dynamics that may go out of control very fast. >> very quickly. [inaudible] >> it won't within the israelis will launch nuclear weapons against israel. in which case, the entire question of the middle east will be, you know that israel didn't launch this without your approval. so it's a situation where no matter, it's like my being a shadow cia. know i'm not. the more i say it in russian, the more they are convinced i am cia. and that really gets to be another problem. . .

>> this week columbia university announced the winners of the 94th pulitzer prize. up next, booktv teaches this year's winners in the categories of general nonfiction, biography and history. first the winner for history, "lords of finance" written by liaquat ahamed. this program lasts an hour. ♪ >> coming up next, booktv presents "after words," an hour

long interview program where we invite a guest host to interview the author of a new book. this week liaquat ahamed presents in his book "lords of finance:the bankers who broke the world" that four of the world's central bankers attempted to rebuild the global economy following world war i but instead contributed to the economic collapse that led to the great depression. mr. ahamed profiles the central bankers from england, germany, france and the united states. and examines their collective fear of inflation, their interest in the gold standard and their failed plans to stabilize the international economy. liaquat ahamed discusses his book with gerald seib executive washington editor of the "wall street journal." sflv >> host: i'm gerry seib executive editor of the "wall street journal." it's my pleasure to be talking

to liaquat ahamed who had the great good fortune of writing the book about the great depression that has come out in what people have experienced since the great depression. i guess the obvious starting point. how did you come to write this book and have the good fortune when it's topic a on everyone's list. >> guest: the second answer to the question is luck. i started it -- i first thought of it in 1999. when the asian crisis hit. >> host: uh-huh. >> guest: and i was then in the investment business. and the emblematic image of that era -- that "time" magazine that had the officials on the cover. and i started reading up about past crises. and i discovered there was another committee to save the world. it was then called the most exclusive club in the world.

savings the world presided over the west economic collapse. >> host: by that committee you mean the central bankers of the four most powerful economic countries in the world. >> guest: that's correct. >> host: and you chose to focus on them. tell us a little bit who they are and why they became the focus for you. >> guest: okay. the second figure was the name of montague norman. at the time he's none known but at the time he was the most important central bankers in the world. he had the sort of mitechniq mitechnique -- mystery that alan greenspan had. both of his grandfathers had been bankers and the directors of the bank of england. one of his grandfathers had been the governor. he was a an odd character. he dressed with a cape and a

floppy hat and a big emerald ring. the "new york times" called him -- described him as looking like the chief conspirator out of an italian opera. so he was the central figure and was the -- was there throughout the occurrence. the second figure was a great friend of his, benjamin strong, who was the first governor of new york federal reserve. the third figure was yal mashat. >> host: the central central bank. >> guest: and i really wanted to focus on them for two reasons. most economic history is written as the history of economies. i wanted to -- to write history about people. >> host: uh-huh. >> guest: and key decision-makers. in part sort of to turn the

spotlight on the decision-makers leading up to the great depression. because it's my view and i think it's the consensus view now that the great depression was the result of major policy make sure. >> host: uh-huh, uh-huh. >> guest: i also wanted to -- i mean, by focusing on individuals, you're able to capture some of the sort of uncertainty of history as it's being lived. >> host: yeah. >> guest: and that i think was sort of -- it was almost a literary device. >> host: now, we'll get to those policy mistakes but there's a fifth character who's also fascinating -- they were all fascinating which is also your good fortune i guess. it's maynard keynes a more familiar figure to your readers today. how he enters the scene and why he's so important in this picture of the economic world of the 1920s and 1930s even though he really didn't have an official position from which he exercised any power? >> guest: yeah, he enters the

scene in 1919 at the age of 36. he had been an advisor to george at the paris peace conference. and thought that the deal that had been in particular german reparations, the fine that had been imposed on germany after the first world war was a tragic mistake. and so he wrote this book "the economic consequences of the peace" and it became a bestseller. >> host: uh-huh. >> guest: and throughout the '20s he was sort of a gadfly. i occasionally describe him as the paul krugman of the era. that's a compliment to paul krugman. >> host: and a metaphor for everyone these days. >> guest: he wrote brilliantly. but he was also -- he had this infallible ability to be right and he was less sort of burdened by ideological blinkers in the way the central bankers were.

and he was able to look at the world with a fresh eye and bring this remarkable analytical ability. and by the way, this is keynes before he invented keynesian economics. >> host: that's the result of the disaster he failed to head off, right? >> guest: exactly. that's right. >> host: and what he was saying was, break out of your straight jackets. think more creatively. and by the way, let's not be tied to the gold standard. isn't that the crucial -- >> guest: yeah --. >> host: the argument of the day? >> guest: he focused on two things. one was reparations and it was a tragic mistake and it imposed a terrible burden on the world or a fault line which is going to break. and the second was that the gold standard put the -- going back to the gold standard after what had happened during the first world war when all of europe had run up enormous debts was putting the world into a straight jacket, which made it very difficult to cope with all

of the overhang of debts after the first world war. >> host: well, let's talk a little bit about that first of the giant policy mistakes which you focus on which really was the resolution of the first world war. and the decision to impose enormous reparations on germany. i think it's interesting to readers today who probably think of the great depression, the stock market crash in this country, the great depression globally as something that simply emerged out of the ether somehow. you make a very persuasive argument that the seeds were sown in the immediate aftermath in the first world war which looked at ridiculous reparations were demanded of jet stream and that set off a whole sequence of events. talk about that first policy mistake that you point to. >> i think the important thing to remember that 1929 was only 10 years after the first world war. you know, which was the most expensive disastrous war in history up to that time.

and all of europe basically bankrupted itself during that war. most countries devoted 50% of their gdp to fighting the war. they all ended up in the war with debt to gdp levels of 2, 300, 400% of gdp. and trying to figure out how to pay this -- pay for this burden was very difficult. in part they paid for it by inflating the debt away. the two allied countries, britain and france, owed enormous debts to the u.s. >> host: husband. -- uh-huh. >> guest: in order to finance those debts they demanded gigantic reparations from germany. and the warheads were tied with reparations to germany. the u.s. refused to forgive these debts.

calvin coolidge said they hired the money, didn't they? and the sort of tragic consequences followed from that decision. initially, it tried to impose a debt of something like $30 billion on germany which had a gdp of $12 billion. >> host: which would be in the trillions today? >> guest: it would like the u.s. having a debt of $45 trillion, which would be crazy. they eventually negotiated that down to about -- to $12 billion. but even then the germans thought this was completely unfair so never wanted to pay. and europe -- britain and france never wanted to forgive it. forgive this debt because they felt obliged to pay a similar debt to the u.s. for their war debts. >> host: so that's the mess the central bankers that you write about really have dropped in their laps to some extent. >> guest: yeah, yeah. >> host: but then they have to

handle it. how did they handle it? and what do you think were the principal mistakes they made having received this mess and to some extent being asked to deal with it and clean it up? >> guest: the first world war -- one of the consequences of the first world war was massive inflation. the german price level went up four times during the first world war and then the famous case of hyper inflation in the '20s. britain, which was the least hard-hit -- it's price level rose 2 1/2 times. the central bank said, look, we never want to have this again so we have to go back to the gold standard because that at least will impose limits on how much inflation there can be. >> host: so they viewed the gold standard for the cure for hyperinflation. >> guest: exactly. but they were fighting the battle of the sort of last battle.

when they went back to the gold standard after the first world war, they made three mistakes. one is -- because prices had risen, they went back at roughly the same exchange rates, britain and the u.s. did. that meant that the value of gold had -- the value of gold relative to goods had diminished considerably so there was not enough gold to go around. so it was -- the world suffered from the sort of shortage of gold throughout the '20s. the second is most of the gold, two-thirds of it had moved to the u.s. because of the first world war. capital flights, european countries paying for the war. so the u.s. had too much gold and europe had too late. and it was like trying to play poker where one party has all the chips. i mean, the game never gets off the ground. and the third problem was -- and

affected britain in particular the sort of in an effort to reclaim its past status, it went back to the gold standard at the old exchange rate. so the pound was consistently overvalued. and the world -- the central bankers spent most of the mid to late '20s trying to do everything to prevent this whole structure from falling apart in particular from preventing the pound from collapsing. >> host: so the central bankers essentially adopted this strategy of trying to defend at all costs a monetary system that really had become an anachronism at that point? >> guest: exactly. >> host: and the policy mistakes were in defense of something they should have let go? >> guest: exactly. >> host: and in the u.s., that policy mistake took the effect of very low interest rates designed to help the europeans by keeping interest rates low so that they could handle these massive bills that they had to pay? >> guest: yeah.

and the sort of signature moment was in the middle of 1927. the pound was coming under increasing pressure. and the central bankers organized a secret meeting in an unusual place, long island. >> host: a little more remote now than i take it now? >> guest: right. it was actually at the estate of auden mills and they sort of tried to stitch together a deal to keep the structure going. and the deal was that the u.s. ease interest rates. and you can almost date the beginning of the stock market bubble from the day the fed eased in july 1927. and within -- within three months the stock market was up 20%. and it never looked back thereafter. >> host: that has a familiar ring to it, doesn't it?

very low interest rates produce an inflated stock market. is that the same scenario that we just saw over the last, say, five years in the united states today? >> guest: yeah. i mean, i think less of the stock market and more of the real estate this time. yeah. the similarity is that then and now we had a bubble. then it was in the stock market. this time it was in real estate. both bubbles were caused by mistake in fed policy. interestingly enough, both bubbles were exacerbated or some would say even caused by a malfunctioning international financial system. then it was the decision to east side, to prop up the pound. this time it was the consequences or the effects of massive accumulation of dollars in the hands of asian central banks. and then both bubbles as they always do eventually burst. >> host: it's interesting because in reading the book, you

read this -- these descriptions that you have of the position of the united states occupied in the -- in the immediate aftermath of world war i an emerging economic power. accumulated massive -- massive financial reserves. it's emerging of the new manufacturing of the world. it sounds a lot like china today. and i'm wondering if you see some analogies between the position the united states took as it emerged in this -- in this enviable spot after world war i and what's happened with china today? >> guest: yeah. there are certain parallels. i think the most important parallel we're obviously in a transition period. and that economic leadership is certainly slipping away from the u.s. in quite the same degree as it had over the past, let's say, 30, 40 years. i don't think -- the big

difference is the u.s. by the mid-1920s was an economic giant. had the largest economy. so not only did it -- was it a financial giant but it was an economic giant. and britain was truly, you know, on its knees. >> host: on the way down. >> guest: whereas here we have a situation where the u.s. is by far the largest economy. i mean, china -- the gdp of china is a third of the u.s. so despite the fact that it's got this enormous financial muscle, it's still not the economic giant that the u.s. is. so i think that's where the analogy probably breaks down. >> host: in any case -- we've reached this point in your narrative in which a giant mistake has been made. everybody has lashed themselves to the gold standard and the u.s. is trying to help the europeans and the british doing that by holding interest rates down. that's in 1927.

the next five or six years are bad that we know now. and what about the decisions in the great depression. how did things play out from there? >> guest: i think the one sort of event that i make a big deal of is the death of benjamin strong. >> host: right. he's the ben bernanke of -- >> guest: yeah, he was the head of the new york fed. and after doing this deal with britain in 1927 -- and i should say something about him. he had a very tragic life. he contracted -- well, his first wife committed suicide. he remarried. his second wife left him in 1916. that same year he contracted

tuberculosis on a trip from europe. he would go off to the mountains of colorado to try to recuperate. he was taking so much morphine to deal with the pain that eventually basically destroyed his digestive system. and in 1928 he died on the operating table with a thing called diverticitis. he kept the world going through its straits. when he died, power shifted from the new york fed, of which he was leader, to the federal reserve board in washington, which was run by a bunch of minor political hacks and smalltown businessmen who really didn't understand monetary policy. so i say that just to describe the context in which the following mistakes were made.

so the stock market bubble takes off. the fed torn between the new york fed and the federal reserve board is paralyzed. they just couldn't agree on what to do. and so they ended up doing nothing. as a consequence the bubble really moves up. and eventually bursts in october '29. >> host: by doing nothing they leave interest rates unrealistically low without the bubble's creation? >> guest: right. they change them modestly but always too little too late. the second consequence of the bubble, sort of paradoxical, it sucked in capital from europe. not only were we getting a bubble in the u.s., but europe, which depended to service all

its debts on u.s. capital suddenly were starved of capital. and so europe in particular, germany, went into the depression first. >> host: even though the cause was arguably on this side of the atlantic? >> guest: exactly. and it shows the interconnections of the world. so germany goes into of a recession and the beginning of the great depression. the u.s. bubble then bursts in 1929. the federal reserve actually reacted initially very quickly. i mean, they cut interest rates -- from 6% to 2% in a period of six months. but then they stopped. we then got a series of banking crises, runs on banks, developing at the end of 1930. and here's where the crucial sort of -- where strong missed. he would have most likely would

have known what to do. and the key is if you get a run on a bank, the first -- the first job of the central bank is to prevent the contagion effect and to prevent that run from running throughout the system. the federal reserve failed to do that. as a consequence it allowed its banking system to collapse. >> host: what could it have done to top the contagion of the runs? >> guest: two things. the first was inject reserves into the system. it could have done open market operations, buy government bonds, flood the system with cash. and secondly, and again, this is what they ended up doing in 1932. this would not be the federal reserve but the treasury and the government should have acted to replenish the equity of banks. and they entered into a program in 1932 to inject capital into

banks. they just didn't do it in 1931 when the bank panics were occurring. >> host: what did they do? >> guest: they just sat by and let banks go under. they basically argued that it was not their job to bail out bankers from the consequences of their poor investment decisions. >> host: something you also hear these days. >> guest: right. >> host: and you hear the counter-argument which makes more sense in this context, i suppose. >> guest: and the unfortunate consequence was that the u.s. banking system had this massive run. bank deposits shrank eventually by 40%. the consequence loans shrank by 40%. and that was the central policy mistake in the u.s. >> host: and by then you're in a hole that's very deep indeed? >> guest: exactly. >> host: now, one -- let me go back just one step. you described a federal reserve system in this country much different or at least significantly different than the

one we have today. the power was in the new york federal reserve bank. the board in washington, which we think of now as the fed wasn't really what it is today. the system really wasn't set up in a way to have a central brain the way we have one now. how did it get that way? and was it fixed or changed at least as a result of what you're describing? >> guest: yeah. i mean, the fed was created in 1913. really largely as a consequence of the 1907 financial panic. and the initial plan, which was concocted by a group of bankers who met in secret -- the famous secret meetings of bankers. this one was at an island off the shore of georgia called jekyll island. and six bankers including benjamin strong met there and devised a scheme for essentially

a single central bank which would be owned as a cooperative of banks. that didn't get through congress. largely because congress was very suspicious about investing so much power in one single institution. so it was changed by senator glass -- it became -- what they did was create effective six central banks in the u.s. it was 12 regional banks to act as lenders of last resort to banks in their region. and on top of this whole thing, they imposed a federal reserve board, which was like a regulatory agency designed to sort of oversee these banks. >> host: but not really to make decisions? >> guest: no. it could veto decisions but it couldn't take decisions. so it was actually a recipe for disaster. and we had one of people who could take decisions but needed the permission of another. and unless both agreed, nothing happened.

>> host: but this was done in the name of not having too much financial power centralized anywhere least of all in washington? >> guest: yeah. >> host: and it was a mistake? >> guest: it proved to be a mistake in the great depression, yeah, very much so. >> host: because? >> guest: it was an inefficient system. unless all parties agreed, it was -- if you like a recipe for paralysis. >> host: uh-huh. >> guest: and what happened was the federal reserve banks wanted to do one thing. the board wanted to do another. and instead they did nothing. >> host: and when the most powerful man in this system, mr. strong, dies, then the holes in the fabric become even more apparent? >> guest: yeah. he had been able if you like surmount the institutional constraints by sheer force of personality. with him gone, that was real problem. >> host: and you say in the book that some people think that if he had survived, the whole story might have turned out differently. do you yourself believe that? >> guest: yeah, very much so.

i mean, the first person to sort of make that case -- or well, the -- actually not the first person but one hf the central people making the case had been milton friedman. irving fisher the great economist believed that. it really is a strong theme running throughout economic history. i like it because it says individuals make a difference. >> host: well, that's the message of your entire book. >> guest: exactly. >> host: massive -- even massive historic movements are caused or at least affected by, you know, small numbers of individual people. and you've identified the ones in this case that really matter. >> guest: yeah, 'cause people are policies. and, you know, different people you'd have different policies. and different policies you would have a different outcome. >> host: we're going to take a short break. and we'll come back. and when we return, i want to talk a little bit about lessons learned that might apply in today's environment. >> guest: thank you.

>> host: we talked a fair amount about what happened in this country, the mistakes that were

made that led to the great depression principally by the lack of a central banking system. there was a parallel set of decisions by a parallel set of characters, the three central bankers in europe that you focused on that were being made at the same time. what did they not see or could have seen and head some of this off? >> guest: in some degrees they had even -- they had less degrees of freedom. the u.s. at least had this gigantic gold hoard. its own destiny was in its own hands. >> host: gold in those days liberated because it was wealth? >> guest: and it was the reserves of the banking him. you couldn't -- it determined how much credit central bank could provide. during the late '20s, germany lost a lot of gold. so did britain. so when the great depression hit, they had zero degrees of freedom. they basically had to do

everything to cling on to their gold. and so they kept interest rates much higher than they would have need to otherwise. during the first couple of years. >> host: because they had to have tight money. they didn't have any reserves? >> guest: exactly. that culminated in an austrian bank going under in the summer of 1931. and that provoked sort of contagion effect throughout europe. austria was a tiny country. but when this major bank in austria went under, everyone feared all the german banks would go under, pull their money out of germany. germany had to raise interest rates in the middle of the great depression. so it raised interest rates from 5% to 12%. >> host: uh-huh. >> guest: and that's the last thing you want to do in the middle of a depression. the contagion then moved to britain which then was forced to

raise interest rates to try to defend its currency. and the whole sequence of events was very similar to the asian crisis of 1999 or 1997, '98. that, in effect, tipped all of europe into what was into the great depression. the one player in all of this that had the wherewithal -- or the money to act as the engine within europe was france. they had enormous gold reserves. but the french were just one word, obsessed, by sort of making sure that germany remained weak. and secondly, were sort of ignorant of economics. and so they hoarded this gold instead of recirculating it. and many people would say the french policies played as large

a role, you know, as an incompetent fed in bringing about the great depression. >> host: because they hoarded their gold, let the continent sink, could have sent out a rescue boat in effect and didn't do that? >> guest: yes. and so then germany defaulted on its debts and britain -- >> host: and eventually the whole fed here makes some bad decisions in terms of raising interest rates in the wake of what the europeans did? >> guest: yeah. yeah. >> host: and then a bad situation has become worse in retrospect, right? >> guest: that was the whole system, sort of completely collapsed. >> host: just as a historical note, the common thread in all this is sort of the devotion to gold as the real base of money. which created many of the problems you describe. and eventually it went away. why was there this obsession with gold? and how long did it take the world to get over it in the wake of all this calamity that we're

discussing? >> guest: the obsession with gold was the sort of view that discretionary monetary policy by central banks would end up in disaster. >> host: if left to their own devices. >> guest: so they felt they needed the sternly imposed discipline to ensure the governments didn't borrow too much. and it really was an ideology. i mean, there was very little analysis behind it. it was just a belief system. >> host: uh-huh. >> guest: and we can talk maybe later about the importance of belief systems in leading people into along the wrong path. >> host: uh-huh. and when did the world get over that finally? >> guest: oh, well, the world got over that out of necessity during the great depression. because suddenly no one could hang on to the gold standard. people kept on breaking out of gold. so britain -- britain broke out

from the gold standard in 1931. germany did to some degree. the u.s. did in 1933. france did in 1936. and no one ever went back. >> host: and all too late? >> guest: yeah. but there was a sequence in which the sooner you went off the gold standard, the sooner you recovered. >> host: right. >> guest: from the great depression. >> host: but that wasn't clear until after the fact. >> guest: yeah, that wasn't clear until the late 1930s. >> host: let's talk about lessons today if we could. an interesting note here is that there are in significant positions in the u.s. government now -- ben bernanke, the chairman of the federal reserve board and christina romer, the chairman of the -- president obama council of economic advisors both happened to be students of the depression. both are cited in your book as sources. tell me a little bit about their scholarship is on this era.

and what to the extent you did draw on them, how did you draw on the work that they've done? >> guest: well, in the case of ben bernanke -- his work basically focuses on the consequences of the banking crisis. and why did it cause such a terrible depression and really focused on the fact when banks went under, they called in all their loans. and that caused borrowers to start dumping collateral and created sort of an ever spiraling cycle. and he focused on the mechanics of how that -- how that had worked. in the case of christina romer, she did a couple of seminal pieces. one was on the impact of the great crash on spending. one of the sort of -- one of the

odd things that people had sort of thought -- or tried to figure out is, why was 1930 such a -- what happened in 1930? we had the great crash. why did the economy sort of collapse so much? and she showed that it was basically consumer spending that collapsed. in the wake of the crash. she also did some fantastic work on what got us out of the great depression. because when roosevelt took power, everyone -- you know, the myth is that the government spent a lot of money. >> host: right. stimulus in today's terms? >> guest: the stimulus was relatively modest. roosevelt was still sort of -- had this thing about not allowing the budget deficit to increase too much. what really got us out was expansionary monetary value and when roosevelt devalued the dollar that took all the gold in

the country and basically increased its value by 80%. it was as if we discovered a whole lot more gold. that, in effect, gave the banking system much more reserves and allowed it to lend more. >> host: and that loosened up the whole system, the lubrication of credit is kind of the way people think of it today? >> guest: yeah, and it changed expectations. people said with all this gold -- all this extra money, we don't expect prices to fall. we now expect prices to rise. it made it economic for them to go out and borrow. and we went from a downward spiral then to a virtual circle upwards. >> host: but even that that was a slowly expanding virtualus cycle. it took a long way? >> guest: it basically turned on a dime. i mean, it took a long while because we'd fallen into such a hole.

industrial production made a low in 1933 when roosevelt took office. over the next four years, did your his first term industrial production doubled. gdp went up by 8% a year. for four years. >> host: so the climb out of that hole started and never really stopped. it was just such a deep hole it took a while to get to the top? >> guest: exactly. that's why the whole conservative view the -- roosevelt hampered the economy. there were some things he did which didn't help the economy but net, we had a fantastic recovery during the first roosevelt term. >> host: you would attribute that more expanding the monetary supply than -- >> guest: exactly. >> host: both contributed to one much more than the other? >> guest: very much. >> host: should we feel more secure knowing that people who understand or have studied the causes and effects and the resolution of the great

depression are in positions of power now? >> guest: oh, yeah. look, the central bankers are the authorities in the treasury and the central banks in the '30s took a patient that was sick and applied precisely the wrong medicine. you know, they let the banking system collapse. they tried to control the budget deficit. they raised interest rates in the middle of the depression. i mean, they were like 18th century doctors that thought, you know, the way to cure illness was to draw blood from a patient. we're not doing any of those things. we now know better. >> host: uh-huh. >> guest: so no one -- the federal reserve has cut interest rates to the bone. no one is planning to raise interest rates to defend their currency. we've done just about everything we could to prevent our banking system from collapse. >> host: which one of those in

trying to control the deficit, raising interest rates at the wrong time -- which are those -- in this country leaving aside the european problems, which of those do you consider in retrospect to have been the crucial mistake that made the depression worse and extended its life beyond what it might have been?ñ f >> guest: i think different in different times. 1931 i think it was letting the banking system go under. in 1932, it was trying to control the budget deficit. raising interest rates -- there was a brief period when they raised interest rates. but that was the least problems of the u.s. because it had less of a constraint from gold. in europe i think it was the other way around. it was raising interest rates and keeping interest rates too high that was much more important. >> host: uh-huh >> guest: and less -- budget deficit was a problem everywhere. so the mix varied from one

country to another. >> host: and when you look at both the policy and the central banking reactions to the problem that we're in today, do you see any lessons that have been missed? things that you worry have not really been absorbed? mistakes that are being repeated in any way? >> guest: well, the great depression -- the central lessons are what not to do. >> host: uh-huh. >> guest: that's slightly different from, say, telling you what to do. [laughter] >> host: mistakes you shouldn't make which is different than prescriptions you should write. >> guest: look, we're applying the right medicines. >> host: uh-huh. >> guest: the big question is, is the patient so sick that we're not giving enough of a dose? and more importantly i think in the present case, are there political constraints that are going to limit what the amount of medicine we can provide.

and are we -- you know, it would be tragic if we ended up -- then we ended up into, you know, an economic catastrophe because we didn't understand the system. it would be even more tragic if we ended up into an economic catastrophe despite understanding the system but just not having the political mechanism to do it. >> host: but by that do you mean not being willing to spend enough on stimulus? or do you mean not being willing to spend enough to rescue the financial system, the banking system as it exists today? which worries you most? >> guest: the second. the banking system. look, the stimulus package you could argue that we -- it was not large enough. some very prominent economists who are arguing it was not large enough. the virtues you can always add to it. >> host: uh-huh, uh-huh. >> guest: the banking system seems to be more of a problem

because we need to recapitalize the banking system to bail out the banking system -- it's hard to do it without in some sense bailing out bankers. >> host: right. >> guest: and bankers are -- bankers are not very popular people these days. >> host: but there's also precedent for that. you noted earlier that one of the things that the u.s. government chose not to do was to rescue banks. and i assume that was at least in part a political as an economic decision; right? >> guest: oh, yeah. the sort of parallel between the way banks are viewed now and then is -- i mean, it's quite striking. in 1933, the senate conducted hearings on the causes of the financial collapse. and each of the major bank -- sort of heads of banks was invited up to congress to give his side of the story. and we discovered that the

president of chase, albert wiggins, had made a fortune during the great crash by shorting the stock of his own bank. and he made $4 million just in october, 1929. from his bank's stock price collapse. $4 million if you adjust for the size of chase would be like several hundred million dollars now. >> host: in layman's terms he cashed -- >> guest: more than benefited from the collapse of the stock price. eventually we even had the treasury secretary andrew medical -- mellon he was the third richest person in the country indicted for falsifying his tax returns. and the irs demanded that he repay $3 million or pay $3 million in taxes.

>> host: the tax -- the controversies today seem pretty small potatoes by comparison. >> guest: well, he was the third richest man. >> host: i don't think it's an exaggeration in historic terms to say that the events that you write about and that you're describing here as we talk led to world war ii. i mean, that was in many ways -- that was the geopolitical consequence of the depression and the failure to cope with it. is that an exaggeration. >> guest: in 1929 they had elections in germany. the nazis won. they had 12 seats within 18 months they become the second largest party. within two years they'd taken over the country. no question that certainly in the case of germany, the combination of great depression and the resentment against how

germany had been treated after the first world war led to the nazi's entry. >> host: any other countries that you write about? by the way, should the nazi -- the rise of the nazi party in germany be seen as kind of like the populism on steroids? and was that repeated in other places as those years unfolded? >> guest: it was, i think, the great savior in the u.s. was that roosevelt took this populism and channeled it. and sort of appealed to the better side of our characters. we had our fair share of populists who were going on against banksters. but roosevelt sort of diffused that. and i think that was part of his political genius. >> host: let's return to the central characters. you described the unfortunate and untimely death of benjamin strong. the other three central

bankers -- how did life unfold for them after the calamity. did they in retrospect see the mistakes that they made? did they reconcile them with the -- you know, the decisions they made and the consequences? did they apologize? did they go to their graves thinking that they had done the right thing? i mean, how did history treat them? >> guest: each in a different way. each had sort of completely different outlook. the interesting one was of the governor of the reich's bank between the '20s. he had saved germany from hyperinflation. he was in part for the german economic miracle of the '20s even though a lot of it was based on borrowed money. when the crash occurred, in early 1930, he could see germany was going to go through the wringer. and now he was a brilliant mean but a complete opportunist so he resigned. >> host: rather than fix the

problem. >> guest: exactly. because he did not want to be blamed. he resurfaced three years later in early 1933 as hitler's minister of the economy and head of the reich's bank during the hitler years. and presided over a second economic miracle, a very different one during the hitler years. and it was not based on the gold standard. it was not based on germany rejoining an open economy. it was based on sort of a model of germany basically pulling itself up and arming itself by sort of pulling itself up by its boot straps. and he invented a whole sort of system of running the economy that worked within those terms. in 1939 he fell out with goering because he felt germany was spending too much on armaments.

then was sort of involved with the german resistance movement on the periphery during the hitler years although nothing happened to him. after the july 1944 plot against hitler he was arrested and sent to dachau. in 1945, he was liberated by the americans. and instead of greeting him as a hero, they arrested him. and he was one of the central figures tried at nuremberg and was one of the three people who was acquitted. so, you know, this guy had nine lives. and he ended up being an economic -- sort of setting up his own bank and being an economic consultant to third world countries during the '50s. and lived till a ripe old age and died in 1970. he had an up and down career. >> host: to say the least. >> guest: yeah.

the french head -- head of the french central bank was -- to a large extent he saved france but brought down europe. his whole policies were viewed as being very selfish. he then went and became a banker. and became so disillusioned by politics in the '30s that he became a royalist. being a royalist in france is a very eccentric thing. one-third of 1% of the french believe in restoration of the monarchy or did then. no one does now. >> host: right. >> guest: so he was sort of a quirky character. he had been always sort of an odd fellow. he sort of quintessentially french. he refused to learn english. while being governor of the central bank, he remained mayor

of his town in just outside poitier and would go off every month for a few days to run the affairs --. >> host: this wasn't on the outskirts of paris. i think you said it was 200 miles away. which is quite a distance in those days. >> guest: it was an expression of how sort of uncosmopolitan he was. montegue norman -- his reputation cratered. he went from being viewed as the most important central banker in the world to being a somewhat sad figure. but england being england he remained governor of the central bank until 1944. and, you know, he was -- he's now -- he's the longer standing governor of any central bank in sort of modern history. >> host: and did that despite the fact that he and winston churchill, who became obviously the prime minister and

previously was the chancellor of the exchequer had a strained relationship and churchill blamed him for having forced the disastrous move back to the gold standard. >> guest: oh, exactly. not only that. but he was one of the most -- he really -- he was a supporter of appeasement during the late '30s. now appeasement is sort of an evil word now. it wasn't quite -- it didn't quite have that connotation then. but his view was that another war would basically bankrupt britain. and it would -- it would cause britain to go from being a first rate power to, you know, a second rate power like everyone else. and so he was willing to do almost anything to try to avoid going to war. and that was -- that was basically the philosophy of appeasement in the late 30s most. >> host: it didn't necessarily

mean accepting nazism? >> guest: it was just saying we cannot afford a war. and despite that, he still remained governor of the bank of england in large part because the whole sort of atmosphere change from giving central bankers enormous amounts of authority to basically the power had shifted to the treasuries. and, you know, by the mid to late '30s, power vested in the treasuries and central bankers had a very diminished status. >> host: uh-huh. >> guest: but, you know, out of all of them, if i had to have had dinner with one person, apart from keynes, i would have dinner with norman. >> host: an eccentric and charming. keynes emerges as keynes out of all this. talk a little bit about how that happens.

we think of keynesian economics as being stimulative economics used in fiscal power. how did keynes go from being a sort of an interesting fringe character to becoming a central economic character -- or figure in economic history during this period? what did he do to assume that role? >> guest: pure intellect. essentially he throughout the '20s he was arguing against the gold standard. when that collapsed, he said -- he asked himself the following question. why did the u.s., which was not constrained by the gold standard, still have -- sink into this terrible depression? and what was it about sort of the -- the instability of capitalism that caused a country to, one, go into a depression. and then secondly, not to get out by itself. you know, why weren't the corrective forces able to work? and so he spent the late --

early '30s sort of trying to figure that out. and came up with the general theory of employment, interest and whatever. i mean, that was his masterpiece. and by 19 -- the 1940s was -- had, you know, was the most famous economist in the world. was largely responsible during the second world war. for orchestrating british economic policy, how to pay for the war, without repeating some of the same mistakes that occurred during the first world war. and was the architect of breton woods during the second world war. the whole international arrangement. he'd always put a lot of emphasis on the way international financial arrangements constrained what countries could do. and so he thought it as important as well as sort of reforming the way they managed

their domestic economy to change the whole international financial architecture so that we didn't get into the way the gold standard acted as a straight jacket. >> host: so he goes from being a fringe character to central thinker? >> guest: yeah. and also in the process that's sort of one of the nice things in this whole story. he becomes a very rich man. >> host: because he's a speculator. >> guest: yes. people always say well, he was a currency speculator. he actually didn't make much money from currency speculation. i mean, he went up. he went down. but by 1929 he was back down to his last $50,000. and then in 1932, strongly believing in the roosevelt plan for economic recovery he shifted from being a speculator to being a warren buffett-like long-term investor. bought a whole lot of blue chip stocks at the lows. he actually bought them on

margin. i'm not recommending that. [laughter] >> guest: by the mid-'30s, was worth the equivalent of $30 million today. >> host: so he rode the market up? >> guest: yeah, exactly. >> host: the other part of this that is, i think, painful obvious from the book in that i think it has become painfully obvious to people today is how global the economic system was then and certainly is now. is it more global now than then? did people realize then how interconnected these pieces were? and do you think people realize adequately now how much the connection between the u.s., europe and asia has really become part and parcel of the system? >> guest: yeah. i mean, it is more global now. the central connection then was, you know, europe and the u.s. first of all, we've got many more players. i mean, we did have