With penetrating insights for today, this vital history of the world economic collapse of the late 1920s offers unforgettable portraits of four men--Montagu Norman, Amile Moreau, Hjalmar Schacht, and Benjamin Strong--whose personal and professional actions as heads of their respective central banks changed the course of the twentieth century.
Ahamed starts his book at the end of World War 1 and tells the story of how the western world ended up in a series of financial disasters that lasted through the 1920s and well into the 1930s. He does this by focusing on four central bankers: Montagu Norman, Governor of the Bank of England, Hjalmar Schacht, at the Reichsbank, Emile Moreau at the Banque de France, and Benjamin Strong, Governor at the New York Fed. All four were interesting guys with plenty of eccentricities to liven up the book. Norman and Strong became very good friends. Their decisions, and indecision at critical times, contributed to an imbalanced global economy tipping over into chaos again and again. It has huge parallels to what's going on today in the US and in the Eurozone.
The book has a great blend of economics and anecdote - I have dogeared so many pages. Some other reviewers have found the anecdotes offputting, but I loved them.
The story goes something like this (and without Ahamed's eloquence): Before World War 1, most world economies operated fixed exchange rates under a system called the gold standard. Money was backed by gold - you could rock up to the central bank, present your francs or dollar notes, and ask for a gold ingot. This worked well enough, and was treated as the holy grail of macroeconomics by central bankers and politicians. Trying to stick to the gold standard after World War 1 made already serious economic problems insurmountable.
The Allies were enormously in debt to the US, which had entered the war much later, and Germany was even more enormously in debt to the Allies because of the level of reparations payments assigned at Versailles. The US already had much more gold than it needed, and it kept getting more. Ahamed covers the endless negotiations about Germany's reparations really well, and goes through everything that followed - Germany's hyperinflation, France's surprising economic bounce-back until the 1930s by fixing their exchange rate lower than sustainable (making its exports recover quickly), the UK getting back onto the gold standard at too high a rate, Germany's financial crisis in 1929, the US stock market crash, then a series of banking crises from 1931-33.
In the end, but too late to avoid the massive hardship of the depression, the US abandoned the gold standard and let the value of the US dollar fall. The central bankers come out of the book looking fairly useless (albeit when faced with extremely difficult problems - hindsight is a wonderful thing), and so do most of the politicians. FDR and Keynes look pretty good overall.
The literature on the economic problems of the 1920s and the Great Depression of the 1930s is enormous, but most of it was written by economists and is unintelligible to the average reader. Ben Bernanke's "Essays on the Great Depression" is perhaps the most authoritative analysis, but requires a fairly deep understanding of macroeconomic theory. The writings of Barry Eichengreen, including his book "Golden Fetters" on the critical role played by the gold-based exchange rate system, are more accessible but still highly technical and a challenging read.
By focusing on the central bankers (from Britain, Germany, France, and the United States) who were at the center of economic policymaking in the 1920s and 1930s, Ahamed has found a vehicle that permits a non-technical telling of this extremely important story, one that most people have absolutely no knowledge of, though it was of central importance in shaping the global economic system we have today. He has read the economic literature and in this book proceeds to explain it in human terms.
Moreover, focusing on the personalities and politics behind the policy mistakes of the time highlights an important point: the Great Depression was a man-made event, an avoidable confluence of events and decisions that had catastrophic consequences. True, even the most expert of the decision-makers of the time did not really understand all the consequences of their actions - we benefit from that famously golden hindsight. But as Ahamed's story makes clear, they understood enough to know that many of their actions put the global economy at risk, but they went ahead anyway, often because of the short-term benefits to national, as opposed to international, economic growth and stability.
One can argue, in fact, that the Great Depression (the worldwide catastrophe, not the cyclical downturn in the United States sparked by the 1929 Wall Street crash) was the result of a massive failure of economic diplomacy. As an already unstable system of international finance began collapsing in 1931, central bankers, constrained by national biases, domestic priorities, and an unquestioning allegiance to the gold standard, failed to act and the global economy collapsed.
This failure was recognized at the time, and it's the reason why the post-World War II economic system, created at the Bretton Woods conference in 1944, was not placed in the hands of central bankers. Economic diplomacy has, ever since, been the province of finance and foreign ministries as much, or more, than central banks.
My only quibble with Ahamed's book (the reason I don't see it as a clean, first-swing home run) is his compulsion to find "colorful" stories to attract readers who might otherwise be put off by economic history. He never fails to profile (mercifully, usually in a brief paragraph) any interesting character he comes across. For instance, discussing key individuals who influenced Benjamin Strong (the New York Fed chief who is one of his main characters) at the time of the 1919 Versailles Peace Conference, Ahamed describes the colorful life of Willard Straight (pp. 133-134).
Straight was an adventurous, controversial character who spent years in China as a US diplomat and as a sometime agent of E.H. Harriman, who was interested in Manchurian railway developments. The problem is, he died suddenly in December 1918, before the Versailles conference got underway, and then it turns out that Strong himself fell ill and did not reach the conference until the final days in the summer of 1919. Just what role Straight may, or could, have played is not revealed. The colorful anecdote is enough to justify his inclusion.
Still, this is the best explication I've found, in fluent, non-technical English, of the causes of the Great Depression. I recommend it to anyone who wants to understand this epochal period of 20th century world history.
Liaquat firmly puts the blame for the Great Depression on central bankers refusal to abandon the gold standard. Liquidity was restrained when it needed to be released, with the central bank heads in Great Britain, France, the United States and Germany fearing the loss of the stable gold "anchor". They didn't trust politicians to act responsibly when printing money, which may be a fair judgement in normal times, but 1) gold was not distributed evenly and was highly restrictive 2) 1929+ was an emergency and the world economy needed a large and quick injection of liquidity.
An alternative view was given by Treasury Secretary Andrew Mellon with regard to the Great Crash, "..... It will purge the rottenness out of the system.... People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people." The author gives the quotation but doesn't share the opinion although it could equally have some validity.
A further complication arose from the war reparations that Germany couldn't pay, and which Great Britain and France needed to settle war debts to the United States. He shows how this issue poisoned international relations at a time when positive and constructive attitudes were needed.
Altogether an great book.
The author focuses largely on the personalities of the decision-makers involved, which just emphasizes the sometimes-trivial factors that influence international events.
Its a great book, but be patient.
I don't normally enjoy biographies and handling four at a time is daunting. The writing does not help with its obsession for awkward and useless details like in the following sentence on page 459 - "Several years before when Roosevelt needed help with the trees on his estate in Hyde Park, his Hudson Valley neighbor and friend Henry Morgenthau introduced him to an obscure fifty-nine-year-old economist, George Warren, professor of farm management at Cornell, under whom Morgenthau had studied as an undergraduate" The 'obscure fifty-nine-year-old economist' is relevant to the chapter where this is taken from but I don't understand (or care) if he gave advice to Roosevelt on his trees and was introduced through Morgenthau, himself making a first appearance in the book. The invocation of Morgenthau's name only becomes clear a few pages later where it is revealed that he became acting secretary of the Treasury. Another such example is on page 319, in the introduction to Benjamin Strong's successor, George Harrison. The detail that Harrison clerked for Oliver Wendell Holmes is perhaps tangentially relevant, that the same position was later held by "Harvey Bundy, father of the Bundy brothers, William and McGeorge, and by Alger Hiss, the senior State Department official later accused of being a Soviet spy" is certainly not. Amusingly, Hiss makes another appearance later in the book in another irrelevant anecdote.
Much of the rest of the book is also a meandering mess. Chapter 14 is an excellent example. It starts with the Dow, careens to Will Durant and General Motors, then dives into the Florida real estate market followed by an anecdote about Adolph Miller and his neighbor Herbert Hoover that seems to have no real bearing on the chapter's broad content. The author then talks about the Fed and the difficulties faced by central bankers, illustrated through some excerpts from Benjamin Strong's diary before smashing right back into Durant. After this whirlwind tour of the American financial and political landscape, the author flies off to Germany and Hjalmar Schacht. All of this in the space of ten pages! Needless to say, it makes for poor narrative flow.
In my opinion the reader would have been much better served if the author had chosen to tell the story either through one main protagonist (Schacht?) or through one of the central banks (the New York Fed?). That he let the Time cover story straitjacket him into such a loose narrative was an avoidable mistake. As I read the book I kept asking myself, what were the editors on this project doing?
So does the book redeem itself at all? Only a little bit in part four. The writing improves and some of the multiple threads come together. I personally had an epiphany about the role of money in a modern economy and understood a little better the role of monetary policy. I do wish the book had been better written (or at least better edited). Unfortunately, in its present form, this is not a book I can recommend.
I don't think that the book quite supports the conclusion on the dust jacket, that the "decisions taken by a small number of central bankers . . . were the primary cause of the economic meltdown." In fact the book itself gives a rather different conclusion, p. 501, pinning the primary blame on the Versailles treaty and reparations, and only secondly on the bankers. I would have appreciated a bit more attention to why the gold standard brought (or helped bring) the system down -- perhaps with an overview of different theories as to what actually caused the crash.
The book got off to a good start, but by the middle of the book it became harder to follow the argument. You start to hear about other bankers and characters besides our main four, and the characters and plot becomes harder to follow.
As you are reading the book, if you know nothing in particular about economics, you have to ask yourself, "so what exactly is so bad about the gold standard?" Might it not have prevented Germany's hyper-inflationary period, for example? And the subsequent recoveries of Germany and the U. S. in the 1930's don't exactly support this conclusion, either. Germany afterward experienced a recovery of sorts during the 1930's, despite remaining on the gold standard. The U. S., which effectively devalued its currency and ceased reliance on the gold standard, had perhaps a "better" recovery, but still had very high levels of unemployment -- higher, evidently, than Germany. So how does the gold standard tie into this? After reading the book, let's put it this way -- I'm not advocating a return to the gold standard!
The book actually seems to support the thesis that the dust jacket blurb purports that the book refutes: that in fact the Great Depression was the result of "events beyond any one person's or government's control." If they were due to one person or one government, the author needed to point out a particular person or government, and say -- "Here! If only Strong, or Schacht, or Norman, or Moreau, had just done X instead of Y -- everything would have been different." But such a point never emerges.
Those three European countries ended World War I financially devastated—not just in terms of direct casualties from the war, but also from the loans needed to finance it. The United States, on the other hand, was on the other side of those loans; removed from most of the financial and human effects of the war, after cessation of hostilities the US found itself newly-elevated in the world order.
But beyond the mere balance-book debts and deficits was a deeper issue: their common reliance on the gold standard. All four had suspended matching their currency to the gold available during the war, but afterwards, desperately wanted to get back on the system for perceived stability.
But then they encountered the first crisis: what should they peg their currencies to now? The money supply had grown in all countries as the government pumped out bills to finance their militaries, and on top of that, their gold reserves had drastically changed as well. While the United States' gold reserves had newly-swelled due to their loans, all three European countries found their reserves drastically diminished.
It's fair to say that the gold standard—in all its allure and limitations—forms the central driver of the book. Each struggled to decide when to go back on the system, and stubborn domestic politics complicated acceptance of a devalued currency for most of the European nations. Their ties to gold sharply limited their available actions during the tumultous decade that followed, and sealed their fate with the catastrophic crash. It continues to be astonishing that there exists a faction of Americans—national politicians, even—who advocate for a return to the gold standard and ignore all history that says otherwise.
And then there were the reparations. Under threat of resuming hostilities, the Allies pried a stiff price out of defeated Germany. Not only was land ceded to France and others, and not just there army largely stood-down, but Germany found itself owing billions to France, the US, and the UK. Again, internal politics played a strong role here; the US argued for lower reparations in the interests of the world economy (and because they wanted to disengage with Europe at the time), while the UK and France wanted to squeeze Germany dry, extracting as many kilograms of flesh as they could.
All these tensions recur throughout the book, and it adds a shocking level of detail to what I previously knew about the crash. Again, while Ahamed claims his project is a four-fold biography of these lead bankers, his actual aims are far more grand: a well-written, accessible look at how and why the financial system failed. Unlike his presumptive thesis that hubris and personal factors led to the crash (as his title and other paratext would have you believe), the book's verdict is far more nuanced and damning. Given the financial systems at play and the political situations at the time, it's hard to imagine how any combination of personalities could navigated the troubles.
But that's not to say the book is entirely fatalist; there is one lone speck of light in the darkness, and his name was John Maynard Keynes. While he doesn't get as much attention as the four main characters, he acts as a hectoring marginalia to most of the decisions of the time. Keynes was utterly prescient, and has rightfully seen a resurrection after the crash of 2008. But he is the Cassandra of his tale, predicting the coming crash, and unable to do much more than step out of the way.
In my Money & Banking courses, I would always play the "Anatomy of a Crisis" episode of Milton Friedman's Free to Choose series. In it, Friedman laments that Benjamin Strong died in 1928, believing that Strong would have pushed the Federal Reserve to take the steps necessary to inject liquidity into the American system. It was Friedman and Schwartz's work that showed the U.S. needlessly hoarded gold, keeping monetary policy tight and forcing a chokehold on the U.S. economy. This book tells that part of the story well, including the insights of why France did the same thing. I see nothing to contradict Friedman's assertion that the Great Depression was a monetary phenomenon.
But one cannot understand that period without understanding the role that German reparations had on the entire system. That becomes the snowball that starts the avalanche. Ahamed gives a biography of the central bankers who propped up the gold standard after World War I, their context, psychology, and their interpersonal relationships. He details the decisions in monetary policy made throughout the twenties and early thirties. The life and writings of J.M. Keynes during this period is also chronicled and other prominent economists, such as Irving Fisher, are mentioned as well. Presidents and Prime Ministers are viewed through the lens of monetary policy and international finance. The book is not boring at all, the narrative is quite riveting.
I give this book 5 of 5 stars, it is a must-read for anyone interested in economics of the 1920s and 1930s. I learned a great deal.
But I did learn some things:
That the Great Depression was caused by several factors: the insistence on reparations from Germany after WWI, coupled with the U.S. not backing down on the issue of war debt. The fact that the U.S. and Europe tried to get back on the gold standard. The intransigence of France in the early thirties. The untimely death of Benjamin Strong, who seemed the only guy who understood what was going on and had the social skills to convince the other financial world leaders of what needed to be done.