At a gathering to celebrate economist Milton Friedman’s 90th birthday in November 2002, Ben Bernanke turned to Friedman and said: “Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” Friedman and his collaborator Anna Schwarz had argued in a 1963 tome that the Great Depression had started off as a nasty recession. But central banks led by the US Fed had starved a gasping economy of oxygen when they cut money supply by a third. The economic collapse that followed led to mass unemployment, bank failures and the spread of fascism.
The fall: The New York Exchange on 24 October 1929, also known as ‘Black Thursday’. AFP
Liaquat Ahamed has dealt with this sorry episode in Lords of Finance, which has a powerful blend of piercing insight and gripping narrative. The book retells the story of the greatest economic disaster of the past century through the stories of four powerful and complex men who headed the central banks in their respective countries: Montagu Norman of England, Benjamin Strong of the US, Hjalmar Schacht of Germany, and Emile Moreau of France. These men who, as the subtitle of the book says, were the bankers who broke the world.
And never far from the main story is the rebel: John Maynard Keynes, the English economist who became an implacable foe of the orthodoxy that these four men represented in its quintessence.
Ahamed begins his story with the convulsions that ripped apart the way economic affairs were managed before World War I. And before these convulsions was the first great era of globalization, based on free trade, imperial expansion and the gold standard. Each of these was torn beyond repair during the wanton killing and destruction in Europe between 1914 and 1918.
What followed was a series of mistakes, as politicians and financial leaders tried to use the old rules of the game for what was in essence a new world. The first mistake was the decision by the victorious Allies to impose punishing reparations on a defeated Germany, a move that further ruined the country and cleared the way for Hitler and his thugs. Of the many mistakes that followed was the insistence on moving back to the gold standard, an arrangement Keynes had dismissed as a “barbarous relic”.
Norman, Strong, Schacht and Moreau were at the centre of all this action, and not always in the role of villains, as the title of the book suggests. They did do their best to keep the international financial system working, helped invent the art of modern central banking, were constrained by the rigidities of the gold standard and also saw the need to work together even when their national governments were at daggers drawn (it is called global coordination in our times).
Ahamed started writing this book at a time when the Great Depression was a distant memory, almost a curiosity to be studied by economic historians. But the book has been published at a time when the world economy has come dangerously close to a 1930s-style collapse. This gives the book great relevance and it deserves to be read by anybody who has a serious interest in what has happened to the global economy since August 2007. When one sees central bankers pumping trillions of dollars into their economies to avoid a repetition of the 1930s, you know that they are trying to avoid the glaring mistakes made by the four main characters in Ahamed’s book. Bernanke, the foremost contemporary student of the Great Depression, does seem to take his promise to Friedman seriously: “We won’t do it again.”
But this book has other attractions as well. I will highlight two in this review. First, it subtly informs us that while monetary policy is a dry and technical subject, the actions of central bankers have social consequences. Germany’s tryst with hyperinflation in the early 1920s—when a ride in a Berlin street car that cost 1 Deutsche mark before the war eventually cost DM15 billion—helped speculators, companies that had real assets but paper debts, and unionized workers who had indexed salaries. The middle class that had painfully saved money in the bank was wiped out, and all because German central bankers had recklessly printed money. This is a lesson worth remembering at all times: that economic policy helps and harms various groups in different ways.
Second, Lords of Finance gives us a wonderful look at a world that now seems quaint. A time when an old boys network ran the world financial system, when information was scarce and when even powerful finance officials who controlled national destinies could take leisurely four-month holidays.
It is a world that is a far cry from the meritocratic and workaholic culture of Wall Street and its many variants across the world—but one that is equally prone to hubris and disaster.
Niranjan Rajadhyaksha is managing editor, Mint.