Cover image of "Lords of Finance," a book about how the gold standard caused the Great Depression

Most of us Americans are taught in school that the stock market crash on Wall Street caused the Great Depression. Beginning on Black Tuesday, October 29, 1929, we’re told, the Depression didn’t properly end in the United States until the mobilization for World War II began in 1941 or ’42. But the event was a global catastrophe. How, then, could a single event on Wall Street be the cause of a decade of suffering throughout much of the world? In truth, the stock market crash was just one of several factors, as investment banker Liaquat Ahamed so eloquently explains in Lords of Finance. And the central culprit in the collapse of the world’s financial markets wasn’t speculation in stocks but the gold standard.

The gold standard choked off credit

The ins and outs of finance come across as so much mumbo-jumbo to most of us. But Ahamed details the history with such great clarity that a general reader can emerge from the book with a far more solid understanding of the dynamics at play. The essence of his argument is that, by adhering stubbornly to the gold standard even as the markets unraveled, the world’s four leading central banks choked off the credit necessary to stimulate their economies. In the US, Great Britain, Germany, and France, the conservative policies pursued both by the central bankers and their governments steadily made matters worse. Only when, one by one, they woke up and ditched the gold standard did their economies begin the long, slow climb out of the Great Depression.

Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed (2009) 576 pages ★★★★★ 

Winner of the 2010 Pulitzer Prize for History

Image of a newspaper headlining the Wall Street crash in 1929, which is often thought to have caused the Great Depression
Most of us learned in school that the Great Depression of the 1930s was caused by the Great Crash on Wall Street in October 1929. This book will set you straight.

How the gold standard worked

As Ahamed explains, the gold standard operated to place a limit on the total volume of money a central bank could support in circulation. For example, if you held a £100 bill, you could then go to a bank in England and demand $486 worth of gold in exchange. The British pound was fixed then at $4.86 in gold, and the Bank of England could issue only as much currency as it could reasonably be expected to redeem in gold in a down economy. With a fixed amount of gold in its coffers, and very little new gold being mined during that era, credit became scarcer and scarcer.

Too little gold meant too little money. Which meant that the world was inevitably heading for a fall as the European economies recovered from the devastation of World War I and the US stock market sucked up so much available credit for speculation in stocks. When the crash came and the banks failed in one country after another, people hoarded all the cash they could lay their hands on. Which, of course, made matters even worse. Little remained for the surviving banks to loan to businesses—and few bankers were willing to take chances in such depressed times. It was the perfect storm, in other words.

Four central bankers, and one economist, at the center of this story

Ahamed’s account is far from a dry, academic discourse on finance. He spins out his tale through the lives of the men who led the central banks of the US, Great Britain, Germany, and France during the most crucial years of the 1920s and, in some cases, through the opening years of the ’30s. He singles out five men for special attention:

  • Montagu Norman (1871-1950), Governor of the Bank of England from 1920 to 1944. The bank dates to 1694 and is one of the world’s oldest. It has served as a model for most of the world’s central banks.
  • Benjamin Strong (1872-1928), Governor of the Federal Reserve Bank of New York from 1914 to 1928. The New York Fed was (and is) the first among equals of the twelve regional banks of the Federal Reserve system. During the system’s first decade, the New York Fed called the shots, not the Board of Governors in Washington, DC, as has been the case for decades now. Strong and Norman early became close friends, went on joint vacations together, and often coordinated policies.
  • Hjalmar Schacht (1877-1970), President of the Reichsbank from 1923-1930. In the early 1930s, Schacht threw in his lot with the Nazis and served in senior posts in Adolf Hitler’s government. But he later turned against the regime and participated in efforts to overthrow the Führer.
  • Émile Moreau (1868-1950), Governor of the Banque de France. Moreau and Norman were at loggerheads for years, and their failure to collaborate as the economy went sour contributed to the decline.

The fifth person at the heart of Ahamed’s story is John Maynard Keynes (1883-1946), who is often cited as the most important economist of the twentieth century. Keynes was the outsider who savagely attacked their policies more often than not.

Today, the four bankers’ names are little remembered. But in their day these four men were celebrated both at home and (in some cases) abroad for their leadership. Only Keynes remains widely remembered.

About the author

Image of Liaquat Ahamed, author of this book about how the gold standard caused the Great Depression

Wikipedia tells us that Liaquat Ahamed “was born [in 1952] in Kenya, where his grandfather had emigrated to from Gujarat by way of Zanzibar in the late 19th century. He was educated at Rugby School in England, at Trinity College, Cambridge, and at Harvard University.” An American citizen, he is an investment banker with an extensive resumé that includes long-term stints at the World Bank as well as a number of private banks, insurance companies, and investment funds. He is a non-practicing Muslim. Ahamed and his wife have one daughter, who is married. Lords of Finance is his first book.

For more reading

Previously I reviewed many books about finance, most of them about the economic crises of the 21st century. Among them are:

You might also be interested in 20 top nonfiction books about history.

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