Book Review: Lords of Finance

In Lords of Finance: The Bankers Who Broke the World (Amazon,) author Liaquat Ahamed goes deep into the personalities of central bankers in the years between the first and second world wars – their many foibles and their obsession with the gold standard.

Some interesting titbits regarding the gold standard

Experts thought that the First World War would end a couple of weeks because European economies were so tightly intertwined that the cost of a prolonged war would be unbearable.

So smug were the bankers and economists that they even allowed themselves to be convinced that the discipline of “sound money” itself would bring everyone to their senses and force an end to the war. The experts seemed to have forgotten that among the first casualties of war is not only truth but also sound finance.

In four years of constant and obsessive battle, the governments of Europe had spent some $200 billion, consuming almost half of their nations’ GDP in mutual destruction.

After the War, there was a universal consensus among bankers that the world must return to the gold standard as quickly as possible. The biggest obstacle to such a return was the mountain of paper currency issued by the central banks of the belligerent powers during the war.

Take Britain, for example. In 1913, the total amount of money circulating in the country—gold and silver coins; notes issued by the Bank of England and by the large commercial banks; and the largest category, bank deposits—amounted to the equivalent of $5 billion. This supply of money, in all its various forms, was backed in aggregate by the country’s $800 million of gold.

By 1920, the Bank of England had lent so much money to the government to help pay for the war effort that the total money supply had ballooned to the equivalent of $12 billion. Britain’s gold reserves meanwhile remained roughly the same. Thus, whereas in 1913, there had been 15 cents worth of gold within the country for every $1 dollar in money, in 1920 each $1 of money was backed by less than 7 cents.

Maynard Keynes was strongly against the resumption of the gold standard.

His main point was that under current arrangements, given that U.S. gold reserves were so dominant, to tie the pound to gold in effect meant tying it to the dollar and the British economy to that of the United States—and by implication, to Wall Street.

However, the US and Europe decided to tether themselves to the gold standard. And the rest, as they say, is history.


History is often presented as a linear sequence of pre-ordained events. However, reality is a lot more random. People responsible for setting the course of history are, at the end of the day, human. They act out in anger, claim the moral high ground and dig themselves into irreversible positions, often putting their egos ahead of doing the right thing.

In hindsight, the triggers for the First World War seem trivial, the punishing restitution imposed on Germany by the Allies seems petulant, the moral arguments in favor of returning to the gold standard seem anachronistic and the inability of the US Fed to decisively act against bank failure in the early 30’s seems like a huge failure. However, for the people making those decisions, it seemed entirely rational, logical, right and inevitable.

Recommendation: Read the epilog first and the rest of the book if you find that interesting.

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