Finance lessons from the lost decade

March 24, 2009|Ross Kerber, Globe Staff

As the faltering economy gives rise to once-unspeakable comparisons to the Great Depression, along comes this fantastic book reminding us that the financial crisis of the 1930s was solved by specific policy steps - just as the problems of today shall be in time. The thing is, most of those steps weren't the first choices of the bankers or finance ministers in charge, and their stumbles "Broke the World," as the subtitle of this sweeping history has it.

This isn't an optimistic message from Liaquat Ahamed's telling of a lost decade, a narrative organized around the lives of four central bankers from each of the world's leading powers -- the United States, Britain, France, and Germany. Each emerged from World War I with different economic priorities, and the mess of the Versailles treaty left each codependent on the others in ways that would warp their economies throughout the 1920s.

In guiding the reader through technical details of issues including the Gold Standard, reparations payments, and war debts, Ahamed shows how each national bank head struggled with the orthodoxies of the day. Sometimes it was politicians and outsiders, not bankers, who pressed for or allowed the solutions that led their economies back onto their feet, for better (Roosevelt) or worse (Hitler).

In that light the book serves as a cautionary tale of the limits of financial knowledge and the potential for officials to get it wrong at any turn. But it also should give pause to those who would try to limit officials' choices with harsh constraints on their actions, one intent of the Gold Standard that most nations used to back up their currencies through the Great War.

As Ahamed shows, the Gold Standard was flawed in many ways such as allowing mining discoveries to affect the supply of money. But in a wonderful scene, he shows why its backers -- who came to include Winston Churchill, the Britain's treasury secretary -- stuck with tradition in the face of criticism from upstart economists like John Maynard Keynes, one of the heroes of the era.

As the two and others debated over a salubrious dinner at Churchill's 11 Downing St. residence, Ahamed writes at one point, the discussion "reflected, at bottom, a philosophical divide between those who believed that governments could be trusted with discretionary power to manage the economy and those who insisted that government was fallible and therefore had to be circumscribed with strict rules."