Does the world need a financial Manhattan Project?

• Author: Smick, D.

Excerpt from The Lords of Finance: The Bankers Who Broke the World, by Liaquat Ahamed (Penguin Press, 2009).

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In the early 1940s, the world's best scientific minds took on the challenge of preempting Adolf Hitler 's plans for a nuclear weapon. In a parallel sense, do the world's best financial minds need collectively to assemble to find some global independent means of unraveling today's securitized asset markets and related derivatives products which have paralyzed world credit markets ?

In his new book, Liaquat Ahamed describes a similar exercise in 1912--a coming together of premier experts--which led to the formation of the Federal Reserve.

--D. Smick

The 1907 panic exposed how fragile and vulnerable was the country's banking system. Though the panic had finally been contained by decisive action on [J. Pierpont] Morgan s part, the panic became clear that the United States could not afford to keep relying on one man to guarantee its stability, especially since that man was now seventy years old, semiretired, and focused primarily on amassing an unsurpassed art collection and yachting to more congenial climes with his bevy of middle-aged mistresses.

Shaken by the crisis, the U.S. Congress decided to act. In 1908, it created the National Monetary Commission, consisting of nine senators and nine representatives, and chaired by Senator Nelson Aldrich, to undertake a comprehensive study of the banking system and to make recommendations for its reform. Over the next few years, the commission produced a voluminous set of studies on central banking in Europe but not much else. Memories of how close the system had come to imploding progressively dimmed and the momentum for reform stalled.

In 1912, [Henry] Davison, now a Morgan partner, frustrated by the lack of progress and fearing that without changes the next panic would be even more catastrophic, set out to convene a meeting of experts to develop a formal plan to establish an American central bank--the third in the nation's history. Only five men were invited. Besides Davison himself, there was Senator Aldrich; Frank Vanderlip, the forty-eight-year-old president of the National City Bank, the largest in the country; Paul Warburg, of the well-known Hamburg banking family, a forty-two-year-old partner at Kuhn Loeb who, although he had only just moved to New York, was probably the greatest expert on central banking in the United States; A. Piatt Andrew Jr., the...