PDF Summary:Lords of Finance, by Liaquat Ahamed

In the aftermath of World War I, central bankers wielded unprecedented influence in rebuilding the world's financial systems. Lords of Finance by Liaquat Ahamed offers an inside look at four figures at the center of this transformation: Montagu Norman, Benjamin Strong, Hjalmar Schacht, and Émile Moreau.

Ahamed examines how this banking quartet's decisions—from restoring the gold standard to managing debts and reparations—shaped the global economy in the interwar period. He argues their policies, though well-intended, planted the seeds for the Great Depression by failing to adapt to new financial realities after World War I.

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The severe consequences of the First World War on international relations were a result of the substantial reparations and the significant debts incurred due to the conflict.

The gold standard's failure was due to a mix of insufficient gold reserves and misaligned exchange rates. The European conflict had also imposed a significant load of reparations and monetary commitments, which added to the complexity of the situation.

Ahamed suggests that the aggregate impact played a crucial role in destabilizing the worldwide financial framework during the 1920s. The matter of reparations steadily escalated the strain between France and Germany. Germany disputed allegations that it had initiated the conflict. They resisted vigorously the efforts to resolve their financial obligations, arguing that the burden of the war's costs had been unfairly imposed on them. France's insistence that Germany adhere to the reparations conditions specified in the treaty was resolute. Obligated to take charge in the intricate matter of reparations, the United States emerged as the principal international creditor.

The varied approaches taken by France and the United States regarding the collection of debt repayments exacerbated international strains and hindered the global economy's recuperation.

Ahamed suggests that the quest for collecting war reparations and debts intensified tensions among Britain, France, and the United States. Though the United States had lent almost $11 billion to its European allies, it insisted on making a moral and legal distinction between money owed to it and the reparations extracted from Germany. The Americans argued that their loans were simply contractual obligations, voluntarily entered into by Britain and France, whereas German reparations were a sort of penalty. Britain, in turn, having acted as an intermediary between France and the U.S., by borrowing $5 billion from America and lending $10 billion to its European allies, found itself in a bind. The nation's ability to clear its debts was constrained by obligations to repay American creditors. Europe was ensnared in a harmful cycle that continued until the end of the 1920s, with Britain, burdened by its economic commitments, necessitating remittances from France, which in turn pressured Germany to fulfill its reparations, prompting Germany to seek ways to avoid making international payments.

The Dawes Plan aimed to prolong the timeline for Germany's economic resurgence and to restart the movement of global capital, yet it only masked inherent disputes and postponed a definitive resolution.

Though the Americans very deliberately rejected the idea of linking war debts to reparations, they had to intervene directly to bring some sort of order out of the unfolding economic and political chaos that paralyzed finances. As a result, the Dawes Plan was implemented. In 1924, the Reparations Commission sent a team of American experts, headed by a financier from Chicago, to devise a plan aimed at ensuring Germany's economic steadiness and its ability to meet its reparations obligations.

Ahamed suggests that the implementation of the Dawes Plan marked a shift not only in strategic approaches but also signaled the United States' ascent to economic preeminence.

The approach was shaped by the substantial influence of the United States, reflecting the change in worldwide power structures following the war.

After World War I concluded, the United States emerged as the leading economic power worldwide, characterized by its considerable accumulation of gold and surplus financial resources. The global economy's reconstruction was profoundly influenced by the substantial influence wielded by its financial leaders and banking authorities. Ahamed details the approach devised by an expert team, focusing on the reconstruction of Germany's monetary system, securing its currency by means of a significant financial infusion amounting to two hundred million dollars, and importantly, setting a definitive schedule for future payments of reparations.

The United States implemented policy changes to address global financial imbalances, which involved altering its stance on interest rates and increasingly relying on the British pound sterling.

After the Dawes Plan was put into action, global financial authorities sought to rectify the economic imbalances caused by the conflict through two primary methods: the Federal Reserve initially kept interest rates in the United States at a low level, which allowed European central banks, particularly the Bank of England, to obtain loans at advantageous rates to strengthen their currencies and increase their gold reserves; later, the focus turned to persuading central banks to hold British pounds as a reserve currency, thus guaranteeing a steady demand for the currency of the United Kingdom.

The United States inadvertently contributed to the expansion of the stock market's speculative bubble by keeping interest rates at exceptionally low levels.

Ahamed points out that although these actions provided short-term respite, they inadvertently shook the world's financial stability by setting the stage for an unsustainable surge in the stock market within the United States.

Other Perspectives

• The reparations and debts from WWI were significant, but the severity of their impact on international relations can also be attributed to the lack of effective international institutions to manage post-war recovery and cooperation.
• The failure of the gold standard can also be seen as a result of rigid economic policies and the unwillingness of countries to adjust their domestic economies to the international monetary system.
• The escalation of conflict between France and Germany over reparations was not solely due to monetary commitments but also deeply rooted in historical animosities and nationalistic sentiments.
• While the United States did emerge as a principal creditor, this was also a reflection of its isolationist policies that prioritized American economic interests over international stability.
• The varied approaches to debt collection by France and the United States may have hindered recovery, but the lack of coordinated international economic policies and the overall economic fragility of the time played a larger role.
• The Dawes Plan's aim was not just to prolong Germany's economic resurgence but also to stabilize the European economy and prevent further political unrest.
• The Dawes Plan did not merely mask inherent disputes; it provided a necessary breathing space for Germany and other economies to recover in the short term.
• The influence of the United States post-WWI was significant, but it was not the only factor shaping global power structures; emerging ideologies and other nations' policies also played a role.
• The policy changes in the United States to address global financial imbalances were part of broader international efforts, and the reliance on the British pound sterling was also due to the UK's historical financial dominance.
• The contribution of low US interest rates to the stock market bubble is a complex issue, and other factors such as technological advancements, cultural shifts towards consumerism, and speculative practices in the banking sector also played significant roles.

The historical events of economic downturn in Germany, followed by a stock market collapse, subsequent banking chaos, and the disruption of European monetary systems, may reflect the present circumstances.

Ahamed argues that the descent into the economic depression of the late 1920s was not triggered by a single catastrophic event such as the Wall Street crash; instead, it was the cumulative effect of multiple escalating crises that began with the economic downturn in Germany in early 1928.

The parallels between the halt in American financial investments in 1928 and the volatility of the Mexican Peso in 1994, the downturn of the U.S. stock market in 1929 and the speculative bubbles of 2000, the turmoil in the American banking sector from 1931 to 1933 and the ongoing worldwide financial instability, and the European economic downfall in 1931 and the turmoil in emerging markets from 1997 to 1998.

The author argues that the financial downturn that occurred in the late 1920s shares notable parallels with the recent worldwide economic disturbances, with regard to both their causes and the strategies implemented to manage them. Ahamed draws parallels with the sequence of financial disturbances that started with the dwindling of American financial support to Germany at the outset of 1928, which was soon followed by the devastating Wall Street collapse of 1929, the ensuing banking disturbances spanning from the early 1930s, and the widespread move away from the gold standard by numerous countries in 1931, likening them to modern financial upheavals such as the 1994 Mexican Peso crisis, the collapse of the stock market in 2000 along with the internet bubble, and the credit and banking crisis that occurred in 2007-2008.

Other Perspectives

• Historical events may not be directly comparable due to different contexts, such as changes in technology, globalization, and regulatory environments.
• The causes of economic downturns are complex and may not be directly analogous across different time periods.
• Management strategies for economic crises have evolved, and what worked in the past may not be applicable or effective in the present due to changes in economic structures and institutions.
• The comparison between the halt in American financial investments in 1928 and the volatility of the Mexican Peso in 1994 may overlook significant differences in the economic and political circumstances of the two countries.
• The speculative bubbles of 2000 had unique characteristics, such as the role of technology and the internet, which may not have a historical precedent in the 1929 stock market crash.
• Ongoing worldwide financial instability may have different root causes compared to the turmoil in the American banking sector from 1931 to 1933, such as the increased interconnectedness of global financial markets and the role of complex financial instruments.
• The turmoil in emerging markets from 1997 to 1998 may have been influenced by factors that did not exist in 1931, such as the role of international financial institutions and the speed of capital flows.
• Economic downturns and recoveries can be influenced by a wide range of factors, including fiscal and monetary policy, which may differ significantly from one period to another.

The economic downturn was mainly a consequence of misguided choices by central bank authorities and policymakers, rather than being due to inescapable economic conditions.

Ahamed challenges the notion that the Great Depression was an inescapable disaster in the annals of history. He contends that it was the outcome of a series of inadvertent, albeit ill-advised decisions in the realm of policy formulation.

The indecisiveness of the monetary policymakers during the turmoil, along with their disastrous decision to return to a dysfunctional gold standard.

Ahamed emphasizes that central bankers made two critical mistakes: they insisted on maintaining a monetary system based on gold, which was ill-suited and inadequate for the economic difficulties of the 1920s, and they lacked the decisive action required when confronted with burgeoning crises.

Norman: His distinct personality, perspective, and neurotic tendencies shaped his impact on Strong.

The suggestion by Ahamed is that the distinct mental traits and personal peculiarities of the key financial officials played a crucial role in shaping the economic and political path of the 1920s. Montagu Norman, known for his peculiar behavior, reserved demeanor, and preference for secrecy, held traditional upper-class conservative views and was profoundly dedicated in a manner that shaped the Bank of England's policies in a way that was advantageous to Germany.

Norman was instrumental in persuading the United States to adopt approaches that ultimately turned out to be unsustainable on the international front.

Norman, despite his status as the most seasoned of the four central bankers, was continually beset by a sense of inadequacy. The author suggests that his uncertainties fostered an unusually close relationship with Benjamin Strong. He persistently advocated for the U.S. Federal Reserve to enhance its role in bolstering the global economy, which relied heavily on America's substantial gold reserves for operation. He unintentionally contributed to the expansion of the American stock market's speculative bubble, which subsequently had a destabilizing impact globally, through persuading the Federal Reserve to ease its borrowing constraints in 1927 to aid the British pound.

Strong was recognized for his international outlook, his battles with health issues, and his engagement with the Federal Reserve, in addition to his relationship with Norman.

Benjamin Strong, who headed the New York Federal Reserve, radiated an energetic and robust presence that imparted a feeling of confidence and command. He was lauded in the financial community of the United States post-war, receiving accolades from European monetary officials and prominent individuals within New York's finance realm for adeptly guiding the Federal Reserve's operations during its initial period of confusion. The frenzied facade concealed a profound inner turmoil. Since being diagnosed with tuberculosis in 1916, he constantly faced the looming risk of its return, leading him to spend almost half of his time recovering at different health resorts and sanatoriums. Strong’s great failing was his inability to put down roots. He suffered the deep anguish of his wife's suicide, saw one of his daughters fall victim to a severe infectious disease, and was compelled to place his other daughter in a medical institution for extended treatment.

Ahamed argues that a deep feeling of solitude, combined with his economic and financial convictions, significantly influenced his dependence on colleagues like Norman. His commitment to support Norman and his efforts to assist, especially during the challenges faced by the British pound in 1925 and 1927, led the Federal Reserve to engage in imprudent strategies that significantly contributed to the speculative mania on Wall Street, ultimately having severe consequences for the worldwide economic system.

How his premature death deprived the world of the one central banker capable of preventing the crash from becoming a depression.

Ahamed suggests that the sudden passing of Strong in 1928 was the critical event that precipitated the beginning of the severe economic downturn. During a period of escalating global economic turmoil, he was singularly equipped with the essential expertise and abilities, and was in the distinct position of overseeing the world's largest gold reserves, which could have mitigated the chaos and prevented a catastrophic result.

Schacht earned his reputation through his vast ambition, his knack for capitalizing on opportunities, his intellectual prowess, and his unwavering attention to matters related to wartime reparations.

Hjalmar Schacht, who presided over the Reichsbank starting in 1923 until 1930, was distinguished by his exceptional intellect and creativity, along with an unquenchable thirst for authority and boundless confidence, making him the most notable of the four central bankers. Schacht was proud of his rise in social status, accomplished without the benefits of affluence, aristocratic heritage, or a military background. During his time at the Reichsbank, the author claims that his primary objective was to alleviate the heavy reparations imposed on Germany after the war. He firmly believed that Germany did not possess the necessary means to honor its financial obligations and therefore required alleviation from its oppressive debts.

His approach to policy-making, which he carried out in isolation, further jeopardized the established system's stability.

Ahamed suggests that Schacht's tendency to make decisions independently, without consulting his political superiors, along with his deep concentration on the financial penalties levied against Germany, resulted in choices that were arbitrary and lacked consistency. In 1927, he engineered a stock market crash driven by worries regarding Germany's ability to pay off its obligations. In 1929, his frustration with the stagnant progress at the Young Conference regarding reparations prompted him to provoke a crisis, where he demanded the return of Germany's previous territories. The writer contends that the benefits Schacht and his nation garnered were insubstantial, only serving to heighten the era's strains and amplify worldwide distress.

The adoption of novel financial tactics and the use of flawed tools exacerbated the problems.

The writer believes the economic decline was a result of insufficient innovation and determination. The origins of the worldwide economic challenges stem from the post-war era, characterized by mounting debts, an uneven allocation of gold reserves, a decline in international commerce, and a pervasive loss of trust that influenced global political dynamics.

The gold standard necessitated a rigid structure within which central banks were compelled to adhere to rules that were not well-suited for addressing the prevailing challenges.

Ahamed argues that the decision to revert to the inflexible pre-war gold standard, compounded by the central bankers' inability to adjust to the post-war economic landscape, was a grave error.

Other Perspectives

• The economic downturn was complex and multifaceted, with factors such as structural weaknesses in the global economy, overproduction, and high tariff barriers also playing significant roles.
• The gold standard had been a cornerstone of international finance for decades, and its reinstatement was widely supported at the time as a means to ensure monetary stability.
• The personalities of central bankers like Norman and Strong may have influenced their decisions, but they operated within a broader context of political and economic constraints that also shaped policy outcomes.
• The actions of central bankers need to be assessed in light of the limited economic knowledge and tools available at the time, which may have constrained their ability to respond effectively to the crisis.
• The relationship between Norman and Strong, while influential, was just one of many international relationships and factors that influenced economic policy and outcomes.
• The assertion that Strong's death was a turning point that led to the Great Depression may overstate the influence of any single individual in the face of global economic forces.
• Schacht's policies were at times successful in stabilizing the German economy, and his focus on reparations reflected widespread German sentiment and the burdensome nature of the Treaty of Versailles.
• The criticism of Schacht's isolated policymaking does not account for the broader political dynamics in Weimar Germany, which often necessitated decisive and unilateral action.
• The economic decline of the late 1920s and early 1930s was exacerbated by a range of factors, including geopolitical tensions and market psychology, not solely by the actions or inactions of central bankers.
• The gold standard, while rigid, provided a framework that had previously facilitated a significant expansion of global trade and investment, and its problems were not universally foreseen or agreed upon.

Central bankers have the capacity to calm or intensify financial concerns with their public statements.

In times of financial instability, it is crucial for central bank leaders to manage monetary policy and fiscal measures while also responding to the public's expectations and worries. The story describes the difficult choices the four central bankers had to make as they weighed the option of providing potentially misleading reassurances against the necessity of honesty, even if it meant exacerbating the already widespread fear.

Other Perspectives

• Central bankers' statements are just one of many factors that influence financial markets, and their impact can be overstated when compared to underlying economic conditions and other market dynamics.
• The effectiveness of central bankers in managing public expectations can vary greatly depending on the level of trust and credibility they have established over time.
• There may be instances where central bankers need to withhold full transparency to prevent panic or to buy time for implementing solutions that could stabilize the situation.
• The assumption that honesty will necessarily exacerbate fear may not always hold true; in some cases, clear and transparent communication can build trust and help stabilize markets.
• The dichotomy between providing reassurance and being honest is not always clear-cut; central bankers can provide nuanced messages that are both honest and reassuring, depending on the context.
• The role of central bankers is sometimes limited by political and economic constraints, which can restrict their ability to respond effectively to financial instability.

The shift from prioritizing currency stabilization to adopting a wider scope of economic oversight brought with it numerous challenges.

Throughout the 1920s, the organization experienced considerable transformations. Before the conflict began, central bankers viewed their main role as guardians of the monetary system's steadiness, maintaining its consistency and safeguarding the system's ability to be exchanged for gold. After the war, as nations struggled to regain equilibrium and faced fluctuating prices, the scope of central banking duties widened to include not just maintaining the value of money but also fostering economic growth and striving for complete job availability. During the interwar period, the transition was characterized by volatility and strain as the emerging field of managing national economies left economists and bankers lacking a common vernacular for discourse and devoid of the necessary instruments to grasp the intricacies at play. The central bank's leader was confronted with a heightened challenge, having limited tools at their disposal, and this situation was exacerbated by significant political pressures from their governments, media, and various stakeholders eager to influence policy decisions in an environment where government funds were exhausted and these banks managed the distribution of credit.

Other Perspectives

• The view that central bankers primarily saw themselves as guardians of monetary stability in the 1920s might be oversimplified, as some central banks, particularly in countries that were less affected by World War I, may have already been engaging in broader economic oversight.
• The assertion that the widening of central banking duties to include economic growth and job availability was a post-war phenomenon could be contested by historical evidence of earlier efforts or discussions in this direction.
• It could be argued that the volatility and strain of the interwar period were not solely due to the transition in central banking but also due to broader economic and political upheavals, including the Great Depression and the rise of protectionism.
• The claim that economists and bankers lacked a common vernacular for discourse might be challenged by pointing out that there were significant developments in economic theory and international cooperation during the interwar period, such as the establishment of the Bank for International Settlements in 1930.
• The idea that central bank leaders had limited tools at their disposal could be countered by noting that the period saw the development and implementation of new monetary policy tools and frameworks, although they may have been imperfect or insufficiently understood at the time.
• While political pressures undoubtedly influenced policy decisions, it could be argued that central banks retained a degree of independence and that some policy decisions were based on economic principles rather than political expediency.
• The statement that central banks managed the distribution of credit in an environment of exhausted government funds could be nuanced by acknowledging that the relationship between central banks and government finances varied significantly across different countries, with some central banks having more autonomy and resources than others.