Book Review Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed

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This Book Review of Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed is brought to you from Drew Nelson from the Titans of Investing.

Genre: Economics
Author: Liaquat Ahamed
Title: Lords of Finance: The Bankers Who Broke the World (Buy the Book)


The Great Depression of the 1920s and 1930s is regarded as the most devastating financial crisis and downward spiral in history. Despite the enormous impacts left on the world as a result of the Great Depression, the events leading up to the disaster are not necessarily common knowledge.

Most works on the Great Depression have their focus on the devastating effects on life around the world caused by the Great Depression. Lords of Finance instead focuses on the events leading up to the Great Depression and the condition of the world which permitted such widespread financial chaos.

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The precipitating events of the Great Depression were shaped by the decisions of the four major central bankers of the time: Benjamin Strong of America, Montagu Norman of England, Émile Moreau of France, and Hjalmar Schacht of Germany. The book is written from the perspective of “looking over the shoulders” of these four men as they influenced the balance of the world’s economy.

No one event, man, or decision caused the Great Depression, but instead, it was a collection of events and decisions. From a broad perspective, these included: a strict adherence to an antiquated gold standard for monetary value which became a straitjacket for the participating countries, extensive reparations required of Germany following World War I which made a functioning economy in Germany a near impossibility, the eventual collapse of the German economy, the American Stock Market Crash of 1929, and finally extensive bank runs in America and Europe.

All of these events resulted from collections of poor decisions which the four bankers had a large hand in. The theme of the book is based on whether or not such a catastrophe could happen again.

While the widespread effects of the Great Depression were a result of the unfortunate intervals at which the major events happened, Lords of Finance asserts that ultimately, the world was in a position to experience the Great Depression because of a lack of leadership and economic understanding by the four central bankers. Because history often repeats itself, it is vital that today’s economic leaders learn from the mistakes of the past.


Lords of Finance tells the story of the events leading up to the economic crisis Great Depression. Most recounts of the Great Depression focus on the worldwide troubling economic effects of the depression that have not since come close to being matched, even by the recent catastrophic financial crisis which gripped the world.

The focus of Lords of Finance is on the conditions that permitted such widespread financial chaos to have occurred in the 1920s and 1930s.

It is eloquently written from a perspective “looking over the shoulders” (Lords of Finance, 7) of the four most powerful central bankers of the time, whose decisions shaped the worldwide economy that allowed for and led to the Great Depression.

These bankers were: Benjamin Strong of the Federal Reserve (America), Montagu Norman of the Bank of England, Émile Moreau of the Banque de France, and Hjalmar Schacht of the Reichsbank (Germany). These men are the “Lords of Finance” referred to in the book’s title. While there were undoubtedly other players in the crisis, these four men were responsible for the majority of the decisions that led to the Great Depression.

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The underlying question of the Lords of Finance is whether an event like the Great Depression could grip the entire world again. Coincidentally, the book was published in 2009 near the height of the greatest economic calamity since the Great Depression.

Hopefully, today’s financial leaders have learned valuable lessons from the failures of leadership of the central bankers and other leaders that precipitated the Great Depression.

The Lords

In the 1920s, the world’s central bankers began to take on a celebrity persona due to their incredible influence at the time. Four such bankers are the protagonists of this book: Benjamin Strong of America, Montagu Norman of England, Émile Moreau of France, and Hjalmar Schacht of Germany.

The book makes several references to what essentially amounts to paparazzi of the press corps following these men’s moves as they traveled the world and made decisions affecting the balance of the global economy. More than just colleagues, these men became friends who relied on each other for help in incredibly important decisions.

Described as “the world’s most exclusive club,” these men ran their respective central banks to the best of their abilities. However, in large part due to “a failure of intellectual will” and a “lack of understanding about how the economy operated” (Lords of Finance, 504), all four men played a significant role in enabling the Great Depression to seize the world economy.

The role of a central banker can be put into perspective with the definition of a central bank.

“A central bank is a bank that has been granted a monopoly overissuances of currency” (Lords of Finance, 11). This allows central banks to regulate the price of credit, which in turn determines the money supply within an economy.

Preceding the Great Depression, the central banks were privately owned and had a responsibility to their shareholders. Their most important issue, however, was to preserve the value of their country’s currency.

In 1907, the United States was hit by a severe panic now known as the “1907 Banker’s Panic.”

The panic began when a group of speculators attempted to corner the market on copper with loans from banks. One of the banks lost 50 million dollars in the failure, which triggered a bank run. Fear spread throughout New York City causing bank runs at most of the banks. At the time, the United States was the only major financial power without a central bank.

At various points in American history there were attempts to start a central bank, but due to “an unusually ambivalent attitude to the whole institution of central banking” (Lords of Finance, 52), they had failed to take power.

With no central bank to turn to, the financial community turned to J. Pierpont Morgan who, in addition to being massively wealthy, had lots of experience with financing and bank panics. He led the rescue effort with the help of Benjamin Strong, the president of the Bankers Trust Company and Henry Davison, a J.P. Morgan partner.

They were responsible for fundraising the recovery effort, and for deciding which banks affected should be bailed out and which should be allowed to fail. They ended up raising over $25 million to help with the rescue.

The significance of the 1907 Banker’s Panic was that it exposed the weakness of America’s banking system.

While Morgan and his team helped stave off complete economic collapse, it became clear the country could not rely on one man to do this forever. Over the next few years, plans were put in place for a collection of central banks in America, rather than a single one with all the power.

The regional institutions were to be called Federal Reserve Banks, and Benjamin Strong was offered the job as the first governor of the Federal Reserve Bank of New York. Strong initially refused because he would be taking a large pay cut to be the governor, but after insistence on public duty from Davison, he accepted in October 1914.

Due to its standing as the largest of the regional banks, the Federal Reserve Bank of New York quickly became the most powerful and influential of the central banks. Therefore, Strong became the most powerful and influential of the American central bankers.

Strong served as governor for 14 years; during that time, he was often sick and required extended vacations. In 1928, his illnesses caught up with him, and he passed away, just missing the start of the Great Depression in 1929. Some claim that had he not passed away, America would have been able to get out of the Great Depression quicker. However, his decisions played a large role in leading America into the Depression.

Strong and Norman became particularly close which led to jaded decisions to help each other.

Strong was a large proponent of England returning to the gold standard which certainly influenced Norman’s view. As described later, the return to the gold standard helped solidify the economic downfall of England during the Great Depression. Norman, on the other hand, convinced his friend Strong to keep United States interest rates low causing a speculative stock bubble, which eventually burst and set off the Great Depression in America.

Despite the friendships formed, the four bankers still had a responsibility to the interests of their own countries and politics. War reparations that seemed impossible to pay saddled Schacht and the Germans, but Moreau and the French refused at several points to let up; this caused the German economy to collapse twice and helped form divides between the bankers.

The Gold Standard

The Gold Standard is a monetary system in which the value of a currency is tied to a specific quantity of gold. After the suspension of the gold standard in World War I, most countries returned to the gold standard by fixing their currency to a specific rate of gold.

For example, at the time, one US dollar was equivalent to 23.22 grains of gold. The theory asserts that a person holding one unit of the currency should be able to trade that currency for the equivalent rate of gold bullion. Because all of the world’s major currencies were tied to gold at a specific rate, they were also tied to each other at a specific rate.

The problem with the standard was the amount of currency in an economy was limited by law to the amount of gold reserves held by that country. Each country stored massive amounts of gold in the vaults of their banks which “provided the reserves for the banking system, determined the supply of money and credit within the economy, and served as the anchor for the gold standard” (Lords of Finance, 12).

The laws related to money supply varied by country, but in the United States, the law stated the Federal Reserve was required to have 40% of all the currency it issued on hand in gold. Before World War I, the four largest economies (United States, Britain, Germany, and France) shared relative parity of the world’s ~$5 billion worth of gold which had been mined.

After the war, the world’s gold reserves had increased to ~$6 billion with about $4.5 billion concentrated in the United States.

Germany took the largest hit with less than $1 billion in gold reserves at the end of the War. This led to a world in which “the international gold standard had become like a poker table at which one player has accumulated all the chips, and the game simply cannot get back into play” (Lords of Finance, 164). Meanwhile, prices were close to 50% higher after the war, which effectively meant the purchasing power of the gold reserves had actually contracted significantly.

The gold standard was suspended during the War, but in 1925, newly elected Chancellor of the Exchequer, Winston Churchill, returned Britain to the gold standard, and eventually, the rest of the world followed suit.

The move back to the standard was long supported by Norman, and when Churchill took action to move Britain back, it was described by the Economist as “the crowning achievement of Mr. Montagu Norman” (Lords of Finance, 237). However, the problem of an English shortage of gold reserves was compounded by a misaligned exchange rate (back to the pre-war level) that took a large toll on the British economy.

Interest rates were kept artificially high in the country. This, in turn, hurt Britain’s manufacturing worldwide as they found it difficult to compete with countries that could finance much cheaper. Later in his life, Churchill claimed that the return to gold was “the biggest blunder in his life,” but at the time, there was not much he could do to fix it (Lords of Finance, 239).

The problem created by America’s vast gold reserves was that Britain’s economy was in effect tied to the dollar rather than just gold.

In January 1925 during a visit to America by Norman, his good friend Strong warned him “in a new country such as ours with an enthusiastic, energetic, and optimistic population, where enterprise at times was highly stimulated and returns upon capital much greater than in other countries, there would be times when speculative tendencies would make it necessary for the Federal Reserve Banks to exercise restraint by increased discount rates, and possibly rather high money rates in the market. Should such times arise, domestic considerations would likely outweigh foreign sympathies” (Lords of Finance, 240). This turned out to be quite prophetic of the eventual Great Depression, which the switch back to the gold standard would help the cause.

Another problem with the gold standard was the interconnectivity of each country’s interest rates. Because of this, Benjamin Strong had to develop a policy of keeping interest rates artificially low, which led to a massive stock bubble. The popping of this particular stock bubble in 1929 caused the most devastating stock market crash in the history of the United States.

The crash is now considered the beginning of the Great Depression. The rise of the bubble also created a squeeze in international credit that drove Germany and other parts of the world into their own recession, meaning the bubble was essentially a double-edged sword.

German Reparations

At the conclusion of World War I in 1919, Germany was saddled with a large debt for reparations owed to the Allied Forces as outlined in the Treaty of Versailles, which ended the War. These reparations owed by Germany were the monetary representation of the loss and damage caused by the Germans (the eventual loser) to the Allied forces during the Great War.

The amount Germany owed at the time was 269 billion German Marks. This figure was fought aggressively by Schacht and the Germans throughout the decade. The reparations became a large factor in the eventual collapse of the German economy. At the same time, France owed Britain and the United States $7 billion in war debts, and Britain owed $4 billion in war debts to the United States.

This incredible amount of leverage and interdependence between the world’s great financial powers “left massive fault lines in the world financial system, which cracked at the first pressure” (Lords of Finance, 501).

Another important figure during this time was the British economist, John Maynard Keynes. The brilliant Keynes would go on to become one of the most famous economists in history. He was one of the first who argued against the incredibly high reparations the Germans were demanded to pay.

Looking out for the interests of Germany and knowing the high amount would be virtually impossible to pay, Schacht agreed with him. Keynes predicted the debt would lead to economic chaos within Germany and high volatility of the German Mark, both of which came disturbingly true.

After repeated defaults on the reparations by Germany, France invaded Germany in 1923 in what became known as the Occupation of the Ruhr. This caused much resistance within Germany and led to the plague of hyperinflation that wrecked the German economy.

As mentioned, the reparations played a large role in the eventual economic collapse of Germany, which set off a chain reaction of events that largely impacted and shaped the world. On the one hand, it was the initial falling domino in the Great Depression.

On the other hand, the poor economic conditions of Germany after the collapse allowed for the rise of the charismatic Adolf Hitler and the Nazi Party. This, of course, saddled Germany more than any owed reparations and was an eventual cause of the World War II.

Hyperinflation and the Collapse of the German Economy

Because Germany did not have the funds to pay the reparations, their solution was to print more German Marks and buy other currencies with them at any rate they could get. In 1922 alone, 1 trillion marks were printed, and in the first six months of 1923, 17 trillion marks were printed.

This mass influx of currency into the German economy caused the phenomenon of hyperinflation.

By the end of 1923, “Germany experienced the single greatest destruction of monetary value in human history” (Lords of Finance, 121). At the beginning of 1922, the Mark was relatively stable at around 320 to the dollar.

By August 1923, the Mark was at 620,000 to the dollar. By November 1923, it had risen to 630 billion to the dollar. Prices on goods were doubling every few days, and sometimes even quicker. Workers were given time off work to spend their daily compensation because if they were to wait until the end of the workday, the amount they were paid would be worth substantially less, if not nothing.

At the time, Hjalmar Schacht was a banker who was not yet distinguished within Germany or rich. The hyperinflation situation created an opening for him to enter the public realm. He had long argued Germany should only have to pay about a third of their reparations total, which was a plan that was of course, very popular within Germany.

His rise to fame came when he was appointed currency commissioner and was given the impossible task of fixing the hyperinflation plague that had swept Germany. His solution was the creation of a new currency, the Retenmark, and central bank, the Reichsbank, of which Schacht was now the head.

The Retenmark was not based on gold, but rather on the value of German land.

This, of course, created a problem if someone wanted to exchange the currency for land, as land is not as readily transferable and distributable as gold bullion. When the new currency was introduced on November 20th, the old currency was trading at 4.2 trillion to the dollar.

The conversion rate to Retenmark was set at 1 trillion Marks. The two currencies in Germany did not initially create much of a problem as the old currency had become virtually worthless. This allowed the new currency to take over and solve the hyperinflation problem for which Schacht was declared the “Miracle Man.”

However, Schacht knew the fix was temporary as basing a currency on land was not sustainable in a world where currencies were still fixed on gold. The problem for Germany was with only $100 million in gold reserves; they did not have enough to actually back a viable currency and thus would have to borrow gold reserves from the only country with a surplus, the United States.

The Dawes Plan

In 1924, Charles G. Dawes proposed the “Dawes Plan” in an attempt to solve Germany’s reparation problems. Dawes would eventually go on to become the Vice President of the United States under the Coolidge administration, but was, at the time, the Director of the U.S. Bureau of the Budget. The main points of the Dawes plan included:

  • A loan from the Americans to Germany of 800 million Marks to help Germany repay the debt and to begin the process of rebuilding the ravaged German economy
  • The reduction in debt owed from 269 billion Marks to 226 billion Marks
  • Evacuation of the Ruhr area by French troops

Initially, the Dawes Plan was widely praised and helped Dawes become the 1925 Nobel Peace Prize winner (many regarded his plan the main factor in ending turmoil in Europe).

It also catapulted him into the candidacy for Vice President. In the end, however, the German prosperity created was simply an illusion as the Dawes plan was eventually disastrous for Germany. Germany now owed money to the United States in addition to their existing war debts.

Because of this, essentially every major economy in Europe was now directly tied to the United States’ economy. This problem was described by Keynes as “a great circular flow of paper across the Atlantic: The United Stated lends money to Germany, Germany transfers its equivalent to the Allies, the Allies pay it back to the United States government. Nothing real passes-no one is a penny the worse.”

The Great Crash

The Great Depression officially began in October 1929. Leading up to this month was a nine-year rally in the stock market, due mainly to artificially low-interest rates from Benjamin Strong and the Fed. This rally, however, proved to be a bubble.

After a fall the previous week, the Dow began the week of October the 14th at 350 which was about 10% off its all-time highs set in September. It then fell to 305 or 20% under its peak. On October 23rd, a large “avalanche of sell orders” (354) came from a mystery source that knocked the Dow down 20 points in the final two hours of trading.

The next day, another large flood of sell orders caused a 20% drop, which was compounded by bad storms that made communication across the country difficult. Most investors could not get a hold of their brokers, and the ones that could were only selling. The president of the stock exchange, Richard Whitney, tried to calm the markets by purchasing almost $30 million in securities at substantially higher prices than the sellers were offering.

This did help the market, which, after rallying, only finished down 6% for the day. This money supply came from a group of bankers from several of the nation’s largest banks including Thomas Lamont of J.P. Morgan, who warned that, despite the market’s positive reaction to the large buy, “there is no man or group of men who can buy all the stocks that the American public can sell” (Lords of Finance, 355).

This move helped stabilize the markets for the next two days; however, trading levels were still high. On Monday, October 28th, which would become known as “Black Monday,” the Dow lost 14% which is the largest percentage drop in a single day in the stock market’s history. This effectively erased 14 billion dollars’ worth of value in the stock market.

On Black Monday, George Harrison (the replacement to Strong at the Fed after his death), worked tirelessly to prevent the stock market crash from creating a full- scale financial crisis by affecting the banking industry.

He decided on a plan to buy $50 million of government securities to inject cash into the banking system. However, the next day saw no letup in selling as the Federal Reserve injected another $65 million. In less than six weeks, the Dow had lost close to 50% of its value.

Bank Runs

Despite the efforts of Harrison, the banking system was still susceptible to a great collapse. This began happening in late 1930 when the Bronx branch of the Bank of the United States was approached by a merchant wanting the bank to buy back his holdings of its stock. In 1929, the bank had sold stock to its own depositors with an assurance that they could sell the stock back to the bank at the original purchase price of around $200 per share.

At the end of 1930, the shares were trading around $40.

The bank tried to persuade the merchant to hold his stock which he saw as a sign of trouble within the bank and widely reported his assumption. This caused a run of investors seeking to withdraw the entirety of their savings from the bank, the first such bank run in the United States during the Depression.

A similar scene began happening at the other 57 branches of the bank in New York. The Bank of the United States eventually failed which changed public sentiment toward banks causing the public to begin keeping stockpiles of cash out of the banks. In the months after the failure, $450 million had left the banking system. In May 1931, bank runs started back up, and many more banks were closed as a result.

European Financial Crisis

On May 8, 1931, Austria’s biggest and most reputable bank, Creditanstalt, was forced to declare bankruptcy after booking a loss of $20 million which wiped out most of its equity. In the days following, a run developed on most of Austria’s banks and caused a loss of 50 million dollars or 10% of the deposits.

The Austrian National Bank injected $50 million into the banking system in an attempt to shore it up.

This meant an increase of 20% in the national money supply for the small country of Austria. The bank runs, and panic eventually spread to Germany. Both countries began experiencing shortages in gold reserves.

It quickly became apparent Germany would attempt to suspend paying its war debts yet again. In response, President Hoover enacted a plan to forgo one year of war debts due to America from Britain, France, Italy, and the other allied powers if, and only if, those countries put a halt on the World War I reparations due from Germany. The plan was initially received well as the next day the German stock market rose 25%.

While fundamentally it was a good plan to save Germany, Hoover had not taken into account the French disdain for Germany at the time, as France would have just as soon seen Germany fail. Aside from the disdain, France was Germany’s largest creditor, and at the time, it was second only to America in gold reserves making it the de facto financial power of Europe.

The sentiment within the French government was that America and Britain were plotting against France, and France tried heartily to reject the plan. Amidst the negotiations, Germany’s gold reserves were still shrinking rapidly.

Central bankers provided a loan of $100 million to Germany, which was completely used up within ten days.

The French finally settled on a plan allowing Germany only to suspend part of their reparations owed to France, and they would lend the received reparations straight back to Germany. However, it was too little too late for the Germans. Because of continued runs on its banks, President Hindenburg of Germany declared a two-day bank holiday.

The panic by this time had spread to Hungary, Poland, Yugoslavia, and Czechoslovakia, and these countries were also forced to suspend bank operations. The results were particularly bad in Germany, who was now forced to hike interest rates to 15% to keep money in the country and suspend payments on all war debts. The German economy fell apart for the second time in an eight-year period, which opened the door for Nazism to take power within Germany.

Bretton Woods System

Following the Great Depression was the bloodiest conflict in human history World War II. Germany was once again the primary aggressor of this war led by Adolf Hitler. Hitler’s rise to power came following the second dramatic collapse of the German economy as a result of the Great Depression. So, in the timeline of history, the Great Depression can be seen as a direct cause of World War II.

During World War II, John Maynard Keynes became Britain’s wartime economic strategist.

Determined to prevent the same result that followed World War I, Keynes focused on a post-war financial rebuilding plan for the world. The first element of his plan was a standard, like the gold standard, that was based on rules but had room for adjustment in valuation depending on economic conditions.

The gold standard was viewed as a virtual straightjacket that held its nations hostage. Allowing for deviations in the rules based on market conditions would theoretically make up for the failures of the gold standard. The other element of the plan was the creation of an international central bank; this would be done to prevent the shortages and discrepancies of gold reserves during crisis.

The Americans had begun work on a similar but different plan that gave more preference to American issues. Keynes and the Americans negotiated for two years, and in 1944, presented a unified plan. The plan had developed into a system called the “International Monetary Fund” as it would have the ability to give credit to struggling nations.

The plan was effective for almost thirty years after the war and helped to reconstruct the ravaged nations of Europe and Asia. Additionally, it helped spark a boom in the global economy without the cloud of an international crisis like the Great Depression. This proved to be one of the world’s longest periods of economic prosperity and is one of the great outcomes of the Great Depression.


Discussions on the Great Depression inevitably lead to the question of whether an event of such magnitude could ever plague the world again. This book was coincidentally published at the end of the 2008 Financial Crisis which some assert is the greatest economic downfall since the Great Depression.

However, what made the Great Depression “great” was the series of major events that happened in a short time period. Today’s world is much different from that of the ’20s and ’30s. A modern-day bank run would simply involve thousands of people logging on to their bank’s websites rather than physically lining up outside the banks. Additionally, banks are much more highly leveraged now resulting in more vulnerability for the banks of today.

A big difference between the 2008 Financial Crisis and the Great Depression is the response of the world’s Central Bankers. Throughout the Great Depression, the bankers stood idly by and allowed many banks to fail which contracted to world’s credit supply by 40%. Throughout the 2008 Financial Crisis, bankers made it a point to learn from the lessons of the Great Depression and inject massive amounts of liquidity to keep banks open.


Some believe that the Great Depression was an event that was impossible for any one man or government to prevent. In some ways, this theory makes sense, as the events that precipitated and worsened the Great Depression happened to strike at unlucky intervals.

Lords of Finance claims however that the entirety of the Great Depression was a direct result of bad decisions made by the period’s most important economic leaders. The key takeaway is that history repeats itself, especially within economics, but decisions by leaders can change in response to the crisis. This book shows the importance of learning from past mistakes to prevent future catastrophes. would like to thank the Titans of Investing for allowing us to publish this content. Titans is a student organization founded by Britt Harris. Learn more about the organization and the man behind it by clicking either of these links.

Britt always taught us Titans that Wisdom is Cheap, and principal can find treasure troves of the good stuff in books. We hope only will also express their thanks to the Titans if the book review brought wisdom into their lives.

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