Liaquat Ahamed. Lords of Finance: The Bankers Who Broke the World
Who knew that 500 pages about central banking in the interwar years could fly by so quickly? I’ll leave it to economists and historians to assess the accuracy of the story Ahamed tells. What I can say is that the story is well told, moving briskly and with good humour over a complicated series of events. Ahamed structures his account around the lives of four central bankers, for the United States, Britain, France and Germany respectively. A fifth character, John Maynard Keynes, also makes a number of appearances, usually in the role of a gadfly. And there is a sixth item, of such importance to the story that it might as well be a character in its own right: gold.
Going into World War I, the major currencies of the world were on the gold standard. The central bank for a country—that is, the bank with a “monopoly on the issuance of currency”—would issue currency with the promise that it was convertible at a certain fixed rate with gold. Gold had to be held in reserves at a fairly conservative proportion to the total amount of currency in circulation. For a long time, this arrangement had the effect of limiting inflation, and providing a predictable, stable rate of exchange between currencies, which were pegged to the same standard.
The system meant that the supply of credit in an economy—indeed, in the global economy—was tightly correlated with the quantity of gold held in reserve. For a long time, the supply of new gold flowing into the global economy as a result of mining roughly matched the slow expansion of the economy. But this only masked the fact that it made little sense to tie the availability of a precious mineral to the business cycle, with its changing requirements for the availability of credit. As Lord Beaverbrook, the Canadian newspaper man based in Britain and one of the few prominent critics of the gold standard at the time, complained, “[i]t is an absurd and silly notion that international credit must be limited to the quantity of gold dug up out of the ground. Was there ever such mumbo-jumbo among sensible and reasonable men?”
World War I changed things, as it changed so much else. The nations of Europe had plunged into the conflict expecting a brief, successful encounter which would pay for itself in reparations, and emerged bloodied, shaken, and seriously in debt four long years later. The United States, which has a habit of entering world wars a bit on the late side, came out looking very well, and with an absolutely massive imbalance of the world’s gold in its reserves which it had acquired as a lender to many of the other belligerents. For the United States to have remained strictly on the gold standard would have supplied the economy with far more credit than would have been healthy. Meanwhile, Britain had so exhausted its resources that it was for a time after the war unable to honour its obligation to convert its currency into gold, effectively abandoning the gold standard for this period.
As Britain, France and Germany all struggled to put themselves back on a sound economic footing after the war, they dealt in different ways with the return to the gold standard. Britain, against the advice of Keynes, went back on gold as soon as possible, but at an unsustainably high rate of conversion. It was an attempt to regain the global preeminence in banking which Britain had enjoyed prior to the war, but the result was a deeply uncompetitive export market and steep consequent unemployment in Britain. France, by contrast, did rather well by pegging its currency at a fairly low rate. Germany, reeling from the war and unable to cope with the ruinous payments expected of it by the victors, took its economy on an absolutely wild inflationary ride.
Since the inflationary policies of Germany had been made possible in part by its abandonment of the gold standard, the economic chaos of Germany was interpreted by many as a warning of the perils of leaving gold. Without the discipline of gold, it was thought, governments, especially democratically elected ones, would fall into the same inflationary policies. Thus, behind the debate over the gold standard was a debate about government discretion over the management of the economy.
Ahamed traces the twisting course these economies took through the twenties, as central bankers struggled to learn the rudiments of modern central banking. His account aims to explain how crucial mistakes by some of the main players created the credit policies that underlay the speculative boom preceding the Great Depression. He then shows us how central bankers struggled to cope with the economic fallout of the depression, learning, often too late to prevent economically disastrous consequences, many of the tools that are now a standard part of the central banker’s tool kit.
There were a few points in Lords of Finance at which I wanted Ahamed to explain the workings of the economy more slowly. Like a lot of potential readers of this book, I have a pretty weak grasp of basic economics. But on the whole, this is a clear, readable, and entertaining book. As can be expected with any first printing, I noticed that Lords of Finance was not completely free of typos and errors. Just a few of the ones that caught my eye: If I’m reading it correctly, a sentence on page 249 seems to imply that Benedict Arnold was executed. The temperatures on page 329 should be specified in Celsius or Fahrenheit. That Montagu Norman walked about with a feather jauntily poking out of his hat is a nice detail, but it’s unnecessary to tell us this twice. And the statistician and economist Roger Babson’s anti-gravity pamphlet was titled Gravity—Our Enemy Number One, not, as Ahamed has it, Gravity—Our Number One Enemy.