A few wrong men

A book on the Great Depresssion illuminates our ruinous times

Written by Vikram S Mehta | Published:March 3, 2009 12:40 am

“Read no history: nothing but biography for that is life without theory’ — so wrote Benjamin Disraeli. Liaquat Ahamed’s book The Lords of Finance: The Bankers Who Broke The World which has just hit the bestseller list in the US is not a typical biography. It is not the life story of one individual,but a fascinating read about four powerful,brilliant,idiosyncratic and willful central bankers who dominated the economies of the US,UK,France and Germany in the 1920s; the interrelations between these men and the “series of misjudgements” that pushed the world towards the Great Depression. It is a narrative that communicates the enormous power of political and economic decision makers and the enduring damage that they can wreak through incompetence,short termism and a lack of understanding of how the economy operates.

This article is not a review of Liaquat’s book — it has not yet come to Indian bookstores although I can say that when it does it should be read by not only those who enjoy economic history but also those who revel in the play of language — but a summary of a couple of themes that emerge from the book and which I believe have contemporary relevance and should be reflected upon by our decision makers today.

Liaquat makes the point that the ‘Great Depression’ of 1929-1931 was not foreordained. It was not the culmination of an inexorable economic process — “an act of God or the result of some deep-rooted contradictions in capitalism.” It was rather the direct result of a chain of decisions taken by the individuals in power. Some of these decisions were taken in the 1920s; others after the initial crisis began to unfold. But the cumulative impact of these decisions was the greatest economic meltdown of recent times. The severity of this meltdown can be gauged from a macroeconomic snapshot of that period.  Between 1929-31,the real GDP of all countries fell by an average of 25 per cent; more than a quarter of the labour force lost their jobs and those that did not saw their wages drop by around 35 per cent. The banking system collapsed and every developing country including those in central and eastern Europe (including Germany) defaulted on their sovereign debt. It was “by any measure the most dramatic sequence of collective blunders ever made by financial officials.”

Liaquat’s essential point is that the economic catastrophe of the Great Depression happened because people made the wrong decisions — either because of a misreading of the dynamics of the economy or because of lack of “intellectual will” or because of ego and incompetence.

This point resonates today. With the benefit of hindsight the current financial crisis can be traced back to specific cases of policy misjudgement. Alan Greenspan kept US interest rates down because he was concerned about demand deflation.  He thought that low inflation was because of falling consumption and a faltering economy.  He failed to recognise that it was in fact because of the surge in productivity and the availability of low cost goods and services from emerging markets and in particular India and China. He did not appreciate fully the impact of the forces of technology,liberalisation and globalisation. The result of Greenspan’s easy credit and finance policy was,however,‘irrational’ borrowings and the onset of the real estate bubble.  Again with the benefit of hindsight it is now widely acknowledged that Paulson made a huge mistake by allowing Lehman Brothers to go belly up.  The consequent loss of confidence and trust amongst and within the banking fraternity choked the arteries of  international credit and brought  the global financial system to the brink of total collapse.

One should always be wary of moving from the particular to the general.  But  Liaquat’s message brings into sharp relief the disproportionate and enduring consequences of policy misjudgements. The leaders that will head for Copenhagen towards the end of this year to forge a post-Kyoto response to the dangers of global warming should take heed.

Liaquat makes a second significant observation. He writes that the severity of the Great Depression was because it was not just one crisis but a series of crises that occurred over a relatively short period.  The  “economic whirlwind” that engulfed the globe was because each fed on the other. Thus it all began with the contraction of the German economy in 1928; its impact  ricocheted across the Atlantic to bring down Wall Street in 1929 and the US banks in 1930 and then returned to Europe in the summer of 1931 to unravel the continent’s finances. 

Our world has faced an analogous  set of problems — The Mexican peso crisis in 1994; the Asian currency crisis in 1997; the dotcom bubble burst in 2000 and the banking mayhem upon us today.  We did not,however,confront a comparably severe storm because of the disparate temporal and geographic spread of these problems.  They occurred over a 15 year time span and the authorities had time to manage one before the other hit.

The question that this observation triggers is: what if our current multiple problems coalesce?  What if the current mood of “deglobalisation” and “trade protectionism” undermines multilateralism and kills the Copenhagen talks; what if the surge in nationalism trigger further misadventures a la Iraq and Afghanistan; and the world is hit by another burst of dramatic terrorism (a la 26/11 or 9/11); what if the restive and emergent middle class finally get fed up of corrupt and ineffective leadership,and what if all this happens not in sequence but simultaneously.

One need not here give an answer,other than to say that the consequences would be dire.  But one can state that this is not an impossible scenario. In our connected world the silos have cracked.  What happens in one place has an impact in every place.  The twin messages that I have culled from Liaquat’s economic biography should alert leaders to the consequential damage of an “outmoded” and populist approach to contemporary challenges.  They should read this book to get a fuller sense of their lives “without theory”.

The writer is chairman of the Shell group of companies in India. The views expressed are personal

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