“Those who can’t remember the past are condemned to repeat it.” — George Santayana
The quote above is often used to describe one of Ben Bernanke’s prime qualifications for his position as chairman of the Federal Reserve. As a student of the Depression, it is said, he has a unique perspective on what happened then and knows what has to happen now to avoid a repeat. Put another way, he understands the mistakes that were made last time so we can avoid them this time.
For the average citizen, you pretty much have to take this on faith. Even for someone like me, who’s done a fair bit of reading in economic history, it can be very difficult to get a sense of the big picture.
I’m happy to report that a book I just finished, Lords of Finance: The Bankers Who Broke the World, by Liaquat Ahamed, fills that gap extremely well. The book won the 2010 Pulitzer Prize and has been on my reading list for some time. I wish I had gotten to it earlier.
Lords of Finance deals with the period between the World Wars, including the negotiation of the peace, the Great Depression, and the collapse of the German economy that led to the rise of Hitler. The focus is on the main central banks and how they struggled to deal with the financial and economic aftermath of the first World War.
The portraits of a bygone world and the people involved are complex, detailed, and fascinating. From an economic perspective, one of the book’s two central themes is the struggle of nations to solve their economic problems under the currency and economic constraints of the gold standard. At a time when some are calling for a return to such a standard, it’s interesting to reflect on the problems it created and why nations abandoned it in the first place.
The other central theme is the conflict between national interests, which are inherently parochial, and economics, which are inherently supranational. The pre-WWI world was the most economically integrated that had ever been seen. The European nations were said to be so economically integrated that war was impossible. The gold standard kept currencies fixed against each other, making the integration even tighter. Then WWI came along and proved that good times and economic integration were no preventive for war.
Post-WWI, the bankruptcy of all the combatants, save the U.S., led them to desperate measures to maintain the value of their currency, forcing mass unemployment and sacrifice in the quest to maintain the common exchange value, in gold, of the pre-war currencies. Economic and political conflict broke out as nations sought economic advantage over each other, proving that when times are bad, the conflicts get even worse.
If you combine these two themes—a desperate attempt to maintain fixed currency values across Europe and the world, at the cost of unemployment and sacrifice, while conflicts between nations start to ratchet up (even in the good times) and intensify as the costs build—I think you can see why this is relevant today. History doesn’t repeat itself, but it does rhyme, per Mark Twain, and the parallels between then and now are striking, particularly in Europe. Once again, it has shackled itself to a currency system that forbids countries in trouble from devaluing, generating greater and greater conflict between states.
The differences are also striking, particularly in the U.S. We do seem to have learned substantial lessons since the 1930s, and, unlike then, the Fed has stepped in with credit and market support. The fact that a sustainable recovery appears to be underway attests to the effectiveness of the action so far.
Lords of Finance provides a very thorough and sobering look at a time that was not as different from ours as we’d like to think, and reading it provides a valuable context for our current situation. It’s not a short book, but given the subject matter, it is as interesting and readable an account as you’ll find.