This book is not about the modern financial crash, but is instead about the global depression of the late 1920s and early 1930s (though the author has a short final chapter that tries to tie the present financial crisis to the actions/decisions in the earlier crisis; it is not a very good comparison, and seems forced). It weaves and turns through a host of political and economic people, focusing on four: Montagu Normam (head of the Bank of England), Emile Moreau (head of the Banque de France), Hjalmar Schacht (of the Reichsbank) and Benjamin Strong (head of the NY branch of the Federal Reserve). In the preface, Ahamed says he is writing a biography of the four people and using the events of the economic crash to talk about them and their personalities. In reality, the book is about the events over about a 15-year span (1918 to 1933) that resulted in the greatest international economic collapse of the modern era. It is less biography, and more history, but with a focus on the personalities of these four people.
Its a quick read (even at 500+ pages), as Ahamed has an easy writing style and peppers the economic history with asides about the personalities of the four central individuals (as well as other key characters that wander in and out of the story). Ahamed's central thesis is that two dominant ideological positions (one economic and one political) drove the world over an economic cliff, and that disaster was probably avoidable (and if not avoidable, then the crash could have at least been mitigated).
The political position that broke the world was the question of reparations (from Germany to Britain/France) stemming from World War I. In our modern age, reparations seem a quaint historical artifact. Today, the idea of making the losing state pay for the cost of a war seems practically problematic (could the loser really afford the bill?) and morally questionable. Historically, however, this was the norm. The experiences of the victorious states trying to get the defeated Germans (who didn't think of themselves as defeated) to pay for the costs of war was one of the prime reasons the international economic system collapsed in the early 1930s. As Ahamed notes, Germany's bill (from the victorious states) amounted to about $12 billion when the entire German economy had a GDP of only $7 billion (granted, the bill was spread over a couple of decades). Germany essentially owed two years worth of their entire output to Britain/France (and that was bargained down from the initial reparations goal of $55 billion). Ahamed argues that these costs were a serious burden to Germany, and hindered economic recovery and policy over time.
However, the real story of the reparations is political, not economic. The reason everyone was so entrenched in getting Germany to pay had to do with the debts of the victors, not the losers: Britain and France had spent money like mad during the war, and had to borrow billions from the Americans in order to keep fighting. Britain and France were willing to borrow because they expected to use German money to pay back the loans; historically, this is how wars worked. The loser paid the bills. So, while it became clearer and clearer during the 1920s that Germany could not pay back the reparations (for economic and political reasons), Britain and France could not afford to let the issue go, as they expected to use the money to pay back the United States (and couldn't pay us back without the money). The political divisions between Britain, France and the US over reparations were caught up in issues of war debt, payments, economic policy, and domestic politics. Over time, reparations divided these states, which hindered their ability to come together to stave off the global economic collapse.
For Ahamed, the US isn't blameless here: the US pushed Britain and France to reduce or eliminate the reparations, but refused to discuss reducing the debts that Britain and France owed us (by our logic, at the time, reparations were a political issue and repayment of British/French war debt was an economic issue, and the two were independent). While Ahamed's book has some flaws (see below), he is very good at showing how interconnected/interdependent the global economy and politics was even in the (ancient by modern standards) 1920s.
The second part of the reasons for the global collapse focuses on an economic belief, an ideology. The economic ideology that broke the world was the issue of gold, or the gold standard. Up until this time, states used currency backed by gold. The amount of gold a state had determined how much currency it could issue. But (by the light of modern economics) it also determined a host of other issues: inflation, investment, deflation, growth, employment, etc. In other words, while in the modern era we have central banks (like the Fed) who determine the supply of money by fiddling with interest rates (the price to borrow money), back in the days of the gold standard, the interest rate was determined by the supply and availability of gold. If gold was plentiful, interest rates were low (there was money around to be borrowed). If there was no new gold on the market, then interest rates were high (the supply of money was very small, as money had to be backed by gold, and no gold was available). In hindsight (according to Ahamed), we can look back over centuries of European history and see that gold allowed modest growth (as new sources were found) and general stability. However, as the world moved into the modern era, gold became a ball-and-chain that prevented economic growth. As populations grew, and as the industrial revolution expanded economies, the limited supply of gold (Ahamed makes the claim at one point that - as of the 1920s - all the gold ever mined in the history of humanity would fill one modest two-story house) limited economic growth. If paper money is to be backed by gold, and there is a limited supply of gold, then (by definition) there is a limited supply of money. Limiting the supply of money means high interest rates, which suppresses economic growth. This is the conventional wisdom in economic today, and is so uncontroversial that is hardly seems mentioning
Yet, this was heresy in the 1920s. And, as Ahamed makes clear, the "gold fetish" of the central bankers was not based on economic theory, but on history and belief (ideology). States kept to the gold standard because that is what they had always done. Ahamed's story is also about the struggle of the states to get back to the gold standard they had abandoned in order to fight World War I. And most succeeded: by various economic measures (balanced budgets, borrowing, inflation, deflation, etc.) most of the states managed to bring themselves back to the gold standard of the pre-war period. The cost of this action, however, was massive. None of the economies grew robustly (except the US, which never left the gold standard and was starting its ascent to be the global hegemon it is today) and all had a variety of economic problems (unemployment, slow growth, balance-of-payments issues) that triggered political problems (lack of growth and unemployment cause the fall of several governments in Europe, for example). In short, the ideology of gold drove states to make economic decisions that triggered political crises. In Ahamed's view, this is one of the foundational causes of the rise of Nazism in Germany (but, just as much, one of the causes of the inability of Britain and France to afford to be able to re-arm and oppose Nazi Germany, though I'm interpreting Ahamed at this point). In fact, as Ahamed makes clear, one of the few good points about the global great depression was that it proved, beyond a doubt, that the gold standard was impossible for modern economies to adhere to. It seems clear (again, in hindsight) that the depression was as bad as it was because of the gold standard, and had the world abandoned it earlier, we could have mitigated some of the problems.
All in all, an interesting story. But Ahamed has some failures, though they are systemic and not historical. By choosing to focus on the four characters (and calling the book a biography in the preface), Ahamed is somewhat guilty of false advertising. This is clearly a work of history; the story he wants to tell is one of the intersection of economics, politics and ideology. Yet, by choosing to focus on the four characters, readers get the impression (or, at least, I do) that the real motive power of the economic collapse is in the story of these four men. As the book unfolds, however, you see that these men are embedded in the ideology of the times, and of the political structures of the times. Moreover, to tell this complex story (four countries, fifteen years, plus bit parts for other states/governments as necessary), it becomes necessary to move the camera away from the activities of these four onto other actors (Churchill, Roosevelt, Hitler, etc.) as they make decisions that influence the outcome. As a reader, I started to get the impression that the focus on the four "main characters" was distracting, and that the real story was happening in other places that Ahamed wasn't showcasing. I understand Ahamed's focus on the four; he gives clear evidence that the four corresponded with each other and became (in a few cases) friends. The closeness shared by these four central bankers as the global economy spins out of control makes for a compelling narrative structure. However, the facts don't seem to support that narrative structure; as the global economy truly collapses in the early 1930s, only one of the four characters is even in power anymore (Norman, in England, is still head of the bank; Moreau has moved to a more lucrative private bank; Schacht was given the boot by the German government and has drifted towards Nazism, and Strong had died in the late 1920s). The story at this point is almost entirely one of other characters, and I wanted to see what they were doing and how their actions affected the course of events. In Ahamed's defense, he moves onto these other characters, but calling the book a biography seems a stretch at this point. In the end, I'm left wanting more detail and description of the actions and governments as the world falls apart. The focus on the four individuals creates a nice narrative structure, but fails to be able to effectively tell the entire story. (And, it should be noted, perhaps the story is greater than Ahamed can tell in only 500 pages.)
But maybe this is just my problem with biographies. I rarely read biographies; history is a complex mix of characters, structures, parties, movements, ideas and ideologies. Any focus on a single individual will, by definition, miss telling the whole story. And I'm more interested in the whole story than the complete story of one (even important) individual among a whole tapestry. As such, biographies seem narrow and that's the impression I get from Ahamed. There is a fascinating story here, and Ahamed seems to pick up 75% or so. But I get the feeling that there is more out there that really explains how the world fell of a cliff, and it isn't in the book. (Speculatively, I wonder if the relationship between these four bankers caught the eye of a literary agent or publisher, and if Ahamed shifted the focus of the work to the four central bankers (and away from the central story) on advice of someone who thought it would read easier or be easier to sell. I have no idea if this is the case, but it seems plausible. Ahamed's background is in investments and finance, not history or biography.)
Still, for those interested in the period or in a look at an economic crisis that is significantly worse than what we are experiencing today, this is a good read at a not-to-complex level. Somewhat recommended.
Posted by baltar at May 18, 2009 09:02 AM | TrackBack | Posted to Books | Economics | History