Lords of Finance (CH 4-6)

4. A Safe Pair of Hands

Chapter starts with crisis caused by archduke’s assassination in 1907. The focus was on the role that Benjamin Strong (41 years old president of bankers trust company.). First sign of financial crisis hit New York in July 28 when Austria declared war on Serbia.  Two days later Russian general mobilization while stocks experienced largest down by 7 percent on the same day. Major concern was that the European loans to Americans which amounted to $500 million, EU investors would demand immediate repayment under war conditions. on the same week major banking officials were summoned in offices of J.P. Morgan & Co., when London exchange been forced to stop trading, the bankers in New York decided to close the NY stock exchange. At that time the US was the only major economy without a central bank. That was motivated by the idea that putting power in hands of one institution was undemocratic(un-American) due to such attitude banking policy suffered. So with no central bank, the financial community turned to J.Pierpont Morgan. He had so much more experience in finance than any other. He assigned the best financiers to assist him Davison and Ben Strong and were able to contain some of the damage. After being hit with such a crisis the vulnerability of the U.S banking system was clear.  The U.S Congress decided to act to study assigning a central bank, but with efforts of lobbying the idea was turned down. Until the Glass Plan came to life which modified the idea of a single concentration of power, to having the Federal Reserve Banks and The federal Reserve Board were to be appointed by the president. So in October 14, Benjamin Strong aka “Safe Pair of Hands” was formally elected as the first governor of the Federal Reserve Bank of New York.

5. L’INSPECTEUR DES FINANCES

This chapter starts off with events(&scandals) occurring in France in 1914. Le Figaro, a newspaper opposing the finance French minister Joseph Caillaux, published an affair history of the minster. In response his second wife has purchased a gun and waited for the editor of Le Figaro Gaston Calmette and shot him dead instantly.  The incident lead to split in France between supporters of Caillaux and enemies. Rouvier who was prime minster got exiled for two years and came back as a minister of finance. France at the time was filled with political corruption and conflict of interest with government officials and politicians. In 1892 major company went bankrupt and 800,000 French investors lost $200 million. Rouiver along with 104 financiers got accused of corruption and was forced to resign.  Moreau admired Rouvier despite his ethical misdoings, so he worked under him and was very loyal to him. In 1905 Rouvier became prime minster again with Moreau as his right hand. Rouvier defused the crisis by helping to lead to the Anglo-French entente, but months later the government was voted out.  Moreau was sent to the central bank of Algeria and Tunisia (minor french insitution). In 1908 he was moved back to his hometown. At that time gold coins began to disappear from circulation. The French had a strong mistrust of banks, French peasant was told to keep his gold under the matters. In 1914 july veridtct of Caillaux's wife(who shot the editor)  was found guilty. At the time Parisians struggled on how to pay for their food because silver or gold were hard to get, almost everything stopped accepting banknotes. The banque announced it was prepared to continue paying out gold as it has been the largest gold hoarding entity. In 1914 they had more than $800 million in bullion. That gold was to support the French government in a national endeavor. When order for general mobilization was issued, French gold reserves were immobilized. When the war broke and in August the Germens were as close as 25 miles from Paris, they dropped bombs around Banque de France but the French had already secretly moved its $800 worth of gold from Banque by rail and truck to south of France. By September the vaults of Banque in Paris were empty.

6. Money Generals

As the war broke out, no one know why it happened, army generals were promising to return home by Christmas. Financial officials because they thought the war will be short they focused on being in a good financial shape. Everyone predicted that this war will be short by using European money and liquidity as a measure. Even in 1916 generals were saying it will end in 6 months, the truth of the matter is that Britain, France, Russia, Germany, Austria-Hungry were spending $3 billion each month which accounts to 50% of their collective GDP, it was said no other war in history absorbed so much wealth. So exhausting their funding approaches, they relied on inflation. They did that by turning to central banks and telling them to print money that is not backed by gold. Britain was the most responsible in its financial policy. For the U.S the war was like a fruit that fell from the sky. The demand for American materials from Europe was enormous the gold influx of U.S created expansion of credit and money supply doubled. Strong had two big fears. One was that at the end of the war, this gold would all pour back to Europe, radically destabilizing the U.S banking system. The other was that the gold would stay, potentially causing a shortage of reserves in Europe and threatening even greater inflation at home. So that Fed should coordinate with central banks of Europe. So he visited Europe and visited Paris Banque de France, then the bank of England where he met Norman and became good friends. Then he returned to the U.S in summer of 2016. At the same year Strong was diagnosed with tuberculosis which he got from his visit to Europe. He moved to Colorado to contain the infection but went back to NY to finance for the war when U.S entered it in 1917. The United States spent in total some $ 30 billion on the war, a little over $ 20 billion on its own actual expenditures and another $ 10 billion in the form of loans. The Fed was responsible for selling Liberty Bonds, which brought about $20 billion half of it from NY Fed Reserve. Towards the end of the war the Fed was a transformed system, unlike other centeral banks it had had resisted purchasing government bonds directly and only indirectly helped to fuel the expansion in money supply therefore, Fed secured some credibility.

Question:

What do you think would happen if the U.S economy continued without a central bank (Federal Reserve Bank) during the first Ground War?