My Review of Per Hansen's "There Will be the Devil to Pay"

 The Mother of all Financial Crises

This is a book for economic history nerds, not for the typical lay reader. Danish business school professor Per Hansen takes us deep into the financial crisis of 1931 starting in May when the Credit Anstalt Bank of Vienna collapsed and ending in October in the aftermath of England going off the gold standard. Although the crisis has been covered before by Barry Eichengreen, Peter Temin, Liaquat Ahamed and Tobias Straumann (See: Shulmaven: My Amazon Review of Tobias Straumann's "1931:Debt, Crisis and the Rise of Hitler" ), Hansen’s account is the most detailed.

 

Instead of writing history after the fact, Hansen takes us into the minds of four key players in the crisis as they try to make sense of the enveloping collapse. His four players are Montague Norman, Governor of the Bank of England; George Harrison, President of the New York Fed; Francis Rodd, bank of England official on loan to the newly formed Bank for International Settlements; and Harry Siepmann, Advisor to Norman. They all, especially Rodd, took detailed notes. Hansen records many of them in full and he had access to the numerous telegrams that lit up the wires of Europe.

 

For all four of them the maintenance of the gold standard was the highest priority and as Eichengreen, Temin, and yes Keynes noted, it was the fetters of the gold standard that worsened the crisis. Hansen calls out the fact that the United States and France did not play by the rules of the gold standard by failing to ease credit sufficiently to staunch the inflow of gold coming from Germany and England. It was the gold outflow from Germany and England that forced upon them a deflationary spiral from which there was no recovery.

 

All four of them were operating under the lender of last resort rules proposed by Walter Bagehot in 1873. (See: Shulmaven: My Amazon Review of James Grant's "Bagehot: The Life and Times of the Greatest Victorian" )  Bagehot’s crisis rule called for central banks to lend freely, against good collateral at a penalty rate. That works if there is sufficient good collateral to lend against. In the case of Credit Anstalt, there was none. Indeed, Credit Anstalt was more a private equity fund controlling about 70% of Austrian industry, than a commercial bank. Simply put, it was funding long term equity with short term deposits. When the market recognized the bank’s assets were worth far less than was thought, a bank run ensued. What exacerbated the crisis was that Credit Anstalt was a highly prestigious Rothschild bank with a blue-ribbon board of directors. If it could happen to them, it could happen to any bank.

 

The crisis then moves to Germany in July when the Danat Bank failed triggering an internal and external drain on deposits. In an effort to maintain the gold standard, the Bruening government yet again adopts further austerity policies as a condition to receiving aid from the Bank of England, the Bank of

France and the New York Fed. Yes, George Harrison of the New York Fed was in up to his eyeballs in the European crisis. Although he formally needed approval from the Fed’s Board of Governors in Washington, that was a mere formality. As part of the crisis management a standstill agreement on withdrawing international deposits from Germany was put in place.

 

That standstill agreement kept England from withdrawing gold from Germany exacerbating a gold outflow that was already in train. To staunch the gold outflow the Bank of England recommended an austerity budget which triggered a naval mutiny over pay cuts. It was then only a matter of time before England left the gold standard and let the pound float.

 

The German crisis put such a strain on Montague Norman that he suffered a nervous breakdown and was out of action from mid-August to late September. However, there was not much he could have done. Hansen highlights the fact that origin of the European crisis was the after affects of World War I that left a legacy of inflation along with German reparations payments and an inter-allied debt to the United States. In June of 1930 President Hoover called for a one-year moratorium on all debt repayments, but that was scuttled by France. While England would have benefited because it received less reparations payments than what was owed the United States; for France it was the reverse.  

 

Thus, reparations and the inter-allied debts hung over Europe like a dark cloud until the June 1932 Lausanne Conference which suspended all payments. By then the depression was in full force and Hitler was well on the way to power.

 

As someone who read the front page of every New York Times from August 1929 to March 1933 I have to sympathize with the four bankers and others who Hansen portrays. They were living day-to-day in a continual crisis doing the best they can under the circumstances. Hansen takes us into the weeds, which at times makes it difficult for the reader, it is well worth it. They did not know how the movie would end and were forced to make sense out of the situation as they went along. I had the same feeling about the Great Financial Crisis and the COVID crisis. In case of the latter, the Fed threw out the Bagehot playbook, by lending on questionable collateral. It worked, but along with a too aggressive fiscal policy it left a great inflation in its wake.

 

 

My Review of Andrew Ross Sorkin's "1929"

 The Great Crash and its Aftermath

Andrew Ross Sorkin of CNBC, DealBook, and “Too Big to Fail” fame has written a riveting history the 1929 stock market crash and its aftermath through the eyes of many of its key participants. His writing style puts you in the room with the leading players of the day as they experience the exuberance of the boom and then grapple with grinding bear market that followed. It would have helped if there were an annotated chart of the Dow Jones Industrial average from 1929-1933.

His leading players are “Sunshine” Charlie Mitchell, president the National City Bank and its securities affiliate the leading underwriter of new issues in the 1920’s; Thomas Lamont, the de facto head of J.P. Morgan; Jack Morgan, J.P.’s son and nominal head of the bank; Russell Leffingwell,  a Morgan partner and a founder of the Council on Foreign Relations; Albert Wiggins, president of the Chase National Bank; Jesse Livermore, legendary trader who made $100 million in the crash; Owen Young, president of General Electric and author of the Young Plan for German reparations; John Jacob Raskob, General Motors director, chairman of the Democratic National Committee and developer of the Empire State Building; William Crapo Durant, General Motors founder and leading speculator; Senator  Carter Glass, coauthor of the Federal Reserve Act of 1913 and the Glass-Steagall Act of 1933 and a leading critic of Wall Street speculation;  and Ferdinand Pecora, counsel to the Senate Banking Committee taking on the WASP establishment by investigating Wall Street. We also have cameo appearances of the financier and advisor to presidents Bernard Baruch, and Winston Churchill who was out of government and was speculating in the U.S. stock market, and David Sarnoff, president of RCA, the NVIDIA of its day.

 

The stock market of the 1920’s was the wild west where “pump and dump” pools operated, and insider trading was legal. It was not unheard of for insiders and their friends to receive newly issued stock at a discount from the official offering price. All the while margin was freely available where stocks could be purchased with only 10% of the cash payable upfront. The availability of margin was funded by the call money market at interest rates of up to 20%. It was the call money market that sucked in funds from all over the country, and for that matter the world, to earn high returns. However, this form of leverage could be withdrawn on moment’s notice thereby triggering a liquidity squeeze.

 

I learned a few interesting factoids to comment on. I didn’t know that David Sarnoff was actively involved in the Young Plan negotiations. Perhaps more interesting, I didn’t know that Mitchell of National City and Wiggins of Chase actively lobbied Carter Glass to include J.P. Morgan, as a private bank, in the separation of commercial banking from investment banking. It seems that Glass was close to Morgan partners Lamont and Leffingwell. Thus, any allusion to Glass being the Elizabeth Warren of his day hardly rings true.

 

As someone who has read every front page of The New York Times from August 1929 to March 1933 and has read widely on the subject of the crash and its aftermath, I have a few issues to raise with Sorkin. The first is that the depression was not an inevitable result of the crash. It occurred against the backdrop of inept monetary policy followed by the Fed and more important it was caused by the imbalances caused by World War One rubbing against the rigidities of the gold standard. Thus, the root causes were not domestic in origin as Roosevelt argued, but rather international in origin as Hoover argued. Thus it was no coincidence that the Dow Jones Industrial Average bottomed in June 1932 just when the Lausanne Conference was agreeing to drastic cuts in German reparations payments and the suspension of payments on inter-allied debts. 

 

Sorkin should have read Tobias Straumann’s “1931” where he quoted the 1932 Annual Report from the Bank of International Settlements as follows: “In the circumstance of the German problem- which is largely responsible for the growing financial paralysis of the world – call for concerted action Governments alone can take.”  (See: https://shulmaven.blogspot.com/2019/07/my-amazon-review-of-tobias-straumanns.html ) It was the very Young Plan that Lamont helped to negotiate that made Hitler. His attacks on the Young Plan which stretched out the German reparations to schedule to 1989 and made the payments more rigid, was one of Hitler’s leading campaign issues that gave his Nazi Party 19% of the vote. The prospect of future Nazi victories led to a capital flight from Germany and Austria.

 

I wish Sorkin would have spent more time on what his players were doing in June 1930 when Hoover signed the Smoot-Hawley Tariff Act. The day after Hoover announced that he would sign the bill the Dow Jones Industrial Average plunged 8%, its worst day of 1930.  ( See: https://shulmaven.blogspot.com/2025/04/a-broken-stock-market-and-broken-trust.html ) The Times highlighted the new tariff regime would make it harder for Germany to make it reparations payments and for Britain and France to pay its war debt to America.

 

I also wish that Sorkin were in the room when Britain devalued the Pound and left the gold standard in September 1931, the worst month in stock market history. In response to the fears of a gold outflow, the Fed raised its discount rate from 1.5% to 3.5%. That action was a dagger into the heart of the economy.

 

Thus, in my opinion, the triggers of the Great Depression came in the form of a three-act play. The first was the stock market crash of October 1929, and the second was the signing of the Smoot -Hawley Tariff Act in June 1930. The third and final act occurred when the Fed raised the discount rate in September 1931.

 

My last quibble is that Sorkin used the wrong source for his comments on the interregnum period between the Hoover and Roosevelt administrations. He cites  Eric Rauchway’s “Winter War” which is way too biased against Hoover. (See: Shulmaven: My Amazon Review of Eric Rauchway's "Winter War: "Hoover, Roosevelt and the First Clash Over The New Deal" ) A more balanced account by  Jonathan Alter, a serious liberal, in his “Defining Moment” noted that it was  Hoover treasury department officials, namely Ogden Mills and Arthur Ballentine whose drafts ultimately became  the Emergency Banking Act in March 1933 thereby ending the third banking crisis of the depression.

 

All quibbles aside, Andrew Ross Sorkin has given us a new take on the elements and personalities involved in the crash and its aftermath. Can it happen again? In my opinion, yes. All it takes is human greed combined with lots of leverage accompanied by institutional rigidities and incompetent regulators.

My Review of Jill Eichler's "Mellon vs. Churchill"

 Duel over Debt

On the surface it appears that only a history/economics nerd would read Jill Eichler’s book on the inter-Allied debts arising out of World War I. However, Eichler discusses that history through the lens of its two main protagonists, Secretary of the Treasury Andrew Mellon (1921-1932) and Chancellor of the Exchequer Winton Churchill (1925-1929) It is through their eyes we see how complicated the debt duel was. 

At the end of World War I the allies owed the United States something over $10 billion with the bulk of the borrowings coming from Great Britain and France. Simply put, the allied viewed the debt as a cost of winning the war and therefore did not have to be repaid, while the United States viewed the debt a commercial transaction that had to be repaid. Making matters worse was that the United States in 1922 passed the Fordney-McCumber Tariff which made it more difficult for the Europeans to earn the need dollars to repay the debt. 

In the first round Mellon and then Chancellor of the Exchequer Stanly Baldwin renegotiated the $4.6 billion owed to the U.S. at 4.5% interest rate with a 25-year term, down to a phased 3% and 3.5% loan with a 62-year term in 1922. This took quite some doing on Mellon’s part to convince a recalcitrant Congress to accept the new terms. Nevertheless, Britain was very unhappy with the agreement and when Churchill became chancellor, he worked to further ease the burden. Later in 1926 Mellon negotiated a restructuring of the $4 billion French debt on easier terms than what Britain had agreed to. It took until 1929 for France to finally ratify the deal. France received better terms because Mellon viewed that their ability to pay was less than that of Britain.

Hanging in the background was the issue of German reparations. To Britain and France, the reparation was linked to the repayment of debt to the U.S., while the U.S. viewed it a separate issue. The Dawes Plan of 1924 which enabled U.S. loans to Germany which then were used to pay France and Britain who in turn paid the U.S... For full discussion of this and other inter-related issues see Liaquat Ahamed’s “The Lords of Finance” and Straumann’s “1931: Debt Crisis and the Rise of Hitler.” ( https://shulmaven.blogspot.com/2019/07/my-amazon-review-of-tobias-straumanns.html)

My criticism of Eichler is that she views the Dawes Plan in the light of history rather than how contemporaries experienced it. The Dawes Plan set off a boom in Germany and put Europe on the road to recovery in 1925. That along with the Locarno Treaty which established the borders of Western Europe engendered an uptick in confidence. That was true on the continent, but that was not true of Britain where Churchill returned to the gold standard and over-valued the pound at its pre-war level. Thus, Britain missed out on the boom. It was only with the 1929 stock market crash that the inherent flaws of the Dawes Plan became manifest. In the end most of the debts would never be repaid so it would have been much better had the slate were wiped clean in 1921. The world would be a much different place today had that happened.

Further, Eichler gives us a real sense of the high society that Mellon and Churchill moved in from London parties to excursions in Paris and the south of France. Three people in Mellon’s entourage would go on to bigger and better things. Assistant Secretary of the Treasury Russell Leffingwell would chair JP Morgan and the Council on Foreign Relations; Parker Gilbert who succeeded Leffingwell at treasury would go on to chair the Reparations Commission, and later Morgan Stanley (his son would also do that); and his son-in-law David Bruce would be an early hire in the OSS and later become a distinguished diplomat.

To sum up, Jill Eichler has tuned what could have been a nerdy story into an interesting history of some of the financial aspects of diplomacy of the 1920’s. 

My Amazon Review of Tobias Straumann's "1931:Debt, Crisis and the Rise of Hitler"

Annus Horribilis

Although most scholars put the focus of the Great Depression on events in the United States, Swiss historian Tobias Straumann turns his keen eye on the role Germany had in making the Great Depression “Great.” In fact the 1932 annual report of the Bank for International Settlements noted “In the circumstance of the German problem- which is largely responsible for the growing financial paralysis of the world – call for concerted action Governments alone can take.” To Straumann there is a straight line from the May 1931 failure of the Credit Anstaltt, to Germany suspending convertibility in the wake of bank runs in July, to Britain abandoning the gold standard in September which was followed in September and October by the Federal Reserve raising its discount rate for 1.5% to 3.5% in the teeth of the depression.

He tells part of his story through the eyes of Viennese economist and Swiss banker Felix Somary. As early as 1926 Somary was warning about the unsustainability of the reparations regime establish after the Dawes Plan and as the 1920s roared on he became even more bearish. Unfortunately to be right early is sometimes viewed as being wrong. Trust me, I have experience with this. As a result his warnings went unheeded, even from Keynes.

Although the title of this book is 1931, it really starts in 1930 with the adoption of the Young Plan which modestly reduced German reparations, but made the payment structure more rigid. The plan was predicated on a growing world economy that was quickly turning into a tailspin. From the outset both Hitler and the Communists became severe critics of the plan.

The man caught in the middle was German Chancellor Heinrich Bruning, a centrist. Straumann is more sympathetic to Bruning than many historians. Simply put he had limited options and was hemmed in by the gold standard which left him only one choice, austerity. As a result in the September 1930 elections the Nazi Party received 19% of the vote and becomes the second largest party in Germany. Although we now think of Hitler with his militaristic racist screeds, in 1930 he was offering very serious criticism of the Young Plan in his speeches. Hitler’s electoral gains terrify foreign investors leading to a run on Germany’s gold reserves. Put bluntly, Bruning was in a box and the countdown began.

By 1931 the downward spiral continued with even more austerity coming from Bruning. To maintain domestic popularity Bruning plays the nationalist card in returning the Rhineland to German control and proposing a customs treaty with Austria. Of course the French go crazy and that limits the availability of banking credits from France. Hence both German and French politicians were prisoners of their own electorates. The lesson here is that international agreements must have domestic support in order to work.

After the July 1931 banking collapse the way was open for Hitler. In the October election the Nazis receive 37% of the vote and become the largest party in Germany. With the Communists achieving 15% of the vote, the two extremist parties work hand in glove to bring down Bruning. And the rest as they say is history.

Straumann has written an important history that should be required reading in the capitals of Europe. Although the EU succeeded in Greece, at least for now, it might not be so lucky with Italy. It should heed the lessons of “1931.”

For the full amazon URL see: https://www.amazon.com/review/R3CO3LP16KVA4M/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Benjamin Carter Hett's "The Death of Democracy: Hitler's Rise to Power and the Downfall of the Weimar Republic"

The fall of Weimar and the Rise of Hitler

Hunter College history professor Benjamin Carter Hett has given us an insightful history into the collapse of the Weimar Republic and the rise of Hitler. He understands the power of myth wherein a large portion of the German population and most notably President Paul von Hindenburg believed there was unity in August 1914 at the outbreak of World War One and deceit in November 1918 when Germany surrendered. It was the power of this myth that underlay the success of the German Right.

From the outset the social democratic Weimar government was never viewed as legitimate by the German Right. Thus there was a permanent built-in opposition to the government. That was compounded by the communists in the late 1920s, following Stalin’s orders, called the social democrats “social fascists.” As a result by 1931 there was an anti-democratic majority consisting of communists and Nazis working almost in tandem to destroy democracy. Although Hett covers the communist May Day demonstration of 1929 that was put down by the Social Democrats he spends far too little time on the role the communists played in bringing down Weimar.

Although the Nazis were marginalized in the 1920s, the weakness in the farm economy, the continued burden of reparations and the onset of the global depression enabled the Nazis under Hitler’s leadership to unite the right. According to Hett German politics was based upon three “confessionals”: the Protestants, the Catholics and the socialist/communist factions. With the Left divided, Hitler utilizing the myths of August and October dominated the Protestants and picked off enough Catholics to become the leading rightwing party. As a result by 1933 the Nazis, by default, had to be part of any coalition government and with their successful bullying tactics they seized power. Of course they were aided by the deflation policies of Heinrich Bruning’s Center Party coalition government. In part the deflationary policies were designed to make things worse to relieve Germany of its reparations liabilities.

Hett gets many things right especially his view that the untimely death of foreign minister Gustav Stresemann in 1929 eliminated a democratic voice in Germany’s center-right. In my opinion Stresemann was the only politician who could have stopped Hitler. However Hett gets a few things wrong. First he over-emphasizes the opposition to globalization. He neglects to mention that globalization was at its apogee in 1914 and Germany was benefiting from it. He conflates globalization with reparations and the gold standard. Initially the real problem was with reparations which Hett notes were relatively mild relative to history, but that is a low bar, the burden on Germany was severe. He also mysteriously leaves out the 1922 assassination of finance minister Walter Rathenau by rightwing extremists. Rathenau had the confidence of both the British and French finance ministries and had he lived the reparations issue might have been ameliorated. Hett also gets wrong blaming the German farm crisis on the rise of U.S., Canadian and Australian wheat. That is not quite true. The true causes for the fall in farm prices was the return to market of Russian and southeastern European grain along with the mechanization of agriculture that reduced the need for forage crops. The farm issue is important because the core of Nazi supporters were the Protestant farmers.

Hett ends his book with the Night of the Long Knives in 1934. Here Hitler eliminates Ernst Rohm’s S.A. and more importantly much of the remaining conservative opposition. If there is a lesson to be learned from Hett’s book, it is that conservatives are play with fire when they suck up to rightwing demagogues. Hett has written an important book. Read it.

The full Amazon URL appears at:  https://www.amazon.com/review/R3GV90GRUF90X/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Charles R. Morris' "A Rabble of Dead Money: The Great Crash and the Global Depression: 1929-1939

The Great Depression: Who done it?

Charles R. Morris has presented us with a very thoughtful popular history on the origins of the Great Depression. He pulls together the thoughts of four really good books on the subject without getting too bogged down in technical jargon. They are Barry Eichengreen’s “Golden Fetters,”  Liquat Ahamed’s “The Lords of Finance,” Robert Gordon’s “The Rise and Fall of American Growth,” and Frederick Lewis Allen’s popular history of the 1920’s “Only Yesterday.”

To Morris and most of the economics profession the cause of the Great Depression was the imbalances that arose out of World War I with its interaction with the gold standard. This is more a Hooveresque version of the cause compared to Roosevelt’s view that causes were domestic; namely rampant speculation, the unequal distribution of income and the 1920’s depression in agriculture. Morris debunks all of the Rooseveltian causes and notes that agriculture wasn’t that bad off in the late 1920s. He does not however note the revolution in agricultural technology caused by the introduction of tractors eliminated the need for forage crops that accounted for 40% of the U.S.’s agricultural output. That alone would have triggered a fundamental restructuring of the industry.

Morris is very good at discussing the impact of electricity, automobiles and radio on production and the lifestyles of average Americans. The 1920’s truly brought with it a revolution in production and consumption. He also has vignettes about the rise and fall of the Samuel Insull, the utility mogul and Ivar Kreuger, the global match king as there empires collapsed under a mountain of debt.

If he holds out one party for special opprobrium it is Germany in its failure to step up to its reparations obligations after the 1924 Dawes Plan knocked them down enough to satisfy Keynes. Simply put they never were going to pay and it was the entire reparation process that put an inordinate amount of stress on the global financial system. However it is unrealistic to assume that any 1920’s social democratic government would have put on such a squeeze on their domestic economy as the French did following their defeat in the Franco-Prussian War of 1870.

As a result if a lay reader doesn’t want to slog through the four books I mentioned above, Morris’ alternative is well worth the read.

For the complete Amazon URL see:

https://www.amazon.com/review/RBRIHGNDDR8L8/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Adam Tooze's "The Deluge: The Great War, America and the Remaking of the Global Order, 1916-1931

America as Economic Super Power

Unlike most histories of World War I and the early inter-war years which have a European focus, Yale professor Adam Tooze trains his keen eye on the growing ability of America’s economic power to reshape the world in its own image. To him Wilson’s liberal internationalism is a cloak to extend the power of the United States. He views America’s role in the world as that of “privileged detachment” that began in with Wilson’s formulation of “peace without victory” in early 1917 and ends with Hoover’s reparations moratorium which was designed to bailout Wall Street’s loans to Germany.

He believes that it was Wilson’s goal to make America the arbiter of the world which Wilson and his Republican successors largely succeed at. The only difference between the Wilsonians and their Republican critics was that Wilson wanted to do that from within the League of Nations and the critics from without. Nevertheless the goal was the same.

Tooze chooses 1916 as the start date because it was in that year the Entente power were being bled dry in France in both a physical and economic sense. It was also in that year where the economic output of the United States for the first time exceeded that of the British Empire. The Entente had nowhere else to turn and from then on America became the banker to the world. And it was this financial power that forced all of the major powers to take into account the role of the United States. After the war German statesman Gustav Stresemann realized that the road to German recovery ran through Wall Street and it was Wall Street credits that triggered Germany’s rebound in the mid-1920s.

Tooze also notes that the U.S. was far from being isolationist in the 1920s; isolationism was more a creature of the 1930s. There was the Washington naval arms limitation conference in 1921-22, the Dawes Plan in 1924 and the Kellogg-Briand Pact of 1928.

Tooze’s book covers far more that Europe as he pans the world to include the Russian Revolution and its aftermath, upheaval in China, Britain’s struggle to hold on to India and the shifting coalitions of Japanese politics. My one criticism of the book is that it promises too much. There is far more discussion of the 1916-21 time period than that of the balance of the 1920s. It is far different from, say, Zara Steiner’s “The Lights that Failed” which is very Eurocentric, but that work covers far better the roles of the Locarno Treaty and the League of Nations in Geneva. Nevertheless, “The Deluge…” is a very worthy history of the time when America interposed itself on to the world scene. 

The full Amazon url is:

 http://www.amazon.com/review/R1YUL2VZXIVZBB