Sara S
12-07-2011, 07:40 AM
from delancyplace.com:
In today's excerpt - 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." 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
In today's excerpt - 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." 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