Lords of Finance

Ahmed Liquat, “Lords of Finance:  The Bankers Who Broke the World”, Kindle Edition; Penguin Group (2009) 505 pp.

 Lords of Finance: The Bankers Who Broke the World is a 2009 nonfiction book about events leading up to and culminating in the 1930s Great Depression as told through the personal histories of the heads of the Central Banks of the world's four major economies at the time: Benjamin Strong Jr. of the New York Federal Reserve, Montagu Norman of the Bank of England, Émile Moreau of the Banque de France, and Hjalmar Schacht of the Reichsbank. The book was generally well received by critics, and won the 2010 Pulitzer Prize for History. Because the book was published during the midst of the financial crisis of 2007–2010, the book subject matter was seen as very relevant to then-current financial events.

The book discusses the personal histories of the four heads of the Central Banks of the United States, Great Britain, France, and Germany and their efforts to steer the world economy from the period during the First World War until the Great Depression. The book also discusses at length the career of the British economist John Maynard Keynes who criticized many of the policies of the heads of the Central Banks during this time.

One of the main themes of the book is the role played by the central bankers' insistence to adhere to the gold standard "even in the face of total catastrophe." As Joe Nocera, a book reviewer at the New York Times, stated, "the central bankers were prisoners of the economic orthodoxy of their time: the powerful belief that sound monetary policy had to revolve around the gold standard...Again and again, this straitjacket caused the central bankers — especially Norman, gold’s most fervent advocate — to make moves, like raising interest rates, that would allow their countries to hold on to their dwindling gold supplies, even though the larger economy desperately needed help in the form of lower interest rates."

Another theme that runs through the book is how difficult it was to forecast the financial future and how events would influence world events. "Mr. Ahamed’s opinions are made very clear (the Paris Peace Conference’s plan for Germany to pay war reparations is presented as a great blunder), but his overriding idea is that blame cannot be easily assigned: not even the most sophisticated economists of the era could accurately predict disaster, let alone guard against it. The effects of a public herd mentality at the time of the 1929 stock market crash are depicted as unstoppable."

My Notes:

Pg. 11:  Unlike today when central banks are required by law to promote price stability and full employment, in 1914 the single most important objective of the banks was to preserve the value of the currency.  Because the value of a currency was tied, by law, to a specific quantity of gold and because the amount of currency that could be issued was tied to the quantity of gold reserves, governments had to live within their means, and when strapped for cash, could not manipulate the value of the currency.  Inflation therefore remained low.  Joining the gold standard became a ‘badge of honor.’  By 1914, fifty-nine countries had bound their currencies to gold.  Few people realized how fragile a system this was, built as it was on so narrow a base.

Pg. 15:  Bubbles and crises seem to be deep-rooted in human nature and inherent to the capitalist system.  By one count there have been sixty different crises since the early seventeenth century up to and including the latest 2008 crisis which is the most severe for seventy-five years, since the bank runs of 1931-1933. 

Pg. 154:  After WWI, there was a universal consensus among bankers that the world must return to the gold standard as quickly as possible.  However, they did not all take the same route.  The burden of deflation fell on workers, businesses, and borrowers, that of devaluation on savers.  The US and Britain took the route of deflation, Germany and France that of devaluation.

Pg. 164:  WWI left most of the world’s gold in the US and the rest of the world with insufficient reserves to grease the machinery of trade.  The world of the international gold standard had become like a poker table at which one player has accumulated most of the chips, and the game simply cannot get back into play. Pg. 172:   It meant, in effect, that the Federal Reserve was so flush with gold that it had gone from being the central bank of the US to being the central bank of the entire world.

Pg. 167:  The gold standard had only worked in the late nineteenth century because new mining discoveries had fortuitously kept pace with economic growth. 

Pg. 168:  Keynes’s showed that inflation was much more than simply prices going up, but also a subtle mechanism for transferring wealth between social groups—from savers, creditors, and wage earners to the government, debtors, and businessmen. 

Pg. 203:  In France a swindle that was never to be solved discovered $150 million of  National Defense Bonds that were generally issued in a bearer form and therefore untraceable, disappeared mysteriously from the treasury—in relative terms the equivalent today would be a fraud of $30 billion.

Pg. 308:  It was in 1928 with the Dow at around 200 that the market seemed to break free of its anchor to economic reality and began its flight into the outer reaches of make-believe.  During the next fifteen months, the Dow went from 200 to a peak of 380, almost doubling in value.  It was an obvious bubble.  By November 13, 1929 the Dow had settled at around 240—a 40 percent retreat over the eight weeks since the high in September; it would be at 150 in 1932.  The deepest year of the US depression was 1932, production had fallen 25 percent; investment dived a stunning 50 percent; and prices dropped another 10 percent, reaching 75 percent of their 1929 level.  Unemployment shot up beyond ten million—more than 20 percent of the workforce was now without jobs. 

Pg. 451:  On Roosevelt’s first day in office he closed every bank in the country, imposing a bank holiday until Thursday, March 9.  Simultaneously, he suspended the export or private hoarding of al gold in the US.  Most of Roosevelt’s program(s) had little practical effect but great psychological effect.  An unexpected but very effective action in getting the economy moving again was the temporary abandonment of the gold standard and the devaluation of the dollar. 

Pg. 462:  The combination of the renewed confidence in banks, a newly activist Fed, and a government that seemed intent on driving prices higher, broke the psychology of deflation.  Britain had also broken from the dead hand of the gold standard in 1931 and began to recover that year, the US did the same in 1933.