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Book Review: Financial history repeats itself, and repeats itself, and …

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  • Written by  Kim Fowler
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Lords of Finance: The Bankers Who Broke the World, Liaquat Ahamed, 564 pp., The Penguin Press, member of The Penguin Group (U.S.) Inc., 2009 Lords of Finance: The Bankers Who Broke the World, Liaquat Ahamed, 564 pp., The Penguin Press, member of The Penguin Group (U.S.) Inc., 2009

Open a newspaper or turn on the TV and you’ll be barraged with news of economic turmoil, failing banks, nauseating market rides, epic frauds, wars on multiple fronts, and more. Top that with a heaping dose of societal fears and you might wonder how in the world our global markets survive at all. But it only takes a moment to realize that history definitely has a way of repeating itself.

That became evident as I read Liaquat Ahamed’s Lords of Finance: The Bankers Who Broke the World. The 2010 Pulitzer Prize winner for history—for this book—and an investment manager by trade, Ahamed tells the story of four central bankers, and how they faced and dealt with a series of incredible events during tumultuous times. Beginning with World War I and through the Great Depression, none of these men had a clear road map. As a result, each had a hand in inadvertently steering the world into financial disaster.

Cast of financial characters

Each of these men exhibited the true embodiment of his country.

• Montagu Norman, who served as Britain’s central banker for 24 years, was described as a man of character… as well as being a character himself.

He was wise, yet prone to nervous breakdowns, mood swings, and temper tantrums. Norman enjoyed creating intrigue by traveling incognito, even escaping over the side of a ship and into the ocean to avoid being detected by newspaper reporters. Known to have experimented with spiritualism (even claiming to be able to walk through walls), he nevertheless recognized that the global gold reserves were in short supply and eventually warned that the stock market bubble in the U.S. was in danger of collapse.

• Hjalmar Schacht of Germany was a brilliant, yet arrogant man, devoutly loyal to his home country. However, his antagonistic and unyielding nature made him quick to make enemies, and he eventually became his own worst enemy.

Schacht’s demeanor made him readily at ease with the fledgling National Socialist party and he eventually fell into step with Hitler. Realizing too late that he had “made a deal with the devil,” he attempted to distance himself from Hitler, even leading efforts to overthrow him before war broke out.

However, in a curious twist of fate, Schacht was indicted along with 23 war criminals as part of the Nuremberg Trials. After five attempts to try him, he was eventually acquitted and released.

• Emile Moreau of France was a civil servant who rose quickly in the ranks of the finance ministry, only to be sent to the “back-water” of the Banque d’Algerie.

An embittered man, he was considered “blunt and rude,” which did not help him get along with his peers. Point in fact was his first meeting with England’s Norman. Despite being able to speak French fluently, Norman insisted on speaking only English to the “mono-lingual” Moreau.

It only went downhill from there and Moreau was always considered an outsider by the other three central bankers.

• Benjamin Strong, the first central banker of the U.S., was instrumental in the formation of the Federal Reserve System and was Governor (equivalent to today’s president) of the Federal Reserve Bank of New York for 14 years until his death in 1928.  [Strong chaired the Governor’s Council, the body of the 12 heads of the district Fed banks.] His leadership abilities and take-charge attitude made him a force to be reckoned with, yet he was well liked by all on Wall Street.

Unfortunately, Strong was plagued not only by personal tragedy but also a severe case of tuberculosis, suffering many relapses brought on by the stresses of his job. As I read this book, I imagined Strong as a John Wayne type, a quintessential cowboy, quiet, influential—someone to be trusted. His untimely death has caused some to speculate whether he would have been able to react quicker than his successors and perhaps lessened the impact as the U.S. entered into the Depression.

Together these men worked--sometimes with and other times against one another—to maintain their country’s economic balance on a very precarious mountain of gold. Lords of Finance tells of each country’s loyalty to the gold standard: their primary objective being to maintain the value of their country’s currency as it related to its treasured reserves. However, with the massive expenses of war, there was not enough gold to go around.

Consequently, the gold reserves of each country changed hands immediately, and drastically on a daily basis. In fact, we learn that the movement of gold from one country to another quite literally occurred in an underground vault in London where men physically shuttled trucks of bullion no more than 30 feet from one side of the room to the other.

Death at a critical crossroads

At the end of World War I, Germany was not only accused of being entirely responsible for the war, but was also commanded to pay an exorbitant reparations bill destined to cripple the country. Germany found herself in constant turmoil as powers rose and fell within its government. Incapable of bringing its economy under control, Germany began printing money with reckless abandon. What followed was a staggering inflation rate and a devalued mark, at one point falling to 630 billion to the dollar. German citizens could be found in the streets carting bundles of currency in hampers, wheelbarrows, and baby carriages just to buy basic goods.

In the meantime, a perfect storm was brewing across the Atlantic.

In 1927, the Fed, struggling to help Britain and its overpriced sterling value, cut the key rate to 3.5%. This set off the stock market’s astronomical soar. As the bubble grew, obsession for investing increased. The infatuation was not only experienced by the typical New York financier but by everyday Joes and Janes: the cab driver, the cook, and even the housewife. Women made up nearly a third of the speculators.

It was at this time that Strong died, and the Fed was left drifting without competent leadership.

Déjà vu, but in advance

Dazed and confused, the post-strong Fed was unable to forestall what was to come.

Caught between a Madoff–like fraudster in France and an Enron-sized forgery in Britain, the stock market’s bubble burst and the downward spiral began. By 1932, the U.S. was in the depths of the Depression; unemployment was at over 20%, production was down 25%, and the Dow was trading at 39% of its peak. GM stock, which had been $72 per share at its highest, was now trading around $7.

With the inauguration of Franklin Roosevelt, however, the mood of America changed and the tide began to turn. Using an obscure amendment to the Agricultural Adjustment Act, Roosevelt successfully hid the proverbial needle in a haystack—a measure which allowed him to devalue the dollar against gold and authorized upwards of $3 billion to be issued without the backing of gold. The U.S. was now free from its golden manacles.

The quirky figures who shaped banking’s history

Many other notable historic figures show up throughout the book, as well. Instead of giving us a purely textbook account of how these individuals were involved in the events, we are instead gain a glimpse into their character, and at times see some of their quirks and odd habits.

• John Maynard Keynes, the “voice of wisdom calling in the wilderness,” seemed to weigh in at every turn.

He warned the Allies about being so hard on Germany in their demands for reparations. In fact, he foretold of her disaster in his bestseller The Economic Consequences of Peace; he predicted that the gold standard had outlived its usefulness long before the central bankers realized it; and he prophesied the stock market crash. Initially seen as an annoyance, he clearly knew what others did not and eventually became a sought out advisor.

• Herbert Hoover, President during the Depression, was described as hard working during emergencies. However, his inability to control the economic storm caused him to resort to “conjuring up the genie of prosperity by invocations,” Ahamed writes.  When that didn’t work, he tried to manipulate the outcome by pronouncing only positive facts and fibs, once exclaiming that the employment rate was rising “when clearly it was not.” 

• Franklin Roosevelt was able to do what Hoover was not, yet he definitely was a “bull in the china shop.” 

During his first 100 days in office, he introduced countless initiatives to Congress, including the formation of the Tennessee Valley Authority and the Civilian Conservation Corps, the Glass-Stegall Act and the Truth-in-Securities Act, as well as the Economy Act. While many of these worked, many did not and were in fact contradictory to one another in effect.

With the winds of change came the creation of FDIC, sweeping bank reform and reformation of the Federal Reserve. In an effort to kick-start the economy, Roosevelt convinced the government to buy gold off the open market. But who would decide what the price of gold was?

Why Roosevelt, of course.

Daily, over breakfast, he helped decide the day’s gold price. With no rhyme nor reason, the price was apparently selected at random. One day’s 21 cent increase was chosen by Roosevelt because “it was a lucky number, three times seven.”

Human window on an earlier crisis

While not an easy read, Ahamed’s writing style brings the four central bankers to life. In fact, I often found myself turning to the pictures scattered throughout the text, and imagining some of the behaviors and actions coming from these men staring back at me. Ahamed also includes just enough technical information in the form of graphs and comparative statistics to help the reader understand how each countries’ tactics played out. One graph in particular showed that the road to recovery started only after each allowed itself to break from the gold standard.

One interesting thing I noticed was how often the author included foreign terms and phrases. While I was able to deduce the meaning of some simply by their context, I found myself resorting to online translation websites, just to be sure I fully understood.

In summary, Lords of Finance: The Bankers Who Broke the World, is a terrific read for anyone who enjoys history or has the least bit of interest in what our nation is facing in today’s global economy.

In the past weeks we have seen passage of the Dodd-Frank Act—the most sweeping financial legislation since the 1930’s. Yet some of the same issues being addressed now are not that much different from what was seen during the tenure of these four central bankers. Could it be used as a textbook to guide today’s “lords of finance” through the difficulties of today’s economy?  Maybe…maybe not. However, I would like to think that some things could be learned from this book so that history would not repeat itself with so great and tragic results in the future.
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