Publisher : Tantor Media
Publication Date : 2009 04 01
>> Test tube Economics
The Lords of Finance is about economics in a test tube or large scale monetary tinkering in response to the upheavals of the first half of the 20th century WWI the Depression etc It is about how the four leading economic powers led by the equivalent of four feds dealt with economic chaos without an apparent clue as to the forces at work In a word the US UK France and Germany had to make it up as they went along a form of alchemy almost simply because they didn t have the background we have today In fact they created the background we use today to keep the economic ship aright
I was struck by the vast impact of the punitive reparations meted out to Germany by the post WWI Treaty of Versailles in 1919 Resultant inflation for example was so bad in Germany at one point in the 20 s that the exchange rate of reichsmarks to dollars was billions to one Also the gold standard was considered sacred no matter what was going on a leading factor in extending the Depression at least according to this book
I also learned in passing that even before WWI war was considered unwise because of massive international economic linkages of imports exports loans and interest rates facts that we are take for granted today
The good news out of this misery if any is that nowadays economics should be more science and less art at least if we ve learned from our mistakes in bygone eras
>> How We Stumbled Into The Great Depression
In the middle of a recession there are invariably questions about how we got into it and what we can do to get out of it Politically it quickly devolves into a conflict between the market driven laizzez faire economists and the interventionist Keynesian ones Television and radio infotainers yammer on using their own peculiar jargon that leaves the rest of us who are not economists as much in the dark as we were before
I wanted to know more so I picked up Liaquat Ahamed s detailed history of how the world stumbled into the Great Depression Lords of Finance Ahamed is a twenty year veteran of investment banking and some paragraphs have to be read over a few times but generally it s written for the layman It comes in at 508 pages without notes but it reads like a well crafted novel
The main characters the Lords themselves are Montague Norman of the Bank of England Hjalmar Schacht of the Reischsbank in Germany Benjamin Strong of the N Y Federal Reserve Bank and Emile Moreau of the Banque de France all of whom were well intentioned but ultimately flawed men who were not immune from the kind of gross miscalculations and unwarranted fears that led to the financial disaster of the Great Depression While a great deal of information may be gleaned from their stories that is applicable to the present one must be cautious 2010 is not 1929
Some of the miscalculations early twentieth century central bankers made were over the conduct and financing of World War I No one in financial circles believed the war would outlast the various governments ability to pay for it They were all on the Gold Standard you see and the financial resources of each country were tied to their reserves of gold It was hard to imagine Germany France and Britain would be so foolish as to burden their countries with massive debt just to keep a war going
These top hatted and stiff collared expert prognosticators mired as they were in centuries old financial traditions based on the availability of precious metals completely overlooked the proclivity of wars particularly wars between monarchies empires and single party republics to be self sustaining and self fulfilling If wartime governments run out of money they borrow it mostly from foreign banks incurring massive debt If they don t have enough currency they print it all to keep the war going toward ultimate victory at which time all debts will be easily repaid Or so they thought
The incipient catastrophes from financing the First World War in so unsustainable a fashion were exacerbated by the enmeshment of world financial interests In the introduction Ahmed explains Because financial institutions were so interconnected borrowing large amounts of money from one another even in the nineteenth century difficulties in one area would transmit themselves throughout the entire system
Ahamed stops way short however of ascribing this financial entanglement to any conspiracy of central banking institutions In retrospect it may read like a Dan Brown novel but conspiracies require agreement and the central bankers in the 1920 s could agree on almost nothing Scrambling to force some post war order on the economies of their respective countries they formed alliances made enemies forced concessions engaged in blackmail and all manner of intrigues eventually stumbling into Great Depression through incompetence a too rigid loyalty to ideological principles and misguided policy
The biggest blunder on the road to the Great Depression was the New York Fed s decision to lower interest rates It may have helped Germany s cash flow but it caused massive speculation on Wall Street as investors borrowed more and more money to purchase stocks further inflating the bubble that burst on October 29 1929 Black Tuesday
Ahamed writes Their goal is a strong economy and stable prices This is however the very environment that breeds the sort of over optimism and speculation that eventually ends up destabilizing the economy In the United States during the second half of the 1920s the destabilizing force was to be the stock market p 280
We are put in mind of the economic situation in America before the current recession Overspeculation easy credit artificially inflated prices and a protracted military campaign resulting in massive bad debt much of which is held by foreign banks principally China
In the Depression as well as today the main conflict on the road to recovery was
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 p 230
Traditionalists said Government should keep its hands off the economy and allow the invisible hand of the market to determine its course as proposed by eighteenth century economist Adam Smith Others principally twentieth century economist Maynard Keynes said the government must have control over the economy to keep market pressure from destabilizing it
The real issue for the Federal Reserve governors was that many of the banks closing their doors had sustained such large losses on their loans that they were insolvent the governors made it a principle to let them go under They failed to recognize that by doing so they were undermining public confidence in banks as a repository of savings and were causing the U S credit system to freeze up p 391
What government aid did come was too late By that time Ahamed writes Banks shaken by the previous two years instead of lending out the money used the capital so injected to build up their own reserves
Ahamed seems to say that when a crisis looms the injection of funds to shore up failing banks should come sooner rather than later and in sufficient quantity to capitalize the banks and allow them to begin lending When Adam Smith s invisible hand goes arthritic Maynard Keynes is there to take over the heavy lifting
Amid the chorus of our own contemporary know nothings who spout partisan absurdities about the government not getting involved in economic policy or how deficit spending to get the economy out of crises is tantamount to cultural Armegeddon Ahamed s analysis is a voice of reason The Great Depression was caused by a failure of intellectual will a lack of understanding about how the economy operated No one struggled harder than Maynard Keynes He believed that economists are the trustees not of civilization but of the possibility of civilization p 504
That s something even an artist like me can understand
Bad debt is according to Robert Kiyosaki debt that does not put money in your pocket
>> Absorbing history of a difficult subject by a fine writer
Germany funded 90 of World War One through inflation and borrowings 10 through taxes A rather painless way to fund a war but only if you win The pebble in the pond theory of history kicks in the cause of Germany s collapse in 1933 the pebble being war reparations the culpable Britain France and the United States to a lesser degree Margaret MacMillan s 2002 best seller Paris 1919 lays the groundwork for the accusation against Lloyd George Clemenceau and Wilson even Foster Dulles Ahamad s fascinating book focuses on the machinations of the four central bankers of the major powers post World War One His hero however is Maynard Keynes the brilliant Cambridge scholar and economic gadfly whose soaring reputation dominates modern economic theory a half century after his death in 1946 The dry stuff of monetary and economy theory are simplified explained charted and brought to life with enticing details and cameos of the major players Even minor ones get some billing Harry Dexter White Henry Stimson Rudolph von Havenstein You are not left with names but with flesh blood and anecdotes Of the four bankers Hjalmar Schacht intrigues somewhat bizarre as he joined up with Hitler and then was tried and acquitted at Nuremberg Ahamad s priceless photo of Hitler and Schacht marching lock step both with tight demonic stares tells all Germany s inability or refusal to pay the huge bill of war reparations when coupled with its a fragile constitution divided politics bitterness and middle classes decimated by inflation doomed it A whimsical description of FDR and how he daily calculated the price of the dollar concludes the book In sum this is really about government s power to debase money The gold standard was the only plausible defense against the downward spiral in the value of money Once gone we have what we have in the world today A timely read
