Lords of Finance

The ninth book of the New York Times Ten Best Books of 2009, as well as the winner of the Pulitzer Prize, is Lords of Finance, by Liaquat Ahamed. Subtitled "The Bankers Who Broke the World," it's a lively history of world economics from World War I to the Great Depression, and how the central bankers from the four great economies managed to trigger a financial collapse.

My greatest praise for this book is that I managed to understand it. I look on economics as a dog considers written language. Perhaps Winston Churchill put it best, when Ahamed quotes him as saying of economists: "If they were soldiers or generals, I would understand what they were talking about. As it is they all talk Persian." Of course, Churchill was the British Chancellor of the Exchequer at the time.

Ahamed structures the book around four bankers: Montagu Norman of the Bank of England, Benjamin Strong of the Federal Reserve Bank of New York, Emile Moreau of the Banque de France, and Hjalmar Schact of the Reischbank. He follows them from the beginning of World War I and then into the 1920s, as they all became their respective countries most powerful bankers. Ahamed also includes figures such as economist John Maynard Keynes, who fought against the two things that contributed most to the depression: the gold standard and German war reparations.

Some of the chapters are above my level and I fought to understand them. I still don't quite understand how the gold standard works, but I know that it was a bad thing and was stubbornly held on to. But some of the chapters are riveting. He uses numbers well--consider this statistic on German inflation: In 1914, the mark stood at 4.2 to the dollar. By 1923, a dollar was worth 630 billion marks. This not only destroyed the German economy, but in some ways paved the way for the Nazi party to grow popular.

Another chapter that sings is the one on the stock market collapse of 1929. Ahamed paints a vivid picture of how playing the stock market was a huge fad in the 1920s: "By the spring of 1928, every type of person was opening a brokerage account--according to one contemporary account, 'school teachers, seamstresses, barbers, machinists, necktie salesmen, gas fitters, motormen, family cooks, and lexicographers.' Bernard Baruch, the stock speculator who had settled down to a life of respectability as a presidential adviser, reminisced, 'Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day's financial news as he worked with rag and polish. An old beggar, who regularly patrolled the street in front of my office, now gave me tips--and I suppose spent the money, I and others gave him, in the market."

Some thought that playing the market should be banned, that it was gambling, and that it ran counter to the American value of working hard for one's money. A surprising number saw the crash coming, perhaps most famously Joseph Kennedy who "decided to sell completely out of the market when in July 1929, having already liquidated a large portion of his portfolio, he was accosted by a particularly enthusiastic shoeblack on a trip down to Wall Street, who insisted on feeding him some inside tips. 'When the time comes that a shoeshine boy knows as much as I do about what is going on in the stock market,' concluded Kennedy, 'it's time for me to get out.'"

But many did not get out, and the market went bust. At first it affected only the United States, and there was some schadenfreude from England and France, tetchy over the U.S.'s insistence on them paying back war debts. But soon the misery spread, even to places like Chile, where the country went bankrupt and three different premiers were sworn in in one day before the army took over. By 1932 things were extremely dire in the U.S.: "American corporations, which had made almost $10 billion in profits in 1929, collectively lost $3 billion in 1932. On July 8, 1933, the Dow, which had stood at 381 on September 3, 1929...hit a low of 41, a drop of almost 90 percent over the two and a half years since the bubble first broke. General Motors, which had traded at $72 a share in September 1929, was now a little above $7. And RCA, which had peaked at $101 in 1929, hit a low of $2. When, in August, 1932, a reporter...asked John Maynard Keynes if there had ever been anything like this before, he replied, "Yes. It was called the Dark Ages, and it lasted four hundred years."

Ahamed sprinkles the book with many wonderful anecdotes, such as how Franklin Roosevelt and his advisers arbitrarily determined the selling price of gold, and his chapter epigraphs reveal a great sense of humor. My favorites are Charles DeGaulle on the French: "Only peril can bring the French together. One can't impose unity out of the blue on a country that has 265 different kind of cheese," or Will Rogers: "If stupidity got us into this mess, why can't it get us out?"

Ahamed's greatest skill is making the men of this book seem human. The bankers are brought vividly to life, as are the world leaders who respond to them. He also does readers like me a service and summing everything up at the end: "The first culprits were the politicians who presided over the Paris Peace conference. They burdened a world economy still trying to recover from the effects of war with a gigantic overhang of international debts...More importantly, the debts left massive fault lines in the world financial system, which cracked at the first pressure. The second group to blame were the leading central bankers of the era, in particular the four principal characters of this book...Even though they...spent much of the decade struggling to mitigate some of the worst political blunders behind reparations and war debts, more than anyone else they were responsible for the second fundamental error of economic policy in the 1920s: the decision to take the world back onto to the gold standard."

Given the times we live in, this book is very relevant. Ahamed was writing in during the onset of the recent unpleasantness, and it's instructive to note that despite the objections of some, there were steps taken by those in charge (in both the Bush and Obama administrations) to avoid the disaster of 1929. Believe it or not, we dodged a bullet.