The World Goes Crazy

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Recently by Bill Bonner: What
to Believe About Gold, Stocks and Bonds in2011



all the thought and good intentions that we provided…we achieved
absolutely nothing. Nothing that I did and very little that old
Ben [Strong, head of the US Federal Reserve] did…produced any
good effect…or any effect at all. Except that we collected
a lot of money from a lot of poor devils and gave it over to the
four winds.”

In three sentences,
Montagu Norman, ex-chief of the Bank of England, described the handiwork
of a whole generation of his fellow financial plumbers. This was
the generation that made central bankers what they are today. Before
1914 they were expected to do nothing, that is, neither to aid the
economy nor harm it. Since 1945, hardly a day went by that they
did not clog a pipe or inadvertently blow up a gas main.

This was the
generation of Hjalmar Schacht in Germany and Emile Moreau in France,
while the aforementioned Ben Strong represented the US and Norman
himself, wearing his velvet cape and traveling under a pseudonym,
stood up for England. This was the generation that financed war
well and the peace badly. Borrowing heavily from the Americans,
the British and the French were able to keep WWI going long after
they were effectively bankrupt. Then, rather than write off the
bad debt, everyone waited for someone else to pay it. The Americans
watched the mail for checks from the British, while the British
sent polite reminders to the French, who tried to foreclose on the
Germans by invading the Ruhr; this got them no money, but it had
the unintended consequence of boosting Adolph Hitler’s budding
career in politics. The debts were bad; the busted-up Reich couldn’t
pay anything near the amounts demanded. And the more grease the
Germans scraped up and sent west, the more their own economy creaked
and weakened; the more they tried to pay the less they were able
to pay.

This was the
generation that took its currencies off the gold standard in order
to run up debts that they couldn’t pay…and then went back
on the gold standard, as if they meant to repay them…and then
off again in order to renege.

And this is
the generation that is autopsied in Liaquat Ahamed’s book,
of Finance
. It is meant to be a book about finance. But
the central figures seem scarcely able to add and subtract. The
Germans faced a $12 billion reparations bill, equivalent to about
$2.4 trillion today. There was no way they could pay. Pretending
that the money was forthcoming then was as vain and pernicious as
expecting the Irish to make good on their bank debt, or expecting
Americans to honor their $200 trillion worth of financial commitments,

At least the
Frenchman, Moreau, had his priorities right. He ducked meetings
and dodged international monetary conferences so that he would be
in the country for the opening of hunting season or so he could
run for mayor of his home village of St. Leomer, with about 200
residents. Later, he left his post completely, in order to earn
more money at the Bank of Paris and the Low Countries.

His German
counterpart, Horace Greeley Hjalmar Schacht, should have taken up
hunting too. Instead, he took up Hitler. But that was after he was
famous for having solved Germany’s hyperinflation problem.
The mark had fallen to 4.2 trillion to the dollar in November, 1923.
The trouble with the mark was obvious. There were too many of them;
Schacht’s predecessor, von Havenstain, had anticipated quantitative
easing by 9 decades. Schacht took over at the Reichsbank and on
the 20th of November introduced a new currency, the rentenmark.
Von Havenstain dropped dead the same day. At least Mr. Schacht was
a smart fellow. Like Norman, he occasionally was afflicted by an
honest insight: “The whole modern world is crazy…everybody
here is crazy,” he said. “And so am I… I am compelled
to be crazy.”

But the remarkable
thing is Ahamed’s conclusion. On 502 pages we listen to central
bankers and economists quack like ducks. On page 503, the author
reveals that he is deaf. He tells us that the world is a better
place thanks to them. All the evidence of the previous pages argues
against it. None of them increased world output by a single sou
or pfennig.

Take Mr. Strong.
Would things have gone better if he had not died in 1928, as the
author suggests? He imagines that Strong would have intervened more
forcefully in 1931, forestalling further bank failures. He seems
to have missed the lesson of his own book – that bad debts
should be allowed to die quickly. Besides, in his own telling of
the story, it was Ben Strong who was more responsible for the Great
Depression than anyone else. He lowered rates in 1927, even though
the stock market was already running hot. “One of the most
costly errors committed by [the Fed] or any other banking system,”
Adolph Miller testified before Congress in 1931. The error led to
a bubble…which was followed by a bust, which his successors
– who again refused to let bad debt die – turned into
a long depression.

Good work,


Bonner [send
him mail
] is the author, with Addison Wiggin, of Financial
Reckoning Day: Surviving the Soft Depression of The 21st
The New Empire of Debt: The Rise Of An Epic Financial Crisis

and the co-author with Lila Rajiva of Mobs,
Messiahs and Markets
(Wiley, 2007).

Best of Bill Bonner

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