The 2008 – 2012 global recession is a marked global economic decline which effected the entire world’s economy. Falling international trade, high unemployment rates, inflation, low consumer confidence, escalating petroleum and food prices, lack of availability of loans, decisions to save some politically connected banks but not others and lack of a consensus on an answer are some of the features of this Great Recession. But is this happening for the first time?
The answer is No, THIS HAS HAPPENED BEFORE. The current economic crisis has a precedent: The Great Depression of the 1930s, which affected the future of an entire generation and set the stage for the horrors of the Second World War. Yet this financial meltdown could have been avoided, had it not been for the decisions taken by few central bankers.
“Lords of Finance”, a Pulitzer Prize-winning work by Liaquat Ahamed, is a gripping story with forgotten yet worthy characters and villains hidden inside the drama of The Great Depression of 1930s. It is a lively and fascinating event-by-event look at the lead up to The Great Depression, and the four Lords of Finance who could have prevented the catastrophe.
First, let me say that this is a very well written book and a splendid effort by the author. I was expecting to have to plough through the usual dreadful and boring writing that finance, economics and history seems to generate. To my surprise it was entertaining, informative, interesting, and thought-provoking. Second, the author covers a period and a topic that is usually neglected in most histories – the inter-war period, and especially the financial events that played a major role in the rise of Hitler and the origins of the Second World War.
The Lords of Finance who constitute the title of this book were the four central bankers who in the post-First World War era of 1920s were, like present times, invested with unusual power and extraordinary status. At the Bank of England was the neurotic and enigmatic Montagu Norman; at the Banque de France, Emile Moreau, xeno-phobic and suspicious; at the Reishsbank, the rigid, arrogant, brilliant, cunning and headstrong German, Hjalmer Schacht; and finally, at the Federal Reserve Bank of New York, Benjamin Strong, whose veneer of energy and drive masked a deeply wounded and overburdened man. Once styled by the newspapers as the “World’s Most Exclusive Club”, these four once familiar names, lost under the rubble of time, now mean nothing to most people.
The author quotes Herodotus for “Circumstances rule men, men do not rule circumstances”. The economic and social devastation hammered on Europe by World War 1 and its aftermath provides the circumstances that ruled the bankers as mentioned above, who attempted to rebuild the international financial order. As I understood the book, the most egregious blunders leading to the Great Depression were: fantastic speculative “bubbles” (e.g., the US stock market, Florida real estate); adherence to the gold standard; unsound financial speculation by several large banks; First World War’s reparations and the War itself; lack of a coherent national and international financial policy; and the actions of the four Lords of Finance, themselves.
The author seems to be a great fan of John Maynard Keynes. He sees Maynard Keynes as the only true economic visionary of the epoch, and he clearly regards the Lords of Finance of the book’s title as blinkered by their flawed understanding of how economies slip into, and climb out of, depressions. Ahamed is excellent in explaining why the gold standard, believed at the time to be the bedrock principle of sound economics, proved to be an inflexible vise that crushed attempts to revive world economies in the first few years of the Great Depression.
In particular, the text book economic policy called for raising taxes and interest rates, and slashing public expenditures when economies moved into recession. The thought was that governments needed to balance their budgets, and that higher interest rates would attract new net investment and thus spur employment and spending. It was Keynes in his General Theory of Employment, Interest and Money who ultimately showed why that doctrine was in fact an error. Keynes argued that employment did not automatically respond to those policies, and that government could play a vital role in restarting aggregate demand, and hence employment. But in the early 1930s, it was the orthodoxy of the day that prevailed, and Ahamed explains, worsened the crisis that had begun in 1929.
However, from my point of view, it is also little unfair to picture the Lords of Finance as ‘the bankers who broke the world’. Depending on the circumstances, they took bold measures as well which became their triumphs at that time. To take the most striking example, Schacht was made Germany’s “Currency Commissioner” in November 1923, when that country’s hyperinflation was completely out of control. For example, on November 5, 1923 the price of two-kilo loaf of bread had soared from 20 billion marks to 140 billion, sparking off nationwide riots. In a brilliant stroke, Schacht created a new currency, the Rentenmark, then chose the exact right moment to fix it to the mark (at 1 trillion marks = 1 Retenmark). In so doing, he restored faith in Germany’s currency and beat back inflation. The German press took to calling him the “Miracle Man.”
Finally, I would say that this book is a must read. Ahamed has exhibited wonderful qualities of an historian and an economist. The book is lively and pleasure to read as opposed to monotonous books on history and economics.
This article was published in ‘Impressions’, the in-house magazine of PwC Pakistan.