History examines lives, decisions of money men behind Depression

"Lords of Finance: The Bankers Who Broke the World"

by Liaquat Ahamed

Penguin Press, 564 pp., $32.95

"The bankers who broke the world" are not our current bankers, but the central bankers of 80 and 90 years ago. They were the four men who, by Liaquat Ahamed's account in "Lords of Finance," led the financial system of the West into the Great Depression.

The head of the Bank of France, Émile Moreau, was a minor functionary from the French provinces who had waited decades in the bureaucratic weeds. Once in power, he cared only for defending France and its pile of gold. Of diplomatic skills or charms, Ahamed writes, "He had neither."

The head of Germany's Reichsbank, Hjalmar Schacht, was another provincial, the son of an insurance clerk. Pegged as "cold and unemotional, calculating and shrewd," and having "an astonishing sense of innate superiority," Schacht would later ally himself with Hitler. In the 1920s he saved the German mark. He had the worst hand of cards to play in the financial game, and played it brilliantly.

Montagu Norman, head of the Bank of England, was born into wealth. He had a nervous condition, he hated the press, and he traveled under a false name. He was a bachelor who "lived an existence of almost monkish simplicity, sleeping on a plain iron bed in a bare room." He had an interest in Eastern philosophy. He believed in aristocratic government and did not vote.

The American of the group was Benjamin Strong, head of the Federal Reserve Bank of New York, who, writes Ahamed, "more than anyone else ... invented the modern central banker." Strong never went to college. He began on Wall Street as a stockbroker and was noticed by J.P. Morgan's partner on the New Jersey commuter train.

Strong could have made millions by staying with Morgan. But he accepted a post in the Fed, a new bank "in the hands of a motley crew of small town businessmen and minor-league political hacks." Strong had the worst health of the four bankers and died when he was needed most.

The author, Ahamed, is a longtime investment manager. He knows economics and he can write. By recounting the lives and decisions of these four men, he imbues humanity into a story of debt and money.

By Ahamed's account, the real cause of the Depression was the effort to re-establish the gold standard after World War I against too many obstacles. All four bankers believed in gold-backed money; to Norman it "was one of the pillars of a free society, like property rights or habeas corpus."

But the war had ended with America holding all the gold and demanding Britain and France repay war loans; then demanding reparations from Germany; and Germany, in distress, deliberately inflating its own currency to erase its internal debt.

The fool of the piece is finance minister Winston Churchill, who insists on Britain redeeming the pound in gold at the prewar value, which the Bank of England could not sustain. The wise man is economist John Maynard Keynes, the anti-gold gadfly who predicts disaster.

In Ahamed's story, the 1920s Wall Street boom is a result of easy money by the Fed, and deserves only one chapter. The Smoot-Hawley tariff, which is often named as the Depression-maker, gets but one begrudging footnote. The tariff came in 1930, and by that time the dominoes were set up and beginning to fall.

Bruce Ramsey is a Seattle Times editorial writer.