Lords of Finance: The Bankers Who Broke the World

by Liaquat Ahamed

The second group to blame were the leading central bankers of the era, in particular the four principal characters of this book, Montagu Norman, Benjamin...

the second fundamental error of economic policy in the 1920s: the decision to take the world back onto the gold standard.

Gold supplies had not kept up with prices; and the distribution of gold bullion after the war was badly skewed, with much of it concentrated in the United States. The result was a dysfunctional gold standard that was unable to operate as smoothly and automatically as before the war.

The problem of inadequate gold reserves was compounded when Europe went back to gold at exchange rates that were grossly misaligned, resulting in constant pressure on the Bank of England, the linchpin of the world’s financial system, and a destructive and petty feu...

The quartet of central bankers did in fact succeed in keeping the world economy going but they were only able to do so by holding U.S. interest rates down and by keep...

system that was bound to come to a crashing end. Indeed, it held the seeds ...

Eventually the policy of keeping U.S. interest rates low to shore up the international exchanges precipitated a bubble in the U.S. stock market. By 1927, the Fed was thus torn between two conflicting objectives: to keep propping up Europe or to control speculation on Wall Street. It tried to do both and achieved neither. Its attempts to curb speculation were too halfhearted to bring stocks back to earth but powerful enough to cause a collapse in lending to Germany, driving most of central Europe into depression and setting in train deflationary forces thr...

The U.S. stock market bubble thus had a double effect. On the way up, it created a squeeze in international credit that drove Germany and other parts of the world into recession...

not necessary for the crisis to metastasize into a worldwide catastrophe.

Markets, particularly financial markets, became unthinkingly fearful. To

it required leadership.

After 1929, responsibility for world monetary affairs ended up in the hands of a group of men who understood none of this, whose ideas about the economy were at best outmoded and at worst plain wrong.

George Ha...

but did not have the personality or the stature t...

Instead, authority at the Fed shifted to a group of inexperienced and ill-informed timeservers, who believed that the economy would automatically return to an even keel, that there was nothing to be done to counteract deflationary forces except wait them out. They ...

to act as lender of last resort and support the banking system...

Norman and Schacht both understood that a financial system in free-fall requires active central bank intervention. But their two central banks, the Bank of England and the Reichsbank, were both chronically short of gold and had no room for maneuver. As a consequence, for all of Norman’s enormous prestige and Schacht’s creativity, they were both hamstrung by the dictates of ...

The only central banker outside the Fed with enough gold to a...

Moreau at the Banque ...

But having stumbled inadvertently into a position of fi...

he seemed more i...

using France’s newfound strength for political rather t...

And so what began as modest and corrective recessions in the United States and Germany were transformed by sheer folly and short-sigh...

In 1934, Yale economist Irving Fisher testified before a House committee that when Strong died, “his policies died with him. I have always believed, if he had lived, we would have had a different situation.” He was the first of many economists and historians to raise the tantalizing count...

Though Strong was responsible for many of the errors surrounding the reestablishment of the gold standard, and for the easy money policy that led to the stock market bubble, there is little doubt that in early 1931 he would have acted more vigorously and with greater effect than his successor, George Harrison, to prevent the cascade of bank runs. Moreover, on the international front he was the only member of the quartet with the necessary combination of ability, brains, and vision but also the economic firepower of the Fed’s ...

More than anything else, therefore, the Great Depression was caused by a failure of intellectual will, a lack of understanding about how the economy operated. No one struggl...

and during it to make sense of the forces at work tha...

He believed that if only we could eliminate “muddled” thinking—one of his favorite expressions—in economic matters, then society could allow the management of its material welfare to take a backseat to what he thought were the central questions of existence, to the “probl...

That is what he meant when in a speech toward the end of his life he declared that economists are the “trustees, not of civilization, bu...

There is no greater testament of his legacy to that trusteeship than that in the sixty-odd years since he spoke those words, armed with his insights, the world has avoided an economic catast...

I have been thinking about this book now for over a decade. In 1999, Time magazine featured a cover story entitled “The Committee to Save the World.” The cover depicted three men: Alan Greenspan, then chairman of the Federal Reserve Board; Robert Rubin, then secretary of the treasury; and Larry Summers, then deputy secretary of the treasury.

The three “economist heroes,” as Time magazine called them, were able to avert a disaster by acting quickly and aggressively to commit billions of dollars in public funds to stem a panic of proportions not experienced since the 1930s.

“Most Exclusive Club in the World,”

Timothy Dickinson.

Chernow, The House of Morgan, 215, 310.

Geiss, July 1914: The Outbreak of the First World War,

Wilson and Hammerton, The Great War,

Ferguson, The Pity of War,

my thinking has been framed by four books in particular: the classic by Milton Friedman and Anna Schwartz, A Monetary History of the United States 1857-1960, which highlights the dysfunctional policies and decision making at the Fed; the 1973 book by Charles Kindelberger, The World in Depression , one of the early contemporary books to focus on the global dimension of the economic collapse; and the works of Peter Temin and Barry Eichengreen, especially Temin’s Lessons from the Great Depression and Eichengreen’s Golden Fetters, which identify the gold standard as the chief culprit for transmitting depression around the world.

BAGEHOT, WALTER.

BERNANKE, BEN S. “The World on a Cross of Gold.” Journal of Monetary Economics 31 (1993): 251-267.

_____________Essays on the Great Depression. Princeton, New Jersey: Princeton University Press, 2000.

BIERMAN, HAROLD. The Great Myths of 1929 and the Lessons to Be Learned. Westport, Connecticut: Glenwood Press, 1991. ____________ The Causes of the 1929 Stock Market Crash. Westport, Connecticut: Glenwood Press, 1998.

CHERNOW, RON. The House of Morgan. New York: Atlantic Monthly Press, 1990. ___________ The

EICHENGREEN, BARRY.

Golden Fetters. New York: Oxford University Press, 1992.

Globalizing Capital. Princeton: Princeton University Press, 1996.

FERGUSON, NIALL.

FRIEDEN, JEFFREY. Global Capitalism: Its Fall and Rise in the Twentieth Century. New York: W.W. Norton and Co., 2006.

FRIEDMAN, MILTON, and ANNA J. Schwartz. A Monetary History of the United States 1857-1960. Princeton, New Jersey: Princeton University Press, 1963.