Recently finished a book on the Great Depression called Lords of Finance: The Bankers Who Broke the World. It was a 500+ page behemoth, but a surprisingly quick read. The story focuses on four central bankers during the 20s and 30s: Benjamin Strong of the Federal Reserve of New York, Montagu Norman of the Bank of England, Emile Morceau of the Banque de France, and Hjalmer Schacht of the Reichsbank of Germany. The book begins during the build up to WWI and gives a financial history of the time period between the two wars. It does a great job of highlighting the link between the central banks’ decisions and the conditions that plunged to world into depression, ultimately allowing the rise of Hitler and causing a second World War. One of the strongest sections dealt with post-WWI Germany’s policy of hyperinflation to meet the demands of the Allies reparation payments. The account was truly staggering.

Over the next few months, Germany experienced the single greatest destruction of monetary value in human history. By August 1923, a dollar was worth 620,000 marks and by early November 1923, 630 billion…Here was the president of the Reichsbank, who primary obligation was supposed to be preservation of the value of the currency, proudly proclaiming to the group of parlamintarians that he now had the capacity to expand the money supply by over 60 percent in a single day…For many people, it was just one more sign that German finance had entered an Alice-in-Wonderland phantasmagoria.

In essence, German leaders chose to inflate away their debts, but in the process destroyed the savings of millions of citizens. I had heard of the hyperinflation of this period, but had no idea how bad it was. A thread that runs throughout the book is the world’s reliance on gold as the basis for currency. The author attributes this as the primary cause of the Depression, and the subsequent decoupling to ending it. There was a humorous passage that highlighted the capriciousness of the standard:

Bullion was so heavy – a seventeen-inch cube weighs about a ton – that instead of shipping crates of it across hundreds of miles from one country to another and paying high insurance costs, central banks had taken to “earmarking” the metal, that is, keeping it in the same vault but simply re-registering its ownership. Thus the decline in Britain’s gold reserves and their accumulation in France and the United States was accomplished by a group of men descending into the vaults of the Bank of England, loading some bars of bullion onto a low wooden truck with small rubber tires, trundling them thirty feet across the room to the other wall, and offloading them…the world was being subject to a progressively tightening squeeze on credit just because their happened to be too much gold on one side of the vault and not enough on the other…

Because currencies were pegged to gold, central banks could not sufficiently devalue them, which led to mass deflation and unemployment around the world. The decision that finally ended the vicious cycle, was for countries to leave gold, and allow their currencies to fall. The author has taken a fairly dull subject and made it read like a novel. If you’re interested in economics or financial history, I’d recommend it.