BOOK OF THE DAY: MICHAEL CASEYreviews Lords of Finance: The Bankers who Broke the Worldby Liaquat Ahamed, Heinemann, 564pp, £20
MOST PUBLISHERS insist on books that fall into definite genres. It is refreshing, therefore, to have this superb book which mixes history, economics, biography and geo-politics without any apology.
The author tells the story of the Great Depression in a simple way which highlights the lessons for today, of which there are many. He deals with the foibles of human nature in a witty, yet sympathetic manner as he analyses the behaviour of the “Lords of Finance”, four central bank governors of the day. They were Benjamin Strong (US), Montagu Norman (UK), Hjalmar Schacht (Germany) and Émile Moreau (France).
The other major personality was the brilliant John Maynard Keynes, who contributed many policy ideas without waiting to be asked. Keynes was right in all of his pronouncements while the more bureaucratic Lords of Finance were invariably wrong. This in itself holds a lesson, namely, that administrators cannot solve economic crises any more than a hospital manager can take out an appendix.
During the Great Depression the credit system and stock market collapsed. Real living standards fell by a quarter in three years and unemployment passed 25 per cent. Many countries defaulted on their debts. It was not an act of God but rather the fault of policymakers who were simply not up to the job.
The initial mistakes were made by the politicians who presided over the Paris Peace Conference. They levied massive reparations on Germany – some $2.4 trillion in today’s terms – to be paid to France and Britain. These countries in turn would have to repay huge amounts of war debt to the US. This damaged international relations.
The governors took the world back on the gold standard at a time when gold supplies had not kept pace. This inevitably meant deflation since currencies could not be devalued. Gold became a straitjacket as Keynes predicted, and the distribution of gold bullion was badly skewed. The US and France hoarded gold while the UK and Germany were relatively deprived and hence experienced stronger deflationary impulses. Germany had to borrow abroad to keep its economy from collapsing, even after it had recovered from the worst of its hyperinflation. For most of the period the US faced a dilemma. Conscious of its growing role in the world economy, it tended to keep interest rates low. But in doing so the Fed fuelled a stock market bubble – just as Alan Greenspan did over half a century later.
As the bubble inflated it sucked in scarce capital from Europe, causing recession there. When the bubble burst the recession spread to the US. As American banks got into difficulties the Fed refused to act as lender of last resort.
Montagu Norman wrote revealingly in 1948: “nothing I did, and very little that old Ben did [Benjamin Strong]
The Great Depression paved the way for Hitler (Schacht was his advisor for a time). The one good thing to come out of it was the work of Keynes which informed policymaking for decades to come.
Michael Casey is a former chief economist at the Central Bank and a former member of the board of the International Monetary Fund