Liaquat Ahamed: Lords of Finance: The Bankers Who Broke the World

Lords of Finance by Liaquat Ahamed is a 2009 nonfiction book about events leading up to and culminating in the Great Depression as told through the personal histories of the heads of the Central Banks of the world's four major economies at the time: Benjamin Strong Jr. of the New York Federal Reserve, Montagu Norman of the Bank of England, Émile Moreau of the Banque de France, and Hjalmar Schacht of the Reichsbank. Liaquat Ahamed's book was generally well received by critics, and won the 2010 Pulitzer Prize for History. Because Lords of Finance was published during the midst of the financial crisis of 2007–2010, the book subject matter was seen as very relevant to current financial events. One of the main themes of the book is the role played by the central bankers' insistence to adhere to the gold standard "even in the face of total catastrophe." As Joe Nocera, a book reviewer at the New York Times, stated, "the central bankers were prisoners of the economic orthodoxy of their time: the powerful belief that sound monetary policy had to revolve around the gold standard...Again and again, this straitjacket caused the central bankers — especially Norman, gold’s most fervent advocate — to make moves, like raising interest rates, that would allow their countries to hold on to their dwindling gold supplies, even though the larger economy desperately needed help in the form of lower interest rates." Another theme that runs through the Liaquat Ahamed book is how difficult it was to forecast the financial future and how the events would influence world events. "The opinions of Liaquat Ahamed are made very clear (the Paris Peace Conference’s plan for Germany to pay war reparations is presented as a great blunder), but his overriding idea is that blame cannot be easily assigned: not even the most sophisticated economists of the era could accurately predict disaster, let alone guard against it. The effects of a public herd mentality at the time of the 1929 stock market crash are depicted, all too recognizably, as unstoppable."

“We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand.”

- John Maynard Keynes

"Flying Blind" by Joe Nocera for The New York Times: You read the Liaquat Ahamed book's sections on reparations — and there are lots of them because the issue dogged the world for more than a decade — with a growing sense of horror, knowing how it all turns out. But you also read Lords of Finance with a growing sense of recognition. As you learn how the world spiraled into depression, about the interconnectedness of the banking system, where a failure in one country led to problems in other countries, about the way economic orthodoxy caused brilliant central bankers to make mistake after mistake, and on and on — you can’t help thinking about the economic crisis we’re living through now. The central bankers of the 1920s and ’30s were flying blind; Liaquat Ahamed's Lords of Finance makes that quite clear. They could only hope the moves they made would help the economy instead of hurting it. Sometimes they were right, but often they were wrong. We like to think that today we have a better grasp of the machinery that moves an economy — but do we? Federal Reserve Chairman Ben Bernanke and former Treasury Secretary Henry Paulson were much quicker than the earlier lords of finance to throw money at the banking system to prevent it from collapsing, a lesson they learned from the inaction of the Federal Reserve in the 1930s. But Paulson also allowed Lehman Brothers to default, an event that set off a contagion of failure around the world. Here at this critical moment, with a new administration having just taken office, and with so much riding on its policy responses to the current crisis, “Lords of Finance” poses an unsettling question. Do we really understand the workings of that delicate machine any better than our forebears did? Or do we only think we do?



"Pride Before the Fall" by Richard Lambert for the Guardian: The world's four most important central bankers, the principal characters of Liaquat Ahamed book, "Lords of Finance," recognised the political blunders of the peace process and did what they could to deal with the consequences. But more than anyone else, they were also responsible for the second fundamental error of economic policy - the decision to return to the gold standard, at the wrong time and the wrong rate. The Bank of England's Montagu Norman was the first among equals. In the words of his French counterpart, he appeared "to have stepped out of a Van Dyck painting, elongated figure, pointed beard, a big hat ... Very mysterious, extremely complicated, one never knows the depths of his thoughts". Norman saw a return to the gold standard at the prewar rate as a matter of national pride, a moral commitment to those who had placed their assets and their trust in sterling. He could not accept the idea that the City of London should play second fiddle to anyone in the global capital markets. Short-term economic pain would be worth the financial long-term gain. Making up the quartet of central bankers were Hjalmar Schacht of Germany - a man with an extraordinary capacity for making enemies, whose prominent support for the Nazi party was to take him all the way to the Nuremberg trials - and the wily Emile Moreau of France. Unlike Schacht, he was not close to Norman and the distrust was mutual. A Bank of England note-taker at their first meeting observed that he was "stupid, obstinate, devoid of imagination and generally of understanding, but a magnificent fighter for narrow and greedy ends". Then there was John Maynard Keynes - incisive, hostile to those who attacked "the problems of the postwar world with unmodified prewar views and ideas", and almost always ignored. One of the great set pieces of the Lords of Finance is a dinner at 11 Downing Street in March 1925. Chancellor Winston Churchill is trying to make up his mind about the gold standard: Norman, whom Churchill could not stand, is not invited, so senior treasury officials argue his corner. Keynes makes the case against gold, but tragically is not on best form. As the night wears on and the alcohol flows, Churchill is swayed by the idea that failure to act would be seen as a public admission of Britain's diminished role in the world. The final word of the night goes to Reginald McKenna, a banker and former Liberal chancellor. "There is no escape. You will have to go back; but it will be hell." The price of that dinner was economic catastrophe - first in Britain and then more generally. The world's gold reserves were inadequate to take the strain. Because sterling had gone in at the wrong rate, the Bank of England was under constant pressure and Britain's manufacturers were priced out of their export markets. Liaquat Ahamed argues that the four central bankers were able to keep the show on the road only by holding US interest rates down and keeping Germany afloat on borrowed money. The Fed was torn between two conflicting objectives: to keep propping up Europe by cutting interest rates, or to control speculation on Wall Street by raising them. It was a system that was bound to come to a crashing end.

"More than anything else, more even than the belief in free trade, or the ideaology of low taxation and small government, the gold standard was the economic totem of the age. Gold was the lifeblood of the financial system. It was the anchor for most currencies, it provided the foundation for banks, and in a time of war or panic, it served as a store of safety. For the growing middle classes of the world, who provided so much of the savings, the gold standard was more than simply an ingenious system for regulating the issue of currency. It served to reinforce all of those Victorian virtues of economy and prudence in public policy. It had, in the words of H.G. Wells, "a magnificent stupid honesty" about it."

- Liaquat Ahamed, Lords of Finance

"Who Caused the Great Depression?" by Frank Ahrens for the Washington Post: Until last year, few believed anything would stop U.S. homes from going up in value 10 percent every year. That is, until the sub-prime mortgage crisis exploded. Likewise, in the prosperous and interdependent Europe of 100 years ago, war was considered unthinkable because it would destroy all. By 1917, an entire generation of young male university graduates was dead. And, frankly, the brainpower needed for forward-thinking was lacking. European bankers of the time carried a cavalier ignorance of economics, and that goes double for America's first Federal Reserve directors. The science of monetary policy was still in its infancy, and no one could have expected four dreary bankers to turn suddenly into brilliant, ahead-of-their-time economists. That role should have fallen to John Maynard Keynes, one of the few heroes of the Liaquat Ahamed book, Lords of Finance. Keynes called the gold standard a "barbarous relic" and clearly explained its limits; in 1925, he accused the British banking elite of "attacking the problems of the post-war world with unmodified pre-war views and ideas." But despite being a well-known Cambridge don, Keynes was an outsider, not a member of the world's most exclusive club, and those in power largely ignored his warnings. Looking at the events of the 1920s and 1930s, one wonders: Could a modern confluence of catastrophes cause another global depression? No major power is likely to return to the gold standard, so that risk is off the table. But is there a comparable systemic problem today, something we refuse to see? Liaquat Ahamed thinks we're plain lucky that recent financial crises -- in Mexico in 1994, Asia and Russia in 1997-98, the United States beginning in 2007 -- "have conveniently struck one by one, with decent intervals in between." After reading his bracing book, one can only hope that our economy is in the hands of decision makers who are more numerous, less powerful or much wiser than in the past.