February 9, 2011

Depressions are not Acts of God: on the Lords of Finance

Ahamed, in this book, lays out just what happened in the time period covering the run-up to the First World War to the run-up of the second. The subtitle of the work speaks of the bankers who broke the world, and I can imagine it felt something like that, both for the workers, the reinters and the capitalists. There’s a good bit of economic history here but a paucity of the political history – you need to know that for context. What you get here is the economic driver of that context that happened (If you believe in economic determinism).

Anyway:

Late in the book, the author quotes the newly-sworn-in president, Franklin Roosevelt in context of temporarily unpegging the dollar from the gold standard. He supposedly joked that reporters can ask all they want about the gold standard because no one in the public knows what the gold standard is. (Broadly, it is keeping a fixed exchange rate between a currency and gold. Naturally it becomes more complicated in practice.) The gold standard is the center of this book. In this book, it is the devil – once the central banks allow for floating exchange rates economic prosperity starts to work out. In fact, where at one point the French central bank’s gold holding made it the strongest developed country economically and politically, once everyone started going off the gold standard the holdings became a liability and the Franc was too strong.

I may be a little reductive here (because thick book > short review) but the author’s insistence is that the central banks were too stuck on the gold hoarding orthodoxy and too slow to listen to the genius that was J. M. Keynes (and even Irving Fischer). Ahamed even draws the parallels to contemporary situations. It’s an imperfect parallel – there’s no large economy suffering under the yoke of reparations. However, we may be able to learn from past history and correct our policies even at this late date in our generation’s depression. Central Banks are not a Panacea, but our Federal Reserve System is not a monster from Jekyll Island either. It could use some more oversight, but it can be a powerful tool in policy. Those who love the idea of hard money should read this, at least for a little context – especially since the global population and economic growth have boomed in the last 80 years and the gold supply has not. Inelastic supply stays that way.