Lords of Finance: The Bankers Who Broke the World

by Liaquat Ahamed

Hitler, who showed little interest in economics, had two overriding objectives—to combat unemployment and to find the money to rearm.

minister of the economy in August 1934.

But it was just his consummate skill in swindling other people which made him indispensable at the time.”

threw the whole baggage of orthodox economics overboard. He embarked on a massive program of public works financed by borrowing from the central bank and printing money. It was a remarkable experiment in what would come to be known as Keynesian economics even before Maynard Keynes had fully elaborated his ideas.

Schacht also renegotiated the terms of Germany’s massive foreign debts, ruthlessly playing off its creditors against one other, particularly the British and the Americans. The recovery was not quite the miracle that Nazi propagandists made everyone believe it was.

the boom remained stunted and lopsided. Much of the increase in production came in arms-related industries, such as autos, chemicals, steel, and aircraft, while such everyday consumer items as clothing, shoes, and furniture stagnated.

As a consequence, the standard of living of ordinary Germans rose hardly at all. They had to content themselves with a drab existence of shoddy goods made of ersatz materials—sugar from sawdust,

flour made with potato meal, gasoline distilled from wood, margarine from coal, and clothes m...

While other European countries let their currencies fall against gold, Schacht, motivated by a combination of concern for prestige and fear of inflation, refused to break o...

German goods were overpriced on the world markets and its exports stagnated. In order to cope with the pressures created by this bloated exchange rate, an elaborate system of import controls was put in place and foreign trade was largely based on barter. Under this “Schachtian” system, Germany was reoriented from an open economy integrated with the West to a closed autarkic economy connected to Ea...

Behind the gleaming achievements, therefore—the autobahns, the Volkswagen, the Junker bombers, and the Messerschmitt fighter planes—the Nazi economy was a rickety machine plagued by shortages and relying ...

Schacht, once such a strong believer in an open Germany integrated with the West, justified himself by arguing that he had been driven to the policy of hunkering down and looking inward by a deranged international system: “The whole modern world is crazy. The system of closed national boundaries is suicidal . . . everybody here is crazy. And so am I. Five years ag...

He never joined the Nazi Party nor did he become a member of Hitler’s inner circle.

But as the regime’s abuse of power mounted, he found himself increasingly at odds with the direction of those who ran it.

he came into open conflict with them, especially over corruption.

By 1937, the strains of helter-skelter rearmament and deficit financing began to tell. Shortages began to bite. Schacht tried to push Hitler to go slow on the arms buildup and ease up on consumer austerity.

Walter Funk, an alcoholic homosexual.

In the years immediately before the war, Schacht took a leading part in several of the conspiracies by conservative politicians and businessmen to overthrow Hitler. They involved trying to induce members of the army high command to stage a coup by convincing them that under the Nazis, Germany would be plunged into a war for which it was ill prepared. The first took place in 1938 when Hitler tried to take over Czechoslovakia. Plans for that pustch were aborted at the last minute when British prime minister Neville Chamberlain and French premier Édouard Daladier backed away from the brink by making concessions at Munich. A second occurred in late 1939 in the weeks before the invasion of Poland. This final conspiracy was overtaken by events before the plotters could act.

published, in February 1936, as The General Theory of Employment, Interest, and Money.

it transformed the understanding of the modern monetary economy and still today provides the foundation for much of the government and central banks’ management of the system.

the spring of 1937, Keynes suffered the first of his many “heart attacks.” He was diagnosed with a chronic cardiac condition caused by a bacterial infection of the

heart valves.

By 1936, his net worth was close to $2.5 million—the equivalent today of $30 million. Though the bear market of 1937 more than halved this, by 1943 it had recovered to $2 million.

He was elevated to the peerage in 1941, as Lord Keynes of Tilton,

invited to be a director of the Bank of England by his old opponent, Montagu Norman.

When the Second World War broke out in Europe, Keynes became an unpaid economic adviser to the chancellor of the exchequer. Within a short time he was Britain’s principal wartime economic strategist.

to avoid a repeat of the mistakes of the First World War, which had largely been financed by printing money, Keynes designed the framework for paying for this war without as much recourse to inflation. He also acted as the principal negotiator for Britain with the Americans over the scope, terms, and conditions of Lend-Lease.

“he has not the faintest conception of how to behave or observe the rules of civilized discourse.”

White also happened to be a Soviet agent, originally recruited in 1935 to the same spy ring that included Whittaker Chambers and Alger Hiss. During the war, along with several colleagues at the Treasury’s Division of Monetary Research, whom he talked into the cause, he did much to support the Soviet war effort and beyond. As the principal Treasury representative on interagency committees dealing with international affairs, White handled more pieces of classified information than any other single official in the administration, including the president, and passed on secrets about the whole range of U.S. financial policies to Soviet intelligence, including U.S. strategy on financial aid to the USSR. He helped the Communist cause in China by delaying payments of American aid to Chiang Kai-shek, and arranged for the U.S. government to furnish the Soviets with a duplicate set of printing plates of the currency to be issued under the Allied occupation of Germany—thereby allowing the Soviets to finance their share by printing American money with American-supplied plates. When these activities eventually came to light after the war, he insisted that he had not been a Soviet agent—he was neither a member of the Communist Party nor had he accepted any money from the Soviets—but had only been acting in the best interests of the United States, believing that the United States and the Soviet Union, allies at that time, had closely aligned objectives. But in 1942, no one was yet aware o...

Bretton Woods in the White Mountains of New Hampshire.

The conference opened on June 30, 1944.

International Monetary Fund.

On July 22, the conference came to its formal close

Two years later, Keynes’s heart finally gave out and he died at the age of sixty-one. White was appointed the U.S. executive director of the International Monetary Fund after the war, but in 1947, under investigation by the FBI, he was forced to resign, citing ill health. The next year, after being publicly named as a Soviet agent by Whittaker Chambers, he was called to testify before the House Committee on Un-American Activities. Three days after his testimony, on August 16, 1948, he, too, collapsed and died of a heart attack at the age of fifty-six.

Nevertheless, the legacy of these two men, the international monetary arrangements known as the Bretton Woods System, fruitfully endured for another thirty years. It provided the foundations for the reconstruction of Europe and Japan after the war, it allowed the global economy to boom through much of the 1950s and 1960s without any of the financial crises that had been so much a part of its history, and it set the stage for one of the longest periods of sustained economic growth the world has ever seen.

ANYONE who writes or thinks about the Great Depression cannot avoid the question: Could it happen again? First it is important to remember the scale of the economic meltdown that occurred in 1929 to 1933. During a three-year period, real GDP in the major economies fell by over 25 percent, a quarter of the adult male population was thrown out of work, commodity prices fell in half, consumer prices declined by 30 percent, wages were cut by a third. Bank credit in the United States shrank by 40 percent and in many countries the whole banking system collapsed. Almost every major sovereign debtor among developing countries and in Central and Eastern Europe defaulted, including Germany, the third largest economy in the world. The economic turmoil created hardships in every corner of the globe, from the prairies of Canada to the teeming cities of Asia, from the industrial heartland of America to the smallest village in India. No other period of peace time economic turmoil since has even come close to approaching the depth and breadth of that cataclysm.

Part of the reason for the extent of the world economic collapse of 1929 to 1933 was that it was not just one crisis but, as I describe, a sequence of crises, ricocheting from one side of the Atlantic to the other, each one feeding off the ones before, starting with the contraction in the German economy that began in 1928, the Great Crash on Wall Street in 1929, the serial bank panics that affected the United States from the end of 1930, and the unraveling of European finances in the summer of 1931. Each of these episodes has an analogue to a contemporary crisis.

The first shock—the sudden halt in the flow of American capital to Europe in 1928 which tippe...

But the biggest difference was to be found in the management of the crisis. The U.S. Treasury under Secretary Robert Rubin forestalled a default by providing Mexico an emergency credit of $50 billion with astonishing rapidity.

in 1994, Mexico could devalue the peso.

The second crisis of the series, the Great Crash, has a very obvious modern-day parallel in the fall of the stock market in 2000. Both followed a frenzied bubble in which stocks completely lost touch with economic reality, becoming grossly overvalued—by most measures 30 to 40 percent. In both cases, after the sell-off it became apparent that much of the rise had been pushed by a rogue’s gallery of Wall Streeters and corporate insiders.

The 1931-33 sequence of banking panics that started with the failure of the Bank of United States has many of the same characteristics as the current global financial crisis that began in the summer of 2007

Offsetting this has been the response of central banks and financial officials. In 1931-33 the Fed stood passively aside while thousands of banks failed, thus permitting bank credit to contract by 40 percent. In the current crisis, central banks and treasuries around the world, drawing to some degree on the lessons learned during the Great Depression, have reacted with an unprecedented series of moves to inject gigantic amounts of liquidity into the credit market and provide capital to banks. Without these measures, there is little doubt that the world’s financial system would have collapsed as dramatically as it did in the 1930s.

Finally, the European financial crisis of 1931 also has its modern-day counterpart in the “emerging markets” crisis of 1997-98.

In 1997, a similar sequence of rolling crises afflicted Asia. South Korea, Thailand, and Indonesia all had to suspend payments on hundreds of billions of dollars of debt. Asian currencies collapsed against the dollar, undermining all confidence in emerging-market securities and eventually setting off the default of Russia in 1998 and of Argentina two years later.

To the contrary, in this book I maintain that the Great Depression was not some act of God or the result of some deep-rooted contradictions of capitalism but the direct result of a series of misjudgments by economic policy makers, some made back in the 1920s, others after the first crises set in—by

any measure the most dramatic sequence of collective blunders ever made by financial officials.

Who then was to blame? The first culprits were the politicians who presided over the Paris Peace Conference. They burdened a world economy still trying to recover from the effects of wa...

Dealing with these massive claims consumed the energies of financial statesmen for much of the decade and poisoned international relations.

More important, the debts left massive fault lines in the world financial system, which cracked at the first pressure.