Lords Of Finance Sparknotes - Financial Freedom

Lords of Finance: The Bankers Who Broke the World, by Liaquat Ahamed, chronicles the decisions made by the central bankers of England, France, Germany, and the United States in the years leading up to and immediately following World War I, arguing that their flawed policies contributed significantly to the Great Depression.

The book centers on four key figures: Montagu Norman, Governor of the Bank of England; Émile Moreau, Governor of the Banque de France; Hjalmar Schacht, President of the Reichsbank; and Benjamin Strong, Governor of the Federal Reserve Bank of New York. These men, dubbed the “Lords of Finance,” wielded immense power over their respective nations’ economies, and their actions had global repercussions.

Ahamed argues that these bankers were deeply committed to the gold standard, a system where currencies were directly convertible into gold at a fixed rate. While the gold standard provided stability and facilitated international trade in theory, its rigid adherence, particularly after WWI, proved disastrous. The war had created massive imbalances in the global economy. Countries like the US, which had remained relatively unscathed, emerged as major creditors, while Europe was heavily indebted.

The central bankers, driven by a desire to return to pre-war economic normalcy, prioritized restoring the gold standard at its pre-war parities. This decision forced countries, particularly Britain, to deflate their economies, meaning raising interest rates and reducing the money supply. This made it more expensive for businesses to borrow money, leading to unemployment and economic stagnation. Norman, in particular, was a staunch advocate for maintaining the pound’s pre-war value, even at the expense of British jobs and industries.

France, under Moreau’s guidance, pursued a different strategy. They devalued the franc, making French goods cheaper and more competitive on the international market. While this helped the French economy recover, it also created tensions with Britain, which felt unfairly disadvantaged. The competitive devaluation of currencies became a recurring theme, contributing to global instability.

Germany, under Schacht, faced hyperinflation in the early 1920s. While Schacht is credited with stabilizing the German currency, his policies were also criticized for being overly focused on short-term solutions and for relying heavily on American loans. This dependence on foreign capital left Germany vulnerable when the global economy soured.

Strong, at the Federal Reserve, initially attempted to counteract the deflationary pressures in Europe by lowering interest rates in the US. This fueled an unsustainable stock market boom in the late 1920s. When Strong died in 1928, the Federal Reserve, lacking his leadership, tightened monetary policy to curb speculation. This triggered a market crash in 1929, which spread quickly throughout the world, plunging the global economy into the Great Depression.

Ahamed concludes that the Lords of Finance, despite their good intentions, made a series of critical errors. Their rigid adherence to the gold standard, their failure to coordinate policies effectively, and their misjudgment of economic conditions all contributed to the global economic crisis. The book serves as a cautionary tale about the dangers of unchecked power and the importance of understanding the complexities of the global economy.