Delanceyplace: A European Bank Brings Down The World
Just as Europe is struggling in 2011 to contain a banking crisis, it struggled in 1930 - unsuccessfully - to contain another banking crisis. The results was a key element in turning the slump of 1929 into a worldwide Great Depression. In 1930, a year before the more renowned failure of the Bank of United States sent Americans into a panic, a series of major banking crises had created a worldwide recession which John Maynard Keynes referred to as "The Great Slump of 1930" writes Liaquat Ahamed.
While production around the world had plummeted, there was reasonable cause for optimism. There had been no major financial disaster or bankruptcy - and the U.S., at least, had recovered nicely from a similar slump in 1921.
The optimism turned out to be unfounded as debt problems in Austria swept through Europe and eventually the world economy and became one of the major causes of the Great Depression. "Arnold Toynbee ... would later compare the events of the summer of 1931 to the summer of 1914. Both began with relatively minor events far from the hub of the world that would nevertheless set in train a cascade that plunged out of all control and brought down an entire world order":
On Friday, May 8, the Credit Anstalt, based in Vienna and founded in 1855 by the Rothschilds, with total assets of $250 million and 50% of the Austrian bank deposits, informed the government that it had been forced to book a loss of $20 million in its 1930 accounts, wiping out most of its equity. ... Austria was a small country, about the tenth the size of Germany, with a population of fewer than seven million and a GDP of $1.5 billion. Nevertheless, the news burst like a bombshell upon the City of London and the Bank of England.
Like many German banks, the Credit Anstalt made direct investments in industry, similar to those of a modern private equity firm. It was, however, especially vulnerable not only because it borrowed short term money to finance what were long-term, highly illiquid investments, but also because it had an unusually large amount of foreign borrowing on its books.
Fearing a monetary breakdown in Austria would spread to neighboring countries, Montagu Norman, [Chairman of the Bank of England] was determined to mount an international rescue effort. None of the central bankers had faced an international financial crisis before; they, therefore had to make things up as they went along. In doing so they made two mistakes. Given the scale of the problem, they came up with far too little money; and believing that it was necessary to put together as international a consortium as possible, they did not act quickly enough.
The announcement of the rescue package failed to stabilize the situation, perhaps because more people knew how deep the problem went than the government realized. ... All banks in Hungary were closed for three days. In Danzig and Riga, in Poland, Yugoslavia and Czechoslovakia, banks were suspended. ... Germany faced an economic disaster. ... the collapse of the German banking system in the summer of 1931 sent the economy lurching downward again.
Author: Liaquat Ahamed
Title: Lords of Finance
Publisher: The Penguin Press,
Date: Copyright 2009 by Liaquat Ahamed
pp. 370-372; 384-385
Lords of Finance: The Bankers Who Broke the World
by Liaquat Ahamed by Penguin Press HC, The
Hardcover
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