Lords of Finance

-         Liaquat Ahamed

It is rare to come across a book as timely, well-written and informative as Liaquat Ahamed’s ‘Lords of Finance’.

The four powerful protagonists were central bankers - Montagu Norman of the Bank of England (“the fragility of his mental constitution had long been an open secret within financial circles”), Benjamin Strong, the first governor of the Federal Reserve Bank of New York (“not a man to wait upon orders, made himself the chief pilot of the whole system”), Emile Moreau of the Banque de France (“though he had considerable experience in banking, his understanding of monetary economics was quite rudimentary and at times confused”) and Hjalmar Schacht of the Reichsbank (“his astonishing sense of innate superiority – he was in many ways a classic lower-middle-class overachiever.”)

The book describes the war reparations imposed on Germany by the Allied European Powers who themselves owned money to the US as a result of the first world war – as Lord Keynes put it “a sense of impending catastrophe overhung the frivolous scene.” These reparation payments were the straw that broke the camel’s back – the residual payments of the war which included pensions and compensations to those who had lost property, new social obligations like insurance for the unemployed and welfare payments were already burdening the beast.

Thus ‘the various governments of Germany resorted to the Reichsbank to print the money’. The result – hyperinflation with the supply of currency notes becoming a major logistical operation involving ‘133 printing words with 1783 machines … and more than 30 paper mills.’

Thus ‘inflation transformed the class structure of Germany far more than any revolution might have done….professors begged on the streets, and young ladies from respectable families became prostitutes.’

The disastrous decision to go back to the gold standard – ‘the theological belief in gold as the foundation for money was so embedded in their (bankers) thinking, so much a part of their mental equipment for framing the world, that few could see any other way to organize the international monetary system.’ There were two ways – deflation or devaluation. The author draws an analogy of a person who has put on weight and is having a hard time fitting into his clothes.

“He can either choose to lose the weight – that is, deflate – or alternatively accept that his larger waistline is now irreversible and have his clothes altered – that is devalue….The United States and Britain took the route of deflation, Germany and France that of devaluation.” The result was an overvalued pound and an undervalued franc. The US economy “more dynamic and unhampered by a large internal debt, was quick to bounce back from the recession, but Britain remained stuck.” Keynes recognized that “the new arrangements were in fact different from the hallowed and automatic prewar mechanism. As he put it in the ‘Tract’: “A dollar standard was set up on the pedestal of the Golden Calf. For the past two years, the US has pretended to maintain a gold standard. In fact it has established a dollar standard.”

The Dawes Plan in 1924 on reworking of European debts to the US started ‘a boom in lending in Germany! London basked “in the full sunshine of Peace”, the British economy tethered as it was to the United States and Wall Street. The easing of credit by the Fed in 1927 to ‘prop up the pound’ helped ‘fuel the stock bubble that subsequently led to the crash two years later.’

A few sentences from the Epilogue might be well worth remembering today. “Markets, particularly financial markets, became unthinkingly fearful. To reestablish sanity and restore some sort of equilibrium in these circumstances required a very visible head to guide the invisible hand. In a word, it required leadership.”

This is a book worth reading for those interested in history, economics, financial markets and biographies.