Lords of Finance by Liaquat Ahamed.
Published 6:30 am, Thursday, January 22, 2009
As the United States and most of the rest of the world struggle through the economic downturn of 2009, Liaquat Ahamed is an unexpected beneficiary. When he started researching his history of global finance years ago, he almost surely did not realize how relevant it would become upon its January 2009 publication date.
But even without its contemporary relevance, Lords of Finance would qualify as an outstanding book. That’s because Ahamed, with economics degrees from Harvard and Cambridge universities plus 25 years as a professional investment manager, found a fascinating frame for relating global economic history from the beginning of World War I until the dying days of World War II. He built his book around the lives of four nearly forgotten men who wielded power between those wars — the central bankers from the United States (Benjamin Strong, Federal Reserve Bank of New York), England (Montagu Norman, Bank of England), France (Emile Moreau, Banque de France) and Germany (Hjalmar Schacht, Reichsbank).
Relating the life of each man on his way to power constitutes a considerable biographical accomplishment for Ahamed. He characterizes Strong as a policy maker whose “veneer of energy and drive masked a deeply wounded and overburdened man.” Norman is “neurotic and enigmatic,” Moreau “xenophobic and suspicious.” Schacht is “rigid and arrogant but also brilliant and cunning.”
The fifth main character held no official position at a central bank. He was a gadfly from the younger generation, an independent-minded British scholar with unusual ideas. His name — John Maynard Keynes — is invoked today far more frequently than the names of the central bankers.
A lengthy book about the role of central bankers perhaps sounds boring, something to read dutifully but not enthusiastically. Ahamed, however, is a skilled storyteller. He is able to personalize economic history in ways that allow the book to succeed even for lay readers.
The over-arching reality of national and global economics during the period was the gold standard. Nations literally tied the amount of money in circulation to how much gold they possessed, mostly in bank vaults. Considered logically, tying economic policy to gold stores made no sense. But despite the desire of fiscal and monetary policy makers to be viewed as scientists of sorts, such policy making is more art than science no matter how many numbers get crunched.
“Few people realized how fragile a system this was, built as it was on so narrow a base,” Ahamed explains. “The totality of gold ever mined in the whole world since the dawn of time was barely enough to fill a modest two-story town house. Moreover, new supplies were neither stable nor predictable, coming as they did in fits and starts and only by sheer coincidence arriving in sufficient quantities to meet the needs of the world economy. As a result, during periods when new gold finds were lean, such as between the California and Australian gold rushes of the 1850s and the discoveries in South Africa in the 1890s, prices of commodities fell across the world.”
The gold standard died slowly and without an obvious standard to replace it. The twists of the interwoven narratives in the four featured nations are, unsurprisingly, complicated because international relations are always complicated. Readers unfamiliar with economic history will find welcome recognition in the more familiar political history.
For example, as Schacht rose to a position of authority within Germany’s central bank, he could not have totally predicted the impact on his life of pleasing the Nazis, especially Nazi dictator Adolf Hitler.
“When he first came to power, Schacht used to say that he would be willing to make a pact with the devil in order to restore German economic strength [after World War I],” according to Ahamed. “By the late 1930s, he began to fear he had done just that. He never joined the Nazi Party nor did he become a member of Hitler’s inner circle. But as the regime’s abuse of power mounted, he found himself increasingly at odds with the direction of those who ran it.”
The other central bankers featured in the book never had to deal directly with Hitler or anybody else quite as ruthless and insane. But the travails of those bankers mounted, too, and none came to a completely happy end.
The judgment on them can sound harsh. Toward the close of his tour de force, Ahamed remarks that the Great Depression of the 1930s “was caused by a failure of intellectual will, a lack of understanding about how the economy operated.”
It will be interesting to learn, decades hence, whether a different author writes similar words about what might be shaping up as the Great Depression of the early 21st century.