Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World by Liaquat Ahamed Read Free Book Online Page A

enduring classic. For example, by tracing through the consequences of rising prices on different classes in a stylized picture of the economy—what economists today might call a model—he showed that inflation was much more than simply prices going up, but also a subtle mechanism for transferring wealth between social groups—from savers, creditors, and wage earners to the government, debtors, and businessmen. He thus highlighted the fact that the postwar inflation in countries such as France and Germany was not just the result of an error in monetary policy. Rather, it was a symptom of the fundamental disagreement that had wracked European society since the war about how to share the accumulated financial burden of that terrible conflict.
    In contrast to
The Economic Consequences,
the new book had almost no practical impact. At a time when the currencies of Central Europe had completely collapsed and the franc was perilously close to the edge, few people could be convinced to entrust the management of national moneys and currency values to the discretion of treasury mandarins, politicians, or central bankers. There were too many examples to point to—Germany, Austria, Hungary, admittedly some of them pathologically extreme—of what could happen when the discipline of gold was removed. But the experience of the next decade would, in the words of one of Keynes’s biographers, win for the
Tract
“the allegiance of 243 half the world.”
    NORMAN ’ S RESPONSE TO the
Tract
was predictably to dismiss it as the froth of a clever dilettante. As he wrote to Strong, “For the moment 244 Mr. Keynes seems to have rather outdone himself, a fact that perhaps comesfrom his trying to combine the position of financial mentor to this and other countries with that of a high-class speculator.”
    What separated Norman from Keynes had less to do with economics and more to do with philosophy and worldview. For Norman, the gold standard was not simply a convenient mechanism for regulating the money supply, the efficiency of which was an empirical question. He thought about it in much more existential terms. It was one of the pillars of a free society, like property rights or habeas corpus, which had evolved in the Western liberal world to limit the power of government—in this case its power to debase money. Without such a discipline to protect them, central banks would inevitably come under constant pressure to help finance their governments in much the same way that they had done during the war with all the inflationary consequences that were still all too apparent. The link with gold was the only sure defense against such a downward spiral in the value of money.
    His reaction to the
Tract
was colored by his personal dealings with Keynes. After the war, Norman, agreeing with much of Keynes’s argument on reparations, had consulted him at the height of the German hyperinflation. But Keynes’s vocal opposition to the war-debt settlement with the United States, which Norman had been responsible for engineering, created a rift. Norman, acutely sensitive to public criticism, harbored grudges for a long time—“the most vindictive man 245 I have ever known,” according to one close friend. Thereafter, though their social circles overlapped somewhat and though Keynes, for all his youthful iconoclasm, was already widely recognized as the most brilliant monetary economist of his generation, Norman studiously ignored him professionally, and refused ever to invite him to advise the Bank.
    Strong’s reactions were on the surface similar to Norman’s. He had never met Keynes, but given his puritan background, he would have vehemently disapproved of the Bloomsbury irreverence and mockery of authority. When
The Economic Consequences
came out, he had written of Keynes, “He is a brilliant 246 but, I fear, somewhat erratic chap, with great power for good and, unfortunately . . . some capacity for harm.” Many in his circlehad taken offense at