275
  • "In Strong's view, something about the American character -- the exuberance, the driving optimism, the naive embrace of fads -- lent itself to periods of speculative excess." - 277
  • "At particular times a great deal of stupid people have a great deal of stupid money....At intervals....the money of these people -- the blind capital, as we call it, of the country -- is particularly large and craving; it seeks for someone to devour it, and there is a 'plethora'; it finds someone, and there is 'speculation'; it is devoured, and there is 'panic.'" - 307, Walter Bagehot
  • in early 1929 "The Fed was now paralyzed by this standoff between its two principal arms. The Board kept insisting that the right way to deflate the bubble was through 'direct action': credit controls, particularly of brokers' loans. New York was equally insistent that such a policy could not work, that it was impossible to control the application of credit once it lefts the doors of the Federal Reserve." - 322-3
  • "To jump-start the economy, a central bank had to have enough gold, the underlying raw material for credit creation under the gold standard. The international monetary system was now operating, however, in a very perverse way. Because of investor fear, capital in search of security was flowing into those countries with already large gold reserves -- such as the United States and France -- and out of countries with only modest reserves -- such as Britain and Germany." - 375
  • "'Gold is out of sight -- gone back into the soil. But when the gods are no longer seen in yellow panoply walking the earth, we begin to rationalize them; and it is not long before there is nothing left.' The bullion reserves that backed the credit systems of the world, buried as they were in underground vaults...were invisible to the public eye. They had acquired an almost metaphysical existence. Keynes thought that perhaps gold, its usefulness now outlived, might become less important. He compared the situation to the transition in government from absolute to constitutional monarchy." - 383-4
  • "Money has no motherland; financiers are without patriotism and without decency; their sole object is gain." - 393, Napoleon Bonaparte
  • "As the economy lost ground, unemployment climbed, and the budget deficit widened [in Germany], [Heinrich] Bruning [, the new Chancellor,] focused on balancing the budget. Unemployment benefits were restricted; salaries of all high federal and state officials, including the president's, were slashed by 20 percent. Wages of lower-level officials were cut 6 percent; income taxes were raised, taxes on beer and tobacco increased, and new levies imposed on warehouses and mineral water. All of these measures made the Depression worse." - 400
  • After resigning in 1930, Schacht "spoke about reparations, seeking to make his audience understand German bitterness over the issue: 'You must not think that if you treat people for ten years as the German people have been treated they will continue to smile....Reparations are the real cause of the world-wide economic depression.'" - 402
  • "Never has the incapacity of the economic leaders of the capitalist world so glaringly demonstrated as today....A capitalism which cannot feed the workers of the world has no right to exist. The guilt of the capitalist system lies in its alliance with the violent policies of imperialism and militarism" - 417-8, Schacht, The End of Reparations
  • "Britain's problem was not its budget deficit, but rather that it had clung to the role of banker to the world without any longer having the money or the resources to do so and at a time when most of the world was a damn poor risk." - 429
  • Roosevelt's "simplistic view was that since the Depression had been associated with falling prices, recovery could only come about when prices began going the other way. His advisers patiently tried to explain to him that he had the causality backward....They were themselves only half right. For in an economy where everything is connected, there is often no clear distinction between cause and effect." - 459
  • "In 1935, Congress passed a banking act designed to reform the Federal Reserve. Authority for all major decisions was now centralized in a restructured Board of Governors. The regional reserve banks were stripped of much of their powers and responsibility for open market operations was now vested in a new committee of twelve, comprising the seven governors and a rotating group of five regional bank heads, renamed presidents." - 475

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