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Lords of Finance
The Bankers Who Broke the World
Liaquat Ahamed
read on April 27, 2019

This book is a history of modern monetary policy, from about 1900 to 1950. Prior to this time, there really wasn't much monetary policy at all. Coinage and notes existed, but almost always only to the extent that they were backed by some physical commodity in reserve, most commonly gold. This is insane, but generally worked for a few reasons. First, because economic growth coincidentally tended to track well with the amount of gold that was being mined, expanding the money supply as the economy grew; and second, because people at that time just needed to believe that money needed physical backing. You can make all the academic arguments you want about the necessity of the gold standard - but at the end of the day no bank or government would have been taken seriously on the world stage without it. There simply was not no historical precedent for a currency without backing to garner trust and hold value. Un-backed currency was seen as a license to inflate, the last ditch effort of despots clinging to power.

Other notes:

  • "An petite coup de whiskey". In August 1927 NY Fed president Strong agreed to reduce US interest rates by 0.5% (down to 3%) in an attempt to stabilize and value of the British pound, which had stagnated due to their gold peg. Strong said that in doing so, he'd give a shot of whiskey to the US stock market, which was already doing gangbusters. Indeed, that same month the market quickly grew, and 6 months later Strong reversed the decision. However, the 6 month relaxation in rates is widely credited as the match that sparked the US bubble, whose popping in 1929 led to the Great Depression.
  • Coolidge was heavy into pumping up the market during his administration. He left in early 1929, and Hoover inherited a bubble. Hoover was a known skeptic and had publicly said that market was in a bubble. Once POTUS, he didn't know how to responsibly communicate the same without ending up being the fall guy who undermined market confidence. Poor guy. Coolidge sounds like a real asshole, and Hoover was hemmed in by the prior policy. When disaster hit, Hoover didn't have the the political support nor the instinct and fortitude to a) go off gold and b) shut down banks to stop runs. Doing neither, he oversaw the Depression.
  • Americans tried to bleed Germany w/reparations. We pushed the hard, and refused to grant debt forgivness to them or to our other debtors (UK, France), who respectively needed to bleed Germany in order to pay us. Had we just written this off, their depression, and thus WW2 would likely have been avoided. In the end, we never got what we want anyway - total reparations paid was only about 4 of 32B dollars.
  • Generally, central bankers did not perform the basic functions we think of today as central banking. They pushed to remain on the gold standard, and fought deflationary economic depressions with austerity. All the while, Keynes was screaming into the void that they were doing it wrong.
  • The US left the gold standard in 1933 to stop deflation and get out of the great depression. [Note that the US Treasury did continue converting USD to gold upon request for other nations until the early 70's. I would have appreciated a distinction in this book about to what extent that obligation continuing to hamstring us to gold, but it was not discussed in the book].

Author Bio:

Ahamed has worked at the World Bank in Washington D.C., where he headed the bank's investment division, and at the New York-based partnership of Fischer, Francis Trees and Watts, a fixed-income business and subsidiary of BNP Paribas, where he served as Chief Investment Officer and from 2001-2004 as Chief Executive. From October 2007 he has been a director of Aspen Insurance Holdings and in addition advises several hedge funds, including Rock Creek Group and The Rohatyn Group. He is a member of Board of Trustees at the Brookings Institution and is involved with the New America Foundation. Ahamed was born in Kenya, whither his grandfather had emigrated from Gujarat by way of Zanzibar in the late 19th century. He was educated at Rugby School in England, at Trinity College, Cambridge, and at Harvard University. Through his production company, Red Wine Pictures, Ahamed was a producer on the 2006 film The Situation, set in Iraq. Ahamed comes from the Nizari Ismaili Shia sect, but describes himself as a non-practising Muslim and comes from the Ismailii community. Ahamed's wife Meena is active with Médecins Sans Frontières and other charitable enterprises. His son-in-law is actor Jonathan Tucker. Ahamed is the author of Lords of Finance: The Bankers Who Broke the World (2009). The book was awarded the 2010 Pulitzer Prize for History, the 2010 Spear's Book Award (Financial History Book of the Year), the 2010 Arthur Ross Book Award Gold Medal, the 2009 Financial Times and Goldman Sachs Business Book of the Year Award. For 2009 it was recognized as one of Time magazine's "Best Books of the Year", New York Times "Best Books of the Year" and Amazon.com's "Best Books of the Year". It was shortlisted for the Samuel Johnson Prize.