Monday, October 17, 2016

Lords of Finance (CH 1-3)

Chapter 1 Recap: The reading starts off in 1914 in London setting the scene for that time. The gold standard was in effect at this time and it was considered the “lifeblood” of the financial system. It was believed that a war would be detrimental to everyone involved due to the economic chaos it would create. We then get introduced to Norman Angell who moved to the U.S. out of fear of what Europe’s future looked like. He then moved back to Europe where he started working for the Daily Mail. Angell wrote a piece tilted The Great Illusion which became very popular. Reginald Brett, one of Angell’s followers, founded the Committee of Imperial Defense which was designed to give the British Empire military advice. Lord Esher delivered lectures where he argued that the war is stupid because it leads to commercial disaster, financial ruin and individual suffering. The chapter ends by saying that Lord Esher and Angell underestimated to likelihood of a war amongst European countries breaking out.

Question: There wasn’t too much going on in this chapter as it was a brief introduction to set the scene and introduce some characters, but the concept of the gold standard was referred to in a positive manner. In today’s society, money is backed by government decree (i.e. nothing) while at this time money was backed directly by gold. Do you think the modern system we experience is dangerous as it is not backed by gold, or do you think we have moved on since these times and money can exist in the long-run without being backed by anything?

Chapter 2 Recap: A new character named Montagu Norman is introduced. He visits London the day Austria declares war on Serbia. Neither he nor anyone else knew that the financial system was about to completely fall apart. It was the middle of summer and Norman decided to depart from Brown Shipley. Norman had an exotic house that he took pride in but is described as being fairly modest. Norman did not fit in as a child and was constantly sick. He joined the militia and volunteered for active service and was sent to South Africa. Norman said he felt like a new man while away at war. He was awarded the Distinguished Service Order which became one of his greatest prides. After coming back home, Norman became one of the four main partners at Brown Shipley. At one point in time, he was engaged but the engagement fell apart and left Norman emotionally unwell. He then did some international traveling and finally came home to find out he had GPI and would only have a few months left to live. Meanwhile, the war going on in Europe started to pick up momentum as more countries were getting involved. All of the tension led to uncertainty in the financial markets – all of the loans that went through London would freeze up in the event of war and gold shipments would cease which could cause the gold standard to unravel. The stock exchange closed for the first time in over a century. People rushed to the bank to exchange their notes into gold. As gold was fleeing from the banks, they decided to raise interest rates to 10% to give people an incentive to leave their deposits with the bank. The bank was closed for a holiday and all the bankers wanted to “extend” the holiday to let the panic die down. Norman’s primary concern was the survival of Brown Shipley. All of this chaos was good for Norman’s health as it kept him distracted from his mental status.

Questions: Do you think the bankers’ desire to extend the holiday and keep the bank closed would have been a legitimate method to minimizing the financial chaos, or do you think this approach would have simply delayed the inevitable?
Do you think the action the banks took of raising the interest rates to 10% would have been sufficiently effective to deter individuals from withdrawing their wealth from the bank? Would you have withdrawn your deposits from the bank?

Chapter 3 Recap: Even though people had been anticipating a war for quite some time, everyone was surprised by how quickly it was escalating. The Austrian and German government leaders took vacations during the initiation of the war. A new character named Hjalmar Schacht is introduced and he is caught off guard by the crisis. He was not very high up on the totem pole at the bank he worked at named Dresdner and couldn’t really do much about the crisis but was surprised it was allowed to reach the point that it had. Schacht came from a lower-middle-class family but had a strong work ethic and desire to succeed. Schacht’s father moved to the U.S. temporarily but ultimately moved back to Germany with horrible timing as the economic downturn was just beginning. Schacht’s mother came from a family that was better off than his father, but when she chose to marry Wilhelm Schacht, she took a step down on the social ladder and inherited nothing. Schacht was bullied for his family’s poorness so once he finished school and escaped this misery, he found joy in poetry. After bouncing around from one university to another, he ultimately became a banker. He married a Prussian woman and they had two children. He never believed the war would actually happen and he thought there would be a diplomatic solution, but this was not the case. Germany declared war on France. As Britain stepped in to defend Belgium, Germany was now at war with another country. Despite all of this, Germany’s financial system seemed to be doing better than the rest of Europe’s. This didn’t last and one day in particular, Germany’s financial situation took a dramatic turn for the worse. As the bank almost fell below its minimum of gold backing, the Kaiser was worried of being driven off the gold standard. In August, the bank finally felt confident they had enough gold backings. As Schacht watched the war begin to unfold, he had a clear vision of his own future (though at this point in the novel, we do not know what that vision is).

Questions: As the war lead to overall uncertainty, if the bank had not held a sufficient amount of gold like they temporarily feared, do you think this would have had any impact on the development war itself? What do you suspect would have happened to the banks if they fell below this minimum holding requirement?


  1. I think that not having money backed by gold is definitely more risky, but I also think its benefits outweigh its risks. For example, there is only so much gold, so that is a constraint put on how much businesses and the economy can grow. The more the economy grows the better it is for everyone.
    Extending the holiday alone most likely would not have subdued the chaos, but if the banks were to explain their position and rationalize with their customers I think that may have somewhat benefitted the banks. That raise of interest rates most likely would have a larger effect on the younger customers who are able to have their money held up in the bank for a longer time than older customers who do not have enough time left to live to wait for the benefits of the higher interest rates. But in the end, it just depends on how much each individual trusts their bank to not become illiquid or insolvent.
    I do not think the lack of gold backing would have affected the war if they had been already thinking of leaving the gold standard. This is because in a state of war I think the country would choose to just print more money, because no country is going to lose a war based on the fact they didn’t have enough money when they have the opportunity to just print more money and increase their spending.

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