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Blundering bankers

THE great economic iconoclast John Maynard Keynes wrote in an essay titled "The Great Slump of 1930," published in December that year: "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."

Thirteen months had passed since the crash of 1929; the world was living, in Keynes's words, in "the shadow of one of the greatest economic catastrophes of modern history."

I shuddered when I read this quotation in "Lords of Finance," a magisterial work by Liaquat Ahamed, a veteran hedge fund manager and Brookings Institution trustee. A grand, sweeping narrative of immense scope and power, the book describes a world that long ago receded from memory: the West after World War I, a time of economic fragility, of bubbles followed by busts and of a cascading series of events that led to the Great Depression.

The "delicate machine" Keynes referred to was of course the global economy. By 1930, when he wrote his essay, the West was in bad shape. A combination of divisive postwar politics, a refusal to abandon economic orthodoxy and a series of policy errors by the world's four most important central banks - the Federal Reserve, the Bank of England, the German Reichsbank and the Banque de France - had led to the near collapse of capitalist economies in the West.

"Industrial production had fallen 30 percent in the United States, 25 percent in Germany and 20 percent in Britain," Ahamed writes. "Over 5 million men were looking for work in the United States, another 4.5 million in Germany and 2 million in Britain."

And yet, which is why I shuddered, it was also a moment not unlike the one we're living through now. As scary as things were, it was clear that the abyss had not yet been reached, and there was still a chance that the global economy could pull back from the brink. With the right moves from the central bankers, and a little luck, the Western economies might yet right themselves. In December 1930, the world was holding its breath.

Alas, it was not to be. Six months later, an Austrian bank collapsed, resulting in a run on the rest of Austria's banks. The central bankers responded both belatedly and tepidly, failing to stem the run and then making a new round of policy errors that compounded matters. By 1932, the United States had entered the worst year of the Great Depression - while in Germany Hitler's ascent was assured.

The lords of finance in the title of this book are the four central bankers who dominated that postwar era: Benjamin Strong of the Federal Reserve Bank of New York; Montagu Norman, the longtime head of the Bank of England; Mile Moreau of the Banque de France; and Hjalmar Schacht, who headed the Reichsbank. Ahamed says he got the idea for the book when he read a 1999 Time magazine cover story headlined "The Committee to Save the World," about Alan Greenspan (then the Federal Reserve chairman), Robert Rubin (Bill Clinton's Treasury Secretary) and Lawrence Summers (Rubin's No. 2).

He realized that in the 1920s, the four top central bankers had acquired a similar mystique and fame; they were sometimes described as "the most exclusive club in the world."

He decided to tell the story of "the descent from the roaring boom of the 1920s into the Great Depression" by "looking over the shoulders" of these four men.


This is a beautifully written book. Ahamed has a gift for phrase-making and storytelling that most full-time writers would envy and the decision to build "Lords of Finance" around these four men is a brilliant conceit. Each of them was a powerful personality, with the full range of strengths and weaknesses, insights and eccentricities.

Because much of the book concerns decisions, for instance, to raise or lower interest rates, you need great characters to pull the story along, and Ahamed not only has them but also knows how to make them come alive.

Strong is the domineering American; Schacht the arrogant, headstrong German; Norman and Moreau the prideful Europeans. Strong and Norman became friends, and their letters to each other are a rich source of material, sometimes quite touching.

But as Ahamed's narrative makes clear, it's also a little unfair to portray these men as "the bankers who broke the world," as the subtitle phrases it. For one thing, by the middle of 1931, Norman was the only one of the four still in his job.

For another, they each became famous not because of their mistakes but because of their triumphs.

They were prisoners of the economic orthodoxy of their time: the powerful belief that sound monetary policy had to revolve around the gold standard.

Ahamed also lays the blame for much of the economic turmoil of the 1930s on an issue the central bankers had no control over: the insistence by the Allies that Germany pay war reparations far beyond its means.

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 1930s were flying blind. 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?


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