Sunday, February 15, 2009

Reviews of the Lords of Finance

Both the New York Times and the Washington Post review Liaquat Ahamed’s Lords of Finance: the Bankers Who Broke the World. The book is about the leaders of the central banks of the U.S., England France and Germany during the years leading up to the Great Depression. Both reviews are quite positive. I have not looked at the book yet, but I m a little worried because, although both reviewers liked the book, both also seem to have come away from it with little understanding of how monetary policy, generally, or the gold standard, specifically, operated. Joe Nocera in the Times states that “In a brilliant stroke, Schact created a new currency, the Rentemark, then chose the exact right moment to fix it to the mark … In so doing, he restored faith in Germany’s currency and beat back inflation.” The key to beating inflation isn’t to introduce a new currency at the right moment. The trick is to not keep printing that currency at an ever more rapid pace. Likewise, Frank Ahrens in the Post quotes Ahamed to the effect that all the gold mined up to 1914 “was barely enough to fill a modest two-story town house.” He then adds that, “There simply was not enough of it to fund a global conflict or to allow economic recovery afterward.” To be clear the first quote is Ahamed the second is Ahrens. The small supply of gold is of course what made it useful as an international monetary standard. People didn’t carry around bags of gold. They had long used bank notes or checks as we do now. People can by the same amount of stuff with a few valuable dollars as they can with lots of worthless dollars. By requiring convertibility at a fixed rate the gold standard placed a constraint on changes in the money supply. It limited inflation and exchange rate risk, and encouraged foreign investment. It was adopted for the same sorts of reasons that countries sometimes peg their currency to the dollar or the franc, for instance. The gold standard did not create complete stability. Gold flows and, therefore, changes in the money supply could be influenced by political factors as well as economic ones. And the United States experienced periodic financial crises while on either a gold or bimetallic standard.

When I have had a chance to look at the book I’ll let you know what I think of it, but I worry that the reviewers do not seem to have come away with a very clear picture of the way things worked.

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