Why Read It?
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Lords of Finance provides a fascinating insight into the policy failures that led to the Wall Street Crash and the Great Depression.
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It explores the parallels and the differences between the dramatic events that took place in the late 1920s and early 1930s and the global financial crisis that developed in 2008.
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The author gives new insights into how financial crises develop and the enormous impact that central bankers can have on the lives of ordinary people.
Getting Started
The book tells the story of the events that led up to the Wall Street Crash and the subsequent Great Depression through the lives of four central bankers dubbed by the press of the time as belonging to the “most exclusive club in the world.” It describes how the economic disaster unfolded, beginning after the First World War when the Allies, and France in particular, insisted that a bankrupt Germany pay massive reparations. But if the central bankers cannot entirely be blamed for the issue of reparations, they more than anyone else, according to Ahamed, were responsible for the second fundamental error of economic policy in the 1920s: the decision to take the world back on to the gold standard.
Author
Liaquat Ahamed has been a professional investment manager for 25 years. He has worked at the World Bank in Washington, DC, and was the chief executive of the New York-based partnership of Fischer Francis Trees & Watts. He is currently an adviser to several hedge fund groups, including the Rock Creek Group and Rohatyn Group, and is a director of Aspen Insurance. He is also on the board of trustees of the Brookings Institution.
Context
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Ahamed’s painstaking research uncovers the characters of the four Lords of Finance: Benjamin Strong of the Federal Reserve Bank of New York; Montagu Norman of the Bank of England; Émile Moreau of the Banque de France; and Hjalmar Schacht, in charge of Germany’s Reichsbank. Together these four sought to manage the international financial system in the 1920s.
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He describes in gripping prose how, instead of averting a catastrophe and saving the world, the four piloted the global economy into the abyss.
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He analyzes how too loose a monetary policy in the United States created the stock market bubble that preceded the Wall Street Crash.
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He explains why the economic orthodoxies of the time—the nostrum that currencies should be backed by the gold standard and the belief that governments should cut spending during an economic downturn—helped to create the greatest economic disaster the modern world has seen.
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He shows how the central bankers’ belief that struggling banks should be allowed to fail undermined confidence in the financial system and contributed to the economic collapse.
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He demonstrates how the Great Depression led to the rise of Hitler and the Second World War.
Impact
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Many books about the Great Depression are tinder dry. Ahamed’s book is inspired and its timing could not have been better. It is highly readable and provides a gripping account of the terrible downward spiral known as the Great Depression.
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The book describes how it took a noneconomist, but a man with an incisive mind and clear intuition, President Franklin Delano Roosevelt, to realize that what the world needed was inflation, not further measures that would only compound deflation.
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It shows how financial crises are invariably preceded by investor overconfidence and a belief that economic systems have entered a new era that allows stocks to move higher and higher.
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It warns that even before the First World War there was a widespread view that globalization and the increasing interdependence of economies meant that war was no longer a rational option.
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Let us hope that a well-thumbed copy of Lords of Finance lies on the desk of every official of the major central banks today so that they do not make the same blunders as their well-intentioned predecessors.
Quotations
“[By 1932] industrial production in the United States had fallen in half, prices had tumbled by 30%, and national income had contracted from over US$100 billion to US$55 billion.”
“Asked by a reporter in August 1932 if there had ever been anything like this before, Keynes responded: ‘Yes, It was called the Dark Ages, and it lasted four hundred years’.”
“Don’t forget what desperate straits the allies drove us to … Just try to imagine what a cultured people like the Germans had to go though to fall for a demagogue like Hitler … All we wanted was some possibility of export, for trade, to live somehow.”
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