Lords of Finance: The Bankers Who Broke the World

by Liaquat Ahamed

At times of crisis, central bankers generally believe that it is prudent to obey the admonition that mothers over the centuries have passed on to their children: “If you can’t say anything nice, don’t say anything at all.”

Whether to deflate or devalue became the central economic decision for every country after the war. The burden of deflation fell on workers, businesses, and borrowers, that of devaluation on savers. The fate of the world economy would hinge over the next two decades on which path each country took. The United States and Britain took the route of deflation, Germany and France that of devaluation.

In reaction, Churchill decided one evening to compose a memorandum titled “The Return to Gold.” He had found that one of the best ways for him to get his arms around a subject was to debate his own way through the issues.

“The Governor of the Bank of England shows himself perfectly happy with the spectacle of Britain possessing the finest credit in the world simultaneously with a million and a quarter unemployed,” he growled to his advisers.

As Moreau put it, fixing the exchange rate was a matter of balancing “the sacrifices demanded of the different social classes in the population.”

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”—

Moreover, even if he was sure that the market had entered a speculative bubble, he was conscious that the Fed had many other objectives to worry about apart from the level of the market. He feared that if he added yet another goal—preventing stock market bubbles—to the list he would overload the system.

At this point, with a financial crisis looming, Lord Revelstoke saved the day by suddenly dropping dead.

Because the big New York City banks held their reserves in the form of call loans to stockbrokers, a collapse in stocks inevitably raised concerns about the safety of one bank or the other, often leading to a run on the system, which in turn led to a withdrawal of liquidity from the market, which in turn drove the market down further.

The Census Bureau and the Labor Department, which were responsible for data on unemployment, found themselves under constant pressure to fudge their numbers. One expert quit in disgust over attempts by the administration to fix the figures. Finally, even the chief of the Bureau of Labor Statistics was forced into retirement when he publicly disagreed with the administration’s official statements on unemployment.

But because Britain was unable to generate the same export surpluses as before the war, the City had to finance its long-term loans by relying more and more on short-term deposits. While everyone was dimly aware of this growing mismatch between liabilities and assets, no one had any idea of its magnitude.

The majority, led by the prime minister, Ramsay MacDonald, and the chancellor, Philip Snowden, though all fervent and committed Socialists, were wedded to the belief that the budget must be balanced, no matter that Britain was in depression.

That weekend Churchill had the star of The Gold Rush, Charlie Chaplin, as a guest at Chartwell, his country house in Kent—they had met in Hollywood when Churchill was visiting the United States in October 1929 at the time of the crash. Over dinner Chaplin opened the conversation by saying, “You made a great mistake when you went back to the gold standard at the wrong parity of exchange in 1925.”

The president himself came up with the zaniest idea—that all government debt, $21 billion, be immediately convertible into currency, in effect doubling the money supply at a stroke.

The next day the comedian Will Rogers wrote to the New York Times, “Our President took such a dry subject as banking . . . [and] he made everyone understand it, even the bankers.”

Keynes also wanted to introduce a mechanism for disciplining countries that unfairly cheapened their currencies and accumulated excessive amounts of the world’s reserves without recycling them, as France had done in the twenties and thirties. But the United States, fearing that in the aftermath of the war it might find itself flooded with gold, and thus be accused of underpricing its currency, would not agree.

More than anything else, therefore, the Great Depression was caused by a failure of intellectual will, a lack of understanding about how the economy operated.