The Alchemists

Neil Irwin, then an economics reporter and Wonkblog editor at The Washington Post, tells the financial crisis and the euro crisis through the three unelected officials who held the most power in the world economy: Ben Bernanke of the Federal Reserve, Mervyn King of the Bank of England and Jean-Claude Trichet of the European Central Bank.

Irwin interviewed central bankers, finance ministers and dissenters at the Fed, the ECB, the Bank of England and the Bundesbank. Adam Posen, who sat on the Bank of England's Monetary Policy Committee, wrote in Foreign Affairs that the book gets the people and their motives right and presents them fairly. The New York Times praised Irwin's knack for translating central banking into plain English and his grasp of the politics inside and around these institutions, and Kirkus called it the most complete account to date of the central bankers' response to the crisis.

What sets it apart from other crisis books is its international scope and its long historical prologue on how central banking began and what it learned from its failures. It is sympathetic to its subjects, and readers who think the central banks caused or prolonged the crisis will find that case argued more by the dissenters Irwin quotes than by the author.

It is essential background for anyone who trades rates, currencies or bank stocks, or who wants to understand why central bank meetings move every market.

1. Central banks are the lender of last resort. In a panic, the speed and scale of central bank lending matters more than anything else. Bagehot's old rule still applies.
2. Institutions shape responses. The Fed could act quickly; the ECB had to manage 17 governments and a mandate focused on inflation, which slowed its response to the euro crisis.
3. Monetary policy is political. Central bankers are unelected, so every bold move invites a backlash from legislatures, voters and rival officials, which constrains what they can do.
4. Words can move markets. Draghi's pledge to do whatever it takes showed that a credible commitment can calm markets before any money is spent.
5. History repeats with variations. The book's long history of central banking shows that today's tools, from emergency lending to zero rates, grew out of earlier failures.

After an opening scene in August 2007, when the ECB and then the Fed first pumped emergency money into markets, the book unfolds in four parts.

1. Rise of the alchemists, 1656 to 2006. A history of central banking from Johan Palmstruch's Swedish bank and Walter Bagehot's rules for lenders of last resort to the Great Depression, Arthur Burns and the 1970s inflation, the Maastricht treaty that created the euro, Japan's struggle with zero interest rates and the Great Moderation.
2. Panic, 2007 to 2008. Bernanke, King and Trichet coordinate as interbank lending freezes, the crisis deepens through 2008 and the central banks unleash a wall of money after Lehman Brothers fails.
3. Aftermath, 2009 to 2010. The Fed fights for its independence in Congress, Greece's hidden deficits ignite the euro crisis, King weighs in on British fiscal policy, and the Fed launches a second round of quantitative easing.
4. The second wave, 2011 to 2012. The euro crisis spreads after the Deauville agreement between Germany and France, Trichet hands the ECB to Mario Draghi, and Draghi's pledge to save the euro calms markets. Irwin also looks at China's central bank before returning to the Fed's Jackson Hole conference.

When the first fissures became visible to the naked eye in August 2007, suddenly the most powerful men in the world were three men who were never elected to public office. They were the leaders of the world’s three most important central banks: Ben Bernanke of the U.S. Federal Reserve, Mervyn King of the Bank of England, and Jean-Claude Trichet of the European Central Bank. Over the next five years, they and their fellow central bankers deployed trillions of dollars, pounds and euros to contain the waves of panic that threatened to bring down the global financial system, moving on a scale and with a speed that had no precedent.

Neil Irwin’s The Alchemists is a gripping account of the most intense exercise in economic crisis management we’ve ever seen, a poker game in which the stakes have run into the trillions of dollars. The book begins in, of all places, Stockholm, Sweden, in the seventeenth century, where central banking had its rocky birth, and then progresses through a brisk but dazzling tutorial on how the central banker came to exert such vast influence over our world, from its troubled beginnings to the Age of Greenspan, bringing the reader into the present with a marvelous handle on how these figures and institutions became what they are – the possessors of extraordinary power over our collective fate. What they chose to do with those powers is the heart of the story Irwin tells.

Irwin covered the Fed and other central banks from the earliest days of the crisis for the Washington Post, enjoying privileged access to leading central bankers and people close to them. His account, based on reporting that took place in 27 cities in 11 countries, is the holistic, truly global story of the central bankers’ role in the world economy we have been missing. It is a landmark reckoning with central bankers and their power, with the great financial crisis of our time, and with the history of the relationship between capitalism and the state. Definitive, revelatory, and riveting, The Alchemists shows us where money comes from—and where it may well be going.