Lords of Finance: The Bankers who Broke the World
Penguin Press, 576pp
Review by James Strachan
Too many financial history books lack pace, often mired by an overly scholastic approach. Liaquat Ahamed’s magisterial study is not only a compelling exception, but also perfectly-timed as we find ourselves living again in the shadows of a major financial crisis.
He takes his cue from Disraeli’s belief that we should not read history, only biography, ‘for that is life without theory’, and observes the financial crises of 1929-33 through the four main central bankers of the day. His colourful portraits, combined with well-researched analysis and the practical perspective of an investment manager, bring alive those extraordinary times.
As Ahamed sees it, the bottom fell out of the world economy because quite simply those in charge did not understand how it worked. We now know they applied the wrong medicine to a very sick patient. They cut back on government spending, let whole banking systems go under, and even raised taxes and interest rates.
Ahamed is harsh in his criticisms of the four lead central bankers, and not without foundation. The strength of their self-belief, sometimes based on scant understanding of the real world, and their lack of accountability were both astonishing and dangerous.
Montagu Norman at the Bank of England, who looked as if he had stepped out of a Van Dyck painting, was a strange, lonely and highly neurotic man. In contrast was short, squat and bald Emile Moreau, apparently more like a notary out of a novel by Flaubert. Hjalmar Schacht of the Reichsbank had extreme ambition matched by great intelligence. He became known as The Wizard for saving Germany from the ravages of hyper-inflation. Over at the Fed, Benjamin Strong was seen as a natural leader and a safe pair of hands. And finally, as the pervasive Fifth Man, lurked the brilliant and iconoclastic John Maynard Keynes, the prototype ‘economist hero’.
Keynes was right to chastise Norman and the others for tackling the problems of the day with yesterday’s orthodoxies. Then it was the primacy of the gold standard, more recently it has perhaps been too unqualified a belief in both efficient markets theory and the all-encompassing reach of monetary policy. We have clearly learned many lessons from 1929-33 but not all. Financial crises will remain with us for as long as human nature tends to be excessively pessimistic after being irrationally exuberant. What history reminds us though is that this natural cycle is often exacerbated by the actions of the financial authorities.
In what was actually a series of crises, the first shock came in 1928. The flow of American capital to Europe dried up and tipped a Germany already crippled by reparations into recession. The second crisis was the Great Crash, a 60 per cent collapse in share prices after a frenzied speculative bubble. The third stage was the 1931-3 banking panics that followed the failure of the Bank of United States as the world slid inexorably into the Great Depression.
And who was to blame? Ahamed first points his finger at those Paris Peace Conference politicians who burdened the world economy with massive international debts. Germany began the 1920s owing some $12 billion ($2.4 trillion in today’s money) in reparations to France and Britain. But the four ‘Lords of Finance’ then compounded the world’s financial instability with the disastrous decision to take the world back onto the gold standard.
The detailed description of the cigar and port-fuelled discussion in 1925 at 11 Downing Street leading up to Chancellor Churchill’s decision to support the ‘gold bugs’ is just one of this book’s splendidly vivid tableaux. The quartet knew best and they proceeded to ‘crucify mankind upon a cross of gold’.
A lesson from today’s crisis, especially in a world so much more interconnected, is the need for strong and rapidly achieved international co-operation. Ironically, in the 1920s it was there because it was just a few men and their officials cutting deals, but too often it led to the wrong outcomes.
Strong organised a loan to help Britain back onto the gold standard in 1926 and Norman advised Strong to lower interest rates in 1927, thus increasing the exuberance. In fairness though, on reparations, all four did try to make the best of the bad decisions made at Versailles in 1919; and Norman devoted considerable time to working with Schacht on the problems he faced in Weimar Germany in the 1920s.
While the world economy eventually recovered, the quartet did not fare so well. Strong belied his name, dying early in 1928, dependent on morphine to dampen the pain of ill health. Schacht flirted heavily with the Nazis, which Faustian path led him to the Nuremberg Trials. Moreau ended up as secretary to the Pretender to the French crown, and Norman died an invalid after an infection in his leg spread to his brain and he was finally persuaded to give up the Governorship.
It seems extraordinary that such a strange crew could have had the power to help break the world. We have learned from their mistakes but have much more to do to tame financial crises successfully. But then to give the book’s hero the last word, we should all, like Keynes, be that little bit quicker to say: ‘When the facts change, I change my mind.’