Just Finished Reading: Lords of Finance – 1929, The Great Depression, and the Bankers who Broke the World by Liaquat Ahamed (FP: 2009)

The Wall Street Crash of 1929 is arguably one of the most important events of the 20th Century and is directly implicated in being one of the sparks that 10 years later led to the Second World War. But it was not a simple collapse of the New York Stock market nor was it a simple financial crisis. With origins dating back to the start of World War One and high level players from around the world in the Bank of England, France, Germany and the Federal Reserve Banks in the US the Crash itself was the result of a myriad of decisions (not all of them bad, short sighted or selfish) taken by the pre-eminent experts of the age. Unfortunately for them and the rest of the world they were in uncharted waters after the financial strains of a World War stretched institutions to breaking point and beyond and succeeded in pushing countries off that great hope for stability – the Gold Standard.

The global financial sector – still somewhat in its infancy – might have stabilised after the war ended in 1918 except for the elephant in the room: Reparations against the Central Powers in particularly Germany. With the US unwilling to ‘write off’ the Allies war debt they could hardly write off Germany’s. Indeed the French had no intention doing so, no matter what. With a broken Germany tottering between being unwilling and unable to pay the debt forced on it by the victorious Allies its economy slumped and then collapsed into hyper-inflation. When rescue plans failed and the currency became worthless the German government hoped to at least restructure if not wipe out it’s yet to be paid reparation bill. Meanwhile the British economy, deep in austerity, limped along with high unemployment and lowered expectations. France, meanwhile, despite its never ending criticism of Germany’s failure to pay damages was doing well and acquiring gold at the expense of other European nations. But gold liked to be one place above all else – the US where gold reserves blossomed and the economy boomed. Month after month the NY Stock Exchange rose to historic levels and kept on rising. Some experts where even predicting a never ending boom period – and an end to the boom and bust cycle. Despite fears that the bubble would eventually burst the US government did too little too late to stop it. Rather inevitably in later 1929 the long expected burst happened with, it seemed at first, little down side except for a few overextended investors who lost everything.

But the market had been so good that almost everyone had a slice of the pie. Unfortunately many had borrowed money in the certain hope of being able to pay it back. Now they couldn’t. At first a few of the smaller banks reported difficulty and some of them were allowed to fail. Loans dried up and investment crashed with the market. Cash poor businesses cut back on investment and laid off workers. Panic spread, production dropped and a sudden hike in interest rates just made it worse. Another bank failed and then another. Massive amounts of money poured out of the banks and under people’s mattresses. Confidence was gone. The ‘Crash’ spread across the country and across the world. Banks in Europe began failing. Governments tried to bail them out but the demand for cash readily outstripped supply. The downward spiral accelerated. Nothing like this had ever been seen before and no one knew what to do. The rules of finance put together over decades no longer seemed to apply. Fear stalked the financial capitals of the world and it seemed that Marx was right after all. The contradictions inherent in the capitalist enterprise where about to kill it.

I am honestly fascinated by the Wall Street Crash. It is such a seminal moment in world history. Until reading this excellent book I thought I had a pretty good handle on it but I was most definitely abused of that notion. Now, after reading this deserved Pulitzer Prize winning history, I understand a great deal more of what happened, why it happened, who was responsible and what happened afterwards. It might sound a bit odd when talking about Economics – even the economics of the 1929 Crash – to call the tale gripping but that’s exactly what this was. Told through the eyes and the actions of the four leading bankers of the age this was a detailed depiction of experts out of their depths, of arrogant assumptions that reality could be bent to the human will, of prejudice against those who are not ‘our sort’ and of intellectual upstarts (like John Maynard Keynes) who were ignored until they could be ignored no longer. If you ever wondered why Hitler came to power in Germany in 1933 or about the world’s obsession with gold, or why the dollar is (presently) the world currency or even why the world is the way it is today you could do much worse than reading this great work of financial history. Highly recommended and more Economics to come...