Lords of Finance: The Bankers Who Broke the World
Selected Book Details
- Paperback
- Edition: Reprint
- Author: Liaquat Ahamed
- Publisher: Penguin (Non-Classics)
- Release Date: December 2009
- ISBN-10: 0143116800
- ISBN-13: 9780143116806
- List Price: $18.00
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Summaries and Customer Reviews provided by Amazon
Summary
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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%.Customer Reviews
Average Rating: 
Test-tube Economics
Rating:
`The Lords of Finance' is about economics in a test tube or large-scale monetary tinkering in response to the upheavals of the first half of the 20th century (WWI, the Depression, etc). It is about how the four leading economic powers, led by the equivalent of four `feds', dealt with economic chaos without an apparent clue as to the forces at work. In a word, the US, UK, France, and Germany had to make it up as they went along, a form of alchemy almost, simply because they didn't have the background we have today. In fact, they created the background we use today to keep the economic ship aright.
I was struck by the vast impact of the punitive reparations meted out to Germany by the post-WWI Treaty of Versailles in 1919. Resultant inflation, for example, was so bad in Germany at one point in the 20's that the exchange rate of reichsmarks to dollars was billions-to-one! Also, the gold standard was considered sacred no matter what was going on, a leading factor in extending the Depression - at least according to this book.
I also learned in passing that even before WWI, war was considered unwise because of massive international economic linkages of imports, exports, loans, and interest rates, facts that we are take for granted today.
The good news out of this misery, if any, is that nowadays economics should be more science and less art - at least if we've learned from our mistakes in bygone eras.
How We Stumbled Into The Great Depression
Rating:
In the middle of a recession there are invariably questions about how we got into it and what we can do to get out of it. Politically, it quickly devolves into a conflict between the market driven laizzez faire economists and the interventionist Keynesian ones. Television and radio infotainers yammer on using their own peculiar jargon that leaves the rest of us, who are not economists, as much in the dark as we were before.
I wanted to know more, so I picked up Liaquat Ahamed's detailed history of how the world stumbled into the Great Depression, "Lords of Finance." Ahamed is a twenty-year veteran of investment banking and some paragraphs have to be read over a few times, but generally it's written for the layman. It comes in at 508 pages, without notes, but it reads like a well-crafted novel.
The main characters - the "Lords" themselves - are Montague Norman of the Bank of England, Hjalmar Schacht of the Reischsbank in Germany, Benjamin Strong of the N.Y. Federal Reserve Bank, and Emile Moreau of the Banque de France. all of whom were well intentioned but ultimately flawed men who were not immune from the kind of gross miscalculations and unwarranted fears that led to the financial disaster of the Great Depression. While a great deal of information may be gleaned from their stories that is applicable to the present one must be cautious: 2010 is not 1929.
Some of the miscalculations early twentieth century central bankers made were over the conduct and financing of World War I. No one in financial circles believed the war would outlast the various governments' ability to pay for it. They were all on the Gold Standard, you see, and the financial resources of each country were tied to their reserves of gold. It was hard to imagine Germany, France and Britain would be so foolish as to burden their countries with massive debt just to keep a war going.
These top-hatted and stiff-collared expert prognosticators, mired as they were in centuries-old financial traditions based on the availability of precious metals, completely overlooked the proclivity of wars (particularly wars between monarchies, empires and single-party republics) to be self-sustaining and self-fulfilling. If wartime governments run out of money, they borrow it, mostly from foreign banks incurring massive debt. If they don't have enough currency, they print it, all to keep the war going toward ultimate victory, at which time all debts will be easily repaid. Or so they thought.
The incipient catastrophes from financing the First World War in so unsustainable a fashion were exacerbated by the enmeshment of world financial interests. In the introduction, Ahmed explains, "Because financial institutions were so interconnected, borrowing large amounts of money from one another even in the nineteenth century, difficulties in one area would transmit themselves throughout the entire system."
Ahamed stops way short, however, of ascribing this financial entanglement to any conspiracy of central banking institutions. In retrospect it may read like a Dan Brown novel, but conspiracies require agreement, and the central bankers in the 1920's could agree on almost nothing. Scrambling to force some post-war order on the economies of their respective countries, they formed alliances, made enemies, forced concessions, engaged in blackmail and all manner of intrigues eventually stumbling into Great Depression through incompetence, a too rigid loyalty to ideological principles, and misguided policy.
The biggest blunder on the road to the Great Depression was the New York Fed's decision to lower interest rates. It may have helped Germany's cash-flow, but it caused massive speculation on Wall Street, as investors borrowed more and more money to purchase stocks, further inflating the bubble that burst on October 29, 1929 - "Black Tuesday."
Ahamed writes, "Their goal is a strong economy and stable prices. This is, however, the very environment that breeds the sort of over-optimism and speculation that eventually ends up destabilizing the economy. In the United States during the second half of the 1920s, the destabilizing force was to be the stock market." (p.280)
We are put in mind of the economic situation in America before the current recession: Overspeculation, easy credit, artificially inflated prices, and a protracted military campaign resulting in massive "bad debt,"* much of which is held by foreign banks, principally China.
In the Depression, as well as today, the main conflict on the road to recovery was,
"Between those who believed that governments could be trusted with discretionary power to manage the economy and those who insisted that government was fallible and therefore had to be circumscribed with strict rules." (p.230)
Traditionalists said Government should keep its hands off the economy and allow the "invisible hand" of the market to determine its course as proposed by eighteenth century economist Adam Smith. Others, principally twentieth century economist Maynard Keynes, said the government must have control over the economy to keep market pressure from destabilizing it.
"The real issue for the [Federal Reserve] governors was that many of the banks closing their doors...had sustained such large losses on their loans that they were ... insolvent, [the governors] made it a principle to let them go under. They failed to recognize that by doing so they were undermining public confidence in banks as a repository of savings and were causing the U.S. credit system to freeze up." (p. 391)
What government aid did come, was too late. By that time, Ahamed writes, "Banks, shaken by the previous two years, instead of lending out the money, used the capital so injected to build up their own reserves."
Ahamed seems to say that when a crisis looms, the injection of funds to shore up failing banks should come sooner rather than later and in sufficient quantity to capitalize the banks and allow them to begin lending. When Adam Smith's "invisible hand" goes arthritic, Maynard Keynes is there to take over the heavy lifting.
Amid the chorus of our own contemporary "know-nothings" who spout partisan absurdities about the government not getting involved in economic policy, or how deficit spending to get the economy out of crises is tantamount to cultural Armegeddon, Ahamed's analysis is a voice of reason. "The Great Depression was caused by a failure of intellectual will, a lack of understanding about how the economy operated. No one struggled harder ... than Maynard Keynes. He believed that ... economists are the "trustees, not of civilization but of the possibility of civilization." (p. 504)
That's something even an artist like me can understand.
*Bad debt is, according to Robert Kiyosaki, debt that does not put money in your pocket.
Absorbing history of a difficult subject by a fine writer
Rating:
Germany funded 90% of World War One through inflation and borrowings, 10% through taxes. A rather painless way to fund a war but only if you win. The pebble in the pond theory of history kicks in: the cause of Germany's collapse in 1933; the pebble being war reparations; the culpable, Britain, France and the United States to a lesser degree. Margaret MacMillan's 2002 best seller "Paris 1919," lays the groundwork for the accusation against Lloyd George, Clemenceau and Wilson, even Foster Dulles. Ahamad's fascinating book focuses on the machinations of the four central bankers of the major powers post World War One. His hero, however, is Maynard Keynes, the brilliant Cambridge scholar and economic gadfly whose soaring reputation dominates modern economic theory a half century after his death in 1946. The dry stuff of monetary and economy theory are simplified, explained, charted and brought to life with enticing details and cameos of the major players. Even minor ones get some billing; Harry Dexter White, Henry Stimson, Rudolph von Havenstein. You are not left with names but with flesh, blood and anecdotes. Of the four bankers. Hjalmar Schacht intrigues, somewhat bizarre, as he joined up with Hitler and then was tried and acquitted at Nuremberg. Ahamad's priceless photo of Hitler and Schacht marching lock step both with tight demonic stares tells all. Germany's inability or refusal to pay the huge bill of war reparations when coupled with its a fragile constitution, divided politics, bitterness and middle classes decimated by inflation doomed it. A whimsical description of FDR and how he daily calculated the price of the dollar concludes the book. In sum, this is really about government's power to debase money. The gold standard was the only plausible defense against the downward spiral in the value of money. Once gone, we have what we have in the world today. A timely read.
Good introduction to the interwar crises
Rating: 
It's a good book as an introduction to the 1920's and early 1930's economic turmoil. The one weakness is the conceit of using the four major central bankers as the focus for the story. It works during the first two thirds of the book. However, it then falters towards the end as the post-1929 crisis reaches a crescendo and the monetary and financial crises slip beyond the grasp of central bankers and land on the laps of politicians. Still, it is useful as an overview of how the four major world economies grappled witht he gold standard in the run-up to the Great Depression.
Did not cover parts of the story that I wanted to know
Rating:
The book is aptly titled, as it is about the four men who controled the major banking systems of the world. However, from the reviews, I had expected more. I expected to gain a better understanding of the causes of the depression and how it either ran its course or was reversed by actions informed by policies. I just didn't get that second part from this book.
Here is what I got from the book: these four men did the best they could. It was not clear to them what could be done, and of course they were bound by the interests of their countries and of the banking system. The payment of reparations from World War I was a big issue (O.k., I need to learn more about this -- Germany started the war, then lost, but was unable to pay. But why did the Germans feel so wronged by being asked to pay?) Keynes came along and said and wrote a lot of things that were not terribly clear at the time, and may not be terribly clear now. Hoover and Roosevelt both probably got a lot right and a lot wrong. Most of the world went off of the gold standard, devalued their currency, and the book ends, presumbaly becasue the banking system is saved.
So, I probably expected more of the book than the author intended to cover. Here are some of the things I wanted to know. First, "Devaluing currency" sounds like inflation to me. Didn't devaluation reduce the value of the savings of the hardworking people who had done the right thing and saved? Second, to me the depression was not just about the banks. What did it take for jobs to come back and the standard of living to rise? The U.S. put people to work when we started supporting England's effort in WWII, then continued to ramp up production during and after the war. Was it the war that got us out of the depression (to the extent that a depression is defined by people not being able to find jobs, or not getting paid enough to support themselves)? If so, can we just periodically gather up a bunch of our stuff and burn it, as the Native Americans did in their Potlatch ceremonies, instead of having wars and getting so many people killed and maimed? Third, did the whole depression occur due to a failure of the banking system, and if so, is there anything we can do to keep this from happening withoug causing some other problem? The author addresses this quesion to some extent in his comment posted above.
I have read that Lords of Finance helps inform the current financial problems. What I take from the curent problem is that no one is willing to act while the bubble is growing. In this phase the speculators want the bubble to continue, the followers jump on so they won't lose out, and finally the prudent jump on because they see that they are losing real value. No wonder people don't want to work and save.
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