The Alchemists: Three Central Bankers and a World on Fire Read Online Free PDF Page A

Thanks to the recent invention of the electric telegraph, the panic soon spread to the countryside, and even to the far corners of the empire. Facing a freeze-up in the money markets, the Bank of England, as the writer and public intellectual Walter Bagehot famously wrote at the time, lent “to merchants, to minor bankers, to ‘this man and that man,’” and thus stopped the run—though not the destructive economic downturn of its aftermath. What the ECB did on August 9, 2007, was an updated, electronic version of that same strategy, and Trichet, Bernanke, and King often invoked Bagehot’s words as a model for their own crisis response almost 150 years later.
    Bernanke and other Fed officials understood all too well the United States’ aversion to the type of centralized political control embodied by a central bank. The lack of a central bank in the nineteenth century had meant that banking panics were an almost constant feature of the American economy. Even farmers’ predictable need for cash each harvest season routinely brought the nation to the brink of financial shutdown. Yet the battle to establish the institution that Bernanke would one day lead was exceedingly bitter. The compromises needed to gain Congress’s support resulted in an unwieldy structure that would be a challenge to lead, especially as those old arguments against centralized power reemerged a century later.
    The men who led the global economy in the crisis that began in 2007 had come of age in the 1970s, when central bankers were so fearful of an economic downturn—and the political authorities—that they allowed prices to escalate out of control. “I knew that I would be accepted in the future only if I suppressed my will and yielded completely—even though it was wrong at law and morally—to his authority,” wrote Fed chief Arthur Burns in his diary in 1971. “He”
in this case was Richard Nixon, who insisted that Burns keep interest rates low and the U.S. economy humming in the run-up to the 1972 election. Prices rose so fast that steakhouses had to use stickers to update their menus according to that week’s cost for beef. Central bankers have been vigilant about inflation ever since—for better and, especially in the 2000s, for worse, when some saw inflationary ghosts where there were none.
    But no specters of the past loomed larger for Trichet, Bernanke, and King than the missteps taken by the central bankers of 1920s and ’30s. It was then that the Reichsbank of Germany printed money on a massive scale to fund the nation’s government, so much so that people needed wheelbarrows to carry cash to the grocery store and would buy bicycles or pianos to hold value that reichsmarks couldn’t. That hyperinflation led to the desperate circumstances that allowed the Nazis to gain support. What came next would enable their rise to power.
    The Great Depression was at its core a failure of central banking. Just a few blocks away from the building in Basel, Switzerland, where the central bankers of the early twenty-first century drank good wine and plotted their response to the contemporary crisis, the central bankers of the early 1930s met in a hotel and found far less to agree upon. Blinkered by nationalistic distrust, a misguided commitment to keep their currencies tied to gold, and the lack of a common understanding of how economies work, they concluded that the global economic crisis of 1931 was beyond their ability to combat. Even the technological limits of communication in that era—transatlantic phone calls were accomplished with great difficulty, and jet travel wasn’t yet an option—stood in the way of men like the Reichsbank’s Hjalmar Schacht and the Bank of England’s Montagu Norman. Their shortcomings led millions of people into dire poverty and created a fertile environment for World War II.
    The European currency union that Trichet led—and which in a later phase of the crisis he would take extraordinary steps to try