Wednesday, December 19, 2012

Lords of Finance

While the shooting of the guy with the funny looking hat may have helped launch World War I, it was a decision made by a central banker that helped start the second World War. This very readable narrative covers the "economic" history of the western world, focussing on the time between the two world wars. (Though it does cover the periods before and after.)

In this time period, central banks were just starting to become formal institutions. They were just beginning to understand the importance and power of their policies and positions. A wrong move, and they can destroy an economy or even start a global war. However, the degree of power can vary significantly. Even those with keen insight may be overruled by political expediency.

After World War I, the allies insisted on reparations from Germany. American bankers insisted on war loan repayments from the Europeans. In the end, the Europeans got Hitler and the Americans got the Marshall plan. (Only Finland ended up paying up.) In the process, the German currency was destroyed. Britain's desire to maintain its position as the world's banked and return to the gold standard ended up killing the economy - and setting up the US as the world's banker. France's ineptitude ended up allowing its economy to boom while everyone else was suffering (and then suffer later.) The Great Depression was even caused in part by the US government giving a lukewarm attempt to help support overcome a bad British economic decision.

The real story, however, is of the individual characters. Much sympathy is given to the German central banker who shows great expertise, despite navigating a difficult political situation. (He even allies himself with the Nazis in order to push his policies through.) Keynes is also portrayed as being one of the few people who "has a clue" on how the economic system works. (But alas, he has little political power, and ends up sitting by and watching as bad decisions are made.)

Could some of these problems be similar to today? Is the massive Chinese current account surplus similar to the excess gold that seemed to exist in the US (and at times France)? Are bankers causing problems by keeping rates too low now? The book never addresses any of these questions directly. However, the engaging narrative of the central bankers allows readers to pose many questions of their own.

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