Lords of Finance: History, economics, and finance

In the fall of 2010, as Federal Reserve Chairman Ben Bernanke testified before the Financial Crisis Inquiry Commission, a member jokingly asked the former professor for a reading list to help understand the crisis. One of his picks was Lords of Finance: The Bankers Who Broke the World, the Pulitzer Prize-winning history of the Great Depression by Liaquat Ahamed, published in 2009.

The book tells the story of the four major central bankers of the era: Benjamin Strong, who as leader of the New York Fed at that time acted for the entire Federal Reserve System; Montagu Norman, head of the Bank of England; Hjalmar Schacht, Germany's central bank leader; and Emile Moreau, governor of the Bank of France. The story of these four leaders, their successes and their failures, provides much insight not only into the financial crisis of today, but also into the workings of macroeconomics and the limitations of an economy pegged to gold.

Ahamed chronicles a world that was struggling to recover financially from World War I. As the leading European nations grappled with war debt and reparations, they were hampered in their efforts by a return to a gold standard that no longer functioned in their postwar economies. Working together to abate a series of economic crises erupting across Europe, these powerful bankers were often impeded in their efforts by politicians who had little knowledge of how economies actually worked and often acted according to antiquated economic theories. Meanwhile, John Maynard Keynes, beginning in 1919, predicted the economic disaster that both harsh reparations and a return to the gold standard would bring about.

Only when the major European economies, and then finally the United States, broke from gold, was a worldwide recovery possible.

The book provides details of the world of banking in that age while also recording the lives and personalities of these four men who stood at the center of the international stage during that turbulent decade—but whose important contributions are now largely forgotten. Ahamed's careful depiction of the causes and effects of the worldwide economic collapse in the 1920s is not only a significant contribution to the literature of the Great Depression, but is also a comprehensive primer on the workings of the gold standard, the contrast between the economic policies of the early 20th century and today's, and the actions that central bankers have taken to restore order to world economies in financial crisis. The Lords of Finance is an important addition to the literature of economics, and is a fascinating read.

By Lesley Mace, economic and financial education specialist, Jacksonville Branch of the Federal Reserve Bank of Atlanta
January 24, 2012

Guided discussion questions

  1. In 1931, what was the biggest economic threat facing the world economy?
  2. In the 1920s, what were the key objectives of central banking? Which was the most important?
  3. According to Ahamed, what is a central bank?
  4. According to Federal Reserve requirements at the time, what percentage of currency issued had to be backed by gold?
  5. What is the goal of a central bank in a financial crisis?

Part One
Chapter 2

  1. At the start of World War I, the "international political crisis brought a financial crisis in its wake." What were some of the symptoms of this crisis?

Chapter 3

  1. How had the Reichsbank planned to protect itself against a financial crisis?

Chapter 4

  1. What financial effects did the start of World War I have in the United States?
  2. How did J.P. Morgan help to rescue the economy in the Panic of 1907? What institution was founded as a result of the panic?

Chapter 5

  1. As the country with the largest gold reserves in the world at the start of World War I, how did France protect these reserves?

Chapter 6

  1. What was the "real bills" theory of credit that many directors of the Bank of England subscribed to? How were these directors chosen?
  2. How did the financial position of the United States improve as a result of World War I?

Part Two
Chapter 7

  1. Compare and contrast the economies of Germany, France, Britain, and United States after the war. How did Europe pay its war debts? What happened to the money supply in each of these four countries?
  2. What are "reparations"? Who was to pay them after the war?
  3. What were the terms of the 1919 Peace Treaty? In his book The Economic Consequences of the Peace, what did Keynes argue about the peace treaty's conditions on Germany?
  4. What was the value of the German mark in 1914? November 1923? What caused this devaluation?

Chapter 8

  1. How were war debts linked to reparations?

Chapter 9

  1. What is the difference between deflation and devaluation? Which countries chose to deflate? Which countries devaluated their currencies?
  2. Why did Montagu Norman favor the gold standard?
  3. How was the Federal Reserve of 1913 structured? How was decision making at the Fed affected by this type of structure? How did Benjamin Strong come to be regarded as the leader of the Federal Reserve?

Part Three
Chapter 11

  1. What were the features of the Dawes Plan?
  2. After the war, who was the "Banker of the World"? Who did this country replace?

Chapter 12

  1. Compare the 1924 economies of Britain, the United States, and France.
  2. How did a return to the gold standard tie Britain to the United States?

Chapter 13

  1. How did France differ from the other major countries (England, Germany, and the United States) in how it handled its gold reserves? How did it solve its currency crisis?

Chapter 14

  1. When gold flowed from one country to another, how was the gold standard supposed to stabilize the economies of these nations?

Chapter 15

  1. At the end of 1926, what three economic problems were worrying the world's leading central bankers?

Part Four
Chapter 16

  1. Describe the stock bubble of 1929. What did the Federal Reserve do to try to stop excessive stock speculation?
  2. How did the market for brokers' loans make the Federal Reserve's job more difficult?
  3. How did the U.S. stock market bubble affect Germany?
  4. What was the Young Plan? In your opinion, was it a viable option for Germany?
  5. What was the role of the Bank of International Settlements?

Chapter 17

  1. Why were stock market crashes in the 19th and early 20th centuries always associated with banking crises?
  2. How did the Fed try to prevent the stock market crash of 1929? How did the Crash of 1929 affect the U.S. economy?
  3. Why did low short-term interest rates and "banks flush with excess cash" send the wrong signals in 1930?
  4. What was the new Open Market Policy Conference? Did this new body make it easier or harder for the Federal Reserve to influence the economy? Why?

Chapter 18

  1. Describe the conditions of the "Great Slump" of 1930.
  2. Why were the Smoot-Hawley tariffs not as harmful as many people believe?
  3. Why was the failure of the Bank of the United States such an important event in the history of the Great Depression? How is its failure similar to the failure of an important financial institution in the beginning of the recent financial crisis? Which institution?
  4. What was Bagehot's Rule? How did this rule influence central bankers of the time, especially during the numerous bank failures of the 1920s?

Chapter 19

  1. What did Hjalmar Schacht feel was the "real cause of the world-wide economic depression"?
  2. How did the interconnectedness of international banking in the 1920s cause a banking crisis in one country to spread to another? Is this still the case today? More or less so?

Chapter 20

  1. What economic conditions led to Britain's going off of the gold standard? What happened to the value of the pound sterling?
  2. Describe the economic conditions in the United States as Franklin Roosevelt was elected president in 1932. Did the Federal Reserve's actions help the economy?

Part Five
Chapter 21

  1. What was the first thing Franklin Roosevelt did once he took office?
  2. How did people get goods and services when banks were closed?
  3. How did the Emergency Banking Act change the role of the Fed? What banking sector changes were made with the Glass-Steagall and Truth in Securities acts?
  4. Why does the author, Liaquat Ahamed, call the rescue of the banks "one of the oddest partnerships in the history of economic policy making"?
  5. Why was the Thomas Amendment controversial? How did going off gold help the U.S. and British economies? Did devaluation help the U.S. economy? If yes, in what ways?
  6. What changes in the Federal Reserve's structure were made in 1935?

Chapter 22

  1. Which economy recovered last from the Great Depression? What reason is given for this country's slow recovery?
  2. What policy changes resulted from the Bretton Woods Conference of 1944?

Chapter 23

  1. What series of crises were responsible for the severity of the world economic crisis of 1929–33?
  2. Ahamed links three economic crises of the Great Depression to recent economic crises. Describe these parallels.
  3. How was the Federal Reserve's response to the recent economic crisis that began in 2007 different from its response to the Great Depression?
  4. The author says that the Great Depression was caused not by a failure of capitalism, but by a failure of what? Who does he say is to blame?
  5. What decision by central bankers of the time does Ahamed say is crucial in the development of the Great Depression?
  6. What does the author mean when he says that the Great Depression was caused by a "failure of intellectual will"?
  7. On the last page of the book, the author translates the monetary figures from the book into current figures. How does Benjamin Strong's salary compare to the salary of the Federal Reserve chairman today? How does John Maynard Keynes's investment portfolio compare to the net worth of modern-day investors such as Warren Buffet? How does Germany's postwar-reparations debt compare to its gross domestic product today?

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