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We recently passed the 100th anniversary of the beginning of WWI. This war and its aftermath continues to shape economics and international affairs. “Lords of Finance” by Liaquat Ahamed, is an extraordinary book. Published in 2009, it was a Financial Times/Goldman Sachs Business Book of the Year. It is part biography, part history, with easy to understand coverage of monetary policy. For those intimidated by business, finance or economics, or who find any of these subjects boring, please consider reading this book anyway. It is very readable and the personalities of the central bankers between WWI and the Great Depression at times seem as if they are caricatures.

Mr. Ahamed is not a novice. He is a professional investment manager. He worked at the World Bank, and is remains an adviser to a number of hedge funds. Presently sits on the Board of an insurer that is in the midst of a rare hostile takeover.

The subtitle of the book is “The Bankers Who Broke the World.” His theme is that the Great Depression arose from antiquated monetary policies imposed upon the world by the principal central bankers of the period: Montagu Norman, Governor of the Bank of England; Benjamin Strong of the New York Federal Reserve Bank; Hjalmar Schacht of the Reichsbank; and Emile Moreau of the Banque de France. It was a period of massive unemployment and debt due to reparations and war financing. It was also a period that saw the end of the gold standard and a U.S. power play that caused the transition of world currency from the pound sterling to the U.S. dollar. The personalities of these bankers, the internal politics and cultural biases of their governments, and the absence of transparency in which they operated shaped the outcome that economically nearly broke the world economy.

There were two intriguing revelations for me. The lesser one is that President Hoover was in part unjustly maligned, as Roosevelt adopted some of the policies he wished to have adopted. Coolidge’s ignorance was more to blame for the Depression. The greater revelation is reflected in the handling of the so-called Great Recession of 2008. Chairman Bernanke is an acknowledged expert on the Great Depression. This is reflected in the Feds and Treasury’s adoption of Keynesian monetary policy through TARP after the banking fiasco of 2008. Central Bankers in the post WWI period preferred a monetary policy which tighten credit. This proved to be a mistake and one which some believe was repeated by the size of TARP being too small to jump-start the U.S. economy. The omission of Bernanke and both Secretaries of the Treasury’s is that when credit was loosened during the Depression it came in the form of cheap credit for the banks without strings attached. As with TARP banks were not required to lend the funds to businesses who could then help restore employment. This policy failure was recognized after the Depression and yet Bernanke and the Treasury repeated it in 2008 with the same result. Banks used cheap Federal funds to restore and improve their balance sheet, even after their raised Tier I capital requirements were met and they insulated themselves from Euro weakness. The U.S. government was not innocent either, as it programs to address housing foreclosures avoided principal modifications to both save Fannie Mae and Freddie Mac and to again support bank balance sheets. Real estate speculators are repeating the benefit of this policy at the expense of those homeowners (some of whom, also were not innocent).

I would really like Mr Ahmed to write a sequel to this book, reviewing what transpired since 2008 in light of the failure of monetary policy before and after the Depression. Given that this book was published in 2009 he could only briefly comment about this. Another subject worth exploring in more depth is the transition of the world currency from one nation to another. He briefly addresses the Bretton Woods Conference, with some interesting anecdotes about the bankers’ personalities. Given that a currency war is ongoing between the U.S. and China it is a subject that merits considerable analysis. Had the U.S. dollar not been the world’s currency in 2008 the U.S. economy would likely have folded like Greece. Economic and political power flows from having the world’s currency and both the U.S. and China know it.

To understand international affairs it is essential to follow the money. This book is both fascinating and entertaining. I highly recommend it.

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