by Neil Irwin
I have benefited throughout from wonderful friendships, including with Amy Argetsinger; Margaret Chadbourn; Daniel Drum; Jon Finer; Justin Gillis; Steve, Tara, and Luca Goldenberg; Jay and Elysia Hulings; Jenna Johnson; Nicholas, Erin, and Lena Johnston; Emma Kristensson; Jack Massey; Ellen McCarthy; Bill McQuillen; Matt Vogel; and the marvelous Sarah Halzack. My parents, Co and Nancy Irwin, supported and encouraged me from my earliest days. My uncle Christopher Hicks nurtured my interest in words and ideas. And my siblings Molly Irwin and Nicholas and Ellerbe May and cousins Margaret and Amelia Hicks are the best a guy could hope for. My late grandparents, William Pinckney Irwin III, Walton “Skip” Hicks, and Nancy Jo Hicks, were inspiring examples for how to live a life.
A NOTE ON SOURCES
I became the Washington Post’s beat reporter covering the Federal Reserve on August 16, 2007, one week after the European Central Bank launched the first major intervention of what is now known as the global financial crisis. I intensively covered events from that point forward, focused initially on the work of the Fed and then, when the crisis pivoted to Europe in 2010, with a more global dimension. It was a ringside seat for some of the defining events of our age, and this book is primarily based on the hundreds of interviews I conducted with key central bankers and other policymakers who directed the policy response to the crisis from 2007 on.
Reporting conducted specifically for this book took place in twenty-seven cities in eleven countries, between January 2011 and October 2012. I interviewed many of the senior central bankers whose actions are described here, as well as many more people close to them and other firsthand participants in the events described. The overwhelming majority of sources spoke on a condition of “deep background,” meaning that I was free to use their information and insights, but could not attribute it to them by name or affiliation without further permission. Material that appears in this volume without attribution in the notes that follow was based on those interviews.
In most cases, U.S. economic data is drawn from FRED, the database of economic statistics from the Federal Reserve Bank of St. Louis. European economic data is usually from Eurostat, a service of the European Commission. Most financial market data is from Bloomberg.
This book has benefited from the work of generations of economists, historians, and journalists who have written more deeply on several of the historical episodes covered in this volume. Here are some particular recommendations for further reading on areas explored here—and an acknowledgment that I am indebted to these writers for their work.
David Wessel’s In Fed We Trust and Andrew Ross Sorkin’s Too Big to Fail are exhaustive journalistic accounts of the 2007–2008 phase of the crisis, from the vantage point of the Federal Reserve and Wall Street titans, respectively. Carlo Bastasin’s Saving Europe, published in 2012, is the most detailed treatment to date of the eurozone crisis. Dan Conaghan’s The Bank captures the work of the Bank of England before and during the crisis. Memoirs by two key finance ministers of this period, Hank Paulson (On the Brink) and Alistair Darling (Back from the Brink), are important pieces of the historical record as well.
Turning to the history of central banking included in this book, on the creation of Sweden’s Riksbank, Gunnar Wetterberg’s magisterial history of the institution, Money and Power, is a detailed and reliable guide. On the Bank of England’s work in nineteenth-century Britain, Walter Bagehot’s Lombard Street: A Description of the Money Market remains surprisingly engaging and understandable to the modern reader. Geoffrey Elliott’s The Mystery of Overend & Gurney tells the detailed story of the proto–Lehman Brothers. Robert F. Bruner and Sean D. Carr tell the story of the financial crisis that led to the creation of the Fed in their The Panic of 1907, and H. W. Brands’s The Money Men is a brief history of American central banking up to that point.
Ben Bernanke once wrote that “to understand the Great Depression is the Holy Grail of macroeconomics,” and fortunately there is a wealth of both popular and scholarly efforts to do just that. Liaquat Ahamed’s Lords of Finance covers the era through the window of its leading central bankers. Adam Fergusson’s When Money Dies is a brisk and accessible account of the hyperinflation, and Gerald D. Feldman’s The Great Disorder an exhaustive and authoritative version. On the economics of the Great Depression, A Monetary History of the United States by Milton Friedman and Anna Jacobson Schwartz is hard to surpass, and Charles Kindleberger’s The World in Depression and Barry Eichengreen’s Golden Fetters offer similarly rich pictures of the period.
On the creation of the eurozone, David Marsh’s The Euro and Ottmar Issing’s The Birth of the Euro are essential reading, and Kenneth Dyson and Kevin Featherstone’s The Road to Maastricht is a richly detailed scholarly account. John Maynard Keynes’s Economic Consequences of the Peace was written in 1919, yet is essential reading for anyone wishing to understand European history in the century since.
NOTES
INTRODUCTION: OPENING THE SPIGOT
“Trust was shaken today”: Vikas Bajaj and Mark Landler, “Mortgage Losses Echo in Europe and on Wall Street,” New York Times, August 10, 2007, A1.
“a welcome development”: Bank of England, August 2007 inflation report, press conference transcript, August 8, 2007.
CHAPTER 1: JOHAN PALMSTRUCH AND THE BIRTH OF CENTRAL BANKING
“snork, pork, scolding and swearing”: Gunnar Wetterberg, Money and Power: From Stockholms Banco 1656 to Sveriges Riksbank Today (Stockholm: Sveriges Riksbank, 2009), 44.
So in 1619 the king and members of the merchant class got together: Ibid., 21.
“chief inspector of the banking system”: Ibid., 33.
A ten-daler plate: Rodney Edvinsson, “Swedish Monetary Standards in Historical Perspective,” Stockholm Papers in Economic History No. 6, Department of Economic History, Stockholm University, 2009, http://www.historia.se/SPEH6.pdf.
“good convenience”: Wetterberg, Money and Power, 32.
the equivalent of $76 million in today’s dollars: Adjustment made using workers’ wages to U.S. minimum wage.
“no understanding of the matter”: Wetterberg, Money and Power, 48.
CHAPTER 2: LOMBARD STREET, RULE BRITANNIA, AND BAGEHOT’S DICTUM
“We regret to announce”: Geoffrey Elliott, The Mystery of Overend & Gurney: A Financial Scandal in Victorian London (London: Methuen, 2006), 180.
There was the plantation in Dominica: Ibid., 3–4.
The bank’s partners: Ibid., 177–78.
“One unlucky man”: “London Letters,” Friend of India (Calcutta), June 21, 1666.
“The doors of the most respectable banking houses”: “If anything can justify a suspension of the Bank,” Times (London), May 12, 1866.
“It is impossible to describe”: Elliott, The Mystery of Overend & Gurney, 181.
“When a private person”: Walter Bagehot, Lombard Street: A Description of the Money Market (London: Henry S. King & Co., 1873), 45–46.
In 1873: Ibid., 155–56.
“The peculiar essence”: Ibid., 78.
On the morning of Black Friday: Elliott, Mystery, 181.
“The bankers . . . went wild with fright”: “London Letters.”
“by every possible means”: Bagehot, Lombard Street, 96.
“Banking is a very peculiar business”: Ibid., 81.
“that no one may borrow”: Ibid., 94.
businesses of all types are forced to pull back on their activity: Elliott, The Mystery of Overend & Gurney, 185–86.
Economic statistics for this era: B. R. Mitchell, British Historical Statistics (Cambridge: Cambridge University Press, 1988).
“mulcted for the unthrifty”: Elliott, The Mystery of Overend & Gurney, 184.
“the most mischievous doctrine ever broached”: Thomson Hankey, The Principles of Banking, Its Utility and Economy: With Remarks on the Working and Management of the Bank of England (London:
Effingham Wilson, 1887).
Legislation to empower the bank: John H. Wood, “Bagehot’s Lender of Last Resort: A Hallowed Tradition,” Independent Review (Winter 2003): 343–51.
CHAPTER 3: THE FIRST NAME CLUB
One of the men: Nathaniel Wright Stephenson, Nelson W. Aldrich, a Leader in American Politics (New York: Charles Scribner’s Sons, 1930), 373.
“What was it drove our forefathers to this country?”: Matthew St. Clair Clarke and David A. Hall, Legislative and Documentary History of the Bank of the United States (Washington, DC: Gales & Seaton, 1832).
Nicholas Biddle: Phil Davies, “The Rise and Fall of Nicholas Biddle,” Federal Reserve Bank of Minneapolis, Region 22, no. 3 (September 1, 2008).
he could either tighten or loosen credit conditions: Tim Todd, The Balance of Power: The Political Fight for an Independent Central Bank, 1790–Present (Kansas City: Federal Reserve Bank of Kansas City, 2009).
“the Bank is neither a Jackson man”: Reginald C. McGrane, ed., The Correspondence of Nicholas Biddle Dealing with National Affairs, 1807–1844 (Boston: Houghton Mifflin, 1919).
“Both the constitutionality and the expediency”: Andrew Jackson, “First Annual Message,” speech, United States Congress, Washington, DC, December 8, 1829.
“the titles and estates of our future nobility”: 8 Reg. Deb. 141 (1831).
The downturn was so severe: Todd, Balance of Power, 9.
In San Francisco itself, deposits were unavailable: Robert F. Bruner and Sean D. Carr, The Panic of 1907: Lessons Learned from the Market’s Perfect Storm (Hoboken, NJ: John Wiley & Sons, 2007), 24.
Bank officials standing: Ibid., 78.
“A more incongruous meeting place”: Thomas W. Lamont, Henry P. Davison: The Record of a Useful Life (New York: Harper & Row, 1933), 81.
“It is evident”: Nelson Aldrich, “Monetary Commission,” address, Economic Club of New York, New York, November 29, 1909.
Carter Glass: Todd, Balance of Power, 12.
“The great political power which President Jackson saw”: “He Uses a Tombstone to Bolster Argument: Grewsome Exhibit Made in the House by Congressman Smith in Opposing Money Bill,” Atlanta Journal-Constitution, September 14, 1913, 4.
“radical and revolutionary”: “As Bryan’s Child Aldrich Attacks Money Measure,” Atlanta Journal-Constitution, October 16, 1913, 1.
“If, as most experts agree”: Channing Rudd, “How Money Makes Money,” Sun (London), December 25, 1913, A2.
CHAPTER 4: MADNESS, NIGHTMARE, DESPERATION, CHAOS: WHEN CENTRAL BANKING GOES WRONG, IN TWO ACTS
“jealousy and ill-will toward our economic flowering”: Gerald D. Feldman, The Great Disorder: Politics, Economics, and Society in the German Inflation, 1914–1924 (Oxford, London: Oxford University Press, 1993), 32.
“The precondition for this continuation”: Ibid., 32.
“took on a patriotic and fetishistic quality”: Ibid., 33.
The resulting Treaty of Versailles: Ibid., 148.
“thin and pink-eyelidded”: Harold Nicolson, Peacemaking, 1919, Being Reminiscences of the Paris Peace Conference (Bethesda, MD: Simon Publications, 1933).
The catalog of strange anecdotes: Adam Fergusson, When Money Dies: The Nightmare of the Weimar Collapse (London: William Kimber, 1975), 140.
Communities developed ersatz barter systems: Ibid., 113.
For longer-term savings: Feldman, The Great Disorder, 583.
“made work much slower”: Bernd Widdig, Culture and Inflation in Weimar Germany (Berkeley: University of California Press, 2001), 45.
“that money wouldn’t buy four bottles of champagne”: Ernest Hemingway, By-Line Ernest Hemingway: Selected Articles and Dispatches of Four Decades, ed. William White (New York: Scribner, 1967).
“in well-furnished houses”: Feldman, The Great Disorder, 548.
But whatever workers saved on rent: Widdig, Culture and Inflation in Weimar Germany, 47.
“You could see mail carriers”: Pearl S. Buck with Erna von Pustau. How it Happens: Talk about the German People, 1914–1933 (New York: John Day Company, 1947).
“The Reichsbank . . . today issues”: Fergusson, When Money Dies, 171.
“The running of the Reichsbank’s note-printing organization”: Ibid., 175.
“People just didn’t understand what was happening”: Adam Smith [George J. W. Goodman], Paper Money (New York: Dell, 1982), 57.
“not so much suffering as a sort of horrified incredulity”: Edwin Lefevre, “The Little Fellow in Wall Street,” Saturday Evening Post, January 4, 1930.
“an imperialist seeking the domination of the world”: Liaquat Ahamed, Lords of Finance: The Bankers Who Broke the World (London: Penguin Press, 2009), 260.
“stupid, obstinate, devoid of imagination”: Ibid., 260.
“short, squat, and bald”: Ibid., 259.
“inexpedient to exhaust at the present time”: Allan H. Meltzer, A History of the Federal Reserve, vol. 1, 1913–1951 (Chicago: University of Chicago Press, 2003), 294.
“Undoubtedly for a time we were in a serious condition”: Charles S. Hamlin, address, Dinner in Honor of Visiting Journalists, Washington, DC, May 26, 1930.
But the slumping global economy: Charles Kindleberger, The World in Depression: 1929–1939 (Berkeley: University of California Press, 1973), 131.
“have ample reserves”: Meltzer, A History of the Federal Reserve, 323.
In December, it was 352 more: Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States, 1867–1960 (Princeton, NJ: Princeton University Press, 1963), 308.
On July 9, 1931, Luther boarded a private plane: Ahamed, Lords of Finance, 415.
“made the central banker into a kind of archpriest”: Andrew Boyle, Montagu Norman: A Biography (New York: Weybright & Talley, 1967), 281.
“a spiritual home away from home”: Ibid., 281.
The absence of jet travel: Barry Eichengreen, Golden Fetters: The Gold Standard and the Great Depression, 1919–1939 (New York: Oxford University Press, 1992), 263–64.
The U.S. government, always skeptical: Ralph A. Young, memorandum to William McChesney Martin, August 25, 1961, http://fraser.stlouisfed.org/docs/historical/martin/21_04_19610825.pdf.
“too big for the central banks”: Ahamed, Lords of Finance, 418.
“I declare to you”: Robert Skidelsky, John Maynard Keynes, 1883–1946: Economist, Philosopher, Statesman (London: Penguin, 2003), 448.
“Sorry we have to go off tomorrow”: Ahamed, Lords of Finance, 430.
“chuckling like a boy”: Skidelsky, John Maynard Keynes, 449.
“Grain was being burned”: Studs Terkel, Hard Times: An Oral History of the Great Depression (New York: New Press, 1970), 218.
CHAPTER 5: THE ANGUISH OF ARTHUR BURNS
“This could be the most important weekend”: William Safire, Before the Fall: An Inside View of the Pre-Watergate White House (New York: Belmont Tower Books, 1975), 510.
“Mr. President”: Ibid., 517.
“My efforts to prevent closing of the gold window”: Robert H. Ferrell, ed., Inside the Nixon Administration: The Secret Diary of Arthur Burns, 1969–1974 (Lawrence: University Press of Kansas, 2010), 49.
“invariably courteous”: Milton Viorst, “The Burns Kind of Liberal Conservatism,” New York Times, November 9, 1969.
“I respect his independence”: Eileen Shanahan, “Nixon Aide Sees Price Rise Relief,” New York Times, February 1, 1970.
“When you gentlemen get up in the morning”: Stephen H. Axilrod, Inside the Fed (Cambridge, MA: MIT Press, 2009), 62.
“I knew that I would be accepted”: Ferrell, Inside the Nixon Administration, 47–48
Charles Colson . . . spread the story: Wyatt C. Wells, Economist in an Uncertain World: Arthur F. Burns and the Federal Reserve, 1970–1978 (New York: C
olumbia University Press, 1994), 73.
Another rumor spread by the White House: Ferrell, Inside the Nixon Administration, 48.
“Time is getting short”: Burton A. Abrams, “How Richard Nixon Pressured Arthur Burns: Evidence from the Nixon Tapes,” Journal of Economic Perspectives 20, no. 4 (Fall 2006).
By the end of 1970, Time had published a cover: Time, December 14, 1970.
In a contract negotiated in 1970: “Business: 1970: The Year of the Hangover,” Time, December 28, 1970.
“that steakhouse menus arrived”: David Frum, How We Got Here: The 70’s (New York: Basic Books, 2000), 291.
He also put out a THANK YOU FOR NOT SMOKING sign: William Greider, Secrets of the Temple (New York: Simon & Schuster, 1989), 66.
“as a diversified conglomerate”: Donald F. Kettl, Leadership at the Fed (New Haven, CT: Yale University Press, 1986).
The son of a town manager: Eric Gelman et al., “America’s Money Master,” Newsweek, February 24, 1986, 46.
“I used to say that I never”: Greider, Secrets of the Temple, 86.
