lords of finance

“Lords of Finance: The Bankers Who Broke the World” by Liaquat Ahamed is a historical account of the global financial collapse that led to the Great Depression of the 1930s. The book focuses on the lives and decisions of four central bankers who held immense power during this period: Montagu Norman (Bank of England), Benjamin Strong (Federal Reserve of the U.S.), Hjalmar Schacht (Reichsbank of Germany), and Émile Moreau (Banque de France).

The book traces how their policies, interactions, and missteps contributed to the global economic crisis. Here’s a brief summary of the key themes and insights from the book:

The Main Players: The Four Central Bankers

Ahamed delves into the lives and backgrounds of the four bankers, showing how they shaped the global financial system. Each central banker had unique influences on their country’s policies, yet they were all united in trying to restore the pre-World War I gold standard—a financial system where currency values were tied to the price of gold.

• Montagu Norman (England): Eccentric and secretive, Norman believed in the gold standard as essential to Britain’s power and sought to defend it at all costs, even as it placed enormous strain on the British economy.
• Benjamin Strong (United States): The head of the Federal Reserve in New York, Strong was a key figure in global finance. His policies fueled economic growth during the Roaring Twenties but also contributed to the eventual stock market collapse in 1929. His early death in 1928 left a leadership vacuum in U.S. financial policy.
• Hjalmar Schacht (Germany): Schacht played a pivotal role in helping Germany recover from hyperinflation in the early 1920s, but his focus on balancing Germany’s war reparations under the Treaty of Versailles complicated the country’s economic situation.
• Émile Moreau (France): Moreau was determined to restore France’s economic power after the war and was skeptical of the influence of Britain and the U.S. over global financial matters. His policies contributed to tensions within the international monetary system.

Key Themes and Historical Context

1. The Gold Standard and Its Failures:
   Ahamed argues that the blind commitment to the gold standard was a central cause of the economic difficulties of the 1920s and 1930s. Central bankers believed that the gold standard was the foundation of stable economies, but the rigid adherence to this system ignored the realities of post-World War I economic conditions, leading to deflation, unemployment, and economic stagnation.
2. The Treaty of Versailles and Economic Consequences:
   After World War I, the Treaty of Versailles imposed harsh reparations on Germany, which placed an unsustainable burden on its economy. Schacht’s efforts to stabilize Germany’s finances were complicated by these reparations, contributing to political unrest and laying the groundwork for the rise of Hitler.
3. The Stock Market Boom and Bust:
   Ahamed describes how loose monetary policy in the U.S., aimed at supporting Britain and keeping the gold standard intact, led to the speculative stock market boom of the 1920s. This eventually resulted in the 1929 stock market crash, which triggered the Great Depression.
4. International Cooperation and Disputes:
   The bankers, despite being powerful in their own countries, failed to cooperate effectively to address global financial problems. Misunderstandings, nationalist policies, and differing priorities worsened the international crisis, making it difficult to respond to economic downturns.
5. The Great Depression:
   The collapse of the stock market and the failure of banks in the early 1930s plunged the world into the Great Depression. The central bankers were slow to respond to the crisis, often clinging to outdated principles (such as the gold standard), exacerbating the global economic disaster.

Lessons and Insights

• The Limits of Expertise: The four central bankers were considered financial experts, yet their collective decisions had catastrophic consequences. Ahamed’s portrayal suggests that even those with immense knowledge can be blinded by ideology (such as the gold standard) and fail to adapt to changing circumstances.
• The Role of Central Banks: The book highlights the immense power central banks have over the global economy and emphasizes the need for better coordination and understanding among international financial institutions.
• Economic Nationalism vs. Global Cooperation: The central bankers were often more concerned with their own national interests than with global financial stability. This failure to cooperate on an international level deepened the economic crisis and led to a breakdown in the global economic order.

Conclusion

“Lords of Finance” offers an in-depth look at the complex, often flawed decisions of the men who wielded extraordinary financial power in the 1920s and 1930s. Ahamed’s book illustrates how their mistakes—and the failure of the international community to work together—led to the economic catastrophe of the Great Depression. In addition to providing historical insights, it serves as a cautionary tale about the dangers of rigid thinking, lack of coordination, and the unintended consequences of financial policies on a global scale.