Norman was generally wary of the press and was infamous for the lengths to which he would go to escape prying reporters—traveling under a false identity; skipping off trains; even once, slipping over the side of an ocean vessel by way of a rope ladder in rough seas. On this occasion, however, as he prepared to board the liner Duchess of York for Canada, he was unusually forthcoming. With that talent for understatement that came so naturally to his class and country, he declared to the reporters gathered at dockside, “I feel I want a rest because I have had a very hard time lately. I have not been quite as well as I would like and I think a trip on this fine boat will do me good.”

The fragility of his mental constitution had long been an open secret within financial circles. Few members of the public knew the real truth—that for the last two weeks, as the world financial crisis had reached a crescendo and the European banking system teetered on the edge of collapse, the governor had been incapacitated by a nervous breakdown, brought on by extreme stress. The Bank press release, carried in newspapers from San Francisco to Shanghai, therefore came as a great shock to investors everywhere.

It is difficult so many years after these events to recapture the power and prestige of Montagu Norman in that period between the wars—his name carries little resonance now. But at the time, he was considered the most influential central banker in the world, according to the New York Times, the “monarch of [an] invisible empire.” For Jean Monnet, godfather of the European Union, the Bank of England was then “the citadel of citadels” and “Montagu Norman was the man who governed the citadel. He was redoubtable.”

Over the previous decade, he and the heads of the three other major central banks had been part of what the newspapers had dubbed “the most exclusive club in the world.” Norman, Benjamin Strong of the New York Federal Reserve Bank, Hjalmar Schacht of the Reichsbank, and Émile Moreau of the Banque de France had formed a quartet of central bankers who had taken on the job of reconstructing the global financial machinery after the First World War.

But by the middle of 1931, Norman was the only remaining member of the original foursome. Strong had died in 1928 at the age of fifty-five, Moreau had retired in 1930, and Schacht had resigned in a dispute with his own government in 1930 and was flirting with Adolf Hitler and the Nazi Party. And so the mantle of leadership of the financial world had fallen on the shoulders of this colorful but enigmatic Englishman with his “waggish” smile, his theatrical air of mystery, his Van Dyke beard, and his conspiratorial costume: broad-brimmed hat, flowing cape, and sparkling emerald tie pin.

For the world’s most important central banker to have a nervous breakdown as the global economy sank yet deeper into the second year of an unprecedented depression was truly unfortunate. Production in almost every country had collapsed—in the two worst hit, the United States and Germany, it had fallen 40 percent. Factories throughout the industrial world—from the car plants of Detroit to the steel mills of the Ruhr, from the silk mills of Lyons to the shipyards of Tyneside—were shuttered or working at a fraction of capacity. Faced with shrinking demand, businesses had cut prices by 25 percent in the two years since the slump had begun.

Armies of the unemployed now haunted the towns and cities of the industrial nations. In the United States, the world’s largest economy, some 8 million men and women, close to 15 percent of the labor force, were out of work. Another 2.5 million men in Britain and 5 million in Germany, the second and third largest economies in the world, had joined the unemployment lines. Of the four great economic powers, only France seemed to have been somewhat protected from the ravages of the storm sweeping the world, but even it was now beginning to slide downward.

Gangs of unemployed youths and men with nothing to do loitered aimlessly at street corners, in parks, in bars and cafés. As more and more people were thrown out of work and unable to afford a decent place to live, grim jerry-built shantytowns constructed of packing cases, scrap iron, grease drums, tarpaulins, and even of motor car bodies had sprung up in cities such as New York and Chicago—there was even an encampment in Central Park. Similar makeshift colonies littered the fringes of Berlin, Hamburg, and Dresden. In the United States, millions of vagrants, escaping the blight of inner-city poverty, had taken to the road in search of some kind—any kind—of work.

Unemployment led to violence and revolt. In the United States, food riots broke out in Arkansas, Oklahoma, and across the central and south-western states. In Britain, the miners went out on strike, followed by the cotton mill workers and the weavers. Berlin was almost in a state of civil war. During the elections of September 1930, the Nazis, playing on the fears and frustrations of the unemployed and blaming everyone else—the Allies, the Communists, and the Jews—for the misery of Germany, gained close to 6.5 million votes, increasing their seats in the Reichstag from 12 to 107 and making them the second largest parliamentary party after the Social Democrats. Meanwhile in the streets, Nazi and Communist gangs clashed daily. There were coups in Portugal, Brazil, Argentina, Peru, and Spain.

The biggest economic threat now came from the collapsing banking system. In December 1930, the Bank of United States, which despite its name was a private bank with no official status, went down in the largest single bank failure in U.S. history, leaving frozen some $200 million in depositors’ funds. In May 1931, the biggest bank in Austria, the Creditanstalt, owned by the Rothschilds no less, with $250 million in assets, closed its doors. On June 20, President Herbert Hoover announced a one-year moratorium on all payments of debts and reparations stemming from the war. In July, the Danatbank, the third largest in Germany, foundered, precipitating a run on the whole German banking system and a tidal wave of capital out of the country. The chancellor, Heinrich Brüning, declared a bank holiday, restricted how much German citizens could withdraw from their bank accounts, and suspended payments on Germany’s short-term foreign debt. Later that month the crisis spread to the City of London, which, having lent heavily to Germany, found these claims now frozen. Suddenly, faced with the previously unthinkable prospect that Britain itself might be unable to meet its obligations, investors around the world started withdrawing funds from London. The Bank of England was forced to borrow $650 million from banks in France and the United States, including the Banque de France and the New York Federal Reserve Bank, to prevent its gold reserves from being completely depleted.

As the unemployment lines lengthened, banks shut their doors, farm prices collapsed, and factories closed, there was talk of apocalypse. On June 22, the noted economist John Maynard Keynes told a Chicago audience, “We are today in the middle of the greatest catastrophe—the greatest catastrophe due almost to entirely economic causes—of the modern world. I am told that the view is held in Moscow that this is the last, the culminating crisis of capitalism, and that our existing order of society will not survive it.” The historian Arnold Toynbee, who knew a thing or two about the rise and fall of civilizations, wrote in his annual review of the year’s events for the Royal Institute of International Affairs, “In 1931, men and women all over the world were seriously contemplating and frankly discussing the possibility that the Western system of Society might break down and cease to work.”

During the summer a letter that Montagu Norman had written just a few months before to his counterpart at the Banque de France, Clément Moret, appeared in the press. “Unless drastic measures are taken to save it, the capitalist system throughout the civilized world will be wrecked within a year,” declared Norman, adding in the waspish tone that he reserved for the French, “I should like this prediction to be filed for future reference.” It was rumored that before he went off to convalesce in Canada, he had insisted that ration books be printed in case the country reverted to barter in the wake of a general currency collapse across Europe.

At times of crisis, central bankers generally believe that it is prudent to obey the admonition that mothers over the centuries have passed on to their children: “If you can’t say anything nice, don’t say anything at all.” It avoids the recurring dilemma that confronts financial officials dealing with a panic—they can be honest in their public statements and thereby feed the frenzy or they can try to be reassuring, which usually entails resorting to outright untruths. That a man in Norman’s position was willing to talk quite openly about the collapse of Western civilization signaled loud and clear that, in the face of the “economic blizzard,” monetary leaders were running out of ideas and ready to declare defeat.

Not only was Norman the most eminent banker in the world, he was also admired as a man of character and judgment by financiers and officials of every shade of political opinion. Within that bastion of the plutocracy the partnership of the House of Morgan, for example, no one’s advice or counsel was more highly valued—the firm’s senior partner, Thomas Lamont, would later acclaim him as “the wisest man he had ever met.” At the other end of the political spectrum, the British chancellor of the exchequer, Philip Snowden, a fervent Socialist who had himself frequently predicted the collapse of capitalism, could write gushingly that Norman “might have stepped out of the frame of the portrait of the most handsome courtier who ever graced the court of a queen,” that “his sympathy with the suffering of nations is as tender as that of a woman for her child,” and that he had “in abundant measure the quality of inspiring confidence.”

Norman had acquired his reputation for economic and financial perspicacity because he had been so right on so many things. Ever since the end of the war, he had been a fervent opponent of exacting reparations from Germany. Throughout the 1920s, he had raised the alarm that the world was running short of gold reserves. From an early stage, he had warned about the dangers of the stock market bubble in the United States.

But a few lonely voices insisted that it was he and the policies he espoused, especially his rigid, almost theological, belief in the benefits of the gold standard, that were to blame for the economic catastrophe that was overtaking the West. One of them was that of John Maynard Keynes. Another was that of Winston Churchill. A few days before Norman left for Canada on his enforced holiday, Churchill, who had lost most of his savings in the Wall Street crash two years earlier, wrote from Biarritz to his friend and former secretary Eddie Marsh, “Everyone I meet seems vaguely alarmed that something terrible is going to happen financially. . . . I hope we shall hang Montagu Norman if it does. I will certainly turn King’s evidence against him.”

The story of the descent from the roaring boom of the twenties into the Great Depression can be told in many different ways. In this book, I have chosen to tell it by looking over the shoulders of the men in charge of the four principal central banks of the world: the Bank of England, the Federal Reserve System, the Reichsbank, and the Banque de France.

When the First World War ended in 1918, among its innumerable casualties was the world’s financial system. During the latter half of the nineteenth century, an elaborate machinery of international credit, centered in London, had been built upon the foundations of the gold standard and brought with it a remarkable expansion of trade and prosperity across the globe. In 1919, that machinery lay in ruins. Britain, France, and Germany were close to bankruptcy, their economies saddled with debt, their populations impoverished by rising prices, their currencies collapsing. Only the United States had emerged from the war economically stronger.

Governments then believed matters of finance were best left to bankers; and so the task of restoring the world’s finances fell into the hands of the central banks of the four major surviving powers: Britain, France, Germany, and the United States.

This book traces the efforts of these central bankers to reconstruct the system of international finance after the First World War. It describes how, for a brief period in the mid-1920s, they appeared to succeed: the world’s currencies were stabilized, capital began flowing freely across the globe, and economic growth resumed once again. But beneath the veneer of boomtown prosperity, cracks began to appear and the gold standard, which all had believed would provide an umbrella of stability, proved to be a straitjacket. The final chapters of the book describe the frantic and eventually futile attempts of central bankers as they struggled to prevent the whole world economy from plunging into the downward spiral of the Great Depression.

The 1920s were an era, like today’s, when central bankers were invested with unusual power and extraordinary prestige. Four men in particular dominate this story: at the Bank of England was the neurotic and enigmatic Montagu Norman; at the Banque de France, Émile Moreau, xenophobic and suspicious; at the Reichsbank, the rigid and arrogant but also brilliant and cunning Hjalmar Schacht; and finally, at the Federal Reserve Bank of New York, Benjamin Strong, whose veneer of energy and drive masked a deeply wounded and overburdened man.

These four characters were, for much of the decade, at the center of events. Their lives and careers provide a distinctive window into this period of economic history, which helps to focus the complex history of the 1920s—the whole sorry and poisonous story of the failed peace, of war debts and reparations, of hyperinflation, of hard times in Europe and bonanza in America, of the boom and then the ensuing bust—to a more human, and manageable, scale.

Each in his own way illuminates the national psyche of his time. Montagu Norman, with his quixotic reliance on his faulty intuition, embodied a Britain stuck in the past and not yet reconciled to its newly diminished standing in the world. Émile Moreau, in his insularity and rancor, reflected all too accurately a France that had turned inward to lick the terrible wounds of war. Benjamin Strong, the man of action, represented a new generation in America, actively engaged in bringing its financial muscle to bear in world affairs. Only Hjalmar Schacht, in his angry arrogance, seemed out of tune with the weak and defeated Germany for which he spoke, although perhaps he was simply expressing a hidden truth about the nation’s deeper mood.

There is also something very poignant in the contrast between the power these four men once exerted and their almost complete disappearance from the pages of history. Once styled by newspapers as the “World’s Most Exclusive Club,” these four once familiar names, lost under the rubble of time, now mean nothing to most people.

The 1920s were a time of transition. The curtain had come down on one age and a new age had yet to begin. Central banks were still privately owned, their key objectives to preserve the value of the currency and douse banking panics. They were only just beginning to espouse the notion that it was their responsibility to stabilize the economy.

During the nineteenth century, the governors of the Bank of England and the Banque de France were shadowy figures, well known in financial circles but otherwise out of the public eye. By contrast, in the 1920s, very much like today, central bankers became a major focus of public attention. Rumors of their decisions and secret meetings filled the daily press as they confronted many of the same economic issues and problems that their successors do today: dramatic movements in stock markets, volatile currencies, and great tides of capital spilling from one financial center to another.

They had to operate, however, in old-fashioned ways with only primitive tools and sources of information at their disposal. Economic statistics had only just begun to be collected. The bankers communicated by mail—at a time when a letter from New York to London took a week to arrive—or, in situations of real urgency, by cable. It was only in the very last stages of the drama that they could even contact one another on the telephone, and then only with some difficulty.

The tempo of life was also different. No one flew from one city to another. It was the golden age of the ocean liner when a transatlantic crossing took five days, and one traveled with one’s manservant, evening dress being de rigueur at dinner. It was an era when Benjamin Strong, head of the New York Federal Reserve, could disappear to Europe for four months without raising too many eyebrows—he would cross the Atlantic in May, spend the summer crisscrossing among the capitals of Europe consulting with his colleagues, take the occasional break at some of the more elegant spas and watering holes, and finally return to New York in September.

The world in which they operated was both cosmopolitan and curiously parochial. It was a society in which racial and national stereotypes were taken for granted as matters of fact rather than prejudice, a world in which Jack Morgan, son of the mighty Pierpont Morgan, might refuse to participate in a loan to Germany on the grounds that Germans were “second rate people” or oppose the appointment of Jews and Catholics to the Harvard Board of Overseers because “the Jew is always a Jew first and an American second, and the Roman Catholic, I fear, too often, a Papist first and an American second.” In finance, during the late nineteenth century and early twentieth century, whether in London or New York, Berlin or Paris, there was one great divide. On one side stood the big Anglo-Saxon banking firms: J. P. Morgan, Brown Brothers, Barings; on the other the Jewish concerns: the four branches of the Rothschilds, Lazards, the great German Jewish banking houses of Warburgs and Kuhn Loeb, and mavericks such as Sir Ernest Cassel. Though the WASPs were, like so many people in those days, casually anti-Semitic, the two groups treated each other with a wary respect. They were all, however, snobs who looked down on interlopers. It was a society that could be smug and complacent, indifferent to the problems of unemployment or poverty. Only in Germany—and that is part of this story—did those undercurrents of prejudice eventually become truly malevolent.

As I began writing of these four central bankers and the role each played in setting the world on the path toward the Great Depression, another figure kept appearing, almost intruding into the scene: John Maynard Keynes, the greatest economist of his generation, though only thirty-six when he first appears in 1919. During every act of the drama so painfully being played out, he refused to keep quiet, insisting on at least one monologue even if it was from offstage. Unlike the others, he was not a decision maker. In those years, he was simply an independent observer, a commentator. But at every twist and turn of the plot, there he was holding forth from the wings, with his irreverent and playful wit, his luminous and constantly questioning intellect, and above all his remarkable ability to be right.

Keynes proved to be a useful counterpoint to the other four in the story that follows. They were all great lords of finance, standard-bearers of an orthodoxy that seemed to imprison them. By contrast, Keynes was a gadfly, a Cambridge don, a self-made millionaire, a publisher, journalist, and best-selling author who was breaking free from the paralyzing consensus that would lead to such disaster. Though only a decade younger than the four grandees, he might have been born into an entirely different generation.

Despite their role as national institutions determining credit policy for their entire countries, in 1914 most central banks were still privately owned. They therefore occupied a strange hybrid zone, accountable primarily to their directors, who were mainly bankers, paying dividends to their shareholders, but given extraordinary powers for entirely nonprofit purposes. Unlike today, however, when central banks are required by law to promote price stability and full employment, in 1914 the single most important, indeed overriding, objective of these institutions was to preserve the value of the currency.

At the time, all major currencies were on the gold standard, which tied a currency in value to a very specific quantity of gold. The pound sterling, for example, was defined as equivalent to 113 grains of pure gold, a grain being a unit of weight notionally equal to that of a typical grain taken from the middle of an ear of wheat. Similarly, the dollar was defined as 23.22 grains of gold of similar fineness. Since all currencies were fixed against gold, a corollary was that they were all fixed against one another. Thus there were 113/23.22 or $4.86 dollars to the pound. All paper money was legally obligated to be freely convertible into its gold equivalent, and each of the major central banks stood ready to exchange gold bullion for any amount of their own currencies.

Gold had been used as a form of currency for millennia. As of 1913, a little over $3 billion, about a quarter of the currency actually circulating around the world, consisted of gold coins, another 15 percent of silver, and the remaining 60 percent of paper money. Gold coinage, however, was only a part, and not the most important part, of the picture.

Most of the monetary gold in the world, almost two-thirds, did not circulate but lay buried deep underground, stacked up in the form of ingots in the vaults of banks. In each country, though every bank held some bullion, the bulk of the nation’s gold was concentrated in the vaults of the central bank. This hidden treasure provided the reserves for the banking system, determined the supply of money and credit within the economy, and served as the anchor for the gold standard.

While central banks had been granted the right to issue currency—in effect to print money—in order to ensure that that privilege was not abused, each one of them was required by law to maintain a certain quantity of bullion as backing for its paper money. These regulations varied from country to country. For example, at the Bank of England, the first $75 million equivalent of pounds that it printed were exempt, but any currency in excess of this amount had to be fully matched by gold. The Federal Reserve (the Fed), on the other hand, was required to have 40 percent of all the currency it issued on hand in gold—with no exemption floor. But varied as these regulations were, their ultimate effect was to tie the amount of each currency automatically and almost mechanically to its central banks’ gold reserves.

In order to control the flow of currency into the economy, the central bank varied interest rates. It was like turning the dials up or down a notch on a giant monetary thermostat. When gold accumulated in its vaults, it would reduce the cost of credit, encouraging consumers and businesses to borrow and thus pump more money into the system. By contrast, when gold was scarce, interest rates were raised, consumers and businesses cut back, and the amount of currency in circulation contracted.

Because the value of a currency was tied, by law, to a specific quantity of gold and because the amount of currency that could be issued was tied to the quantity of gold reserves, governments had to live within their means, and when strapped for cash, could not manipulate the value of the currency. Inflation therefore remained low. Joining the gold standard became a “badge of honor,” a signal that each subscribing government had pledged itself to a stable currency and orthodox financial policies. By 1914, fifty-nine countries had bound their currencies to gold.

Few people realized how fragile a system this was, built as it was on so narrow a base. The totality of gold ever mined in the whole world since the dawn of time was barely enough to fill a modest two-story town house. Moreover, new supplies were neither stable nor predictable, coming as they did in fits and starts and only by sheer coincidence arriving in sufficient quantities to meet the needs of the world economy. As a result, during periods when new gold finds were lean, such as between the California and Australian gold rushes of the 1850s and the discoveries in South Africa in the 1890s, prices of commodities fell across the world.

The gold standard was not without its critics. Many were simply cranks. Others, however, believed that allowing the growth of credit to be restricted by the amount of gold, especially during periods of falling prices, hurt producers and debtors—especially farmers, who were both.

The most famous spokesman for looser money and easier credit was Williams Jennings Bryan, the populist congressman from the farm state of Nebraska. He campaigned tirelessly to break the privileged status of gold and to expand the base upon which credit was created by including silver as a reserve metal. At the Democratic convention of 1896 he made one of the great speeches of American history—a wonderfully overripe flight of rhetoric delivered in that deep commanding voice of his—in which, addressing Eastern bankers, he declared, “You came to tell us that the great cities are in favor of the gold standard; we reply that the great cities rest upon our broad and fertile plains. Burn down your cities and leave our farms, and your cities will spring up again as if by magic. But destroy our farms and the grass will grow in the city. . . . You shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”

It was a message whose time had come and gone. Ten years before he delivered that speech, two gold prospectors in South Africa, while out for a Sunday walk on a farm in the Witwatersrand, stumbled across a rocky formation that they recognized as gold-bearing reef. It proved to be an outcrop of the largest goldfield in the world. By the time of Bryan’s speech, gold production had jumped 50 percent, South Africa had overtaken the United States as the world’s largest producer, and the gold drought was over. Prices for all goods, including agricultural commodities, once again began to rise. Bryan won the Democratic nomination then and twice more, in 1900 and 1908, but he was never elected president.

Though prices rose and fell in great cycles under the gold standard due to ebbs and flows in the supply of the precious metal, the slope of these curves was gentle and at the end of the day prices returned to where they began. While it may have succeeded in controlling inflation, the gold standard was incapable of preventing the sort of financial booms and busts that were, and continue to be, such a feature of the economic landscape. These bubbles and crises seem to be deep-rooted in human nature and inherent to the capitalist system. By one count there have been sixty different crises since the early seventeenth century—the first documented bank panic can, however, be dated to A.D. 33 when the Emperor Tiberius had to inject one million gold pieces of public money into the Roman financial system to keep it from collapsing.

Each of these episodes differed in detail. Some originated in the stock market, some in the credit market, some in the foreign exchange market, occasionally even in the world of commodities. Sometimes they affected a single country, sometimes a group of countries, very occasionally the whole world. All, however, shared a common pattern: an eerily similar cycle from greed to fear.

Financial crises would generally begin innocently enough with a surge of healthy optimism among investors. Over time, reinforced by cavalier attitudes to risk among bankers, this optimism would transform itself into overconfidence, occasionally even into a mania. The accompanying boom would go on for much longer than anyone expected. Then would come a sudden shock—a bankruptcy, a surprisingly large loss, a financial scandal involving fraud. Whatever the event, it would provoke a sudden and dramatic shift in sentiment. Panic would ensue. As investors were forced to liquidate into a falling market, losses would mount, banks would cut back their loans, and frightened depositors would start pulling their money out of banks.

If all that happened during these periods of so-called distress was that foolish investors and lenders lost money, no one else would have cared. But a problem in one bank raised fears of problems at other banks. And because financial institutions were so interconnected, borrowing large amounts of money from one another even in the nineteenth century, difficulties in one area would transmit themselves through the entire system. It was precisely because crises had a way of spreading, threatening to undermine the integrity of the whole system, that central banks became involved. In addition to keeping their hands on the levers of the gold standard, they therefore acquired a second role—that of forestalling bank panics and other financial crises.

The central banks had powerful tools to deal with these outbursts—specifically their authority to print currency and their ability to marshal their large concentrated holdings of gold. But for all of this armory of instruments, ultimately the goal of a central bank in a financial crisis was both very simple and very elusive—to reestablish trust in banks.

Such breakdowns are not some historical curiosity. As I write this in October 2008, the world is in the middle of one such panic—the most severe for seventy-five years, since the bank runs of 1931-1933 that feature so prominently in the last few chapters of this book. The credit markets are frozen, financial institutions are hoarding cash, banks are going under or being taken over by the week, stock markets are crumbling. Nothing brings home the fragility of the banking system or the potency of a financial crisis more vividly than writing about these issues from the eye of the storm. Watching the world’s central bankers and finance officials grappling with the current situation—trying one thing after another to restore confidence, throwing everything they can at the problem, coping daily with unexpected and startling shifts in market sentiment—reinforces the lesson that there is no magic bullet or simple formula for dealing with financial panics. In trying to calm anxious investors and soothe skittish markets, central bankers are called upon to wrestle with some of the most elemental and unpredictable forces of mass psychology. It is the skill that they display in navigating these storms through uncharted waters that ultimately makes or breaks their reputation.