Finance lessons from the lost decade

Liaquat Ahamed. Liaquat Ahamed. (Brendan Smialowski/Getty Images (left))
By Ross Kerber
Globe Staff / March 24, 2009
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As the faltering economy gives rise to once-unspeakable comparisons to the Great Depression, along comes this fantastic book reminding us that the financial crisis of the 1930s was solved by specific policy steps - just as the problems of today shall be in time. The thing is, most of those steps weren't the first choices of the bankers or finance ministers in charge, and their stumbles "Broke the World," as the subtitle of this sweeping history has it.

This isn't an optimistic message from Liaquat Ahamed's telling of a lost decade, a narrative organized around the lives of four central bankers from each of the world's leading powers -- the United States, Britain, France, and Germany. Each emerged from World War I with different economic priorities, and the mess of the Versailles treaty left each codependent on the others in ways that would warp their economies throughout the 1920s.

In guiding the reader through technical details of issues including the Gold Standard, reparations payments, and war debts, Ahamed shows how each national bank head struggled with the orthodoxies of the day. Sometimes it was politicians and outsiders, not bankers, who pressed for or allowed the solutions that led their economies back onto their feet, for better (Roosevelt) or worse (Hitler).

In that light the book serves as a cautionary tale of the limits of financial knowledge and the potential for officials to get it wrong at any turn. But it also should give pause to those who would try to limit officials' choices with harsh constraints on their actions, one intent of the Gold Standard that most nations used to back up their currencies through the Great War.

As Ahamed shows, the Gold Standard was flawed in many ways such as allowing mining discoveries to affect the supply of money. But in a wonderful scene, he shows why its backers -- who came to include Winston Churchill, the Britain's treasury secretary -- stuck with tradition in the face of criticism from upstart economists like John Maynard Keynes, one of the heroes of the era.

As the two and others debated over a salubrious dinner at Churchill's 11 Downing St. residence, Ahamed writes at one point, the discussion "reflected, at bottom, a philosophical divide between those who believed that governments could be trusted with discretionary power to manage the economy and those who insisted that government was fallible and therefore had to be circumscribed with strict rules."

In setting up his narrative, Ahamed faces some limits in his material. The reclusive British bank head, Montagu Norman, wasn't even in attendance at this key dinner. Norman's savvy US counterpart, Benjamin Strong, died in 1928, before the storm broke. Neither man always acted in concert or agreement with their French and German counterparts, Émile Moreau and Hjalmar Schacht, respectively.

But the four bankers mark as good a group as any to lay out the choices left to policy makers as the 1920s got under way. Harsh payments imposed on Germany had backfired by wiping out its value as a trading partner and hobbling the ability of Britain and France to repay war debts to the United States. Each nation in its way tried to balance the world's interests with their own, with mixed results.

Ahamed, an investment manager also involved with the Brookings Institution, writes that he grew fascinated with the era after looking for parallels with the trio that Time magazine famously credited as the "Committee to Save the World" -- Alan Greenspan, Larry Summers, and Robert Rubin. Though he barely mentions the modern day in his book, the parallels are clear throughout -- starting with Norman, whose hatred of publicity and of explaining himself ate steadily away at his credibility. The problem for all officials in the face of panic, Ahamed writes elsewhere, is that honesty can feed a frenzy, while bland reassurance "usually entails resorting to outright untruths."

Ahamed has a compelling ability to package other universal truths within complex financial explanations, such as his description of how the real question each country faced in the 1920s was whether to deflate their prices or devalue their currencies. A section on Germany's Schacht in particular is fascinating for the bargain it describes him striking with Hitler in order to become the country's top banker for much of the 1930s. It then sketches Schacht's disillusionment that alienated him from the Nazis so much it led to his acquittal at the Nuremberg war crimes trials.

Even though Ahamed was writing before the scale of today's problems became clear, he sums up all he needs to, in a brief epilogue, the real horror of the era: that it took bankers too long to dope out the problems and react strongly enough. It wasn't the storm of events but rather "a lack of understanding about how the economy operated" that caused the Great Depression. Here's hoping that whatever mistakes leaders make today, they make them quickly.

Ross Kerber is a Boston Globe business reporter. He can be reached via

LORDS OF FINANCE: The Bankers Who Broke the World By Liaquat Ahamed

Penguin, 576 pp., $32.95

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