Lords of Finance: 1929, the Great Depression, and the Bankers who Broke the World By Liaquat Ahamed, Random House, £20

A grand, sweeping narrative of immense scope and power, Lords of Finance describes a world which receded from memory long ago: the West after World War I, a time of economic fragility that led to the Great Depression. A veteran hedge fund manager and a writer of great panache and erudition, Liaquat Ahamed makes his book about an international monetary horror story seem like a labour of love. The reader, who might not expect to be enthralled by the dangerous mutability of the gold standard, for example, will find it a subject of real fascination as the author does a superlative job of explaining the problems of how one shyster, one bank, one treasury or one economy can set off repercussions all around the globe.

“We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand” — so wrote the great economic iconoclast, John Maynard Keynes, in an essay titled “The Great Slump of 1930,” published in December that year. By then, “Over 5 million men were looking for work in the United States, another 4.5 million in Germany and 2 million in Britain.” The world was holding its breath. Alas, it was not to be. Six months later, an Austrian bank collapsed, resulting in a run on the rest. The central bankers responded both belatedly and tepidly, failing to stem the run and then making a new round of policy errors that compounded matters. By 1932, the United States of America had entered the worst year of the Great Depression.

The lords of finance who constitute the title of this book are the four central bankers who dominated that post-war era: Benjamin Strong, the domineering American of the Federal Reserve Bank of New York; Montagu Norman, the mysterious head of the Bank of England; the prideful Émile Moreau of Banque de France; and Hjalmar Schacht, the arrogant German who headed Reichsbank, whose ardent support for the Nazi party was to take him all the way to the Nuremberg trials. But as Ahamed’s narrative clarifies, it is a bit unfair to portray these men as “the bankers who broke the world,” as the subtitle phrases it. For one thing, by the middle of 1931, Norman was the only one of the four still in his job. For another, they each became famous not because of their mistakes but because of their triumphs in the past.

In March 1925, there was a dinner at 11 Downing Street. Chancellor Winston Churchill was trying to make up his mind about the gold standard. Norman, whom Churchill intensely disliked, was not invited, so senior treasury officials put forward his views. Keynes made the case against gold, but tragically was off colour. As the night wore on and the alcohol flowed, Churchill was swayed by the idea that failure to act would be seen as a public admission of Britain’s diminished role in the world. The final word of the night went to Reginald McKenna, a banker and former Liberal chancellor: “There is no escape. You will have to go back; but it will be hell.”, he concluded.

The outcome of that dinner was economic catastrophe — first in Britain and then all across the globe. The world’s gold reserves were inadequate to take the strain. The pound had been pegged at an abnormally high rate. Hence, Britain’s manufacturers were priced out of their export markets. Ahamed argues that the four central bankers were able to lumber along by holding interest rates down in the United States and keeping Germany afloat on borrowed money, a system destined for failure. At the root of the problem, though, was an issue the central bankers had no control over — the insistence by the Allies that Germany pay war reparations far beyond its means. Norman was fiercely opposed to the size of the reparations the Allies were demanding, arguing that they would bring down the German economy — which is precisely what happened. By the early 1930s, Germany was effectively bankrupt and public resentment over the onerous efforts to extract billions in reparations helped pave the way for political turmoil, the emergence of Hitler and the inevitable World War II.

Britain abandoned the gold standard in 1931, and its recovery started that year. The US followed in 1933, which marked the low point in its depression. Only Germany held on to the gold standard, and the rest, as they say, is history.