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The High Priests of Mammon

Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed







stumped by those “damned dots” of budget

The High Priests of Mammon

figures. Small wonder, finance has always been the Petri dish of conspiracy theories to which even the economist prime minis-Anand Chandavarkar ter of Britain, Harold Wilson and a former

Oxford don, fell prey when he accused the he universe divides naturally into gnomes of Zurich of sinister intent against

Lords of Finance: The Bankers Who Broke the

the trinity: god (divinity); Caesar World by Liaquat Ahamed (New York: Penguin Press), the British pound. (polity), and mammon (economy), 2009; pp 564, $32.95 (hardcover). The epistemic stance of the book is

whose high priests are the principal protagonists of this fascinating book detailing the lives and career of the central bank governors of the United Kingdom (Montagu Norman, 1920-44); United States (Benjamin Strong, 1914-28); France (Emile Moreau, 1925-30); and Germany (Hjalmar Schacht, 1923-30, 1933-39); and their role in the world economy. Largely unheard of in 1914, the Big Four constituted by 1926, just before the onset of the Great Depression of 1928-32, the “most exclusive club in the world”. They were determined in concert to resolve the depression through an unwavering adherence to the gold standard – “a barbarous relic” (John Maynard Keynes). They had the capacity and power to “crucify mankind upon a cross of gold,” which they fulfilled very much in the spirit of captain Ahab’s relentless pursuit of Moby Dick, or, the White Whale, in H ermann Melville’s classic.

Biographical History of Depression

This book could be regarded as a biographical history of the Great Depression written from the novel perspective of the governors of the principal central banks (Bank of England, the Federal Reserve System, the Reichsbank, and the Banque de France) who sought to reconstruct the system of international finance after the first world war, deriving their mandate from their governments who then believed

– mistakenly as it turned out – that matters of finance are best left to bankers, who alone can fathom the mystique and arcana of finance. Winston Churchill was not the only finance minister to be

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may 23, 2009 vol xliv no 21

well conveyed by its lead epigraph: “Read no history – nothing but biography, for that is life without theory” (Benjamin Disraeli). An approach not too dissimilar to that of the distinguished Oxford historian, Lewis Namier, well-described by Isaiah Berlin as a “sort of Pointillism, the ‘microscopic method’, the splitting up of social facts into details of individual lives – atomic entities, the careers of which could be precisely verified; and these atoms could then be integrated into greater wholes...with a marvellous power of imaginative generalisation” (Personal Impressions, Viking Press, New York, 1980; 81-2). Traditionally, central banks have been the subject of institutional h istories like those of the Bank of England

by John Clapham, John Fforde and
R S Sayers.


But Liaquat Ahamed views central banks through the prism of the personalities, character, mindset and motivation of the governors of central banks, who enjoyed a high degree of de facto autonomy unfettered by latter day concepts of t ransparency and accountability. The vivid narrative in elegant jargon-free prose is well-supported by a robust s cholarly apparatus, but, oddly, the e xhaustive bibliography does not cite the critically important primary archival sources like the Norman-Strong correspondence and the diaries of Norman and Moreau, extracts from which are so well deployed in the text. Surprisingly, he overlooks the perceptive revisionist evaluation of Norman by Theodore G regory in his “The Norman Conquest, Reconsidered” (Lloyds Bank Review, O ctober 1957) which gives a more balanced interpretation of the return to the gold standard by Britain.

Likewise, he uncritically accepts the conventional charge that Harry Dexter White was a Soviet spy, overlooking the International Monetary Fund historian’s well-documented article that the charge against White is “still not proven” (J M Boughton, History of Political Economy, 33:2, 2001). The author, however, brings a very congenial background to his assignment – Cambridge and Harvard, World Bank and investment finance – and is agreeably free of the déformation professionalle syndrome that so often seems to afflict international civil servants even in retirement.

Given the biographical angle of the book, the reader is prompted to ask: What, in fact, were the salient personality traits of its dramatis personae, given that character is destiny. The biographic details of the governors concerned are set out with graphic, almost visual, fidelity in the book. The pride of place naturally belongs to Montagu Norman, the governor of the Bank of England, the doyen of the international sodality of central bank governors, whose tenure of 24 years – the second “Norman Conquest” of England – is still unmatched in the annals of central b anking. Norman’s only rival in professional longevity, albeit in cloistered academia, was Maurice Bowra, who served as warden of Wadham College, O xford, for an unbelievable 32 years if only to prove that Oxford is not always the home of lost causes.

Norman, the Improbable Hero

Norman was the quintessential British establishment figure down to his charming eccentricities and whimsy. An Etonian, who came up to King’s College (Cambridge) in October 1889, he went down in July 1890 in mysterious circumstances but there was “nothing disgraceful, on either side” (King’s College Annual Report, 1950: 13). Rather, a simple case of “Cambridge was no place for him”. Following a strong family tradition of banking, he served an apprenticeship with Martin’s Bank and then joined the firm of Brown, Shipley, and Co which took him to A merica. His years in New York made him eager to promote closer ties between B ritain and the US. He became the director of the Bank of England in 1907 before b eing appointed as governor in 1920. A lonely bohemian figure, he relied wholly on his instincts and scorned economic e xpertise to the point of later famously i nstructing the Bank of England’s chief economist: “You are not here to tell us what to do, but to explain to us why we have done it”. No wonder, Keynes found him “always a bsolutely wrong”.

Strong, the Jekyll-Hyde Personality

Norman’s American counterpart and closest confidant among the Big Four was Benjamin Strong, who skipped college (Princeton) because of financial difficulties and instead joined a Wall Street brokerage firm which he quit in 1900 to join a bank, J P Morgan and Co, and later became the president of Bankers Trust at the comparatively young age of 41, before being elected as the very first governor of the Federal Reserve Bank of New York. He was a born leader who was “at the head of the table, wherever he sat”, but “few people could claim to know him intimately” although one contemporary remembered him as “a Jekyll and Hyde personality, usually p olite, but flying at times into terrible r ages”. Strangely, the two otherwise l onely figures Norman and Strong, shared an u ncanny affinity which materially p romoted the cause of inter-central bank cooperation.

Schacht, the Odd Man Out

In one sense, Hjalmar Schacht of Germany, was the odd man out of the Big Four being the only professional economist among them who earned his doctorate from the University of Kiel with a dissertation on the foundations of British mercantilism in the 18th century. He rose quickly as a wellestablished middle-level officer of one of the most powerful banks in Berlin, the Dresdner Bank. His fluency in English got him sent with a member of the Dresdner Bank’s board to the United States (1905), where they met with president Theodore Roosevelt and the partners of J P Morgan and Co. Schacht’s dominant trait was “his astounding self-confidence, self-discipline, energy and unrelenting drive”. But he a lways remained “a man apart, unique,


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Economic & Political Weekly

may 23, 2009 vol xliv no 21


s olitary, without followers or any coterie of partisans. He had no friends, only e nemies”. Thus, Norman, Strong and S chacht shared the dominant trait of being lonely men, scornful of collegiality, which in fact, was their subsequent undoing. Schacht was the polar opposite of N orman, yet they struck up a “genuine and enduring friendship”.

In contrast, Strong did not take to S chacht to the same degree and thought him an “exceedingly vain man”, but was duly impressed by the way he handled the Reichsbank and enlisted the support of his government (The Weimar Republic). Schacht also resisted the importunities of Hitler and was acquitted in the Nuremberg trials on the grounds that his involvement with Nazi regime had ended before war broke out. After peace he started a new c areer as an independent economic consultant and became an adviser to the governments of Indonesia, Egypt and Iran. Interestingly, his appointment in Indonesia was largely at the initiative of Sir Mirza Ismail, the Indian United Nations Representative, who rightly judged that Schacht’s experience in coping with the German hyperinflation would be invaluable in controlling Indonesia’s raging inflation.

Moreau, a Civil Servant and Banker

In contrast to the other governors, Moreau, was a member of the elite administrative cadre of inspecteur des finances that wielded true power in a France bedevilled by almost kaleidoscopic changes of fractious legislatures and governments. He also served an invaluable apprenticeship as the director general of the Banque d’Algerie, the central bank of Algeria and Tunisia. This unique background of a civil servant and banker no doubt set Moreau apart from his central banking counterparts, but unlike them he had to contend with the hallowed place gold occupied in the French psyche of private hoarding by peasants on top of the Banque de France’s propensity to treat gold reserves like f amily heirlooms never to be bought out and touched.

Raising Questions

The book, however, raises some overarching questions: Why, despite the impressive consensus on the restoration of the gold standard, there was no sustainable economic recovery? First, it was based on the fallacious assumption that monetary p olicy is a stand-alone instrument predicated – to invoke Tinbergen’s Law – on the basis of one target and one instrument. In practice, an effective policy requires the coordination of different policy instruments, monetary, fiscal and exchange rate (James Tobin’s Common Funnel Theorem) to cope with cumulative causation. Even within the monetary sphere, the debatable issue was whether it was the parity exchange rate and/or the return to the gold standard. This was the subject of a classic debate between Keynes and Gregory, who endorsed Henry Clay’s argument that the rate of 10% b elow parity had no particular sanctity. More importantly, the major cause of economic failure was the total abdication of responsibility by the political leadership of the four industrial democracies, who delegated it to non-elected governors. Was it not Napoleon who said war is too important to be left to generals: finance also is too important to be left to bankers. Keynes was right on target, when he wrote of the The Economic Consequences of Mr Churchill (1925), the then chancellor of exchequer, rather than the Consequences of Mr Norman. Likewise, Churchill’s successor, Philip Snowden, gave a free hand to Montagu Norman. There was also an acute class deficit in the leadership of the industrial democracies who reflected the sentiments of the upper and middle classes, while there was no constituency of the unemployed working class anywhere, except in Sweden, where Bertil Ohlin in 1932 argued long before Keynes that full employment should be the proper norm of stabilisation policy.

Central Banking Chronicle

This book can be read at another level as a chronicle of the heyday of presidential (non-collegial) central banking, with no transparency and accountability, which glacially transformed into parliamentary central banking by cabinet (Monetary Policy Committee) concomitantly with transparency and accountability, pioneered by the sweeping reform of the Reserve Bank of New Zealand, 1989, and its catalytic e ffect on other industrial democracies.

Even high priests need Levites as was so memorably said by Keynes. But the most innovative central banking technique of the 20th century – the direct issue of securities by the central bank – was pioneered by Raul Prebisch, governor, Central Bank of Argentina, in the 1930s, when even Keynes in his Treatise, Vol II, was troubled by the prospect of “a shortage of central bank ammunition”. In light of all this, it does seem a little too excessive to claim, despite Strong’s emphasis on price stability, that “it was Strong more than anyone else who invented the modern central banker”. The essence of modern central banking is a discretionary policy, whereas the quartet only struggled to restore the rules of the gold standard.

The improbable hero of this saga is undoubtedly Montagu Norman who poignantly wrote in his diary: “nothing that I did, and very little, that old Ben [Strong] did, internationally produced any good e ffect – or indeed any effect except that we collected money from a lot of poor devils and gave it over to the four winds.” What public figure of his standing has ever made such a high-minded confession? He always remained the moral titan. The best epitaph for the most legendary central banker of all time.

A concluding quibble. Granted that the protagonists of the book were all central bankers, one wonders why the qualifier “central” is missing from the subtitle, with its eerie resonances of the powerful Medici banking clan, who effectively ruled 15th century Florence. A humbling reminder of the perils of a bygone age of central bank hubris, when central bankers still ruled the roost. Today, it is the era of summits of heads of state (G-7 or G-10), who are the effective coalitions of international economic policy. Moral: Render unto mammon what is Caesar’s (economic agendas need a political imprimatur).

No matter. This book ranks as a distinctive contribution to the literature of central banking as well as that of the Great Depression. An economic thriller of the sub-genre “How-Done-it”. But with one unsolved mystery. The charisma of central bankers always seems to extend beyond their authority and efficacy.


Economic & Political Weekly

may 23, 2009 vol xliv no 21

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