Summer Reading
Book recommendations: Banking, Financial History and Regulation
Summer is now upon us and it is time to dig into that growing pile of books, the ones we haven't gotten around to reading quite yet but have rather set aside for when we have a bit more free time. For many readers this may be just a week or two at the beach in July or August, perhaps the whole month for our more sensible European friends, but in my case ‘summer’ now runs from early June through late October. Which means I have plenty of time to read and reflect. And to share my thoughts in writing with all of you.
My own reading interests are pretty eclectic, but not exceptionally broad or deep. I used to read a lot of fiction, supplemented with period or place-appropriate history, journalism and travel literature. We spent 16 years in London and much of what I read in those years was British or European in origin and/or subject, and was mostly sourced though our local (Holland Park) Daunt Books or from John Sandoe Books in Chelsea, both great examples of what a good book store should and still could be. I miss a lot of things about London, but these two book stores are up near the top of the list.
Now that I am back in the USA, however, I have discovered that there is a lot I do not know about my own country, particularly our history, which has now become a bigger focus in my reading. And as a result of my teaching, I have discovered some holes in my understanding of certain topics that I am paid (admittedly not much) to teach, most notably in the area of financial history and regulation. And so these topics have also become a bigger part of my recent reading.
What I have set out to do in this post is to share with you selected recommendations of books that I have enjoyed, or benefited from, in my own exploration of financial history and banking regulation. This is by no means a comprehensive or even representative list of what you should be reading in this field, but I am confident that you will find some good stuff here, ranging from ‘beach reads’ to more substantial fare. Very little on this list is what I would call ‘academic’, but all of it is educational in some important sense, even the beach reads. And every book on this list will help you in some way to understand better the financial world in which we all live. Which of course is why I write this blog.
So let’s get started.
Beach Reads. The books noted in this section, the ‘beach reads’, are all great fun but they also have substantial educational value, often because of the perverse ‘cultures’ they describe at various banks and financial institutions. This is particularly true of the books from the 1980s, the period during which many of the financial excesses which culminated in the global financial crisis really took root. Younger students please take note: In recommending these books, for example Liar’s Poker or The Predators Ball, I am not suggesting that you should emulate the personal or professional behavior portrayed therein. My objective is quite the opposite in fact. I want you to be appalled, even if you are also laughing at the same time. Think of some of these books as you would the film Animal House, which is not a model for how one is to behave in college, even at Faber (“Knowledge is good”). This is the reason I have included on my list both the Tom Wolfe book and the David Mamet play, works of art which have very little to teach us about the workings of banks or other financial institutions, but which have important lessons for us about the moral rot in parts of the financial services industry and the appalling behavior of some of the people who work there.
What follows is simply a listing of my recommended ‘beach reads’, in more or less reverse chronological order, but I have also included in the text which follows a brief commentary on each of these books if you would like some more insight into why I recommended them.
The Big Short, Lewis (2010); Fool’s Gold, Tett (2010); Too Big to Fail, Sorkin (2009); When Genius Failed, Lowenstein (2001); Liar’s Poker, Lewis (1989); Barbarians and the Gate, Burrough and Helyar (1989); The Predators Ball, Bruck (1989); and Bonfire of the Vanities, Wolfe (1987). I would also recommend the film versions of The Big Short and Too Big to Fail, which I preferred to the books, as well as the film version of the David Mamet play, Glengarry Glen Ross (1992).
Now on to the weightier stuff.
The History of American Banking. The banking system we have in this country was not created in one go out of whole cloth. It developed slowly and rather haphazardly over several centuries, from the days in which we were still a British colony. To understand contemporary American banking, one really must know something about the Bank of England, the First and Second Banks of the United States, the Civil War, ‘free banking’, the gold standard, and American political and economic history. All of this is covered in Scott Nelson’s A Nation of Deadbeats (2012)). Nelson is a former W&M history professor now teaching at the University of Georgia, whose specialty is 19th century American history. In this book he does a masterful job of weaving entertaining stories and characters into the broader narrative of American financial and political history. If you choose to read just one book on American financial history this summer, I would encourage you to make it this one.
Nelson’s book more or less ends with the onset of the 20th century, which is a good place to pick up the history of American banking with two other favorites of mine, Ron Chernow’s The House of Morgan (1990) and Roger Lowenstein’s America’s Bank (2015). Chernow’s book is about the Morgan family’s international banking interests and Lowenstein’s is about the founding of the Fed, stories that are of course closely intertwined in many ways. There is a lot of history (and biography) in these two books and I recommend them both, particularly to any students who are looking to work at JP Morgan or Morgan Stanley. If this is you, drop everything else you are doing and read the Chernow book now. And find a way to talk about it in your interview.
To fill in some of the historical gaps in the story of American banking, I would also suggest a somewhat more academic work, Calomiris and Haber’s Fragile by Design (2014), which was recommended to me by the former president of the Richmond Fed, Jeff Lacker. This book is a bit dense and you should feel free to skip over some of the more conceptual material early in the book, but make sure to read about clearing houses, the regulation of interstate banking, bank consolidation, regulatory reform and the very different structure of the banking systems in other countries. These are all important parts of the story of American banking which are often overlooked.
And for something more artistic, I recommend the filmed version of the Steffano Massini stage play, The Lehman Trilogy, which opened at the UK’s National Theatre in 2018 and then transferred to Broadway. This is a great story and great art, truly financial and social history at its best.
History of the Federal Reserve. The Federal Reserve Bank—technically the Federal Reserve System— is arguably the world’s most important financial institution and we should all know more about it than we probably do. In my Financial Services class, I start students off with Ben Bernanke’s short book, The Federal Reserve and the Financial Crisis (2012), which provides a good historical and institutional overview of the Federal Reserve before we dig more deeply into the Fed’s various activities during the Global Financial Crisis (on which topic, more below).
Another way to approach this topic would be to begin with Lowenstein’s America’s Bank (noted above), which tells the story of the Fed’s founding and of the various political compromises among competing interest groups which resulted in the strangely configured entity we now know as the Federal Reserve System, a monster which even Mary Shelley could not have imagined.
A good sequel to the Lowenstein book is Liaquat Ahamed, The Lords of Finance (2009), an ironically titled book about the three central bankers who arguably drove the global financial system to the brink of disaster during the 1930s. Which of course was not at all what they thought they were doing, an important lesson in itself.
For all of you Reagan Republicans and Fed monetary policy hawks, I can also recommend William Greider, Secrets of the Temple (1987), which goes inside Paul Volcker’s Fed during the years 1979-1987. This was the period in which the Fed effectively broke the back of US inflation, but at a very high economic cost, the credit (and blame) for which today is generally attributed to the leadership and personal will of Chairman Volcker. It is said that there are two things one does not want to see being made—laws and sausages. But after reading this book, you may agree that monetary policy should perhaps be added to the list.
If you enjoy Secrets of the Temple, you might like to pair it with a reading of Greider’s infamous Atlantic magazine article about fiscal policy during the early Reagan administration, The Education of David Stockman, which I have written about in a prior post. As a former Reagan Republican myself, I found both works quite enlightening, but also a bit disconcerting.
If your Fed interest is primarily in the area of monetary policy, I recommend that you read Bernanke’s 21st Century Monetary Policy (2022), which would also be a good paring with Greider’s Secrets of the Temple. I found the Bernanke book a bit dense and duplicative, and at times a tad defensive, but if you get nothing else out of the book you will come to understand why the author is now referred to (often derisively) as “Helicopter Ben”.
Students with serious macro-economic academic or career ambitions will also want to read the Friedman and Schwartz classic, A Monetary History of the United States (1971). I can’t personally recommend this book because I haven’t read it, at least not yet, but it is widely and favorably referenced in much of what I have read. This book may be a bit like the Bible perhaps, more often cited than read (let alone understood), but hopefully it is not like the music of Wagner, which is said to be “better than it sounds”.
If you really want to go whole hog into the history of the Fed, you might check out Allan Meltzer’s multi-volume History of the Federal Reserve. I have not read this yet, but Volume One is sitting on my bookshelf and I plan to get to it later this summer, once I build up the courage.
Contemporary Critiques of the Fed and Financial Regulation. Here I have three books to recommend, all of which I have read this summer. The first is Morgan Ricks, The Money Problem (2016), which I am currently reading. This book explores how our understanding of the term ‘money’ impacts our thinking about financial regulation, including the very topical subjects of deposit insurance and the Fed’s lender of last resort responsibilities. The concept of money is not as clear cut as one might think, and much of what you learned in school is incomplete, but the implications are important, and Ricks explains why.
Peter Conti-Brown’s The Power and Independence of the Federal Reserve (2016) is the best book I have read about the institutional structure and history of the Fed, and I have now read it twice. In a similar vein is Lev Menand, The Fed Unbound (2022), which consolidates some of the material covered by Ricks and Conti-Brown into a critique of Fed ‘independence’, sure to be a topic of heated discussion as we move into the next Presidential election cycle, aka ‘silly season’.
The Bank of England. If the Fed is now the most important financial institution in the world, the Bank of England is among the oldest, founded in the same year as the College of William and Mary, in 1693. I have not read widely about the British banking system, although I have just ordered David Kynaston’s book on the Bank of England, Till Time’s Last Sand (2017). In my mind, however, the classic study of the Bank of England will always be Walter Bagehot’s Lombard Street (1873). Students from my Financial Services class will recall the phrase “Bagehot’s dictum”, which comes from this book. This is a phrase that is thrown around quite a bit in central banking circles, but I would guess that most people who know and use the phrase have never in fact read the book, which is a shame. Lombard Street is a great book and Walter Bagehot was a fascinating man, who lived in very interesting times. He is remembered today as an early editor-in-chief of The Economist magazine as well as the author of Lombard Street and another classic, The English Constitution (1867). The Bank of England and the English constitution played major roles in the development of the United States, and we colonials should probably learn more about this history from across the pond. Reading Lombard Street would be a good place to start.
The Global Financial Crisis. The global financial crisis of 2008 was a major historical event, the ramifications of which are still playing out today. The GFC is a subject about which every serious student or practitioner of finance should have more than a passing familiarity. Deep knowledge is called for here, and fortunately there is a lot of published material to help us educate ourselves. What follows is just a sampling.
As a warm-up, I have noted above three good ‘beach reads’ which are actually quite educational and address various aspects of the GFC: Andrew Ross Sorkin’s Too Big to Fail (the collapse of the US banking system and the government’s disjointed policy response), Michael Lewis’s The Big Short (securitization, sub-prime mortgages and the US housing bubble), and Gillian Tett’s Fool’s Gold (JP Morgan’s development of credit default swaps). These are all good books, which many of you will likely have already read.
I have also read three GFC memoirs: Courage to Act (Bernanke), Stress Test (Geithner) and On the Brink (Paulson), each of which has its merits, particularly if you are interested in the personalities behind the policies. But in the interests of time and conserving space on your bookshelf, you might instead prefer to read the subsequent book written collaboratively by the same three authors, Firefighting: The Financial Crisis and Its Lessons (2019). However if you are in fact more interested in the personalities than the policies, you might also like to watch the video documentary, Hank: Five Years from the Brink (2013), which I found to be a fascinating study of a fascinating man, who may or may not have been the right person for the job as US Treasury Secretary during the GFC.
Among the many other books written about the GFC, I would highlight four: David Wessel’s In Fed We Trust (2009), Joe Stiglitz’s Freefall (2010), Neil Irwin’s The Alchemists (2013) and Alan Blinder’s After the Music Stopped (2013). It has been quite a while since I read these books, but I recall thinking that all of them were solid books written by knowledgeable authors, most notably Blinder, who was a former vice-chair of the Fed and as a result was very informed about the mechanics of the Fed’s operations during this period. If you choose to read just one of these books, I would make it Blinder’s, in part because of his prior role at the Fed and in part because the later publication date allows him to comment on the subsequent stages of the GFC, particularly its impact in Europe.
For those of you who wish to do an even deeper dive into the GFC, I should also mention the Financial Crisis Inquiry Report published by the US Congress in 2011. I have read (or at least skimmed) this report cover to cover and there is a lot of good stuff here, but it comes with some clear political spin in both the majority (Democratic) and minority (Republican) reports. So by all means dip into this document, but evaluate its contents with a skeptical eye.
Banking in the 1980s and 1990s. No study of the GFC would be complete without at least noting the failure ten years earlier of the giant hedge fund Long-Term Capital Management, a story well told in Roger Lowenstein’s When Genius Failed (2001). The LTCM fiasco was the logical culmination of many troubling trends in the US banking industry which came to fruition during the 1980s and 1990s. And so you may want to pair your reading of the Lowenstein book with Michael Lewis’s Liar’s Poker (1989), a fun romp set at my old firm Salomon Brothers, from whence came many of the ‘geniuses’ who built and blew up first Salomon and then LTCM.
The 1980s were also the decade of the junk bond financed hostile takeover boom, and here I can recommend two fun books: Burrough and Helyar’s Barbarians at the Gate (1989), about the leveraged buyout of RJR (the bidding for which was ‘won’ by KKR), and Connie Bruck’s The Predator’s Ball (1989), about Michael Milken and his firm Drexel Burnham Lambert, who were at the center of much of the most controversial investment banking activity from this period.
For a more literary perspective on the excesses of this era in banking and the broader financial services industry, two works come immediately to mind: Tom Wolfe’s Bonfire of the Vanities (1987) and David Mamet’s Glengarry Glen Ross (1992 film version). Both of these works made me squirm at the time I first experienced them, as they struck a little close to home. But I suppose that was the authors’ intent; good art is supposed to challenge us, not make us comfortable.
Financial Risk and Speculation. Here I have three recommendations, all of which are fun reads. The first is Peter Bernstein, Against the Gods: The Remarkable Story of Risk (1998), a book which many of my students have read and loved over the years. Peter Bernstein was quite a polymath and this book is a quirky study of how our understanding of ‘risk’ has evolved over a long period of time. The second book is Nasim Taleb’s The Black Swan (2007), which describes how even today we still think wrongly about the risk of highly improbable but very consequential events, including financial crises. And the third is Edward Chancellor’s Devil Take the Hindmost: A History of Financial Speculation (2000), which documents periods of extreme financial speculation over some three hundred years, from 17th century London to Japan in the 1980s. I am just now dipping into this book, but have enjoyed it so far and have been quite impressed with how little some things have changed.
Book Reviews. In Arthur Miller’s play All My Sons (1946), there is a great line from a character who never buys books but always reads book reviews, because he wants to stay “abreast of [his] ignorance”. Well I do buy books, lots of them, but I can’t read everything that is published, nor would I want to. And so I too read a lot of book reviews. And so far it seems to be working. My ignorance has remained quite intact and I am keeping fully abreast of it.
The Financial Press. I also read a fair amount of traditional journalism, unlike many of my students who seem increasingly to get their news from social media. And at the top of my list of preferred financial journalist sources are three publications: The Wall Street Journal, The Financial Times and The Economist. Each of these publications has its own distinctive merits, but if I could read just one journal it would be The Economist, which has a rather exclusive cache with extensive and in-depth reporting but a somewhat limited (selective?) circulation. As one former Economist editor wrote about his magazine: “Never in the history of journalism has so much been read for so long by so few”.
Which was true, at least until my blog came along.