Books by Ahamed, Liaquat

Ahamed, Liaquat. Lords of Finance. New York: Penguin Press, 2009. ISBN 978-0-14-311680-6.

I have become increasingly persuaded that World War I was the singular event of the twentieth century in that it was not only an unprecedented human tragedy in its own right (and utterly unnecessary), it set in motion the forces which would bring about the calamities which would dominate the balance of the century and which still cast dark shadows on our world as it approaches one century after that fateful August. When the time comes to write the epitaph of the entire project of the Enlightenment (assuming its successor culture permits it to even be remembered, which is not the way to bet), I believe World War I will be seen as the moment when it all began to go wrong.

This is my own view, not the author's thesis in this book, but it is a conclusion I believe is strongly reinforced by the events chronicled here. The present volume is a history of central banking in Europe and the U.S. from the years prior to World War I through the institution of the Bretton Woods system of fixed exchange rates based on U.S. dollar reserves backed by gold. The story is told through the careers of the four central bankers who dominated the era: Montagu Norman of the Bank of England, Émile Moreau of la Banque de France, Hjalmar Schact of the German Reichsbank, and Benjamin Strong of the U.S. Federal Reserve Bank of New York.

Prior to World War I, central banking, to the extent it existed at all in anything like the modern sense, was a relatively dull field of endeavour performed by correspondingly dull people, most aristocrats or scions of wealthy families who lacked the entrepreneurial bent to try things more risky and interesting. Apart from keeping the system from seizing up in the occasional financial panic (which was done pretty much according to the playbook prescribed in Walter Bagehot's Lombard Street, published in 1873), there really wasn't a lot to do. All of the major trading nations were on a hard gold standard, where their paper currency was exchangeable on demand for gold coin or bullion at a fixed rate. This imposed rigid discipline upon national governments and their treasuries, since any attempt to inflate the money supply ran the risk of inciting a run on their gold reserves. Trade imbalances would cause a transfer of gold which would force partners to adjust their interest rates, automatically cooling off overheated economies and boosting those suffering slowdowns.

World War I changed everything. After the guns fell silent and the exhausted nations on both sides signed the peace treaties, the financial landscape of the world was altered beyond recognition. Germany was obliged to pay reparations amounting to a substantial fraction of its GDP for generations into the future, while both Britain and France had run up debts with the United States which essentially cleaned out their treasuries. The U.S. had amassed a hoard of most of the gold in the world, and was the only country still fully on the gold standard. As a result of the contortions done by all combatants to fund their war efforts, central banks, which had been more or less independent before the war, became increasingly politicised and the instruments of government policy.

The people running these institutions, however, were the same as before: essentially amateurs without any theoretical foundation for the policies this unprecedented situation forced them to formulate. Germany veered off into hyperinflation, Britain rejoined the gold standard at the prewar peg of the pound, resulting in disastrous deflation and unemployment, while France revalued the franc against gold at a rate which caused the French economy to boom and gold to start flowing into its coffers. Predictably, this led to crisis after crisis in the 1920s, to which the central bankers tried to respond with Band-Aid after Band-Aid without any attempt to fix the structural problems in the system they had cobbled together. As just one example, an elaborate scheme was crafted where the U.S. would loan money to Germany which was used to make reparation payments to Britain and France, who then used the proceeds to repay their war debts to the U.S. Got it? (It was much like the “petrodollar recycling” of the 1970s where the West went into debt to purchase oil from OPEC producers, who would invest the money back in the banks and treasury securities of the consumer countries.) Of course, the problem with such schemes is there's always that mountain of debt piling up somewhere, in this case in Germany, which can't be repaid unless the economy that's straining under it remains prosperous. But until the day arrives when the credit card is maxed out and the bill comes due, things are glorious. After that, not so much—not just bad, but Hitler bad.

This is a fascinating exploration of a little-known epoch in monetary history, and will give you a different view of the causes of the U.S. stock market bubble of the 1920s, the crash of 1929, and the onset of the First Great Depression. I found the coverage of the period a bit uneven: the author skips over much of the financial machinations of World War I and almost all of World War II, concentrating on events of the 1920s which are now all but forgotten (not that there isn't a great deal we can learn from them). The author writes from a completely conventional wisdom Keynesian perspective—indeed Keynes is a hero of the story, offstage for most of it, arguing that flawed monetary policy was setting the stage for disaster. The cause of the monetary disruptions in the 1920s and the Depression is attributed to the gold standard, and yet even the most cursory examination of the facts, as documented in the book itself, gives lie to this. After World War I, there was a gold standard in name only, as currencies were manipulated at the behest of politicians for their own ends without the discipline of the prewar gold standard. Further, if the gold standard caused the Depression, why didn't the Depression end when all of the major economies were forced off the gold standard by 1933? With these caveats, there is a great deal to be learned from this recounting of the era of the first modern experiment in political control of money. We are still enduring its consequences. One fears the “maestros” trying to sort out the current mess have no more clue what they're doing than the protagonists in this account.

In the Kindle edition the table of contents and end notes are properly linked to the text, but source citations, which are by page number in the print edition, are not linked. However, locations in the book are given both by print page number and Kindle “location”, so you can follow them, albeit a bit tediously, if you wish to. The index is just a list of terms without links to their appearances in the text.

August 2011