4. MAIN CHARACTERS
Emile Moreau,
Head of the Bank of France
Montagu Norman
Head of Bank of England
Hjalmar Schacht
Head of German Reichsbank
Benjamin Strong
Head of NewYork Fed
5. JOHN MAYNARD KEYNES
‘The hero of the book”
Economic observer before he became the Economist
• No official position to exercise power
• Observations were infallibly right and increased his
popularity
• Came to notice in 1919 when he was 36
• Strong views drew attention
• Advisor at Paris Peace conference
His two main stands on policy mistakes were:
1. Imposing reparation on Germany after WWI
was detrimental for the world economy
2. The gold standard that put the world in a
difficult position after a lot of debt
6. The Gold Standard
Why it was thought as useful?
• They thought they needed an external discipline to ensure
government did not borrow too much
• Massive inflation after WWI
• Gold standard as cure of hyperinflation
Gold changing hands
Run on the banks
Problems with the Gold standard
• Gold supplies had not kept pace with growth in the economy
• Value of gold to goods had diminished as the countries went
back to the same exchange rate
• After the war, most of the gold ended up in the US
Changing from the Gold Standard
(1931 )Britain, (1931) Germany, (1933) US, (1936) France
Hindsight :The sooner the country left the gold standard,the sooner
it recovered
10. v Less than $150 million in gold reserves remained
v Stopped paying reparations
v 6 governments failed in the past 5 years
v Experiments with currency: Rentenmark
1923
12. 1925
BRITAIN
Churchill appointed chancellor of the exchequer
Highest unemployment in Europe
Return to the the gold standard
”Because he has no instinctive judgment to
prevent him from making mistakes and
because, lacking this instinctive judgment
he was deafened by the clamorous voices
of conventional finance” [Referring to
Churchill’s decision to return to the gold
standard]
15. UNITED STATES STOCK BUBBLE
A bull market
Trading: America’s new pastime
Market is a fantasy, but economy was okay
Hoover’s jawboning
“History, which has a
painful way of repeating
itself, has taught us that
speculative overexpansion
invariably ends in over-
contraction and distress,”
- Paul Warburg, 1929
(financier)
16. 1925-1929
FRANCE
Large gold reserves & growing
(French economy booming too)
GERMANY
Short on gold reserves
UNITED STATES
Large gold reserves
BRITAIN
Short on gold reserves
NewYork sucking capital from abroad at a time when Europe was
very dependent on American money
18. WHATWAS DONE
Conflict between Board and the NewYork Fed
• Banks would vote to raise rates and be overridden
• Gridlocked
• No leader
Cut financing for broker’s loans & eventually raised rates
“Wall Street has become a colossal suction pump, which is
draining the world of capital and the suction is fast producing a
vacuum over here.That is why bank rates are rising throughout
Europe.That is the reason of the steady withdrawal of gold from
the Bank of England.”
– Viscount Rothermore in the Sunday Pictorial
20. 1929-1931
Psychological impacts of crash profound
• Drop in demand for expensive items
• In the wake of the crash, banks began carrying larger
cash balances as a precaution
US MONETARY INTERVENTION
- Hoover cut income tax rates
• Not much effect
- NY Fed at first injected money and cut rates
- Banks failed, but Fed refused to act
ENGLAND & GERMANY INITIALLY RELEAVED
- Suffering from high unemployment
- Cash now leaving the US
21. 1931-1933
BRITAIN LEAVES THE GOLD STANDARD
Sterling devalued
US FALLS INTO DEEP DEPRESSION
§ Unemployment
§ Hoarding
§ Bank and business closures
§ Banks seen as crooks
Fed tried to inject money, but too late
22. EMERGENCY BANK ACT
• Gives Roosevelt power over banking
First day in office, closes banks
• Shadow banks form
FIRESIDE CHATS
“I want to talk for a few minutes with the people of the United
States about banking “
When banks reopened,people deposited money
LEFT THE GOLD STANDARD
• Financial markets rewarded the move
23. Schacht wanted to rule Germany through
Nazi party
Hitler’s goals
1. Combat unemployment
2. Rearm
Schacht used public works and printed
money
ECONOMY REBOUNDED
During the war, Schacht was arrested by
the Nazi party, freed by the Allies,
arrested, tried and acquitted
24. RELEVANCE TODAY
History repeats itself, learn your lessons
Decisions of a few people affect a lot of people
Globalization and international connectedness is
Injection of money can be too late
Jawboning
Shadow banking
Politics
