10 shocking things you probably didn’t know about central banking

April 4, 2013

I traveled the world, interviewed countless sources, and pored over thousands of pages of historical documents in the course of reporting my new book, The Alchemists, about how the central bankers came to exercise such great power over the world and how they have used it in the global financial crisis and its aftermath.

TheAlchemistsCover

But forget those broad themes and world-historical events; for those, you can buy the book! These are a few of the stranger and more surprising things I learned during my deep dive into the past and present of the central banks. 

1)   The first central banker in history was pretty shady. Hans Witmacker was born in present-day Latvia, worked in banking as a young man in Amsterdam, and spent time in a debtor’s prison. Then he reinvented himself, moving to Sweden as “Johan Palmstruch,” and apparently ingratiating himself with the ruling class sufficiently that they trusted him enough to start the first central bank. Stockholms Banco ultimately replaced the heavy copper plates that were Sweden’s money with easy-to-exchange paper notes, backed not by copper but by loans. Thus Palmstruch brought the first modern paper money to Europe. It all tumbled apart when there was a run on the bank, and Palmstruch was sentenced to death (the sentence was commuted, but he died shortly thereafter anyway). Good news for Sweden: Their next try at a central bank was more successful; it would become the Riksbank, the country’s central bank to this day.

2)   The floor of the House of Representatives could be just as much of a zoo in 1913 as it is today.  In the debate over whether to pass the Federal Reserve Act, Rep. George Ross Smith of Minnesota carried onto the floor of the House a 7 foot by 4 foot wooden tombstone, a prop meant to “mourn” the deaths of industry, labor, agriculture, and commerce, the result, he said, of putting political appointees in charge of the newly formed central bank. “The great political power which president Jackson saw in the First and Second National banks of his day was the power of mere pygmies when compared to the gigantic power imposed upon [this] Federal Reserve board,” Smith argued. Ron Paul couldn’t have said it better himself.

3)   We should wish for all central bankers to keep a diary. Arthur Burns was chairman of the Federal Reserve in the 1970s, the man who is as culpable as any other for the seemingly out-of-control inflation that took root in that decade. He also kept a heck of a diary, one which shows his growing disillusionment with Richard Nixon, who had appointed him to the Fed chairmanship. “I knew that I would be accepted in the future only if I suppressed my will and yielded completely—even though it was wrong at law and morally—to his authority,” Burns wrote at one particularly dark moment. We can only hope that the current generation of central bankers have been keeping similarly introspective diaries and that they will one day become public.

4)   American economists were awfully prescient about the problems that would eventually crush the euro. Here is Paul Krugman, writing in Fortune in 1998: “a recession develops in part—but only part—of Europe. This creates a conflict of interest between countries with weak economies and populist governments—read Italy, or Spain, or anyway someone from Europe’s slovenly south—and those with strong economies and a steely-eyed commitment to disciplined economic policy—read Germany. The weak economies want low interest rates, and wouldn’t mind a bit of inflation; but Germany is dead set on maintaining price stability at all cost . . . The result is a ferocious political argument, and perhaps a financial crisis, as markets start to discount the bonds of weaker European governments.”

 

Ben Bernanke in 2002, when he became a Fed governor
Ben Bernanke in 2002, when he became a Fed governor

5)   Ben Bernanke is almost certainly the only man to have been mocked for his choice of socks by both the president of the United States and the Washington Post, on separate occasions. Bernanke wore tan socks sometimes as a White House economic adviser before George W. Bush appointed him to the Fed chairmanship, for which the president ribbed him. Our own Dana Milbank had some fun on his behalf over the same tendency in a 2005 column. More broadly, Bernanke had a bit of adjusting to do from his academic life to the highest rungs of power, including trimming his beard more tightly and getting more frequent haircuts. The contrast in photos between 2002 Bernanke, when he came to Washington to be a Fed governor, and 2013 Bernanke, is striking. You can, with reasonable accuracy, guess the year of a Bernanke photo by how tightly cropped his facial hair is.

 . . . and a more closely-trimmed Bernanke today.
. . . and a more closely-trimmed Bernanke today.

 

6)   Jean-Claude Trichet has a really long name. You rarely see the name of the former president of the European Central Bank spelled out in its entirety. There is a reason for this: It is Jean-Claude Anne Marie Louis Trichet.

7)   Mervyn King, the governor of the Bank of England, thinks of monetary policy a bit like conducting an orchestra. He gave an unusually introspective interview with a classical music program years ago, in which he said, “I think the role of conductor combines the ability to be a free spirit, to use imagination, as well as to be an intellectual study, which is what I did for most of my life,” he told Gilbert Kaplan in 2004. “The ability to do that and lead a team, just to get a team of people laying for you. That’s what I’ve tried to do at the Bank of England and what I think I would have much enjoyed doing as a conductor.” He said in the same interview that he had been judged tone deaf as a child.

8)   If there had been a bipartisan financial reform bill, it probably would have involved doing something rather obscene to the Fed. In early talks over what would become the Dodd-Frank Act, Sen. Chris Dodd was looking to find bipartisan agreement with the Republican leader of the banking committee, Richard Shelby. He saw going after the powers of the Federal Reserve as a key part of the answer. Shelby was furious at the Fed for its actions before and during the crisis, and Dodd was angry at the Fed for its failures in protecting consumers. Clipping the central bank’s wings seemed like a pathway to agreement on financial reform more broadly; Shelby’s staff even called this the “[Expletive] the Fed” option. But ultimately, there was no deal to be made, and Dodd got the law through the Senate without Shelby and most of his fellows Republicans.

9)   The means of announcing Fed policy decisions is decidedly low-tech. When the Fed announced its “QE2” program of bond purchases in November 2010, here’s what actually happened: The Fed’s press office faxed the announcement over to a Dow Jones reporter’s fax machine in the press room in the basement of the Treasury Department, where the fax was photocopied and distributed to all the reporters present. They had ten minutes to write their stories before Treasury staffer Sandra Salstrom rang a bell to indicate they were free to distribute the news across the world. In one step toward modernity, by then she used her BlackBerry to count down the time, not, as it had been previously, a cartoon wristwatch. There is some substantive reason for the odd procedure; Treasury staff do not themselves handle or distribute the announcement, instead leaving it to reporters themselves, lest there be an appearance that the Fed's independence was undermined.

10)  In the middle of a crisis, even major decisions happen on the fly. In early November 2011, Greece was looking for a new prime minister, somebody who could come in fresh to lead a coalition government of the center-left and center-right party, have credibility with international creditors, and then step down. Panagiotis Roumeliotis might have been that man. He sat down for lunch at the International Monetary Fund one day, where he was Greece’s representative. His cell phone rang. It was the outgoing prime minister, George Papandreou. “We need you to come to Athens immediately,” he said. “We would like for you to become prime minister.” Roumeliotis gathered his things, called his wife (who was none too pleased with the plan), and was on a 4 p.m. flight from Dulles to Frankfurt. But by the time he landed in Greece, the negotiators had changed their mind; the fact that he was tied to the IMF—even though it was on the Greek government’s behalf—was too fraught politically. Lucas Papademos, the former vice-president of the ECB, would instead become prime minister of Greece at its moment of maximum peril.

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Sarah Kliff | April 4, 2013