“…with all the thought and good intentions that we provided…we achieved absolutely nothing. Nothing that I did and very little that old Ben [Strong, head of the US Federal Reserve] did…produced any good effect…or any effect at all. Except that we collected a lot of money from a lot of poor devils and gave it over to the four winds.”
In three sentences, Montagu Norman, ex-chief of the Bank of England, described the handiwork of a whole generation of his fellow financial plumbers. This was the generation that made central bankers what they are today. Before 1914 they were expected to do nothing, that is, neither to aid the economy nor harm it. Since 1945, hardly a day went by that they did not clog a pipe or inadvertently blow up a gas main.
This was the generation of Hjalmar Schacht in Germany and Emile Moreau in France, while the aforementioned Ben Strong represented the US and Norman himself, wearing his velvet cape and traveling under a pseudonym, stood up for England. This was the generation that financed war well and the peace badly. Borrowing heavily from the Americans, the British and the French were able to keep WWI going long after they were effectively bankrupt. Then, rather than write off the bad debt, everyone waited for someone else to pay it. The Americans watched the mail for checks from the British, while the British sent polite reminders to the French, who tried to foreclose on the Germans by invading the Ruhr; this got them no money, but it had the unintended consequence of boosting Adolph Hitler’s budding career in politics. The debts were bad; the busted-up Reich couldn’t pay anything near the amounts demanded. And the more grease the Germans scraped up and sent west, the more their own economy creaked and weakened; the more they tried to pay the less they were able to pay.
This was the generation that took its currencies off the gold standard in order to run up debts that they couldn’t pay…and then went back on the gold standard, as if they meant to repay them…and then off again in order to renege.
And this is the generation that is autopsied in Liaquat Ahamed’s book, Lords of Finance. It is meant to be a book about finance. But the central figures seem scarcely able to add and subtract. The Germans faced a $12 billion reparations bill, equivalent to about $2.4 trillion today. There was no way they could pay. Pretending that the money was forthcoming then was as vain and pernicious as expecting the Irish to make good on their bank debt, or expecting Americans to honor their $200 trillion worth of financial commitments, today.
At least the Frenchman, Moreau, had his priorities right. He ducked meetings and dodged international monetary conferences so that he would be in the country for the opening of hunting season or so he could run for mayor of his home village of St. Leomer, with about 200 residents. Later, he left his post completely, in order to earn more money at the Bank of Paris and the Low Countries.
His German counterpart, Horace Greeley Hjalmar Schacht, should have taken up hunting too. Instead, he took up Hitler. But that was after he was famous for having solved Germany’s hyperinflation problem. The mark had fallen to 4.2 trillion to the dollar in November, 1923. The trouble with the mark was obvious. There were too many of them; Schacht’s predecessor, von Havenstain, had anticipated quantitative easing by 9 decades. Schacht took over at the Reichsbank and on the 20th of November introduced a new currency, the rentenmark. Von Havenstain dropped dead the same day. At least Mr. Schacht was a smart fellow. Like Norman, he occasionally was afflicted by an honest insight: “The whole modern world is crazy…everybody here is crazy,” he said. “And so am I… I am compelled to be crazy.”
But the remarkable thing is Ahamed’s conclusion. On 502 pages we listen to central bankers and economists quack like ducks. On page 503, the author reveals that he is deaf. He tells us that the world is a better place thanks to them. All the evidence of the previous pages argues against it. None of them increased world output by a single sou or pfennig.
Take Mr. Strong. Would things have gone better if he had not died in 1928, as the author suggests? He imagines that Strong would have intervened more forcefully in 1931, forestalling further bank failures. He seems to have missed the lesson of his own book – that bad debts should be allowed to die quickly. Besides, in his own telling of the story, it was Ben Strong who was more responsible for the Great Depression than anyone else. He lowered rates in 1927, even though the stock market was already running hot. “One of the most costly errors committed by [the Fed] or any other banking system,” Adolph Miller testified before Congress in 1931. The error led to a bubble…which was followed by a bust, which his successors – who again refused to let bad debt die – turned into a long depression.
Good work, boys.
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