Aditi Sahasrabuddhe on the Role Central Banker Relationships Play in Economic Crises

Aditi Sahasrabuddhe is a political scientist at Brown University and the author of the new book, Banker’s Trust: How Social Relations Avert Global Financial Collapse. In Aditi’s first appearance on the show, she discusses how central bankers’ relationships in the 1920’s impacted the global economy, how the ending of those relationships played a part in the Great Depression, how we can apply those principles to the Great Recession and the present, and much more. 

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This episode was recorded on July 30th, 2025

Note: While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected]. 

David Beckworth: Welcome to Macro Musings, where each week we pull back the curtain and take a closer look at the most important macroeconomic issues of the past, present, and future. I am your host, David Beckworth, a senior research fellow with the Mercatus Center at George Mason University. I’m glad you’ve decided to join us. 

Our guest today is Aditi Sahasrabuddhe. Aditi is the author of the new book titled Bankers’ Trust: How Social Relations Avert Global Financial Collapse, and she’s a political scientist at Brown University. Aditi joins us today to discuss how relationships among central bankers of the world are important when dealing with economic crisis. Aditi, welcome to the program.

Aditi Sahasrabuddhe: Thank you so much for having me.

Aditi’s Intellectual Journey

Beckworth: It’s great to have you on. I’ve been looking forward to this because as I read your book it really resonated with me, the importance of human relationships, the importance of people’s ability to communicate and connect with others, the importance of emotional intelligence, not just analytical intelligence. You really highlight this, and this is something I think we take for granted, or we just don’t wrestle with much, as economists, as political scientists. Your whole book is about that. I’m so delighted to get you on to talk about it. Tell me, how did you get interested in looking at central bankers’ personalities, their relationships, from 1920s up to the Great Recession? It’s really fascinating, but what pushed you on this journey?

Sahasrabuddhe: That’s a great question. I think of myself as a child of the Global Financial Crisis. It’s when I was starting out my own undergraduate degree, and it’s partly why I chose to study economics in the first place, just curiosity of what is going on around us and finding better ways to understand it. I’ve also always loved history and political history. Especially at Edinburgh University, there’s a very rich tradition of economic history being taught there, so I had many opportunities to take classes that crossed all of these disciplinary boundaries and developed my curiosity in the field of international political economy, which is a political science subject today.

Since then, while I’ve been doing my research at grad school, I learned a little bit more about the swap program from 2008, which is something I knew a lot less about at the time. I was fascinated. I was so curious about how these arrangements are made, who makes them, how do they come about so quickly, et cetera. I was also, at the same time, provoked by the book, The Lords of Finance.

Beckworth: Oh, yes.

Sahasrabuddhe: I imagine most of your audience will know it well, which drew on the role of, who was doing all of the crisis management in the Great Depression. It really made me wonder, is that a bigger story? Is there some element of those sorts of relationships maybe mattering in 2008? I used my PhD dissertation as the opportunity to investigate that question.

Beckworth: So interesting. You mentioned the currency swap lines, and one of the people that endorses your book on the back is Paul Tucker, former, I believe, deputy governor at the Bank of England. He’s been on the podcast a few times. One of the things he mentioned to me in the past and in his book as well, I was like, “Why didn’t India get a currency swap line?” We’ll come back to this later, but these details matter. Maybe there’s other things at play than just pure economics is what your book really speaks to. You really get into the heart of this issue about relationships and people. Maybe just to kick things off here, I want to talk a little bit more about your theory, your motivation. Let’s give a story. Let’s give the example that you gave at the beginning of the book, of Louis Franck at the National Bank of Belgium. Why is his story a nice example of what you’re getting at in this book?

Louis Franck at the National Bank of Belgium

Sahasrabuddhe: That’s a great question. What I found most exciting about this example is this invoking by central bankers of not just their knowledge of economics and how they do their job, but how they speak, how they think. We see the phrase, “he opens his heart as well as his head.” The way in which central bankers not only think about their interactions, but then talk to their counterparts across borders really struck me in that way. In Belgium, there was already an agreement with the Fed in the 1920s to provide this loan from the Fed to Belgium.

There’s a breach of trust. There’s a personal relationship that is breached by the central bank governor in Belgium, that really affects Benjamin Strong, who was the governor of the Federal Reserve at the time. I think that’s exactly the kind of story that I wanted to tell. I found so many more examples of this, which is, we think a lot about who we work with when we do any of our jobs. When we’re talking about lending billions of dollars overnight across borders, these sorts of relationships matter fundamentally.

Beckworth: It was so interesting to read just right out the gate that Benjamin Strong and then Montagu Norman from the Bank of England, that they were the two leaders, as you point out in this book, we’ll get to later, they were really the two generals guiding the international monetary system during the 1920s. They didn’t care for the previous head of the National Bank of Belgium, Fernand Hautain, if I’m saying his name correctly. They were delighted to get this new person, but it’s just striking to see how they were hung up over personality, over demeanor, how they carried themselves, little things like that that affected whether the National Bank of Belgium got the loan or not.

Relationships and Crisis

Now, you mentioned in your introduction, where you really fleshed out this idea of the importance of relationships, that it really does matter. It’s not just a curiosity, it really does matter, especially in moments of crisis. In fact, that’s in the subtitle of your book, how relationships can make a big difference when we have crisis. You talk about those moments of maybe Knightian uncertainty, those times where we really can’t model or think probabilistically about outcomes. We have nothing to go on but friendships, relationships. One central banker picks up the phone, calls the other one that he may know. Those things matter.

As I was reading that, Aditi, I really began to think, this is why we have all these conferences that central bankers go to. We’re recording this, and in a few weeks, they’re going to have the Jackson Hole Conference in Wyoming. It’s like the most prominent central bank meeting in the world. You might say, “What’s the point of it?” They announce big policy changes. I think maybe even a bigger point is they develop and nurture their relationships, because all the big central bankers are there. G7 meetings, IMF meetings in the spring and the fall, those things are all important for the very point you make in this book. Tell us more about this link between these relationships and crisis.

Sahasrabuddhe: I’m so glad you asked that. Crises are the fundamental conditioning of my argument. This is a story about crisis management. Already, you mentioned the point of radical uncertainty. I’m really looking at times that are not normal times. We’re looking at times in which the typical economic indicators, they can’t tell us what they usually would about how good is the collateral that a country can provide, how strong is the economic management to those indicators of growth and inflation and all the other things that we usually look at.

Are they telling us what we need to actually know? Can they be as indicative as they usually are in more normal circumstances? We can talk about this later on as well, but this idea of radical Knightian uncertainty is actually invoked by central bankers themselves in 2008. They know they’re operating in a moment in which we really aren’t in our typical models of economic decision-making. Something that really struck me in the archives, which is also central to the argument, is we see central bankers talk to each other about how banking is a relational profession.

It is about who’s doing the job, and that most of these cooperative arrangements are not automatic or mechanistic. They come down to the question of does the other person trust us? When we think about we’re in a crisis, countries need to be able to lend each other money in times of liquidity shortage, et cetera, you’re not going to just be able to do that with anyone because the typical indicators may not be as informative. We do fall back on our own judgments and heuristics anyway. One of those would be the type of familiarity that you have with the person you’re interacting with, that will give you a lot more information about, is this a credible borrower, for lack of a better word.

Is this someone who will do everything and make every effort to honor the agreements that we’re making? When we think about crisis context, everything that usually tells us when collateral is good cannot tell us if that collateral is good or not. Often, there may not be enough collateral. You’re putting your relationship and the ability to honor that on the line instead.

Beckworth: When these central banks are in crisis, they want to turn to each other. Sometimes, all they have is the relationship. They don’t have the collateral, the data. Lots of uncertainty. The only thing that is certain is that they know these folks from conferences, from dinners, maybe playing golf together, all those things. As I read this book, it really made me think about Jerome Powell. I know right now he’s under a lot of pressure from President Trump, but I think he is someone who fits the bill well in terms of having really good social skills, emotional intelligence. I remember when he became Fed chair, maybe it was during the pandemic, but he said he was going to wear out the carpets on Capitol Hill.

He was going to visit everyone multiple times, develop relationships. He was smart. He had the political smarts. Not every central banker has that, but I just think he’s exceptional. I would dare say he is probably someone who can handle the pressure right now, where some other person being attacked by Trump may not be able to deal with it as well. Not just Trump, but the pandemic, working with the other central banks. Whenever there’s a crisis, you need someone who’s got good people skills.

This book just really underscores that. If anyone in the Trump administration is watching or listening to this, make sure whoever you pick for the next Fed chair has really good relational and people skills. If you don’t know what that means, read Aditi’s book. We will link to that in our transcript. Make sure you get a copy, read it before you pick your next one. Now, Aditi, this is really good stuff. We’re going to work through some examples from history, the 1920s, the Great Depression, briefly touch on Bretton Woods, and then we’ll come to the present, the 2008, 2009 crisis and 2020.

Central Bank Club

I want to step back while we’re discussing these more theoretical foundations here. The importance of relationships is very clear when you read the book, and it’ll be in our discussions too, but it also opens the door to suspicions, people on the outside looking in. I go all the way back to Andrew Jackson and the Second Bank War. He could not stand Nicholas Biddle, who was the head of the Second Bank of the United States. Nicholas Biddle was this elite person. Something that you really highlight is so fascinating about Montagu Norman, Benjamin Strong, they were elites.

They wanted people who looked like them, who acted like them, who had the similar charisma and sophistication as them. It’s easy for someone from the outside looking in to get suspicious. This is where conspiracy theories come up, because if you’re not on the inside, if you’re not accepted into this club, in fact, you talk about this differentiated access to it, and we’ll come back to that. Not everyone can be in the club. I think that raises concerns. Any thoughts on that point?

Sahasrabuddhe: Many. I can start with the point of prestige, and then maybe go back to—

Beckworth: Sure.

Sahasrabuddhe: —also the point of secrecy, which I guess we’ve talked around when we talk about Jackson Hole and Basel, et cetera. The first part is, prestige is so fundamentally important to how they think about their abilities to execute their jobs, their ability to stay apolitical. This is how they view, not just themselves, but vet their counterparts as well. This comes across throughout the book. It’s come across throughout the interviews I’ve done, which is even now, folks I’ve talked to say, “We try to keep these networks closed. We can’t keep it overly open. There’s needs to limit who has access to various types of agreements, fora, et cetera.”

That ties closely to the point of secrecy. As you mentioned, central bankers will be meeting very soon at Jackson Hole, they meet regularly in Basel, which is another source of, I think, many conspiracy theories. I have very mixed feelings about the point of secrecy, because I think it’s essential when it comes to certain types of policymaking, any leak in monetary affairs could affect how the markets are going to react. That affects everyone’s day-to-day economic means. At the same time, it could really jeopardize the independence of central banks in many ways.

Again, the more we see this in the more conspiratorial way, it’s harder for people who want to clamp down on the independence of the Fed. I think it’s a very difficult dance that they have to choreograph when they think about the theater of how they do their jobs, and how public they are and they can be, and how close they need to be at the same time. 

To your point about J. Powell, I think he’s been so effective in both managing the theater of his position right now and maintaining that independence that they really need to have, but has also built the ties he needs on Capitol Hill and his banking community. Something that struck me about him was, at the start of COVID, there was a lot of concern that Powell may not have the same sort of international collegiality with his counterparts overseas to continue the swaps.

He tested that hypothesis, and we saw that he has that clout to play that same part that his predecessors have done. I think that’s been super important to thinking about his independence, the idea of prestige, how he’s viewed by his counterparts overseas, which are central to the Fed’s ability to play this global role and meet its responsibilities that come with US dollar centrality in the system.

Beckworth: I think there’s this tension here. On one hand, you want to look disciplined, prestigious, in control. A private banker, you want that. Your central banker, you want that. You don’t want someone who’s panicky, who’s going to rile markets up. On one hand, you want to be very tight-lipped, very proper, always wearing a suit. Everything looks just right. On the other hand, though, as you mentioned, relationships are important as well. You’ve got to get to know people. I think Jerome Powell does a good job threading that needle, trying to get both of those done.

It’s not easy. For sure, it’s not easy to do both. Now, this brings me to an example back around the time of the Great Recession. I’ve often thought about. I think I’ve mentioned it on the show before, but Ben Bernanke gave a speech when he was Fed chair. In fact, it was maybe 2007 or 2006, it was leading up to the Great Recession. The speech was on the Treasury yield curve. As you know, Aditi, when that thing gets inverted, historically, it signals a recession is coming.

It was starting to get inverted. What Ben Bernanke said in his speech was, “This is nothing about the economy getting weak. Everybody, calm down. This is all about a term premium adjusting, demand for safe assets,” some other story. I always thought to myself, Ben Bernanke could not say otherwise. Right?

Sahasrabuddhe: Right.

Beckworth: He has to keep calm, that prestige, that look. Even if inside in his heart he knows and he thinks this is actually pointing to a recession, he can’t say that. He has to play the role of the central banker. I do think he said the theater of the position is important, but also the relationships. One other point I just want to bring up with you about this is, as I read this, some people play this role better than others. Benjamin Strong, we’ll talk about it in a minute, played it really well. It really speaks to some of these bigger debates. You’re a political scientist.

Central Bankers and the Butterfly Effect

I’m going to mention a theory here that I know it’s not very popular, like the great man theory of history. This makes you think about that, like, hey, some people are better than others. When they do a good job, do they alter the path of history? That one is more debatable. In my mind, at a minimum, it does speak to another interest I have that’s like chaos theory and butterfly effect stories. One person steps in, makes a difference. 

I’ll give example, Ben Bernanke—Ben Bernanke, we’ll talk about him later, too—I think he was well placed for the Great Recession. He was trained. You change one person, one detail, history is very different. I think that’s another point that I was going through my mind, as I read your book, I was like, “Man, change one detail, one person doesn’t recommend Ben Bernanke, history is very different.” 

I remember at the time when Ben Bernanke was being nominated, Glenn Hubbard was also slated. There was a good chance he was going to get it, John Taylor. Maybe they would have done fine jobs. Who knows what made the difference between those three people, but it was Ben Bernanke. I just think these little changes can have huge differences in outcome, and where would we be today? It could have easily been the case we repeat the Great Depression in 2008, 2009, but we didn’t. Have you ever thought about your work here in terms of butterfly effects and little changes leading to big changes over time?

Sahasrabuddhe: Yes, a lot, actually. To your point about if it weren’t Ben Bernanke, I think that’s a really important question because you’re right that Hubbard or John Taylor would have done a fine job, but they might have also done a different job. Even if they were able to manage the crisis in the same way, there’s every likelihood that it might have been more of a US focus or more on the monetary side, or something else. The policies that are enacted may not have looked the same at all. I found many examples of how these changes in leaders and even in less core central banks have mattered.

When we think about the story of Schacht taking over the Reichsbank in the hyperinflationary period, we see how Germany’s fortunes change under a different leader. Coming back to 2007/08, Bernanke is an expert on the Great Depression. He had learned very specific lessons from his research, from his own PhD thesis. Mervyn King, his counterpart at the Bank of England, had also done a lot of research on historical financial crises from the 1800s. It really helped to have people who were attentive to these historical particularities that need to be avoided in a different circumstance in the future.

That made a huge difference to thinking about what the outcome really looked like. In terms of butterfly effect, it’s hard to really imagine what the world would have looked like with a different central banker. I think, again, history gives us an example when we see the Great Depression and Strong’s sudden death in 1928, or even maybe more subdued examples of who took over the Bank of England in the 1960s during the Bretton Woods’ last few years. It was a big discussion of who’s easy to work with. Do they have good relations with both the bank at home but also internationally? These are things that the central bank actually takes into consideration when they choose their leaders. I’m certain it will matter even when it comes to the discussion of who replaces Powell next year. It’s a perennial question, I think.

Beckworth: You mentioned Benjamin Strong. He died, I believe, of tuberculosis. How did he catch that? I know he had it for a long time. He dealt with it. Some random person that he got it from some time in the past altered history. That’s the butterfly effect, right?

Sahasrabuddhe: I never thought of it that way, yes.

Beckworth: Or let me give you another story. This one is a little more contentious. I’m going to apologize to those out there. I had on the podcast a few years back, Larry Ball from Johns Hopkins, and he had a book on Lehman’s collapse. He argues that the Fed should have stepped in and saved Lehman. All right? He argues that it was still technically solvent, and I forget all the details. His argument is this. The only reason we did not is because Treasury Secretary Hank Paulson said no. Bernanke probably would have were it not for Hank Paulson.

That’s the argument of his book. I know it’s contentious. People disagree with it. Let’s just say, for the sake of argument, his claim is true. One person makes a difference between what is arguably the catalyzing run during the Great Financial Crisis. If you don’t have Lehman, I think arguably you could say it would have been a much milder recession. You wouldn’t have the big financial collapse. That run on the money market account, take that away. Who knows? Very different. Again, why was Hank Paulson appointed? Why did he have such fear of bailing out?

I know his concern. He didn’t want to be the bailout man. You just change the little things like this, and man, you get a very different historical past. All right, enough speculation from me, Aditi. We’re here to talk about your hard work, not my speculations. I’ll have to save those for maybe a novel I’ll write one day of a counterfactual history of Great Recession.

Sahasrabuddhe: That would be fun.

Montagu Norman and Benjamin Strong

Beckworth: Let’s go to the 1920s. You have a really great chapter there, and you have a number of fascinating characters. Some of them will be familiar, some will be new. Montagu Norman, as we talked about, he was governor of the Bank of England. Benjamin Strong, the New York Fed president, but also you could say the effective leader of the Federal Reserve System, and definitely the leader in international finance. Tell us about these two individuals some more. We’ve touched on them, but tell us about their friendship and how they really grew close together.

Sahasrabuddhe: Yes. I think these are two figures who are some of the most interesting historical characters I have ever come across. It’s really interesting to think about how they got to know each other. It was when Strong took over the Federal Reserve Bank of New York presidency, and he was on a mission to go out and meet his counterparts across the pond. He and Norman hit it up when Norman was deputy governor, I think, at the time at the Bank of England. Norman thought about London’s position in the global context as equal to what’s happening in international markets, that he equated domestic policy and ideas in many ways to Britain’s international trajectory and cooperation between central banks.

He was also extremely prestige-oriented. Strong came from the banking background that he liked, that he shared. They were both previously in the private sector. They developed a unique relationship to the point where they went on holiday together. They had met each other’s mothers, they spent Christmases together a lot of the time, and they talked extensively about their fears collectively of what happens when either one is dealing with someone else if one of them retires before the other. This was a very, very unique relationship that, again, if we think about these idiosyncrasies, set up how central banking works today when we think about the quiet bilateral politics that’s going on between countries, the creation of Basel, which was of the BIS, which is, of course, after Strong’s time, but he was certainly part of those conversations in the years before.

I think that they set up the whole idea of ad hoc cooperation. They didn’t ever want anything to be too systematized, too automated between central banks, especially when it came to crisis management and dealing with difficult circumstances between one another. It’s a fascinating relationship that develops over time and also was central to creating this very core network of central bank leaders, where they also included the governors of the Bank of Japan and the Reichsbank once Schacht takes over. They also kept the French out for many, many years until Strong had a little bit more of a say. Again, collectively, they set up this system of secretive ad hoc cooperation between central banks through their relationship.

Beckworth: In today’s parlance, we might say they had a bromance going on.

Sahasrabuddhe: Exactly.

Beckworth: Hanging out. Now, of course, a very sophisticated, proper, elite bromance. Still, it was so amazing to read that their mothers got to know each other. They spent holidays together, constantly staying in touch. The fruit of that investment was they kept the 1920s going. The international monetary order was sustained by that relationship. They were the two most important central banks, and they were able to keep things going. You give a number of examples, German reparations, the Dawes Plan, that I did not know until I read your book about this Japan boom-bust cycle in the ’20s, Britain’s return to gold. All those were dependent upon these two characters, making sure things happen. It’s just so interesting to read all of this. 

Now, you also highlight that central banks during this time really stepped up and took an important role because the governments, after World War I, they stepped back. They were dealing with increased voting rights, enfranchisement, labor market reforms. They were very domestically focused, and they weren’t as concerned internationally. The central bankers filled that role. It was interesting to read as you highlighted that Montagu Norman and Benjamin Strong, they both really pushed for central bank independence. I was like, “Wow, I didn’t realize that was a thing back in the 1920s.” Tell us about that side of it. Why was it necessary for them to fill this void? How did they fill the void?

Sahasrabuddhe: Great question. I’ll go backwards, which is the point of central bank independence being such an old idea, I think, is something that is very underappreciated in a lot of the literature. Historians might say otherwise, because, of course, I think they’ve looked at it a lot more than the rest of us. The idea, a lot of it came from Montagu Norman’s disdain for politicians. He, again, thinking about the idea of prestige and how he viewed the identity of a central banker as being better and above the rest, is very much visible in how he conducted himself, how he conducted his relations with the government, et cetera.

I think this postwar period was an opportunity in which governments were distracted. They also were not on their own capable of returning to the gold standard prewar parity. They needed monetary support, monetary policy support. They needed the banks that hold currency reserves and manage the value of their currencies to do this job. Because Montagu Norman was in charge at the Bank of England at the time, the most important central bank out there, this really enabled him to informally create the idea of central bank independence.

He also not only thought about the idea of it, but also facilitated its spread across the world. Many of these loans that were given out were conditioned on other banks assuming autonomy from their government. One of the big breaches of trust that we see happen in 1925 Belgium, or 1926. It’s that the National Bank of Belgium had not achieved autonomy from political involvement, from the government. That was the thing that really broke its trust with the Federal Reserve in order to get the loan that it wanted.

That partnership was extremely important to a lot of these loans that were then handed out to central banks across borders. They facilitated them through the types of conditions that would be attached, which is, “We’ll only do this if you are able to maintain your space from political power.” This is why Havenstein, Schacht’s predecessor, could not get the kind of loan that he wanted. It’s because they saw him as weak and more like the German government rather than the strong, stoic central bank leader that he should have been.

Beckworth: You mentioned Rudi Havenstein was the central bank leader in Germany during the hyperinflation period. I think many of us have heard of him. Tell us the name of the central banker who takes over after him, that Montagu Norman and Benjamin Strong really embraced with open arms.

Sahasrabuddhe: Yes. That was Hjalmar Schacht, who, for anyone interested, is one of the two figures on the cover of my book, the other one being Montagu Norman. He was someone who Norman, I think, had heard a lot about. They had not met until he took over the Reichsbank, but they both knew that they shared this idea of the importance of prestige of bankers. They were well known in banking circles, Schacht less trusted by them in Germany, but still well known. They both talked about the public as the vulgar masses. Again, that idea that the bankers were above the rest was something that really brought them together.

In a very extreme way, which is on their first meeting, Schacht pretty much asked Norman for a massive loan in order to create the Second Bank that enabled the facilitation of dealing with hyperinflation through the Rentenmarkand the Golddiskontbank. This is not something, again, you might do with someone you’ve just met on New Year’s Day. That’s exactly how they created that bank that was really central to Germany’s ability to come out of that hyperinflationary period. 

Whereas Havenstein had tried the same thing, but in correspondence between Norman and Strong, you can see that they both talk about how they tried to build this personal relationship with him. They talked about the importance of these relationships, more than just automatic and mechanistic cooperation, and that it was not reciprocated by Havenstein. Also, that they saw him as weak and had succumbed to political pressure, whereas Schacht was this polar opposite to that. He was completely embraced by the two people who were trying to build and embed this notion of autonomous central banks at the time.

Beckworth: Yes. What’s interesting about that story is because Montagu Norman and Benjamin Strong do embrace Schacht, the new central bank governor from Germany, the French become uncomfortable with Montagu Norman and Benjamin Strong. Another key character in your book is Émile Moreau from the Bank of France. Tell us about this central banker.

Émile Moreau

Sahasrabuddhe: This is one of my favorite relationships in the book because it’s the opposite of the type that facilitate cooperation. It’s almost like a petulant childish fight between Norman and Moreau. At the end of the chapter, I discuss how they were dealing with one another through Strong. They effectively needed a mediator in order to conduct any central bank activity at the time.

It’s a multitude of factors. First is Norman in general didn’t like the French. In particular, he didn’t like their government. He always said that I have no problem with the bank, but you need to be so far apart from it because I really despise your government. It’s pretty much, I think, verbatim what he said to them at times, but he also didn’t think of him as particularly intelligent. He didn’t think of him as trustworthy, and this relationship was mutual.

When Strong was expanding his own network in Europe, this is what he learns from his British counterparts. You can’t trust the French. This is, of course, well known Anglo-French rivalry, I guess, just playing out through the banking system, but those ideas then also affected these personal relationships because they saw Moreau as more provincial. He had spent a lot more time in Algeria. He’d not been on mainland Europe for a decent amount of his career. He wasn’t very high up at the bank for a while before he takes on the position of the governor, in contrast to the rest of them.

They did, in some ways, Schacht and Norman, that is, really looked down on him. When they would have these ad hoc meetings, which would be specifically informal, so they don’t have to invite the French, they would make sure that he was never involved in any of these secret meetings. The few times he was there, there was pretty much no conversation directly between the French representative and Norman. It was always through Strong, which I think is hilarious because at the end of the chapter, I think I talk about how Strong was trying to get Norman to cooperate with Moreau on some important questions, and he said, “Something like that would prove fatal.” It’s really a very extreme approach.

Beckworth: When I was reading this, I was thinking, “Man, are we back in high school?” It’s like these cliques of central bank governors who stick together, the German, the British, the American, to a lesser extent, but particularly the British and the German, and they really look down, and they don’t invite the French to come participate. As you mentioned, they had these secret meetings, and they’d invite everyone but the French. It was just so striking, and as you said, when they did come, they wouldn’t talk to them much. Wow. It did seem immature, but I guess that’s the way they operated at the time. 

Japan

Talk briefly about the Japan story, because I had not heard this one, that they actually had a postwar boom after World War I. They also had a big earthquake, and after the boom, had a bust. Between the bust and the earthquake, they needed help as well, and they, too, had central bank governors. They had a main governor, a vice governor who knew English, knew modern economic theory. Guess what? They were looked at favorably. They’re part of the club, right? Tell us that fascinating story.

Sahasrabuddhe: I think the Japan case is extremely interesting. I always wanted to learn more about it while I was writing this book. The case of Japan is I think it was soon after the war, they had this industrial boom. I think a lot of investment in building up the economy. The boom in Japan wasn’t really sustainable, and so when it crashed, like any economic cycle, because it was such a large boom, it was also a pretty big collapse. 

They also had a lot of shake-up at the Bank of Japan. I think the governor at the time also died suddenly, and then we see, in a way, Junnosuke take over. He and his vice governor were central to bringing Japan into this Western circle of financiers. They again talk a lot about, as you mentioned, their ability to speak English, their understanding of economics, but also the very active effort of getting to know the American private banking system and bankers at various important banks here. We see this again, understanding amongst the Japanese central bankers that this is about personal relationships, this is about developing support and sympathy for your economic needs from your counterparts that would really enable the kinds of loans that were needed.

When they faced this earthquake suddenly in 1923, this is also when they were recovering from a crisis, so they needed additional support. At this point, Inoue was stepping away from the bank to join the Ministry of Finance because he was called in for more fiscal needs that they needed his expertise in. They pretty much made sure that loan was negotiated with him before he stepped away.

He traveled to the United States to meet with Strong, where then he was not surprised to also meet Norman in New York at the time. He was able to get this massive loan that was through the support of JP Morgan and other large banks in the UK, as well as private banks and branches in Britain. And then he steps away into politics, which was not well received by Benjamin Strong. They lost contact for a few years before he comes back into the bank.

Beckworth: The whole 1920s period for Benjamin Strong and Montagu Norman, the two leaders of the international monetary system at the time, they remind me a lot of the 1990s and Alan Greenspan. Bob Woodward wrote a book, The Maestro. I remember very vividly the lead article in The Economist magazine, and it was titled, “Central Bankers as God.” It was just during this period, everyone hung on the words of Alan Greenspan, and he was revered like a saint.

Benjamin Strong and the Great Depression

I get this is very similar to what was happening in the 1920s, but like all good things, it comes to an end. Let’s transition into that end, because it takes us into the Great Depression, the next part of your book. You really draw the line, I believe, in 1928 with the death of Benjamin Strong. You give three reasons why his death was so pivotal, above and beyond, there’s a fundamental story you could tell as well, but you give this relational story.

Number one, you say Benjamin Strong’s successor at the New York Fed, George Harrison, was much more easily pressured. He was more not rock the boat with the rest of the US government, US Treasury, the Board of Governors, that the Fed takes over. Benjamin Strong’s personality is gone. It’s hard to replace that within the US. Your number two point is it undermines the Anglo-American cooperation. Now, Montagu Norman doesn’t have his buddy he can call up.

Finally, Montagu Norman loses his clout. If he doesn’t have the New York Fed to back him up globally, he loses his clout. Those things really undermine what made the 1920s really work well. Now, Aditi, someone like Barry Eichengreen might push back a little bit more than I just did. He might say, “Well, 1920s, the economies were okay. Therefore, it allowed Montagu Norman and Benjamin Strong to run the show for a decade. Once the economy tanked, it wouldn’t have mattered if Benjamin Strong was here.” There’s this big debate. Did Benjamin Strong make a difference? Did his absence make a difference?

Sahasrabuddhe: That’s a great question. I think this is the chapter that might provoke the most opposition or disagreement, perhaps in the book. I do and I don’t agree with the conventional view that perhaps he didn’t matter to the point that, of course, economic considerations and the climate also mattered in terms of the depression and the US leading to it were bad times. It was difficult for countries to do anything beyond that.

My response to that take would be essentially that I think what I show is the 1920s were not all that good times either. We can see it may not be as big a crisis as the depression, but there are cyclical and spurts of crisis across the world that these bankers are affected by. We’re looking at Britain’s return to gold and a lot of instability before that. We’re looking at the boom and bust in Japan, hyperinflation across Central and Eastern Europe. These were not good times for most people either, and they were able to overcome those political disagreements that we see through Versailles and postwar reparations and negotiations, which became extremely difficult sticking points 10 years later, when some of those problems had been resolved.

I would say that I wouldn’t disagree that the economy mattered, but I wouldn’t say that Benjamin Strong on his own, in his absence, didn’t matter because we can see how policymaking changes in very significant ways under his successor, especially at the international level. I would agree a lot more with the take that maybe there was a lot more continuity when it came to domestic policymaking. Harrison thought about US economic policy and monetary policy very much similarly to Strong. It’s partly why he was chosen to be successor.

When we think about the global repercussions, I think there’s many more channels through which we can see the, as you call it, the butterfly effect of what happens when we take one individual out of the picture. It may not be an immediately visible thing, but there’s so many other changes that happen leading through that.

Beckworth: Right. You could make the argument that had Benjamin Strong survived through the early ’30s, maybe we would not have had the Great Depression. Maybe he would have stepped in and helped the Austrian and German banking sector out. He would have done more for the British gold standard attempts. That was absence, and part of its absence was because you didn’t have a strong personality like Benjamin Strong.

It’s hard to do counterfactual history here. I think that’s a reasonable argument. Milton Friedman and Anna J. Schwartz make this point. Charles Kindleberger do. On the other side is Barry Eichengreen and Peter Temin, as you note. They would make the case that the interwar gold standard quit working. It wasn’t like the classical gold standard in the late 1800s because, again, enfranchisement, political rights, labor movements, the governments had to have more of a domestic focus, not worry about international stabilization or international balance.

The question is, well, could they have threaded that needle between stabilizing domestically and internationally if you had Benjamin Strong there? Again, maybe it would have been something more 2008 if you had Benjamin Strong versus what actually occurred at that time.

Sahasrabuddhe: That’s what I would have expected if the counterfactual did happen, which is Benjamin Strong thought about what’s going on in international markets as a domestic problem. We see a lot of these industrial breakdowns in Germany and Austria. We see so many problems with Britain after it returned to gold and then eventually left gold, as they’re losing all of their reserves. These are fundamentally domestic problems that also had international roots.

Perhaps if you have a policymaker who sees those problems as an international problem, which I think Norman did, but then has the ability to handle them as international problems also, that might have led to quite different outcomes. I think one of the ways we see that breakdown is it’s not that Norman and Harrison didn’t get on in the way that he didn’t get on with Moreau, but there were important communication breakdowns.

They weren’t as open with one another about the state of their economic positions, the concerns that they were facing, the pressures that they were under. So many instances in which Harrison notes that he’s blindsided by the information he receives when he goes to London, because that’s not the full conversation that he had with Norman, who gives him a little bit of the picture. The second thing is Norman also has his own nervous breakdown and goes to Canada to convalesce, where he did meet with Harrison when he’s on the continent, but again, doesn’t tell him the whole story.

At this time, Harrison’s dealing with Norman’s deputy, who Norman never communicated with. One of the things that really breaks down with the relationship is the ability to convey the most essential information that they need to do the kind of policy they were able to do. We can see that there really was an apathetic approach to that type of communication in a time where it’s really necessary.

Beckworth: That’s a great point you make about the Great Depression being an international Great Depression. It wasn’t a bunch of shocks independently happening in different countries. They were all linked together by the international gold standard, and therefore had there been someone who really understood it, like Benjamin Strong around, who also was experienced in it, very different outcome seems plausible. Now, you mentioned this point, and I want to use that to bring in something that I like to talk about, and that is the role that France played in the Great Depression.

This isn’t in your book, I don’t believe, but Doug Irwin wrote this paper about the role France played in the Great Depression. He argues France hoarded all the gold. Typically to make a gold standard work, when gold flows across the border, it affects your stock of money. If you get a bunch of gold into your country, you’re supposed to expand the stock of your money supply. If gold leaves, you shrink it. What happened was France brought all this gold in, and it sterilized it.

He has this paper and some other articles. He notes that between 1926 and 1932, France’s stock of the world’s [gold] grew from 7% to 28%. He also mentions during the very end of the decade, France was absorbing about half of the new stock of gold coming out. France was literally hoarding the gold, creating deflationary pressures around the world. Doug goes on to make the claim that in 1930 and 1931, about half of the global deflation can be attributed to France. He puts the blame on France.

Now, I bring all this up because I wonder if there’s any connection between Émile Moreau—now, he stepped down in 1930. He wasn’t there for the whole time. I wonder if there’s any like bitter feelings like, “You know what, we don’t need you. We’re just going to hoard this gold. We’re going to sterilize gold inflows.” Maybe he didn’t intend to create a global Great Depression. At a minimum, he had no sense of urgency to play by the rules of the game, the global gold center, because these characters hadn’t been nice to them. They hadn’t invited him to meetings. They kept him out of the loop. Why should he go out of his way for the Bank of England or for the Fed?

Sahasrabuddhe: I think that’s definitely a really important point. We see that in Moreau’s actions when Moreau was trying to get France back onto the prewar stabilization of the front. This is something that really upset Norman, too, which is France does it without any international assistance, unlike pretty much every other country. I think what that’s indicative of, which I wouldn’t disagree with, is this large element of this mercantilist approach to isolation and hoarding from the French that perhaps Moreau was pushed to do because he couldn’t rely on support from his counterparts beyond.

I’ve not heard the argument that so much of deflation could be attributed to that. I’m sure that there’s an element of that isolationist approach because we can’t trust the support of our counterparts under Moreau, probably going on in terms of how France approached its late 1920s policy that then had vast repercussions down the line.

We also see this in how they then make it really difficult for Luther to get a loan later on when he needs it for Germany and then also on behalf of Austria, which is they had a lot more power in the 1930s than they did in the 1920s and used it in ways that most of the central bankers historically in the previous decade had not done that quite the same.

Great Financial Crisis

Beckworth: So many fascinating stories. That’s what really makes this book so fun to read. Now, for the sake of time, we’re going to have to skip a part of it. Aditi has a whole section on the Bretton Woods and the introduction of currency swap lines. Let’s jump to more recent times. Let’s jump to the very period that was your awakening, where you cut your teeth on macroeconomic crisis, and that’s the Great Recession or the Great Financial Crisis. Tell us how personal relationships become important in this event.

Sahasrabuddhe: The one thing I would say is I think they matter differently in the sense of it’s not the same degree of doing favors as we’ve seen 100 years ago. I think central banks are a lot more constrained legally, politically, in terms of the rules that they follow. At the same time, they do maintain a lot of discretion. There’s a lot of studies in the economics literature also that shows that, especially when it comes to times of crisis, which is, again, the focus of the book, this discretion of leadership is always heightened.

That’s where we see the personal relations and the relational aspect really come out here, which is, on the one hand, a lot of the swap lines to the G7 economies, perhaps not entirely surprising, these are very important economic partners. But at the same time, how they go about doing these swap lines is a lot more on the relational side. In my interviews, I talked to the bankers who enacted this policy because in this case, I had the opportunity to for many of them.

Again, to note that they are certainly following very different rules today and are doing what they can within the legal limits, is that they do also attest to the fact that they have a lot more discretion in how they make these arrangements, especially in the earliest lines where it’s the earliest moments of this uncertainty where they don’t know if something’s going to work. They don’t want to oversell the policies that they’re enacting. Bernanke had talked about this in his own book.

Many central bankers outside of the US who would be close allies said, “We can’t just pick up the phone and ask for $200 billion overnight if we don’t know who we’re working with.” That kind of trust, I think, really matters in these conditions.

India

Beckworth: Aditi, one of the most interesting cases in this period, at least for me, was who got the lines, and you mentioned G7 are the ones you would expect, but one of the largest economies in the world did not get it, India. As I mentioned earlier, Paul Tucker, who’s endorsed your book, he has made this point many times; this is something that should have been maybe decided by the State Department, not the Fed. Anyhow, what’s your take on that?

Sahasrabuddhe: I had the chance to interview Paul for this book as well. That’s one of the earliest conversations that we had, which was also validating for me because in the US, a lot of what I would hear, and I think is not wrong, but still surprising, is that India is not seen to be a close US partner in the sense of it was not as closely tied to the banking system. If we look at the data, it’s more closely tied than I think Brazil. That’s a country that did get a swap while India didn’t.

We also know that there are countries that have slightly more closed capital accounts that did get swaps, which India didn’t. The arguments of convertibility also were perhaps not as strong, or at least not as convincing to me in my reading to really stand out as an anomaly, especially because when we see how the Fed lays out which of these emerging markets they should give swaps to, they really thought about it as what are the systemically important ones with the GDP of over a trillion dollars. India, again, certainly fits that case. Many reasons to be surprised by this.

On that point, one thing, again, I’m sure amongst many arguments is that I had the chance to talk to the governor of the Reserve Bank of India, who, the first thing he said to me and I write about it in the book is, “I’m not a career central banker.” He had moved into the profession from a previous position as finance secretary. He’d been a lot more involved in the political arm of financial policy in India. He didn’t have the knowledge and the way in which central bankers hold themselves and interact with each other that his counterparts did.

A lot of people I talked to across Europe and the UK also intimated at how these identities are extremely important to how you carry yourselves, how you negotiate, how you broach questions. One of the things central bankers don’t do is publicly criticize one another, which I think Subbarao had done at some point. It creates some tensions between central bankers in the US and here. It’s much harder to develop those relationships of trust that you can see in other cases.

Beckworth: Once again, it’s important for central bankers to be in that environment, in that realm where you go to conferences, you go to meetings with IMF, you do all the things you’re supposed to do as a central banker. You develop relationships, trust, you carry yourself, you’re very careful in what you say in public. Apparently, this one governor did not do that. He did not make the cut when it came time for the currency swap line. So fascinating.

Sahasrabuddhe: It’s a really good example of the continuation of this idea of prestige, I think. Again, no one today, especially from the people I’ve talked to, I can’t imagine any of them talk about their counterparts the way we see Norman write about his. That’s not going to happen in the same way. Those ideas of who’s in the network, again, without sounding conspiratorial, I think it’s a fairly open secret that central banking is a very clubby profession. Again, in a way, deliberately so. If you’re not in that club, it’s much harder to know the intricacies of how they function.

Beckworth: It’s an elite group. When you think about the people who typically get in there, they go to the elite schools. If they’re an academic, they get an elite academic department. If they go to policy, they’re getting top policy jobs. It’s the elite of the elite, they get in there, and there’s a certain decorum, way you carry yourself. It’s important to have that and develop the trust and the relationship.

Jerome Powell the Central Banker

Again, in my mind, this is just a continuation of what happens earlier, just in a different form. Again, the importance of developing the ability to communicate and such. I want to circle back to Powell as we close, because on one hand, again, you got to carry yourself like a central banker, communicate with other central bankers, be in the club. On the other hand, you still have to deal with politicians. This was the issue in 1930s, where domestic politics became more important.

I just think Powell has done a good job balancing both of those requirements for his job. He’s aw-shucks enough guy where he can go down the hall, go golf with somebody, talk shop about biking with someone else. Who knows? Maybe he goes hunting. I’m just making this up. I just have the sense he could be that guy, but then he can also go to a central bank meeting and play the role of central banker. That is a skill set that not everyone has, I guess, is my point. I think Alan Greenspan did it really well. I think Powell did it really well. I just think whoever that is the next Fed chair here in the US, they got to play the game too.

Sahasrabuddhe: They really do. If I think about the policy implications of the book, some people have, and I don’t think unfairly or wrongly so, have jumped to the conclusion that, oh, this needs to stay clubby in order for these swaps to be done when there’s a crisis. My policy recommendation would be even though central banks are domestic institutions, they’re working in an inherently international environment all the time.

I think to your point, Powell knows exactly how to speak the language of domestic politics, but also handle the international aspects of this point. Today, on the day of recording, at least, I listened to what I could of the presser after the rate announcement. He talked so carefully about the risks to inflation that they need to keep track of. One could easily assume that part of it is the tariff policies and everything else that could be affecting the economy, without again explicitly saying that.

He knows how to think about the fact that what happens in the US is not just a function of domestic policy, but also how it’s responded to overseas. I think anyone who takes on his position moving forward is going to have to do that because the rest of the world relies on it. The worry is that the government may not feel that way.

Beckworth: With those words of wisdom, our time is up. Our guest today has been Aditi Sahasrabuddhe. Her book is Bankers’ Trust: How Social Relations Avert Global Financial Collapse. Be sure to get your copy. Aditi, thank you so much for coming on the program.

Sahasrabuddhe: Thank you so much. This was great.

Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. Dive deeper into our research at mercatus.org/monetarypolicy. You can subscribe to the show on Apple Podcasts, Spotify, or your favorite podcast app. If you like this podcast, please consider giving us a rating and leaving a review. This helps other thoughtful people like you find the show. Find me on Twitter @DavidBeckworth and follow the show @Macro_Musings.