Lords of Finance – Review
The book Lords of Finance provides a penetrating insight of the history about the economy during the World War I period and the great depression that began in 1929. It is commonly known that the Great Depression was an unavoidable part of the happenings in the economy, and it was beyond any person’s or government’s control. The book reveals that the economic problems that were experienced during the Great Depression came along as a result of the decisions that were made by several central banks. The economic meltdown had devastating effects that later led to the nations disagreeing with each other, which was the key cause of the World War II (Dowswell 118). The book explores the life history of four men who were heads of central banks of their times and the impacts which they had on the economy of various countries. The way of life of these individuals changed the course of the twentieth century causing a complete turnaround of the economy of their respective country and that of the world economy in general.
In the book, we are introduced to Montagu Norman who was the president of the Bank of England. Montagu Norman has an uninteresting character as he is emotional and hard to understand (Ahamed 25). His personal character is distinct since he seems to be suffering from neurosis so that he is easily irritated. Norman was determined to return to the gold standard after the war period as he termed the gold standard as a matter of national pride. He got strong support from Benjamin Strong, head of US Federal Reserve, who was also his friend.
The second character in the banking world at the time that we are introduced to is Emile Moreau who was the president of Banque de France. Emile Moreau has a xenophobic and suspicious character in his personal life, which makes him stubborn and hard to deal with. He seems to criticize everything. The next governor is Hjalmar Schacht from Germany. He is arrogant in his personal life but despite his arrogance, he is very bright and makes wise decisions, which are based on facts, something that was rare in his times (Ahamed 28). Benjamin Strong was the head of Federal Reserve Bank of New York. From the look on his face, he was full of energy and highly determined to get a forward drive. However, his face which displayed a person that was full of energy only acted to cover the real him.
After the World War I, almost all the countries were defeated, and they experienced a decline. Most of the countries were on the verge of collapsing economically, which posed a great challenge. The continued existence of the economies purely lied on the hands of the economy heart beat which was the central banks of the individual countries. It was purely the role of central banks to ensure that they took necessary measures so as to control the main threat that the economy faced and this was the probability of collapsing.
Despite the bank heads’ differences, they were brought together by a common fear, which was the fact that they had to prevent inflation. All these countries had stood strong with the capitalism ideology. However, after the adverse effects of the war, there were threats that the economy of their respective countries would collapse, which would consequently mean that the ideology failed. The heads of the central banks had to make sure that the economy of not only their own countries but even the economy of the rest of the countries that practiced capitalism had to stand strong so that they could minimize the effects of capitalism.
The book also included John Maynard Keynes, whom it suggests to also have a greater insight about the depression than the rest of the people. After Germany lost in the World War I, its allies demanded reparation of $100 billion dollars. Keynes, being an economist at that time was one of the few people who understood the implications that reparation would have on the economy. The war had left most of the European countries bankrupt and hence the demand of $100 billion dollars was over stretching the economy of Germany because that amount was nearly ten times higher than the Germany’s GDP at that particular time. Keynes was fully aware that so as to pay any amounts to her allies, Germany had to export more commodities than it was importing. At that particular time, it was impossible to have more exports than imports since the country’s economy had already been weak. Exporting more than the imports would mean that the economy was at threat and more so, it was not only the economy of Germany that was threatened but the economy of Europe as a whole.
Although reparation was negotiated and reduced, it still did not save the situation of Europe as Germany still had to pay amounts that were higher than its GDP. Germans at that time were filled with bitterness as they felt that they had unfairly lost in the war. The leaders were also bitter not only because of the amount that was being demanded from them, but also because they felt that their position as one of the greatest super power had been shaken, and other countries did not respect them as they used to.
One of the greatest events that happened was the dinner that was held at 11 Downing Street in March 1925 where Chancellor Winston was in a dilemma whether to go back to the gold standard or not. Norman Keynes was not invited to the dinner due to personal differences with Winston. Norman warned them of the devastating effects that going back to the gold standards would have. Despite the warnings, they finally settled on a single opinion that they had to go back to the gold standard so as to make sure the dignity of Britain was maintained. They decided on this fact despite the problems that they foresaw to happen. The results were devastating as the world gold reserves at that particular time were not enough to sustain the country’s economy. The banks were under pressure, and the British manufacturers became wiped out of their export market.
For a brief period in the mid 1920s, their efforts were seen as highly successful as the world currencies seemed to have stabilized. The stabilization was as a result of great effort as the currency had in the past been faced by acute fluctuations with the economy experiencing great variation with time. Capital in these countries started flowing freely, which made the bank heads believe that they had achieved their dreams that were to strengthen and stabilize their economy. However, with time there started to appear problems with the set out economy situation of the time. There were cracks in the setting of the financial system that had been put up. The main reason that had been attributed to the weakening of the economic system, which had seemed to be strong enough, was the revelation that gold standards that were termed as the umbrella of stability had proved to be unreliable.
After World War I, the US returned to gold at $20.67 parity since much of the gold had reached her shores during the war period from the other European countries. However, for the rest of the European countries, it was hard to go back to the gold system. The main reason it was hard for them was that most of their gold reserves were depleted during the war. The countries had used all the gold they had during the war, and for this reason, the inflation rate was on the peak high. During the war period, the central banks did not have full control of evaluating the amount of currency in the circulation. As a result of the banks’ inability to control the amount of currency, the inflation rate continued to increase almost in all countries across Europe. For this reason, the currency which could be exchanged for gold was a major problem as the currencies of most countries had lost value at a great rate.
After the discovery of the fault in the common belief that gold was a universal measure of stability, there were many outcomes. Countries had previously used gold to maintain their economies at a stable position. Different banks had created their reserves using the gold bars as they believed that the gold prices would remain relatively the same over time. However, after the revelation that the gold could not be termed as a universal measure, it became difficult for the banks to continue holding to the gold that they had in their reserves. The world economy was mostly held by these super power countries, which were the strongest, and hence the controllers of the economy during that particular time. The threat of the economy shook the super power countries, and because of this, the world economy, which was purely driven by those countries, began a downward spiral. The downward spiral had devastating effects both on the host countries and the other countries in the world in general. The widespread effects that the spiral movement had became to be known as the Great Depression (Watkins 150).
Massive inflow of gold to the US economy led to the increased productivity in the country. New York Fed Strong started to cut short the effects of adding gold on the money supply. The US financial controllers contracted the amount of credit that they supplied the banks with; this acted to offset any liquidity that came about from the gold inflows. It was important because it provided a clear explanation that could rectify the commonly held belief that the economy of the 1920s was inflationary. The major evidence showed that Fed failed to liquefy the economic activities when it was highly needed since the economy was growing at that particular time.
Government price indices have been found to be inaccurate. Ahmed noted that, since 1925, the US wholesale price on the products fell by ten percent while the consumer prices have fallen by two percent. It is believed that, in the 1920s, the economy was inflationary, while in the 1930s, it was deflationary. On the other hand, England jumped back to the gold standard; it struggled a lot to remain on the gold standard since it was unable to acquire enough gold to regularize the standard.
Things to Learn from Lords of Finance
One of the main reasons that can be attributed to the Great Depression is the collapse of Germany’s economy. The reason behind Germany’s economy collapse was the fact that its allies who had lost in the World War I demanded high amounts of reparation. Were it not for the great amounts that the countries were demanding, Germany would have found other means to repay the amount. The Great Depression that arose from these factors should act as a lesson to creditors. Before demanding the debt from the debtor, the creditors should first consider the debtor’s financial position; if the debtor cannot repay, then the debtor should not be put under pressure as it could have negative impacts on everyone around them.
Another lesson to be learnt from the Great Depression is the need for consultation of the managers. John Keynes had foreseen that the gold standard would never have positive impacts on the economy of the countries; however, the managers had ignored him and instead continued to use the standard. If the governors had listened to him and abandoned using the standard, than the Great Depression would have been avoided, and even if not completely avoided, its effects would have been mitigated. Governors and managers never learn from this incident and stop over relying on their instincts and professional advice.
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In today’s world, people never seem to learn from the Great Depression and the influence that the political system has on the rate of inflation and economic stability. Before France returned to the gold measure, Prime Minister Raymond Poincare played a great role in enhancing the stability and improving the franc health. Within the Prime Minister’s first week arrival to his office, franc was greatly strengthened as it decreased from 50 dollars to 35 dollars. It should be a lesson that in today’s economy, not only the money supply that matters, but also, there are other factors that influence the stability of the economy including the political conditions.
Due to the current conditions and depression experienced in various countries, it proves that people fail to consider the need for international cooperation (Lagadec 102). If the governors had cooperated, they would have foreseen the trouble in the future that could arise from their decisions. Currently, many countries such as Greece get themselves in crisis; it shows that people are yet to learn the importance of cooperation between the various countries. If the top managers and governors start to consider the need of working together on the international levels, then it will become easier for them to foresee any danger in the future.
- Ahamed, Liaquat. Lords of Finance: The Bankers Who Broke the World. London: William Heinemann, 2009. Print.
- Dowswell, Paul. The Causes of World War II. Chicago: Heinemann Library, 2003. Print.
- Lagadec, Erwan. Transatlantic Relations in The 21st Century. London: Routledge, 2012. Print.
- Watkins, Thomas H. The Great Depression. Boston: Little, Brown, 1993. Print.