Lords of Finance: The Bankers Who Broke the World (Hardcover)

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Key Phrases: between chaos and hope, demented inspirations, gold fetters, United States, Bank of England, New York (more...)

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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.

From The Washington Post

The Washington Post's Book World/washingtonpost.com Reviewed by Frank Ahrens

From the 1870s to 1914, the world's developed nations basked in a shimmering age of commerce. The European powers were at peace. Goods flowed home from colonies. The newly reunited United States was growing into muscular adolescence. And all of the world's major economies rested on a seemingly solid base: the gold standard.

But it proved to be a system in a snow globe, easily shattered. World War I broke the idyll and unhooked country after country from dependence on gold. They resorted to printing money to fund the war, leading to massive inflation, unemployment, political instability and general suffering across the Continent.

It's no wonder, then, that after the signing of the armistice in 1918 the world's four most powerful bankers -- a fraternity described in newspapers of the time as "the world's most exclusive club" -- did everything they could to force nations back to the discipline of the gold standard.

It was a ruinous decision. as Liaquat Ahamed notes in Lords of Finance, all the gold mined in history up to 1914 "was barely enough to fill a modest two-story town house." There simply was not enough of it to fund a global conflict or to allow economic recovery afterward.

Ahamed's illuminating and enjoyable book focuses on the four men whose arrogance and obstinacy, he contends, caused the worst depression in modern times: Benjamin Strong Jr., the morphine-using, consumptive governor of the New York Federal Reserve; Montagu Norman, the spiritual seeker at the helm of the Bank of England; Emile Moreau, the xenophobic governor of the Banc de France; and Hjalmer Schacht, the president of Germany's Reichsbank, a Prussian by temperament, if not by birth, whose sensibilities led to a flirtation with the Nazis.

They were the most important central bankers in their respective nations when those four countries controlled most of the world's wealth and one -- England -- was its unrivaled lender. It was a time, almost unrecognizable to us, when the central banks that printed each nation's currency were privately owned, and regulation was unheard of. As a consequence, this handful of men -- who knew each other intimately enough that one was godfather to another's son -- could wield a coordinated, long-lasting and terrible impact on the global economy.

The gold standard's role in the worldwide depression of the 1930s has been probed before, notably in Barry J. Eichengreen's scholarly Golden Fetters (1992). But Ahamed -- a hedge fund adviser, a World Bank veteran and a supple writer -- personalizes the story, exploring how insular relationships led to bad choices. Strong and Norman, for instance, became friends and gained each other's trust through lengthy correspondence. Strong used his influence to secure a loan for England, then prodded Norman to put England back on the gold standard. Norman, in turn, persuaded Strong to push down U.S. interest rates, helping to create the stock bubble that eventually burst in October 1929. When Strong died in 1928, his replacement became Norman's thrall and fell in lock-step with the emphasis on gold, extending the economic agony.

Meanwhile, the unchecked concentration of power in one banker's hands was also roiling Germany. In 1924, Schacht went bizarrely off the farm and attacked his government, releasing public statements accusing the state of losing control of its finances and saying that Germany was too broke to pay additional war reparations. While Schacht partly spoke the truth, his freelancing undermined already shaky public confidence. Later, he sabotaged a loan his nation tried to secure in New York, nearly bringing down the government.

Ahamed damns the dead, placing blame at the feet of men largely lost to history. The risk in writing about forgotten men, however, is that they might not have been interesting enough to be remembered. Lords Of Finance unearths some gossipy details: Norman, for example, was a salad-bar spiritualist who tried a little of this, a little of that (including Theosophy and autosuggestion) and once told colleagues he could walk through walls. But quirky does not equal memorable. These four bankers are about as compelling to us as, say, Treasury Secretary Henry Paulson may be to readers a century from now. My guess is that readers in 2109 will instead remember Warren Buffett and Bill Gates, just as we still know J.P. Morgan and John D. Rockefeller.

Rather than splendid personalities, this book's real advantage is timeliness. Parallels to today's global financial collapse come with regularity throughout, sometimes causing spit-take laughs, sometimes shudders. Heading into the Paris Peace Conference of 1919, one pugnacious English banker proposed forcing Germany to pay reparations of $100 billion, eight times its pre-war gross domestic product. He said he came up with the figure "between a Saturday and a Monday" -- which sounds a lot like the three-page request for $700 billion Paulson whipped up one weekend in September and sprang on Congress.

Until last year, few believed anything would stop U.S. homes from going up in value 10 percent every year. That is, until the sub-prime mortgage crisis exploded. Likewise, in the prosperous and interdependent Europe of 100 years ago, war was considered unthinkable because it would destroy all. By 1917, an entire generation of young male university graduates was dead. And, frankly, the brainpower needed for forward-thinking was lacking. European bankers of the time carried a cavalier ignorance of economics, and that goes double for America's first Federal Reserve directors. The science of monetary policy was still in its infancy, and no one could have expected four dreary bankers to turn suddenly into brilliant, ahead-of-their-time economists.

That role should have fallen to John Maynard Keynes, one of the few heroes of Ahamed's book. Keynes called the gold standard a "barbarous relic" and clearly explained its limits; in 1925, he accused the British banking elite of "attacking the problems of the post-war world with unmodified pre-war views and ideas." But despite being a well-known Cambridge don, Keynes was an outsider, not a member of the world's most exclusive club, and those in power largely ignored his warnings.

Looking at the events of the 1920s and 1930s, one wonders: Could a modern confluence of catastrophes cause another global depression? No major power is likely to return to the gold standard, so that risk is off the table. But is there a comparable systemic problem today, something we refuse to see? Ahamed thinks we're plain lucky that recent financial crises -- in Mexico in 1994, Asia and Russia in 1997-98, the United States beginning in 2007 -- "have conveniently struck one by one, with decent intervals in between." After reading his bracing book, one can only hope that our economy is in the hands of decision makers who are more numerous, less powerful or much wiser than in the past.

Copyright 2009, The Washington Post. All Rights Reserved.

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Product Details

• Hardcover: 576 pages
• Publisher: Penguin Press HC, The (January 22, 2009)
• Language: English
• ISBN-10: 159420182X
• ISBN-13: 978-1594201820
• Product Dimensions: 9.4 x 6.4 x 2 inches
• Shipping Weight: 1.9 pounds (View shipping rates and policies)
• Average Customer Review: 4.3 out of 5 stars  See all reviews (60 customer reviews)
• Amazon.com Sales Rank: #2,131 in Books (See Bestsellers in Books)

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Customer Reviews

Most Helpful Customer Reviews

126 of 136 people found the following review helpful:

5.0 out of 5 stars The Four Bankers of Apocalypse, January 25, 2009

By	Izaak VanGaalen (San Francisco, CA USA) - See all my reviews (TOP 500 REVIEWER)    (REAL NAME)

Liaquat Ahamed, a former World Bank economist and investment fund manager, began research on this book long before the current financial crisis, having no idea of the relevance it would have upon its publication. It is a history of the financial and economic turmoil that began in 1914 and didn't really end until after World War II. He traces the development of this crisis through the lives and actions of four central bankers: Benjamin Strong of the Federal Reserve of New York, Montagu Norman of the Bank of England, Emile Morceau of the Banque de France, and Hjalmer Schacht of the Reichsbank of Germany. The liquidity crisis of 1914 has suddenly become a subject of interest as it bears relevance to today's problems.

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. Of course, the chain of events was more complicated than that and Ahamed recognizes the complexity. Each of the four bankers and their respective countries were pursuing their own agendas as opposed to trying to save the system as a whole, the gold standard was the proverbial straw that broke the camel's back.

Ahamed has written an interesting history of what otherwise would be a fairly dull story. It makes one think about flaws in the system - like sub-prime mortgages, derivatives and the excessive use of credit - and how things could have been different if they had been recognized earlier.

78 of 85 people found the following review helpful:

5.0 out of 5 stars Central Banks in the First 40 years of the 20th Century, February 7, 2009

By	Donald Costello "dcnj1" (Bridgewater, NJ United States) - See all my reviews (REAL NAME)

First, let me say that this is an extremely well written book. I was expecting to have to plow through the usual dreadful writing that finance and economics seems to generate. To my surprise I found a book that was crisp, clear, and interesting. Fun, in fact. Second, the author covers a period and a topic that is sadly neglected in most histories - the inter-war period, and especially the financial events that played a major role in the rise of Hitler and the origins of the Second World War.

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. If we are to judge everyone against the standard of the most brilliant mind in their field, very very few of us are going to come out well.

The most important point the book makes is how factors other than purely economic issues play a role in making economic decisions, but how the consequences of those economic decisions then rebound onto the wider political history of the times. While the book deals with a different time and political landscape, the parallels to our own times are VERY frightening. The author does not emphasize the parallels, and the book was actually completed before many parallel events occurred. To my mind that just makes them more compelling.

63 of 72 people found the following review helpful:

5.0 out of 5 stars Massive Speculation leads to a Depression.Hoover got it right, February 16, 2009

By	Michael Emmett Brady "mandmbrady" (Bellflower, California ,United States) - See all my reviews (TOP 1000 REVIEWER)    (REAL NAME)

The author of this book has done an excellent job in analyzing what the main cause of the Great Depression was.The crucial pages in the book that provide the answer are pp.295-302.It is here that we find Benjamin Strong,in August of 1927, who knew full well that the United States was in the midst of not one ,but two raging, speculative bubbles,one in stocks and the other in real estate,forced through a one half of one percent rate cut that simply fueled the specultive bubbles even further.We find Herbert Hoover,blamed for the Great Depression in the United States,calling the future outcome one hundred percent correctly when he stated that the speculation of the late 1920's would lead to a Depression unless the banker financed speculative build up was stopped.Hoover's attempt to stop the insane rate cut failed.President Coolidge simply pointed out that there was nothing he could do because the Federal Reserve System was independent of the Federal Government.He stated that he had no authority to attempt to get the FRS to reverse the rate cut ,which they eventually did in February ,1928.
Unfortunately,by that time that action was too little and too late.Only a policy of credit restriction applied against speculators might have mitigated the eventual depression.

I highly recommend the book.It puts to rest once and for all the canard ,repeatedly told by Murray Rothbard and Milton Friedman,that the FRS was part of the Federal Government and was controlled by government bureaucrats who told the bankers what to do.It is just the reverse.The bankers were so powerful that they could tell an American president what to do.It is interesting to realize that the bankers have again brought the United States to the edge of financial catastrophe with their highly speculative loan policies