Norman and Schacht both understood that a financial system in free-fall requires active central bank intervention. But their two central banks, the Bank of England and the Reichsbank, were both chronically short of gold and had no room for maneuver. As a consequence, for all of Norman’s enormous prestige and Schacht’s creativity, they were both hamstrung by the dictates of the gold standard and were forced to remain locked in with the United States, deflating as it did.
The only central banker outside the Fed with enough gold to act independently was Moreau at the Banque de France. But having stumbled inadvertently into a position of financial dominance, he seemed more intent on using France’s newfound strength for political rather than economic ends. And so what began as modest and corrective recessions in the United States and Germany were transformed by sheer folly and short-sightedness into a worldwide catastrophe.
In 1934, Yale economist Irving Fisher testified before a House committee that when Strong died, “his policies died with him. I have always believed, if he had lived, we would have had a different situation.” He was the first of many economists and historians to raise the tantalizing counterfactual that things would have turned out differently if Strong had lived. Though Strong was responsible for many of the errors surrounding the reestablishment of the gold standard, and for the easy money policy that led to the stock market bubble, there is little doubt that in early 1931 he would have acted more vigorously and with greater effect than his successor, George Harrison, to prevent the cascade of bank runs. Moreover, on the international front he was the only member of the quartet with the necessary combination of ability, brains, and vision but also the economic firepower of the Fed’s gigantic gold reserves behind him to have assumed the leadership of the world economy and taken steps to counteract the global deflation.
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. No one struggled harder in the lead-up to the Great Depression and during it to make sense of the forces at work than Maynard Keynes. He believed that if only we could eliminate “muddled” thinking—one of his favorite expressions—in economic matters, then society could allow the management of its material welfare to take a backseat to what he thought were the central questions of existence, to the “problems of life and of human relations, of creation, behavior and religion.” That is what he meant when in a speech toward the end of his life he declared that economists are the “trustees, not of civilization, but of the possibility of civilization.” There is no greater testament of his legacy to that trusteeship than that in the sixty-odd years since he spoke those words, armed with his insights, the world has avoided an economic catastrophe such as overtook it in the years from 1929-33.
TRANSLATING SUMS OF MONEY
This book is inevitably full of figures—particularly financial figures—in a variety of currencies. To keep things simple and help the reader, I have converted amounts that would normally be expressed in other currencies (for example French francs or German marks) into U.S. dollars—except in those cases where the context clearly requires otherwise.
Understanding the significance of economic numbers from the 1920s and relating them to today’s dollars is not a straightforward exercise. Not only have prices risen enormously since then, but the United States and European economies have also grown gigantically.
Financial magnitudes that relate to an individual’s economic situation—say Hjalmar Schacht’s salary—are best translated by adjusting for changes in the cost of living. As a rule of thumb, to compensate for the effects of inflation, multiply by a factor of 12. Thus Benjamin Strong’s salary of $50,000 as governor of the New York Fed in the mid-1920s would be the equivalent today of $600,000. And Keynes’s nest egg of $2 million built up over a long career of speculating in financial markets would be the same as $24 million today.
By contrast, in order to grasp the true significance of sums of money that relate to the economic situation of whole countries, such as the size of war debts owed to the United States, it is most useful not simply to make allowances for changes in the cost of living, but instead to adjust for changes in the size of economies. To translate such figures into comparable 2008 magnitudes, multiply by factor of 200.
For example, the bill for German reparations was fixed in 1921 at $12 billion. A similar debt today would be $2.4 trillion.
ACKNOWLEDGMENTS
I have been thinking about this book now for over a decade. In 1999, Time magazine featured a cover story entitled “The Committee to Save the World.” The cover depicted three men: Alan Greenspan, then chairman of the Federal Reserve Board; Robert Rubin, then secretary of the treasury; and Larry Summers, then deputy secretary of the treasury. The article described how close the world had come to an economic meltdown in 1997 and 1998—the big Asian economies of Korea, Thailand, and Indonesia had had to suspend payments on hundreds of billions of dollars of debt, Asian currencies had collapsed against the dollar, Russia had defaulted on its domestic debt, and the hedge fund, Long-Term Capital Management, had lost $4 billion of its investors’ capital, threatening the stability of the entire U.S financial system. The three “economist heroes,” as Time magazine called them, were able to avert a disaster by acting quickly and aggressively to commit billions of dollars in public funds to stem a panic of proportions not experienced since the 1930s.
While the crisis of 1997 and 1998 was being played out, I was a professional investment manager. In trying to understand the origins of that economic breakdown and the role of central bankers in the drama, I began reading about the history of past upheavals, and in particular about the greatest financial crisis of them all, that which began in 1929 and led to the Great Depression. I discovered that in the 1920s, there was another group of high financial officials, this one dubbed by the press the “Most Exclusive Club in the World,” which in its day also sought to manage the international financial system. But, instead of averting a catastrophe and saving the world, the committee from the 1920s ended up presiding over the greatest collapse that the global economy had ever seen. This book is the result of that research.
My biggest debts are to Strobe Talbott and Brooke Shearer. Ever since I began serious work on the book in 2004, they have been mentors, promoters, counselors, and editors, painstakingly reading and commenting on each successive draft. I also owe an enormous debt to Timothy Dickinson. He too read and commented on various drafts. With his astounding knowledge of history and his prodigious memory for facts, quotes, and anecdotes, he has helped me to understand much better the wider social and political context in which the events described here took place.
I would also like to thank all those who helped in various ways in the researching and writing of this book: David Hensler, Peter Bergen, and Michael D’Amato, whom I press-ganged into reading various sections of the book; Derek Leebaert, who guided me through the ways and byways of embarking on such a venture; Lily Sykes, who was so creative in hunting down documents and old newspapers clippings from archives in France and Germany; Felix Koch, who assisted with translations from German; Sarah Millard, Hayley Wilding, and Ben White at the Bank of England, Joseph Komljenovich and Marja Vitti at the Federal Reserve Bank of New York and Fabrice Reuzé at t
he Banque de France for their help in tracking down letters, documents, and photographs in their collections; and Reva Narula and Jane Cavolina for so efficiently organizing the footnotes. In addition, thanks to those friends who have listened so patiently to me talk about this book and given their support and encouragement: Michael Beschloss, David and Katherine Bradley, Jessica and Bob Einhorn, Michael Greenfield, Philip and Belinda Haas, John Hauge, Margaret Hensler, Homi Kharas, and Shahid Yusuf.
I would like to express my gratitude to Peregrine Worsthorne for spending an afternoon with me sharing his memories of his stepfather, Montagu Norman.
Over the years, including while researching this book, my whole family and I have benefited from the generosity of Richard and Oonagh Wohanka, who have opened their various homes to us in London, Paris, and most inspiringly Cap d’Antibes—which makes an unlikely but important cameo appearance in this book. Another place in the south of France, Cap Ferrat, shows up in the story. It is therefore fitting that I thank Maryam and Vahid Allaghband. I had few more productive weeks of writing than the one I spent working from the terrace of their villa on Cap Ferrat overlooking the Mediterranean.
I discovered that becoming an author can be a lonely business. I am therefore grateful to all those who have given me an excuse to get away periodically from pouring over old biographies and newspaper articles from the 1920s. I especially want to thank my colleagues at The Rock Creek Group, Afsaneh Beschloss, Sudhir Krishnamurthy, and Siddarth Sudhir and Nick Rohatyn of The Rohatyn Group for allowing me to keep at least one foot in the world of investments.
I had the good fortune to persuade David Kuhn to take me on as a client. He has not simply been my agent but more than anyone else helped give substance to what was at the time only the germ of an idea. I would also like to thank Billy Kingsland.
I have also had the benefit of working with two great editors at Penguin. Scott Moyers provided me with his incisive comments and direction during the early stages and Vanessa Mobley helped shape the book into its final form. I must also thank Ann Godoff for taking a gamble on an unknown and unproven writer. Susan Johnson did a stellar job with the copy-editing while the whole team at Penguin, particularly Nicole Hughes and Beena Kamlani, shepherded the book through the production process with great efficiency.
Finally, I would like to thank my family. My constant companion while writing has been our dog Scout, who took over the armchair in my study. My two daughters, Shabnam and Tara, have now flown the coop, but from afar have humored—and also encouraged—their father in his endeavor to transform himself from investment manager to writer. No one has been a greater champion of that change than my darling wife, Meena. For thirty years, she has been my anchor. It is to her that this book is dedicated.
NOTES
xi “Read no history”: Disraeli, Contarini Fleming, 141.
INTRODUCTION
1 “I feel I want a rest”: “Norman Sails Unexpectedly for a Vacation in Canada,” New York Times, August 16, 1931.
2 “monarch of [an] invisible empire”: Kathleen, Woodward. “Montagu Norman: Banker and Legend,” New York Times, April 17, 1932.
2 “the citadel of citadels” and “Montagu Norman was the man”: Monnet, Memoirs, 95.
2 “the most exclusive club”: New York Herald Tribune, July 10, 1927.
4 “We are today”: Keynes, J. M., “An Economic Analysis of Unemployment?” June 22, 1931, in Collected Writings, 13: 343.