19 July 2010
Lord of Finance
One of the more enlightening recent reads has been Liaquat Ahmad’s ‘Lord of Finance’ a study of the quartet of powerful central bankers from the UK, USA, France and Germany who dominated the interwar global economy.
We’ve often written about how history tends to repeat itself and this book is an excellent reminder of this. The Bailout of 2008 wasn’t quite so unprecedented as one might believe. The crash of 1929 was also a momentous event and also provoked momentous responses.
In order to forestall this financial fire stampede, with everyone heading for the exit doors at the same time, some of the bankers proposed to close down the stock exchange as had been done at the outbreak of war in I9I4.
The meeting went on till 2:00 a.m. Harrison was adamant. "The Stock Exchange should stay open at all costs," he told the gathering. Closing the stock market would not solve the problem, only postpone it and, by pre¬venting transactions, might possibly prolong it and force even more bank¬ruptcies. He proposed instead that the New York banks take over a good portion of brokers' loans from those trying to pull out of the market. By thus stepping into the breach, they would head off panic selling and a complete meltdown. "I am ready to provide all the reserve funds that may, be needed," he reassured the bankers.
Over the next few days, as the Fed did just that, New York City banks took over $1 billion in brokers' loan portfolios. It was an operation that did not receive the publicity of the Morgan consortium, but there is little doubt that by acting quickly and without hesitation, Harrison prevented not only an even worse stock collapse but most certainly forestalled a bank¬ing crisis. Though the crash of October I929 was by one count the eleventh panic to grip the stock market since the Black Friday of I869 and was by almost any measure the most severe, it was the first to occur without a major bank or business failure.
The market traded up for the last couple of days of October. It then fell back again, revisiting the lows of Black Tuesday on November 13. By the last weeks of November, the Dow had settled at around 240-a 4% percent retreat over the eight weeks since late September. The bubble that had begun in early I928 had lasted little more than a year and a half. By all indications, the effect of the October crash had merely been to squeeze out all the froth and return the stock market closer to its fair value.
IN THE WEEKS that followed the Great Crash, the dazed financial press struggled to make sense of what had happened. Despite the magnitude of psychological impact of the collapse turned out to be profound, particu¬larly in consumer demand for expensive goods: the automobiles, radios, refrigerators, and other new products that had been at the heart of the boom. Car registrations across the country plummeted by 25 percent and radio sales in New York were said to have fallen by half.
The editor of the Economist, Francis Hirst, who had fallen ill on a trip to the United States and was convalescing in Atlantic City at year's end) captured the mood. "Rich people who have not sold their stocks feel much poorer .... The first result therefore, has been a heavy decline in luxury buying of all sorts and also a large amount of selling of such things as motor cars and fur coats, which can now be bought secondhand at surpris¬ingly low prices. The favored health resorts have suffered enormously ... a very great number of servants, including butlers and chauffeurs, have been dismissed."
Immediately after the crash, Hoover, who liked nothing better than emergencies, threw himself into action. He was one of the hardest-working presidents in the history of the office, at his desk by 8:30 am and still there into the early hours of the next morning. Within a month, his administra¬tion had pushed through an expansion in public works construction and submitted a proposal to Congress to cut the income tax rate by a flat 1.0 percent. The federal government, however, was then tiny-total expendi¬tures amounted to $2.5 billion, only 2.5 percent of GDP-and the effect of the fiscal measures was to inject barely a few hundred million dollars, less than 0.5 of 1.0 percent of GDP into the economy.
Hoover had, therefore, to content himself with playing the part of chief economic cheerleader. Unfortunately, it was a role for which he was poorly suited. Shy, insecure, and stiff, he was ill at ease with people and surrounded himself with yes-men. He was also "constitutionally gloomy,” according to William Alien White, "a congenital pessimist who always saw the doleful, side of any situation." Unable to inspire confidence or optimism, he resorted, according to the Nation magazine, to "trying to conjure up the genie of prosperity by invocations" that things were about to get better.
Does that seem to have an awful lot of 21st century echoes?