Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed

It's never a good sign when a book starts with a wry midwit joke, ic.
"Read no history - nothing but biography, for that is life without theory." -- Benjamin Disraeli

What follows turned out to be a litany of failures, as told by someone with an eye for plausible culpability.

The biggest economic threat now came from the collapsing banking system. In December 1930, the Bank of United States, which despite its name was a private bank with no official status, went down in the largest single bank failure in U.S. history, leaving frozen some $200 million in depositors funds. In May 1931, the biggest bank in Austria, the Creditanstalt, owned by the Rothschilds no less, with $250 million in assets, closed its

As the unemployment lines lengthened, banks shut their doors, farm prices collapsed, and factories closed, there was talk of apocalypse. On June 22, the noted economist John Maynard Keynes told a Chicago audience, We are today in the middle of the greatest catastrophethe greatest catastrophe due almost to entirely economic causesof the modern world. I am told that the view is held in Moscow that this is the last, the culminating crisis of capitalism, and that our existing order of society will not survive it. The historian Arnold Toynbee, who knew a thing or two about the rise and fall of civilizations, wrote in his annual review of the years events for the Royal Institute of International Affairs, In 1931, men and women all over the world were seriously contemplating and frankly discussing the possibility that the Western system of Society might break down and cease to

Norman had acquired his reputation for economic and financial perspicacity because he had been so right on so many things. Ever since the end of the war, he had been a fervent opponent of exacting reparations from Germany. Throughout the 1920s, he had raised the alarm that the world was running short of gold reserves. From an early stage, he had warned about the dangers of the stock market bubble in the United States.

Though forty-three years old, Norman was still not married and lived alone in a large two-story stucco house, Thorpe Lodge, just off Holland Park in West London. The house and his staff of seven servants were his two great luxuries. When he had bought it in 1905, it was a wreck; over the next seven years, he had devoted his energies to a complete reconstruction.

Like most other German bankers and businessmen, he believed that the villain of the piece was a fading Britain conspiring to deny Germany its rightful place among the Great Powers.

Furthermore, to prevent the sort of raid on the mark that the French had allegedly orchestrated in the Moroccan crisis, the Reichsbank instructed banks to curb the amount of money taken on deposit from foreigners. With all these measures under its belt, the Reichsbank entered August 1914 with large enough gold reserves on hand to feel confident about avoiding a replay of 1911 and was also quick, once the crisis became apparent, to take preemptive action by suspending the gold convertibility of the mark on July 31.

as the financiers of Europe watched their continent slip toward Armageddon, its credit system collapsing onto itself, world stock markets closing their doors, and the gold standard grinding to a halt,9 they clung to the illusion that global commerce would be disrupted only briefly and the world would rapidly return to business as usual. Few imagined that they might be witnessing the last and dying convulsions of an entire economic order.

Everyone arrived in Paris expecting France, which had suffered the worst civilian damage and heaviest casualties, to be the strongest advocate of punitive reparations against Germany. Instead, it turned out to be Britain. A strong liberal contingent within the British Treasury had developed peace plans based on a moderate settlement. But in the months leading up to the Peace Conference, the press, led by the Times and the Daily Mail, launched a cheap jingoistic campaign in favor of a harsh settlement and, during the December 1918 election campaign, the slogan that the Allies should squeeze Germany until the pips squeak14 struck a chord with the electorate

Frances desire for reparations arose from its own sense of vulnerability. Twice invaded by Germany in the last fifty years, France was consumed by the fear of a German revival. Germany was more aggressive, more successful, younger, richer, and more dynamic. It was also 50 percent largersixty million Germans versus forty million Frenchmen. Though the French prime minister, George Clemenceau, never actually made the statement attributed to him by German propaganda, that the fundamental problem was that there were twenty million too many Germans, it was clearly in his mind. France was therefore determined to weaken Germany by every means possibleby disarmament, by slicing off as many parts of its neighbor as it could, and by extracting reparations

In May 1919, when the terms of the peace treaty were finally unveiled to Germany, the whole country exploded in shock and anger. It was to lose one-eighth of its territory. Alsace and Lorraine were to revert to France; the Saar coal mines were also ceded to France; North Schleswig was to be subject to a plebiscite as to whether it wished to become part of Denmark; Upper Silesia, Posen, and West Prussia went to Poland. Both banks of the Rhine were to be permanently demilitarized; the army was to be cut to no more than one hundred thousand men, the navy was to be dismantled, and the merchant marine distributed to the Allies. Though the Allies had delayed fixing the size of reparations, it was widely known that the amounts being mooted were gigantic. In the interim, Germany was required to pay an initial $5 billion before May 1, 1921. A new Reparations Commission, to be based in Paris, was created specifically to determine Germanys liability and to supervise its collection. The worst humiliation was Article 231, the article of shame, which branded Germany as solely responsible for the war. The reaction within Germany to the peace treaty reached a pitch of hysteria. All forms of public entertainment were suspended for a week as a sign of protest. Flags across the country were lowered to half-mast. The chancellor, Philipp Scheidemann, characterized the terms as unbearable, unrealizable, and unacceptable, and proclaimed that it would make the Germans slaves and helots . . . doing forced labor behind barbed wire and prison bars. The Germans were given a deadline of five days to agree to the terms or face a resumption of hostilities. Scheidemann resigned rather than put his signature on the document, of which he said, What hand would not wither which placed this chain upon itself and upon us? On the day that Germany accepted the terms, its Protestant churches declared a day of national mourning

Behind all the divisions that were to wrack Germany for the next few years, the one single factor that united every class and every political partydemocrats and royalists, liberals and Socialists, Catholics and Protestants, northerners and southerners, Prussians, Bavarians, Saxons, and Hessianswas the injustice of the peace treaty, or as it was called the

Schachts first introduction to the issue of reparations came in the fall of 1919. He was asked to join a group of industrialists and businessmen sent to The Hague to negotiate with the Allied commission on the delivery of goods in kind as part of the interim settlement. The German delegation was subjected to a litany of petty humiliations: they were forced to stay at the worst hotel, given bad food, their movements restricted, and they were openly followed. Finally, during the negotiations themselves, they were not even provided with chairs but were required to stand. When Schacht complained, he was told, You seem to forget that your country lost the war. It was Schachts first encounter with what he was to call the medieval arrogance of the victors

From an early age, people had remarked on young Maynards intellect, which had been carefully nurtured from his childhood. Born in 1883, in Cambridge, England, he spent most of his life in and around Cambridge University. His father, John Neville Keynes, was a don, a philosopher, and logician of great early promise but little ambition who had drifted into university administration

In 1914, the mark stood at 4.2 to the dollar, meaning that a mark was worth a little under 24 cents. By the beginning of 1920, after the full effects of the inflationary war finance had worked through the system, there were 65 marks to the dollarthe mark was now worth only 1.5 centsand the price level stood at nine times its 1914 level. Over the next eighteen months, despite an enormous budget deficit and a 50 percent increase in the amount of currency outstanding, inflation actually slowed down and the mark even stabilized. Foreign private speculators, betting that the mark had fallen too far, moved some $2 billion into the country. After all, this was Germany, not unjustly viewed before the war as the epitome of discipline, orderliness, and organization. It seemed inconceivable that it would allow itself to sink into an orgy of monetary self-abasement and give up on restoring order. Nothing like this has been known in the history of speculation, wrote Maynard Keynes. Bankers and servant girls have been equally involved. Everyone in Europe and America has bought mark notes. They have been hawked . . . in the streets of the capitals and handled by barbers assistants in the remotest townships of Spain and South America.

In early 1923, when Germany was late in meeting a reparations payment for that yearthe precipitating incident was the failure to deliver one hundred thousand telephone poles to Franceforty thousand French and Belgian troops invaded Germany and occupied the Ruhr valley, its industrial heartland. The chancellor, Wilhelm Cuno, powerless in every other way, launched a campaign of passive resistance. The budget deficit almost doubled, to around $1.5 billion. To finance this shortfall required the printing of ever-increasing amounts of ever more worthless paper marks. In 1922, around 1 trillion marks of additional currency was issued; in the first six months of 1923 it was 17 trillion marks.

With the mark falling faster than domestic prices were rising, foreigners were able to live grotesquely well. Berlin apartments worth $10,000 before the war could be bought for as little as $500. Malcolm Cowley, an American literary critic then living in Paris, in Berlin to visit his friend the journalist Matthew Josephson, wrote, For a salary of a hundred dollars a month, Josephson lived in a duplex apartment with two maids, riding lessons for his wife, dinners only in the most expensive restaurants, tips to the orchestra, pictures collected, charities to struggling German writersit was an insane life for foreigners in Berlin and nobody could be happy there. For one hundred dollars, a Texan hired the full Berlin Philharmonic for an evening. The contrast between the extravagance of foreigners, many of them French or British, but also Poles, Czechs, and Swiss, and the daily struggles of the average German to make a living only fed the resentment against the Versailles settlement further.

The truth seems to be more complex than either explanation. Von Havenstein faced a very real dilemma. Were he to refuse to print the money necessary to finance the deficit, he risked causing a sharp rise in interest rates as the government scrambled to borrow from every source. The mass unemployment that would ensue, he believed, would bring on a domestic economic and political crisis, which in Germanys current fragile state might precipitate a real political convulsion. As the prominent Hamburg banker Max Warburg, a member of the Reichsbanks board of directors, put it, the dilemma was whether one wished to stop the inflation and trigger the revolution or continue to print money. Loyal servant of the state that he was, Von Havenstein had no wish to destroy the last vestiges of the old order. Alternatively, if by standing firm against the government he forced it to raise taxes or cut domestic expenditures, he would be accused, particularly by his nationalist friends on the right, of being a tool of the blood-sucking Allies, who all along had been insisting that Germany could pay reparations if it would only cut its domestic expenditures and raise taxes. In effect, Von Havenstein would be in the position of doing the Allies dirty workhe just could not bring himself to act as the collection agent for his countrys enemies. Faced with these confusing and competing considerations, Von Havenstein decided to play for time, supplying the government with whatever money it needed. Contrary to popular myth, he was perfectly aware that printing money to finance the deficit would bring on inflation. But he hoped that it would be modest, and that in the meantime, something would turn up to induce the Allies to lower their demands or at least agree to a moratorium on actual payments, giving Germany some breathing space. It was a total miscalculation. Von Havenstein failed to recognize that experimenting with the currency was like walking a knife-edge. A moderate degree of inflation does not remain moderate for long. At some point the public loses confidence in the authoritys power to maintain the value of money, and deserts the currency in panic. Germany passed this tipping point in the middle of 1921

THE problem of collecting reparations from Germany was made infinitely more complex by that of war debts owed to the United States. Britain had gone to war as the worlds banker, controlling over $20 billion in foreign investments. No other financial centerneither Berlin nor Paris, certainly not New Yorkcame close to matching Londons standing as the hub of international finance. Through it passed two-thirds of the trade credit that kept goods flowing around the globe and half the worlds long-term investmentsover $500 million a year. Meanwhile, France, though never so dominant a financial power, had its own overseas portfolio of $9 billion, of which an astounding $5 billion was invested in Russia

He was especially influenced in his sense of high purpose about Americas world mission by a group of young men with whom he had become friends who went by the mysterious name The Family. Based in Washington, The Family was an exclusive private club, which he had been invited to join before the war. It had no official name, was indeed not really a club at allno officers, no charter, no formal membership roll. It had come into being in 1902 when three young army officers, captains Frank McCoy, Sherwood Cheney, and James Logan, all in their early thirties, attracted to Washington by Theodore Roosevelts call to youth, decided to rent a house together at 1718 H Street. This soon became a gathering spot for ambitious young diplomats and service officers, all similarly inspired by Roosevelts vision of a muscular U.S. foreign policy. In the absence of a formal name, it came to be known as the 1718 Club or The Family

Few people in those days thought in terms of a special relationship between Britain and the United Statesindeed, the phrase was only coined in 1945 by Winston Churchill. Before the war, most London bankers viewed their counterparts in the United States with that superciliousness reserved for unsophisticated kinsmen, too rich for their own good

On the way home, the British team passed through New York. Strong and the Morgan partners advised them that they would not get a better deal by waiting and urged them to settle. Arriving in Southampton on January 27, 1923, Baldwin made the foolish mistake of revealing the terms to the press, even before he had had a chance to present them to the cabinet, and in the belief that his remarks were off the record, declared that he was for acceptance. He then dug himself in deeper by telling the gathered reporters that any deal would have to satisfy Congress, many of whose representatives came from the West, where they merely sell wheat and other products and take no further interest in the international debt or international trade. The headlines the next day announced that the British chancellor of the exchequer considered the average senator a hick from way back. The prime minister was furious. Having lost two of his sons in the war, Bonar Law had been all along deeply offended by the American view of war debts as just another commercial transaction. I should be the most cursed Prime Minister that ever held office in England if I accepted those terms, he told Baldwin. On January 30, Baldwin made a strong plea in the cabinet for accepting the deal. He admitted that the Americans could have been more generous, that they had made great fortunes out of the war, that they worshipped the God Almighty Dollar but this was best that Britain was going to get

The alternative was to accept that past mistakes were now irreversible, and reestablish monetary balance with a sweep of the pen by reducing the value of the domestic currency in terms of goldin other words, formally devalue the currency. This sounds painless. But to a generation reared on the certainties of the gold standard, devaluation was viewed as a disguised form of expropriation, a way of cheating investors and creditors out of the true value of their savingswhich to some degree it was. Moreover, it was not completely costless. Central banks that resorted to devaluation as a way of cleaning up a past monetary mess were viewed as the financial equivalent of reformed alcoholicsit was hard to clear the stain on their reputations for financial discipline, and as a consequence, they generally had to pay up to borrow

The committee recommended that the Bank resume gold payments as soon as possible, and in order to achieve this goal, begin to contract its credits to banks and merchants and shrink the supply of paper money by withdrawing its notes from circulation. The Bank wisely waited until 1815, when a defeated Napolon was safely in exile on St. Helena, before taking this advice. Over the next six years, it almost halved the supply of paper money in Britain, driving down prices by 50 percent. And though those years from 1815 to 1821 had been years of riots and agricultural distress, Britain went back on gold in 1821. Over the subsequent half century, it transformed itself into the worlds largest economic power. Many believed that the resumption of 1821 had been the single most important defining decision in its financial history. That the Bank had been willing to inflict the pain of a 50 percent fall in prices in order to restore the gold value of the pound had set sterling apart from every other currency in Europe, and made it the worlds premier store of value.

Inspired by this exampleand in complete contrast to every other European countryin 1920, the Bank of England chose the path of deflation, matching the Fed and raising interest rates to 7 percent. The budget was balanced. The economy plunged into sharp recession, two million men were thrown out of work. Nevertheless, by the end of 1922, the Bank had succeeded in bringing prices down by 50 percent, and the pound, which had fallen as low as $3.20 in the foreign exchange market on the fear that Britain was headed for devaluation, climbed back to within 10 percent of its prewar parity of $4.86. But whereas the U.S. economy, more dynamic and unhampered by a large internal debt, was quickly able to bounce back from the recession, Britain remained stuck. The number of unemployed would not fall below one million for the next twenty years. It soon became apparent that Britain had sustained terrible damage as an economic power during the war. Industries such as cotton, coal, and shipbuilding, in which it had once led the world, had failed to modernize and the traditional markets had been lost to competitors. Labor costs had risen as unions negotiated shorter working hours

She once complained that she disliked being in the country in August, because my legs get so bitten by barristers -- lydia lopokova

What separated Norman from Keynes had less to do with economics and more to do with philosophy and worldview. For Norman, the gold standard was not simply a convenient mechanism for regulating the money supply, the efficiency of which was an empirical question. He thought about it in much more existential terms. It was one of the pillars of a free society, like property rights or habeas corpus, which had evolved in the Western liberal world to limit the power of governmentin this case its power to debase money. Without such a discipline to protect them, central banks would inevitably come under constant pressure to help finance their governments in much the same way that they had done during the war with all the inflationary consequences that were still all too apparent. The link with gold was the only sure defense against such a downward spiral in the value of money

In the process he stepped on a lot of toes, not concealing his impatience with the members of the Board. Some complained that he had an overblown sense of his own abilities, that he was too confrontational, that he lacked judgment, particularly about people. But as the intellectual leader of the Federal Reserve, he had acquired a large following within the organization and was worshipped by the younger men. If there was one problem with this whole process of making monetary policy, it was that it all depended too heavily on Strongon his judgment, his skill, and his insight. He was too autocratic, operated on his own too much, and did not spend the time to build a consensus through the whole system. As a result, the rationale for many of his decisions was misinterpreted and his motives were constantly questioned. His failure to institutionalize policies and the thinking behind them meant that once he was no longer around, the Fed would become paralyzed by internal conflicts

The two had known each other for more than twenty years. They socialized in the same circles and were both members of the Berliner Mittwochgesellschaft, the Wednesday Society, a select discussion club restricted to eighty-five members and founded in 1915. Stresemann, who thought highly of Schacht, had been trying to find a position for him in the new administration for some weeks

The decision to wait those extra days, allowing the old currency to sink by another 80 percent, was a brilliant tactical move. The Reichsmark became so worthless that the government was able to buy back its many trillions of debt, valued at $30 billion when first issued, for only 190 million Rentenmarks, equivalent to about $45 million.22 For the next few days, marks, both new and old, continued to fall on the black market. On November 26, the Reichsmark was trading at 11 trillion to the dollar in Cologne. Then the strangest thing began to happen. The exchange rate began to reverse itself. By December 10, it was back at 4.2 trillion to the dollar. Within a few days prices stabilized. When prices were so insanely rising, the average German had done everything he could to get rid of any cash he received as fast as possible. Now this spiral reversed itself. As prices began to hold and then fall, it became profitable to hang on to cash. Farmers, their confidence in money restored, began bringing produce to market, food reappeared in the shops, and those interminable queues began to melt away. Lord dAbernon, the British ambassador, wrote of the astonishing appeasement and relief brought about by a touch of the magical wand of Currency Stability. . . . The economic dtente has brought in its train political pacificationdictatorships and putsches are no longer discussed, and even the extreme parties have ceased, for the moment, from troubling

Young, the true architect of the plan, had believed that in the climate of bitterness and recrimination prevailing in 1924, Europe would be able to improvise its way toward an eventual solution only by avoiding confronting its problems head-on. The plan had therefore very deliberately swept a whole series of issues under the carpet. The total bill for reparations remained unspecified. As a result, resentment within Germany continued to fester just below the surface. Moreover, the new German prosperity depended on what Keynes described as a great circular flow of paper across the Atlantic: The United States lends money to Germany, Germany transfers its equivalent to the Allies, the Allies pay it back to the United States government. Nothing real passesno one is a penny the worse. The engravers dies, the printers forms are busier. But no one eats less, no one works more. No one was willing to predict what would happen once the music stopped. Nevertheless, the initial fanfare associated with the plan did catapult Charles Dawes, hitherto a relatively obscure financier, to fame and fortune. In the summer of 1924, Coolidge selected him to be his running mate; Dawes was elected vice president of the United States that autumn. For having bought time for Europe and at least created the illusion that the Continents battles over money were finally over, he was awarded the 1925 Nobel Prize for peace

April 1925 might have been a good month for Governor Norman and the Bank of England, but in Paris, Governor Georges Robineau and the Banque de France were being simultaneously vilified and mocked in the press. Earlier that month, the French public had learned that for the past year, senior officials at the French central bank had conspired with their opposite numbers at the French treasury to cook the Banques books. The deception had begun as far back as March 1924. The government, finding it difficult to attract new buyers for its short-term debt, was forced to ask the Banque for an advance to cover some of its maturing bonds. But the amount of currency that the Banque could issue was limited by law and, in the embattled climate of the time, the government did not wish to face the political embarrassment of asking the National Assembly to raise the ceiling. Obliging officials at the Banque had found a way of issuing extra currency but disguising the fact with an accounting ruse, at first a technical, almost trivial adjustment, which no doubt those involved thought a temporary and justifiable expedient. But the scope of the operation had progressively grown and by April 1925, the fake balancesles faux bilans amounted to some 2 billion francs, equivalent to 5 percent of the currency in circulation

The Banque itself remained a private institution owned by shareholders. Though the governor and deputy governors by this time tended to be drawn from the ranks of the higher civil service, they were still ultimately responsible to the twelve-man Council of Regents. In addition, the governor, though appointed by the government, was also required to own one hundred shares, which in the 1920s cost the franc equivalent of $100,000. Since few government officials, even the very highest, had that much free capital, the purchase money was lent by the regents, making the average governor very much their agent

Since the founding of their republic, Americans had had a love affair with France and especially with Paris. In the early twenties, with the franc at a quarter of its prewar level, that romance had suddenly become accessible to any American with a couple of hundred dollars to spare. A tourist-class passage across the Atlantic could be had for as little as $80 and the cost of living in France was astoundingly cheap for anyone with dollars. By 1926, an estimated forty-five thousand Americans were living in Paris and every summer another two hundred thousand tourists arrived to enjoy the combination of culture, gracious living, and a risqu nightlife that made Paris, even then, the most visited city in the world

Unfortunately, the affection of Americans for all things French was increasingly unrequited. The French press had for a while expressed its indignation at the spectacle of rich Americans taking advantage of the low franc to buy up the choicest French property on the Cte dAzur and Cte Basque, along the Loire valley, and on the Champs de Mars in Paris. The newspaper Le Midi had taken to referring to Americans as destructive grasshoppers

The franc found as much comfort in Poincars personality as in his political stature. The most uncharismatic politician in all Francecold, withdrawn, and antisocial33he made up for it by his prodigious appetite for work, married to a photographic memory, and a meticulous attention to detail. Most of all, in an era when French politicians seemed to have only the vaguest comprehension of the boundary between public obligation and private gain, he was scrupulously honest. He had a well-publicized provincial suspicion of all cosmopolitan Parisians, particularly bankers. The average French investorthe small shopkeeper from Picardy; the thrifty farmer in the Auvergne; the eminently practical village doctor from Normandy; and of course, the glass manufacturer of Poincars native Lorrainerecognized themselves in him and took comfort in his stewardship of their finances

The new folk heroes of the market were the pool operators, a band of professional speculators analogous to the hedge fund managers of today. They were typically outsiders, despised by the Wall Street establishment, who accumulated their fortunesthough they would soon enough lose themby betting on stocks with their own and their friends money. The seven Fisher brothers who had sold their automobile body company to General Motors for $200 million ran such an enterprise, as did Arthur Cutten, an old hard-of-hearing commodity trader from the Chicago wheat pits; Jesse Livermore, the great bear trader; and Kennedy, who had made his first million investing in the stock of the Hertz Yellow Cab Company and was now making his profits as an investor in the movie industry. Biggest of them all was Billy Durant, who became the cheerleader for the bull market. Operating from a high-floor office at the corner of Broadway and Fifty-seventh, the exiled creator of General Motors now specialized in ramping stocksacquiring large blocks in secret, eventually publicizing his positions to drive the price high, then off-loading them as a sadly unsuspecting public piled in. He traded so frequently and in such large amounts that he had to use twenty different brokers, his commissions just to one of whom amounted to $4 million a year. When he went to Europe, his transatlantic phone bills alone were said to be $25,000 a week.

Marthe Hanau was a forty-two-year-old divorce who in 1925 had started a stock tip sheet, La Gazette du Franc. By 1928, she had a following of hundreds of thousands of investors. Taking advantage of the gullibility and cupidity of the small-town savers who were her clientslocal priests, retired soldiers, schoolteachers, and shopkeepersshe promoted stocks that were often little more than paper companies. When her success brought her to the attention of the authorities, Hanau, nicknamed by the press La Grande Catherine de Finance, kept investigators at bay by bribing politicians. The archbishop of Paris was one of her clients. But eventually her extravaganceshe always traveled in a convoy of two limousines, in case one of them broke down; regularly splurged $100,000 on diamonds; and periodically spent the weekend at the Monte Carlo gaming tablescaught up with her. In December 1928, she was arrested and forced into bankruptcy, owing $25 million dollars.

Germany, now locked out of the American market, grabbed at any and every source of credit on which it could lay its hands. In May 1929, the Swiss banker Felix Somary, nicknamed by his American colleagues the Raven of Zurich for his unremitting dark croakings of a crash to come, received a frantic call from the German finance minister, Rudolf Hilferding, desperate to borrow $20 million to pay public employees. Somary flew to Paris to finalize the necessary arrangements with Schacht, reporting back to the president of the Swiss National Bank, Almost all the great powers have been negotiating for months about how many billions a year should be paid until 1966, and thereafter until 1988, by a country that is not even in a position to pay its own civil servants salaries the next day.

As bankers assessed the market after the summer, they were assisted by a fresh new voice to add to the blithe new-era optimism of the Wall Street Journal and the dark mutterings about portents and misgivings from Alexander Dana Noyes, financial columnist of the New York Times. That week, the premiere issue of BusinessWeek hit the newsstands. It sought to bring the successful Time magazine formula of snappy and vivid writing to the corporate world. From the very first issue, the editors expressed their skepticism about the bull market. For five years at least, they wrote, American business has been in the grips of an apocalyptic, holy-rolling exaltation over the unparalleled prosperity of the new era upon which we, or it, or somebody has entered. It had carried the country into a cloud-land of fantasy. As the fall begins, they warned, there is a tenseness in Wall Street . . . a general feeling that something is going to happen during the present season. . . . Stock prices are generally out of line with safe earnings expectations, and the market is now almost wholly psychological.

Babson had some other quirkier ideas. Having suffered a bout of tuberculosis as a youth, he believed in the benefits of fresh air and insisted on keeping all the windows in his office wide open. In winter, his secretaries, wrapped in woolen overcoats, sheepskin boots, and thick mittens, had to type by striking the keys with a little rubber hammer that Babson had himself expressly invented. He was a strict Prohibitionist, believed that the gravity of Newtonian physics was a malevolent force, and had published a pamphlet entitled GravityOur Number One Enemy.44 He had been predicting a market crash for the past two years and until now had been completely ignored. After Babsons gloomy forecast, the New York Times sought a rejoinder from Irving Fisher, professor of economics at Yale, and the most prominent economist of the time. Originally a mathematician who had gone on to make major contributions to the theory of money and of interest rates, Fisher was quite as odd a bird as Babson. Having also suffered from tuberculosisalthough in his case at the age of thirty-onehe had emerged from the sanatorium a committed vegetarian. He suffered from terrible insomnia and, to cope with it, had designed a bizarre electrical contraption that he hooked up to his bed and was convinced helped him to fall asleep. He was also a proponent of selective breeding and was secretary of the American Eugenics Society; he believed that mental illness originated from infections of the roots of the teeth and of the bowels and, like Babson, was a fervent advocate of Prohibitionby 1929, he had even written two books on the economic benefits of Prohibition. Again like Babson, he was a wealthy man, having invented a machine for storing index cardsa precursor of the Rolodexthe patent of which he sold to Remington Rand in 1925 for several million dollars. By 1929, he was worth some $10 million, all of it invested in the stock market

During the day, the New York Fed had injected a further $65 million. The Board, especially Roy Young, was greatly irritated when it found out later that day about Harrisons show of independence and initiative; his failure to get Washingtons approval first was a clear defiance of established protocol. In response to Youngs rebuke, Harrison shot back that there had never been such an emergency, that the world was on fire and that his actions were done and cant be undone. The Board tried to pass a regulation prohibiting the New York Fed from making any further independent transfusions of cash, but questions arose about whether it had the legal authority to do so. During the next few days, there was considerable legal wrangling over the precise jurisdictions of the Board and the New York Fed. Harrison eventually proposed that they postpone the bureaucratic argument over powers and procedures until the crisis was over, agreeing in the meantime not to act unilaterally provided the Board gave him the authority to buy as much as $200 million more in government securitiesan arrangement which allowed him to draw on the whole Federal Reserve System rather than the resources of the New York Fed alone

One group who seemed to have taken Mellons advice on liquidation to heart was the Russians. In 1930, desperately in need of foreign exchange, the Soviet government secretly decided to put its most treasured art works up for sale to its capitalist enemies. For Mellon, it was a once-in-a-lifetime opportunity to purchase a unique collection of art at throw-away prices, and he did not let it pass. Following a series of clandestine negotiations through art dealers in Berlin, London, and New York, Mellon arranged to purchase a total of twenty pieces. Each was a cloak-and-dagger operation. The money was wired to a dealer in Berlin, who placed it in a blocked account and paid out 10 percent to the Russians. Meanwhile, the pictures were surreptitiously removed from the Hermitage, in Saint Petersburg, the surrounding paintings repositioned to disguise the disappearance. They were then handed over at a secret rendezvous and shipped to Berlin for transport to the United States. In this way, during 1930 and into the early months of 1931, the secretary of the treasury spent almost $7 million of his money buying up half of the Hermitages greatest paintings. Among the paintings he bought were the Madonna of the House of Alba by Raphael, the Venus with the Mirror by Titian, the Adoration of the Magi by Botticelli, and The Turk by Rembrandt as well as several works by Van Eyck, Van Dyck, and Frans Hals.

IN December 1930, Maynard Keynes published an article titled The Great Slump of 1930, in which he described the world as living in the shadow of one of the greatest economic catastrophes of modern history. During the previous year, industrial production had fallen 30 percent in the United States, 25 percent in Germany, and 20 percent in Britain. Over 5 million men were looking for work in the United States, another 4.5 million in Germany, and 2 million in Britain. Commodity prices across the world had collapsedcoffee, cotton, rubber, and wheat prices having fallen by more than 50 percent since the stock market crash. Three of the largest primary producing countries, Brazil, Argentina, and Australia, had left the gold standard and let their currencies devalue. In the industrial world, wholesale prices had fallen by 15 percent and consumer prices by 7 percent. -- cf 1921 keep men hired

Despite all this bad news, at this stage Keynes was uncharacteristically sanguine. We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand, he wrote

While everywhere else in the global economy consumers and businesses were cutting back and slashing their budgets, in France, money remained easily available and people continued to spend. French commentators were calling their country Lle Heureuse. In the summer of 1930, Paris was still full of tourists, and business at Au Printemps, the famed Parisian department store, was booming. The contrast with its neighbors could not have been greater. While in Germany 4.5 million men were on the dole and in Britain 2 million, in France only 190,000 men were collecting unemployment benefits. And while prices across the rest of the world were dropping like stones, in France they continued to rise.

The bank had been founded in 1913 by Joseph S. Marcus, a Russian Jewish immigrant who had come to the United States in 1879, and having begun as a garment worker on Canal Street, had made good as a manufacturer of clothing and then as a local banker. The first branch of his bank, located on the corner of Orchard and Delancey Street, catered to the neighborhoods mostly Jewish garment workers and merchants. As a result of Marcuss reputation among the Lower East Side traders for honesty and fair dealing, the bank had done well, although it was undoubtedly helped by the name, which gave many of its Yiddish-speaking clients the impression that it was somehow backed by the full faith and credit of the national government. By the time the older Marcus died in 1927, the bank had grown into an institution with $100 million in assets, a head office at 320 Fifth Avenue, and seven branches across the city. But its officers and its clientele remained predominantly Jewish, and it was snidely nicknamed The Pants Pressers Bank. When Joseph Marcus died, the bank was taken over by his son Bernard Marcus, a brilliant but flamboyant businessman with a taste for conspicuous consumption far removed from his fathers modest ways. When, for instance, Bernard went to Europe, he traveled with thirty pieces of luggage and always insisted on occupying the grandest suite on board ship. Over the next two years, he expanded his base through a series of mergers so that by 1929 it had grown to $250 million in assets. Marcus resorted to a series of practices considered shady, even by the lax standards of the time. The bank lent some $16 million, a third of its capital, to officers of the company and their relatives to allow them to buy its stock. To finance its headlong growththe bank more than doubled in size in two yearsMarcus issued large slabs of equity, which he committed to buy back at the original price of $200. When the price began to fall in the spring and summer of 1929, many investors held Marcus to his guarantees. In order to take up all the stock coming on the market, he created a series of affiliate companiesin todays parlance, off-balance-sheet special-purpose vehiclesthat repurchased the equity with money borrowed from the bank itself. Marcus was in effect using depositors money to support the shares of his bank. In its lending policy, the bank made a big bet on the value of New York City real estate. Half its loan portfolio, double that of comparable firms, went into real estate finance, though again the true exposure was hidden by channeling money through affiliate companies. When the crash hit, the bank was committed to two big projects on Central Park West: $5 million for the Beresford, a twenty-story building at Eighty-second Street with over 170 apartments and another $4 million for the San Remo on Seventy-fourth with 120. Though it was rumored that Marcus himself owned these two developments, his interest in them was disguised through dummy corporations, and every single penny for their construction came from the bank.

The real issue for the governors was that many of the banks closing their doorsby one estimate close to halfhad sustained such large losses on their loans that they were, like the BUS, insolvent. Determined to follow Bagehots rule of only lending to sound institutions and believing that propping up failing banks would be throwing good money after bad, the regional governors made it a principle to let them go under. They failed to recognize that by doing so they were undermining public confidence in banks as a repository of savings and were causing the U.S. credit system to freeze up