LORDS OF FINANCE
The Bankers Who Broke the World
By Liaquat Ahamed

•Sovereign Debt Bubbles
•Wealth Gap & Unemployment
•Long Debt Cycles
•Monetary & Fiscal Policy
•Leads Into World War II

A thread comparing the similarities and differences between the 1930s and 2020s.

This is the story of four central bankers and how their decisions led from the "Roaring Twenties" into the "Great Depression".

•Montague Norman - England
•Benjamin Strong - United States
•Émile Moreau - France
•Hjalmar Schacht - Germany

The story begins at the end of the First World War.

The Treaty of Versailles was signed on June 28, 1919, officially ending the war. The treaty forced Germany to disarm, to make territorial concessions, and to pay reparations to the Allied powers.

Germany was put under such a crushing debt that it would end up taking 92 years to repay. This huge financial pressure led into a period of hyperinflation followed by a global depression.

German resentment led to the rise of Adolf Hitler and eventually the Second World War.

"Germany began the '20s owing some $12 billion in reparations to France and Great Britain; France owed the United States and Britain $7 billion in war debts, while Britain in turn owned $4 billion to the United States."
- Liaquat Ahamed

Before the war, the money supply had been tied to gold reserves. However, during the war a mountain of paper currency had been issued.

The US money supply had doubled, British money supply had doubled, French money supply had tripled, and German money supply had quadrupled.

France, Britain and Germany found themselves depleted of gold reserves, while the US had roughly doubled its gold supply.

This led to the problem of the supply of gold no longer matching the relative sizes of the four economies.

After the war, the four countries and their central bankers did not all choose the same course of action.

The United States and the UK chose deflation.

Germany and France chose inflation.

Germany having little gold and burdened by huge reparations & debts tried to inflate its way out by printing money.

This led to the worst hyperinflation of a major economy in modern times.

To make matters worse, France and Britain depended on Germany's payments in order to pay the United States.

Under the Dawes Plan signed in 1924, the United States began loaning money to Germany.

The US also lowered interest rates in order to encourage the flow of gold back to Europe.

This directly fueled the Roaring Twenties and a US stock market bubble.

In 1928, many of the classic symptoms of a mania were present:

• Concentration at the top of market
• Rise of new amateur speculators
• Financial rationality was abandoned

The "Great Crash" occurred on October 24th, 1929, signaling the beginning of the Great Depression.

The fed actually increased interest rates and decreased the money supply during the Great Depression. Still tied to the gold standard, they tightened monetary policy, and allowed smaller banks to fail.

These policies would further exacerbate the global depression.

Countries began to abandon the gold standard in hopes of printing the money necessary to jump-start their economies.

Facing mounting unemployment and spiraling deflation, Britain abandoned the Gold Standard in 1931 followed by the US in 1933.

After reading Lords of Finance, there are some similarities between the Depression era and today.

Similar to the 1920s, the world is currently in a sovereign debt bubble.

In 2019, global debt-to-gdp hit 322% with total debt reaching all-time highs of $253 Trillion.

Similar to the Depression era, the wealth gap has expanded to levels last seen in the 1930s.

Historically, inequality and large wealth gaps have eventually led to dire consequences. Periods of conflict and social unrest often marked by taxes, revolutions, or wars.

Due to the economic shock of covid19, unemployment over a few months in 2020 has gone from fifty-year-lows to levels last seen during the Depression era.

According to @RayDalio, populism has also reached levels last seen in the 1930s.

In other words, a rebellion of the "common man" against the "elite establishment".

Disenfranchised by the system, voters are voting for anti-establishment movements such as Brexit and Trump.

The 2020s are also taking place during the later stages of @RayDalio's long term debt cycle.

In short, the 1930s was the last time we saw interest rates at zero-or-near-zero and central banks increasing their money supply at this pace.

With interest rates at zero-or-near-zero across the developed world, central banks have the least fuel in their tanks since the late 1930s.

No longer able to lower interest rates, central banks are resorting to buying financial assets financed by the printing of money.

Since the 2008 financial crisis, we've already seen a record expansion of central banks balance sheets.

Modern monetary policy of bailouts for those deemed"too big to fail" is a stark contrast to the fed allowing thousands of banks to fail between 1929-1933.

The 2008 fed response was dwarfed by their response to covid19.

The fed expanded it's balance sheet more in the last three months (+$4.3 Trillion) than it did over the seven years following 2008.

Morgan Stanley sees the Fed’s balance sheet exceeding $10tn by the end of 2021.

The rise of China has created similar tensions between world powers like those that occurred in the 1920's after the Treaty of Versailles.

Today's tension is best seen in the US-China trade war, currency war, and technology war.

https://www.linkedin.com/pulse/big-cycles-over-last-500-years-ray-dalio

In summary, while debt levels, wealth inequality, inflation rates, and the expansion of the money supply are mirroring the Depression era, there are key differences in today's monetary and fiscal response.

In short, "Print the money or trigger the revolution"
- @LukeGromen