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I am an avid
reader of monetary history. Of late I have been focusing on the monetary events of the 1920s and 1930s. By learning
from the maelstrom that riled the global financial scene during those two tumultuous
decades, I aim to better understand present circumstances because there are many similarities between then and now.
I’ve just finished a fascinating book published in 1955 entitled Confessions of The Old Wizard.
It is the autobiography
of Hjalmar Horace Greeley Schacht, whose improbable name reflects his North Schleswig ancestry and his father’s admiration
of an American newspaper editor.
For those not familiar
with him, Schacht is generally given credit for ending in 1923 the Weimar Republic hyperinflation and putting Germany once again on a sound monetary footing, commendable feats which earned
him the nickname
“The Old Wizard”. He did this first as Commissioner of the Currency
for the Finance Ministry and thereafter
as President of the Reichsbank.
For these achievements, he received worldwide
acclaim as well as fame, if that word accurately describes the popular attention
and respect given to a skilled
central banker.
Schacht’s autobiography contains many stories and anecdotes, including
those of his meetings with dozens of famous people. But Schacht’s
account of a meeting with
Benjamin Strong is one I found particularly important,
shocking even.
Strong was president of the Federal
Reserve Bank of New York from its
creation in 1914 until his death
in 1928. Strong, Schacht,
Montague Norman of England
and Émile Moreau of France were the most powerful and influential central bankers of their time.
Strong was in effect the head of the Federal Reserve because the New
York bank back then dominated the system. Reforms
in the 1930s diminished somewhat
the power of the New York bank, but to this day it
remains vitally important
because it alone of the 12 Federal Reserve
banks transacts with other central banks. For example, there is reportedly
some Bundesbank gold stored
in the Federal Reserve Bank of New York’s vault near Wall Street, which is it often
said contains the world’s largest
accumulation of gold.
It is the same
vault Schacht visited during one of his trips to New
York to meet with
Benjamin Strong. Here is how Schacht relates this remarkable event.
Another
amusing incident arose from the fact that the Reichsbank maintained a not inconsiderable
gold deposit in the Federal
Reserve Bank in New York. Strong was proud to be able to show us the vaults which were situated
in the deepest cellar of
the building and remarked:
“Now, Herr Schacht, you shall see
where the Reichsbank gold
is kept.”
While the staff looked for
the hiding place of the Reichsbank
gold we went through the vaults. We waited several
minutes: at length we were told:
“Mr. Strong, we can’t find the Reichsbank gold.”
Strong was flabbergasted but I comforted him. “Never mind: I believe you when
you say the gold is there. Even
if it weren’t you are good for its
replacement."
Shocking, isn’t it. Clearly, it is bad
enough that the Reichsbank gold could not be found nor,
according to Schacht’s
account, did Strong offer to find it. But regardless whether it could not be located due to bad recordkeeping by the Federal Reserve or because the
gold was not in the vault
is not as significant as Schacht’s nonchalant response
to what he astonishingly calls an “amusing
incident”. Where is
his outrage that the Reichsbank gold could not be located? Why
is there no worry about the disposition of the gold and its safety? After
all, as President of the Reichsbank,
he had responsibility for all of its assets, of which gold is by far the most important.
What can we learn from
this event? Schacht apparently considered friendship to other central bankers and his membership in their exclusive
club to be a higher priority than his responsibility as guardian of a nation’s
gold. Schacht did not question Strong,
so the actual location
and true circumstances of
the Reichsbank gold remained
unknown. This astonishing
incident would not have occurred
if the Reichsbank had instead stored the gold in its own vault.
This article has also been published at Smart
Investor.
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