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Lords of Finance: The Bankers Who Broke the World Paperback – December 29, 2009
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Amazon Exclusive: Liaquat Ahamed on the Economic Climate
In December 1930, the great economist Maynard Keynes published an article in which he described the world as living in “the shadows of one of the greatest economic catastrophes in modern history.” The world was then 18 months into what would become the Great Depression. The stock market was down about 60%, profits had fallen in half and unemployed had climbed from 4% to about 10%.
If you take our present situation, 16 months into the current recession, we're about at the same place. The stock market is down 50 to 60 percent, profits are down 50 percent, unemployment is up from 4.5% to over 8%.
Over the next 18 months between January 1930 and July 1932 the bottom fell out of the world economy. It did so because the authorities applied the wrong medicine to what was a very sick economy. They let the banking system go under, they tried to cut the budget deficit by curbing government expenditure and raising taxes, they refused to assist the European banking system, and they even raised interest rates. It was no wonder the global economy crumbled.
Luckily with the benefit of those lessons, we now know what not to do. This time the authorities are applying the right medicine: they have cut interest rates to zero and are keeping them there, they have saved the banking system from collapse and they have introduced the largest stimulus package in history.
And yet I cannot help worrying that the world economy may yet spiral downwards. There are two areas in particular that keep me up at night.
The first is the U.S. banking system. Back in the fall, the authorities managed to prevent a financial meltdown. People are not pulling money out of banks anymore—in fact, they are putting money in. The problem is that as a consequence of past bad loans, the banking system has lost a good part of its capital. There is no way that the economy can recover unless the banking system is recapitalized. While there are many technical issues about the best way to do this, most experts agree that it will not be done without a massive injection of public money, possibly as much as $1 trillion from you and me, the taxpayer.
At the moment tax payers are so furious at the irresponsibility of the bankers who got us into this mess that they are in no mood to support yet more money to bail out banks. It is going to take an extraordinary act of political leadership to persuade the American public that unfortunately more money is necessary to solve this crisis.
The second area that keeps me up at night is Europe. During the real estate bubble years, the 13 countries of Eastern Europe that were once part of the Soviet empire had their own bubble. They now owe a gigantic $1.3 trillion dollars, much of which they won’t be able to pay. The burden will have to fall on the tax payers of Western Europe, especially Germany and France.
In the U.S. we at least have the national cohesion and the political machinery to get New Yorkers and Midwesterners to pay for the mistakes of Californian and Floridian homeowners or to bail out a bank based in North Carolina. There is no such mechanism in Europe. It is going to require political leadership of the highest order from the leaders of Germany and France to persuade their thrifty and prudent taxpayers to bail out foolhardy Austrian banks or Hungarian homeowners.
The Great Depression was largely caused by a failure of intellectual will—the men in charge simply did not understand how the economy worked. The risk this time round is that a failure of political will leads us into an economic cataclysm.
--This text refers to the Hardcover edition.
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Top Customer Reviews
The book is primarily the story of 4 Central Banks - those of the US, England, France, and Germany, and of the heads of those banks. The book actually covers a longer span than the inter-war period, it includes important information about the banks just prior to the First World War, their activities during the war, and extends into the Second World War. The lead-in is especially important, because it explains so much of what happened during the inter-war period.
The events are too complicated to review in detail, but the author explains them well and shows how the personalities of the Bankers as well as the politics of the times influenced events. Let us just say, mistakes were made.
My one quibble with the book is that the author is rather unsparing in his criticism of the bankers. Although this is somewhat justified, I ended up feeling sympathetic to at least the heads of the US Federal Reserve and the Governor of the Bank of England. Their primary fault was an inability to see beyond the conventional economic wisdom of the times. In point of fact, the only person who seemed to get it right during this time was Maynard Keynes.Read more ›
Ahamed's central thesis is that the critical decisions made by these four bankers not only caused the Great Depression but also created the conditions for World War II. The most fateful event of all was the decision to adhere to the gold standard. In retrospect, tying the amount of currency a country has in circulation to the amount of gold it has in its vaults appears arbitrary and nonsensical. However, it seemed like a good idea at the time, it provided a universal standard against which countries could stablize their currencies. Unfortunately it became a straight jacket which gave them little room to maneuver.
When the big four bankers came into power in the mid-1920s, the use of the gold standard actually seemed to be working, currencies were stabalized and capital was once again flowing. The problem however was that there was not enough gold in existence to proide enough capital to finance world trade. According to Ahamed, this was the central flaw in the financial system that led to the Crash of 1929 and the subsequent Great Depression.Read more ›
The author begins the epilogue with this insightful quote but ignores the wisdom of it for most of the preceding chapters.
He acknowledges that Roosevelt "did not even pretend to grasp fully the subtleties of international finance" and that few elements of his New Deal policies "were well thought out, some were contradictory and large parts were ineffectual." He then concludes that the temporary abandonment of the gold standard and the devaluation of the dollar "succeeded beyond anyone's wildest expectations". The conclusion left for the reader seems to be that Roosevelt advocated many foolish polices and, when it came to economics at least, was extremely naive but that since he devalued the dollar he was ultimately vindicated.
The author should have subtitled the book 'How The Gold Standard Broke The World'. Virtually every chapter implies that the gold standard is the explanation behind all the world's economic disruptions. There is no discussion of what the world might have looked like after Roosevelt's policies if there had been no World War, or worse, if the Allies had lost. Without the benefits of supplying and financing the War and subsequent rebuilding of Europe after the War what would have become of the United States economy? Well, I guess we'll never know...or will we?
Given that Keynesian economics is being recycled to address the current economic crisis perhaps we will finally discover whether deficit spending and currency manipulation are truly panaceas or whether this complicated crisis, when looked at in the right way does not become still more complicated.Read more ›
Most Recent Customer Reviews
This book is a great companion to Keynes's "Economoic Consequences of the Peace." One can only wonder at how different the 20th century might have been if the central bankers had... Read morePublished 21 days ago by Tim Cohn
Sorry but could not finish. Lost interest and wonder if these guys were pulling the strings or being affected by world forces.Published 1 month ago by Acciondegracias
Any politician saying we should go back to the 'gold standard' should first read this bookPublished 2 months ago by BJT