Bankers have historically been considered the pillars of the community. They are among most trustworthy and compelling figures in the society; people entrust them with their capital in return for interest. However, from time to time there appear cases of dishonesty in a banking sector, which are followed by dire consequences. Bankers, for instance, are solely blamed for the incidence of the Great Depression of the 1930s, as well as a recent recession of the late 2000s. This paper, through interrogation of pertinent issues, raised in Liaquat Ahameds Lords of Finance, analyzes the role of bankers as stakeholders of economy and influence of divergent stakeholders interests, ineffective legal frameworks, and flawed corporate governance on slump in economy. The paper will give particular attention to events that led to the onset of the Great Depression in 1929, as well as draw reasonable conclusions. Analysis indicates that in oder to achieve functional economy, all the stakeholders, including financial institutions and markets, are required to rest on the foundation of integrity and trust.
The book Lords of Finance: The Bankers Who Broke the World by Liaquat Ahamed is a nonfictional book that chronicles the advent and the challenges of the Great Depression. It provides a thorough study of the events and characters that were central during the depression, including details of how their flawed decision-making, at certain moments, contributed towards deterioration of global economy (Lambert, 2009). The book offers meaningful insights into the functioning of global economy and proper interaction between stakeholders in the economy.
Through portraying the characters of four central banks chiefs of four largest economies of the time, the book ascertains the need for stakeholders to have common goals and objectives, and, most importantly, to operate within a legal framework with integrity. These characters include sir Montagu Norman of the Bank of Central England, Benjamin Strong of the Federal Reserve Bank of New York, Emile Moreau of the Banque de France, and Hjalmar Schacht of Germanys Reichsbank, who convinced their countries that they knew the best way to rebuild global economy after World War I (Ahamed, 2009). However, their secret of working in partnership with one another ultimately led to the Great Depression. Unfortunately, when they realized it, the situation could not be remedied in time.
One of the most prominent themes in this canonical text is differences in stakeholders interests and their influence on decision making process. It concentrates on the controversial gold standard, which is widely blamed for causing the Great Depression. The gold standard is a system of currency valuation that was used up to mid-1930s; according to it, the value of currency was attached to the volume of gold a country possessed (Bordo & Schwartz, 2009). In other words, it represented the value of gold for which a countrys currency could be exchanged. The gold standard is blamed for initiating the Great Depression, because almost all major central banks governors of the time insisted on adhering to it, despite its numerous downsides. Ahamed (2009) clearly intimates that the four governors pursued their personal goals, but those of their citizens. Despite all evidence pointing to the fact that the gold standard was binding, the four chiefs still instituted monetary policies revolving around it in the hope of salvaging global economy.
Allegiance to a particular monetary policy was binding during the 1920s and continues till present days. Despite research studies indicating otherwise, economists more often than not choose to apply what they already know, disregarding the dynamic nature of economy (Collins, 2016). For instance, several months before the onset of the Great Depression, as observed by Ahamed (2009), Sir Montagu Norman, the most fervent of gold standard supporters of the time, raised interests so that the United Kingdom could retain possession of its gold reserves. No due diligence was conducted by the bankers to ascertain possible consequences of their actions. If the central banks governors had done so, as well as had considered the interests of other stakeholders, they would have asserted that raising interest rates, in fact, was detrimental to economy (Bryan, 2010). Emile Moreau also supported the gold standard, despite its adverse effects. Nevertheless, he was rather thoughtful to mitigate its harmful effects through other efficient monetary policies (Ahamed, 2009). Consequently, the lack of transparency among the four bank governors, obsolete gold standard, and vested interests of the countries have brought the world to economic crisis.
The situation in 1920s is not very different from that before the onset of the global recession witnessed between 2007 and 2009. Both of them involved financial institutions and most trusted stakeholders in world economy, who acted in most dishonest manners. They did not consider harmful implications of their actions, as well as the ripple effect they may have on global economy. Similarly to the 1920s, the latest financial crisis was predicated by financial institutions that, pursuing personal goals, acted in ways that sabotaged global economy (Collins, 2016). Shadow banks, such as Lehman Brothers and Bear Stearns, acted dishonestly, which meant circumventing banking regulations and operating with impunity (Collins, 2016). Shadow banks were initially designed as banks but acted in the way that expelled them from being defined as banks. These were the lack of integrity and sinister interests, in the same manner as during the Great Depression in the 1930s, that triggered the most recent global financial crisis.
An important aspect of the theme that brings into focus the role of the various stakeholders in the economy is the goodwill of participants. The economic crisis of the 1930s was triggered by the lack of goodwill and consent between leaders of the worlds major economies (Bryan, 2010). Even though the banks governors were friends, none of them willed the other to succeed at his expense. Some scholars, preoccupied with the role of the gold standard during crisis, fail to appreciate the political decisions that, to the equal extent, contributed towards the depression (Bordo & Schwartz, 2009). The main decision contributing to the recession was insistence of Britain and France to have Germany fulfill its reparation duties after World War I. However, as a result of substantial expenses during wartime, the latter did not have enough money even to reconstruct domestically.
After World War I, all involved countries suffered great economic losses. Disregarding the fact that impoverished Germany was incapable of servicing its debt, the winners of the war compelled Germany to continue paying for reparations. Consequently, the German Republic had to borrow money from the U.S. in order to pay its reparation fees (Ahamed, 2009). The U.S. residents and banks invested in the country, oblivious of how their money was used and whether Germany was capable of returning the money it borrowed. By the time they learned that Germany used the money for reparations they had already invested sizeable amounts of money in the issue. Consequently, the resultant panic and rush to withdraw funds created an unprecedented shortage and triggered economic slump, which was later called the Great Depression.
Parallels can be drawn between the lack of goodwill between the countries after World War I and current situation worldwide, for it undermines the basics of global economy and may result in turmoil once again. Nowadays countries, such as Argentina, Greece, Italy, Venezuela, and many others are highly indebted and bear the risk of defaulting. Some of these countries have invested in their sovereign bonds. If these underperforming economies are forced to institute austerity measures to pay their debts or, otherwise, shift the burden of debt to other sectors of the economy, the shortage of finances and the resultant panic may trigger another economic collapse (Lambert, 2009). The global economic players should have the goodwill to help each other to withstand another economic disaster.
This text is instrumental to those interested in comprehending the nature of financial crises, which includes its emergence, growing, and occasional mutation depending on actions of global economic players. I highly recommend it to economists, especially students of economics and policymakers. The book helps economists to understand numerous issues, for instance, how bankers can influence the economic cycle. Moreover, a detailed explanation of events both preceding and following the Great Depression may provide a proper context for Keynesian versus Friedmans discourse, thus enabling the application of the lessons learned to contemporary economic environment. Ahameds book shows a deep insight into the dynamics of global economy. The possible implications of the lessons in the Lords of Finance transcend the economic sphere; therefore, they may be effectively implemened in sociological and political spheres. The text is also a rich source of historical information; consequently, it will prove useful to historians in studying economic perspectives of the causes of World War I.
In conclusion, it is evident that Ahameds Lords of Finance: The Bankers Who Broke the World is a canonical text with many meaningful insights into the dynamics of economic environment. By providing a thorough analysis of details of events that led to the Great Depression of the 1930s, the book testifies that a functional, enduring global economy can only be achieved when all stakeholders, especially bankers, are joined together by the virtues of trust and integrity. Whereas it is expected that different stakeholders will have different interests, the approaches, policies, and corporate governance interventions must be open to public. Instances when some people, stipulated by vested interests, make their own decisions that have global consequences, such as the case with the gold standard and Germanys reparation, should not occur in the 21st century.
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