Lords of Finance – Liaquat Ahamed [Book Summary]

by Nick

Could it have been supposed that a book on the activities of central banks would turn out to be such a fascinating reading?

Its author, an investment manager by profession, reveals to the reader an exciting story about the catastrophic consequences of rash financial policy decisions made by the central banks of several Western countries in the 1920s and early 1930s.

Although the denouement of this plot is known in advance, the reader’s attention is captured by the most interesting details of how the world economy collapsed.

However, the author says that the Great Depression erupted long before the invention of credit swaps, mortgage bonds, and derivatives, so its lessons are unlikely to be directly related to the current financial crisis.

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Manmade Depression

In the 1920s and 1930s, the economic recovery alternated with a recession.

Massive unemployment became commonplace, and stock prices and exchange rates fell, soared to the skies and fell again. The German brand was so devalued that the Germans went to the store with a trolley full of money. In the United States, people did not trust banks to such an extent that they kept money by burying it in their yard.

The crisis hit its peak in the early 1930s, at the height of the Great Depression, which today is mistakenly considered the result of an unfortunate set of circumstances. In fact, the economic depression was a direct result of the mistakes made by the central banks of the four leading powers of that time – the United States, Britain, Germany, and France. Instead of raising interest rates, banks began to lower them, while not wanting to abandon the gold standard, which has long become obsolete. No matter how stupid or ignorant the actions of the financiers of that time were dictated, the mistakes made by them led the world economy to the Great Depression.

“In the 1920s, central bankers had the same immense power and authority that they have today.”

The history of this global economic catastrophe is associated with the use of the gold standard – the traditional monetary system, which central bankers desperately tried to maintain. According to this standard, the value of any currency had to correspond to a certain amount of gold. For example, the American dollar was worth 32.22 grains of pure gold, the pound sterling – 113 grains. At the beginning of the 20th century, the central banks of the four most developed countries of the West possessed gold reserves, which ensured the value of the paper money in circulation. In 1914, the gold standard was used in 59 countries.

The security of the currency of one country or another with gold indicated that this country is an important participant in the world market. There wasn’t enough gold at all, so the governments of the countries who accepted the gold standard, could not arbitrarily increase the number of paper money in circulation.

A lot of people in those years noticed with irony that gold is mined from underground in Africa only to be transported over a great distance and again placed deep underground – in a bank vault. The gold standard held back inflation, but could not solve many other problems of the economy.

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“Central banks are mysterious institutions whose work mechanisms are so complex and complicated that few outsiders (including economists) understand them.”

By 1914, the gold standard was considered the traditional foundation of the monetary system, but the concept of a central bank became a perfect innovation (especially for the United States). America gradually turned into a global financial and industrial center, but the country regularly experienced surges in a financial panic. During the period of the massive withdrawal of bank deposits in 1907, the role of the central bank was de facto played by the banking company JP Morgan & Co. American bankers, economists, and politicians were extremely interested in having an organization that would deal with financial crises, but they refused to create a central bank because of a suspicious attitude towards any centralization.

Finally, in 1913, President Woodrow Wilson overcame these concerns and enacted the Federal Reserve Act, uniting 12 regional branches under the leadership of a single Council. The most influential of them was the New York branch of the Fed, which was headed by Benjamin Strong. Strong’s annual salary at that time was $ 30,000 — for less than he could earn in a private company.

“In that fateful first week of August 1914, all the bankers and financiers of Europe … were not thinking about military preparations … but about the size of their gold reserves.”

Despite poor health, Strong proved to be a born leader. He became one of the four central bank executives who played a key role in bringing the Great Depression closer. Three others were the fickle, intriguing British Briton Montague Norman, the ever-suspicious Frenchman Emile Moreau, and the rude-haughty German Yalmar Schacht.

“One of the first victims of the war was not only truth but also the stability of financial systems.”

On the eve of the First World War, gold was considered the most important financial asset of banks, since it, unlike paper money, had its own value. Anticipating the enormous costs of warfare, the German Reichsbank accumulated gold for $ 500 million, the Bank of England – for 200, the Bank of France – for 800 million. Many French kept gold coins under their mattresses. On July 29, 1914, about 30 thousand people in a panic before the impending war lined up near the Bank of France in a queue several kilometers long to exchange banknotes for gold. Having satisfied their requirements, the bank, nevertheless, tried to preserve gold to finance the war. In August 1914, his employees liberated the Paris vaults and secretly transported gold to other places in France.

“Before the war, Germany’s annual GDP was about $ 12 billion in equivalent, and it was extremely unreasonable to burden the country’s economy with debts eight times the GDP.”

Economists and bankers of the time believed that the need to conduct foreign trade would soon force European powers to cease hostilities. Central banks were preparing for war, accumulating gold reserves. With the outbreak of hostilities, governments began raising taxes, taking loans, and printing money. The first victim of a protracted war was the gold standard. Central banks violated a gold money supply agreement. During the war years, the money supply in the UK doubled, tripled in France, and grew four times in Germany, causing extremely serious consequences for the economy of this country. Having spent 47 billion dollars on the war, Germany reimbursed with taxes only 10% of this amount. However, while the war crippled the European powers, the US economy flourished.

“Germany was itself guilty of its financial problems. Nevertheless, the reparation payments made … the difficult financial situation of the country completely hopeless. ”

The first world war cost the countries of Europe an amount equivalent to 200 billion dollars. The reckless wartime financial policies left behind huge debts and depreciated currency. The victorious countries were determined to exact reparations from Germany. Britain demanded a refund of the equivalent of $ 100 billion, eight times the German GDP. France, still feeling threatened by the neighboring country, demanded even more.

One of the few people who retained the ability to reason sensibly in this situation was John Maynard Keynes, a young Cambridge economist. In 1919, he published the book The Economic Consequences of the World, in which he argued that Germany could pay no more than six billion dollars in reparations. However, in 1920, the Reparations Commission presented Germany with a bill of $ 33 billion. Germany itself offered to pay $ 12.5 billion, and the Allies agreed to this amount. Later, the Germans said they were not able to pay it. Ultimately, Germany’s financial humiliation set the stage for Hitler’s Nazi propaganda.

140 Billions Loaves of Bread

The need to pay huge reparations caused hyperinflation in Germany. In 1914, the mark’s exchange rate against the dollar was 4.2, by 1922 – 7200, and in August 1923 – 620 thousand. By November 1923, the exchange rate rose to 630 billion marks, then to 1.3 trillion. A kilogram of oil in this period cost 250 billion marks, and a loaf of bread – 140 billion. When going to the store, the Germans dipped money on wheelbarrows, in laundry baskets and baby strollers. The treasury’s printing presses did not manage to print enough money, and the Reichsbank hired private printing houses for this. Some cities began to issue their own money.

“The almost religious belief in the gold standard as the basis of the global monetary system is so deeply rooted … that few people think of any other way to organize the international monetary system.”

While a visitor to a German cafe was drinking a cup of coffee, its price could rise. The end of 1923 was marked by the greatest depreciation of money in human history. Thanks to the collapse of the brand, foreigners could buy an apartment in Berlin for just a few hundred dollars. Famine began in the country, and in November 1923 the first popular riots broke out.

Yalmar Shakht was instructed to carry out monetary reform in the country. Under his leadership, a new monetary unit was created – the rental mark, which replaced the previous Reichsmark. Before introducing a new monetary unit, Mine waited until the mark fell to 4.2 trillion per dollar. The introduction of new money allowed Germany to buy government debt at a reduced price, and the German currency quickly restored stability. A few years later, a real stock market boom began in the country,

“In the early summer of 1928, when the Dow Jones index was about 200 points … it seemed that the market had come off of any economic reality and went beyond the wildest fantasies.”

The economy of Great Britain and France also suffered heavy losses. The world center of financial life has moved to the United States. By demanding that the British and French pay wartime debts, America worsened the economic situation in Europe. While Great Britain remained on the financial hook of America, it could not meet France, and while France, in turn, did not receive a respite, it was adamant about Germany paying reparations.

“The rejection of the gold standard was the first step towards a revival of the economy.”

Seeing a sad example of the depreciation of the German currency, Strong and Norman continued to hold on to the gold standard. Their almost religious belief in this system did not allow them to recognize its inherent problems – for example, the constant lack of gold. On the eve of the war, the four Western powers had gold reserves worth five billion dollars. By 1923, this figure increased to only six billion, although prices rose by 50% and, accordingly, the purchasing power of gold decreased significantly.

Another problem was the high concentration of gold in the United States: a lack of gold in Europe reduced the economic viability of America’s trading partners. The world turned into a poker table, where all the chips were in the hands of one of the players. Strong was afraid that the influx of gold into the economy will provoke a credit boom and uncontrolled inflation, so incoming gold has been withdrawn from circulation. According to him, the Fed could affect the money supply in the United States by buying and selling government bonds. The economic management regime developed by Strong defined the role of central banks for many decades to come.

Gold Standard in Doubt

While the situation of Germany stabilized, Great Britain fell into the economic hole. Despite the rapid growth of London, unemployment in the country’s industry was measured in double digits, and the textile, coal, and shipbuilding industries were in decline. To overcome the devastating wartime inflation, the country began to pursue a tight fiscal policy that led to deflation. The British pound strengthened as a result, while interest rates rose. Seeing the dire state of the British economy, Treasury Secretary Winston Churchill began to think about withdrawing the country from the gold standard system. However, after a thorough study of this issue and consultations with Keynes, he nevertheless sided with the “golden bugs” from the Treasury and the Bank of England. Churchill will later regret this decision.

“In the conditions when … the stock market was preparing for complete chaos, Roosevelt’s instinct did not fail: devaluation changed the whole picture of the country’s economic life.”

In 1926, France broke out its own currency crisis, although not as acute as in Germany. A series of high-profile fraud scandals (even the Bank of France was involved), political disagreements and heavy military debts weakened the confidence of the population in the franc, and it began to weaken quickly. During this period, Emile Moreau became the head of the French central bank. He managed to stabilize the franc and improve the state of the economy without resorting to painful deflation, as in the UK, or to destructive inflation, as in Germany. The weakness of the franc gave French exporters great advantages over competitors. However, although Moro’s strategy was winning in the short term, it ultimately became one of the factors that destabilize the global economy.

US Stock Market Crash

In the late 1920s, American bankers were faced with a new danger – a sharp rise in the price of securities. In August 1927, Fed Chairman Strong, wanting to support the British pound, lowered interest rates. The result of this decision unexpectedly turned out to be the opposite. The US stock market in two months grew by 20%, creating the conditions for the formation of a “bubble” in the securities market and the subsequent collapse.

Strong died in 1928, leaving his successor George Harrison to solve the problem of sharp growth in the stock market. Montague Norman convinced Harrison that the “bubble” would disappear without harm to the economy if interest rates were raised even higher. However, whenever Harrison tried to raise rates, Fed directors in Washington overturned his order. In those days, the concept of active monetary policy was completely new, and no one knew what exactly needed to be done. While Fed officials argued about rates, the bubble burst and the stock market crashed.

“The Great Depression was neither God’s punishment nor the fruit of the fundamental contradictions of capitalism. “It was the result of mistakes made by people who determined economic policy … and became the most dramatic in history due to miscalculations of financial authorities.”

After a stock crash in the United States, banks in Germany went bankrupt, followed by US banks. US President Hoover did not want to intervene in the situation, but his successor Franklin Roosevelt was much more active. In 1933, Roosevelt closed all American banks with his first presidential decree to stop the massive withdrawal of deposits.

Deprived of bank funds, American citizens began to lend to each other and engaged in barter. For example, a ticket for a boxing match in Manhattan could be obtained in exchange for anything worth 50 cents – cashiers accepted hats, shoes, cigars, soap, and even foot cream.

It was Roosevelt in 1933 that brought the United States out of the gold standard system. Great Britain left it in 1931, but American bankers and investors for a long time could not decide on this step. Roosevelt’s trick worked: in three months, stock prices doubled, prices rose, and interest rates fell. Roosevelt not only abandoned the gold standard but also began an active trade in gold. At the same time, he set the price of gold at random, meeting with his advisers at breakfast.

The rejection of the gold standard also helped the UK economy. The weakening of the British pound stimulated exports, contributed to lower interest rates and the country’s exit from the economic depression. France adhered to the gold standard until 1936, because of which it emerged from the depression of the latter.


  • The Great Depression was caused by the rash actions of the central banks of several Western countries.
  • The main mistake of bankers in the 1920s was the stubborn reluctance to abandon the gold standard.
  • To cover the costs of the First World War, governments actively printed money, thereby paving the way for the Great Depression.
  • Germany’s reparations of huge reparations led to the hyperinflation of the brand.
  • Britain’s economy suffered from deflation, which oppressed exports and spurred unemployment.
  • By weakening the franc, France began to undermine British and German exports.
  • In 1927, the Fed, reducing the interest rate, provoked the formation of a “bubble” in the US stock market.
  • In 1929, a stock market crash in the United States led to the collapse of banks in America and Germany.
  • After Britain, the USA and France abandoned the gold standard, their economies began to recover.
  • The leaders of central banks in the 1920s had a poor understanding of active monetary policy and poorly understood the consequences of their actions.

Why You Should Read “Lords of Finance”

  • To better understand the gold standard system
  • To find out about all those events that led to the biggest economic crisis of the XX century and helped to get out of it.
  • To learn more about how money operates in the world of economics and finance

This book is available as:

Audiobook | eBookPrint