A Panegyric for Keynes

Review of Lords of Finance by Liaquat Ahamed


It seems an odd time to write a history book in praise of John Maynard Keynes.  We live in an economic world largely shaped, for the last seventy years, by his ideas.  It isn’t doing too well at the moment.

Nonetheless, that is what Liaquat Ahamed has done with Lords of Finance: The Bankers Who Broke the World.  The book, which won the 2010 Pulitzer Prize in History, traces the economic history of the developed world from just prior to World War I through the first part of the Great Depression.  That description makes it sound like a dry textbook, which it is not.  Ahamed tells the story largely through the biographies of the central bankers of the four most economically influential powers of the day:  Germany, France, Britain, and the United States.

The story, as Ahamed tells it, is of these men and their singular, massive, catastrophic insistence on making the wrong choices again and again, for more than a decade—yielding the Great Depression.  Their wrong choices included clinging to the gold standard and insisting on fiscal discipline, creating conditions for massive unemployment.

Ahamed’s hero is, of course, Keynes.  As a young British academic, Keynes made his name by bucking what was then economic orthodoxy—the gold standard, zero inflation, mechanically balanced trade accounts, and fiscal discipline—in favor of radical and new ideas, including fiat money and using government spending to stimulate the economy, even if it meant running large deficits and causing inflation.

The book is about as entertaining as you can make a book of economic history.  I enjoyed the human touch of getting to know each of the men on whom the story centered:  the eccentric Montagu Norman (UK), his doomed workaholic friend across the Atlantic, Benjamin Strong (US), and Hyalmar Schacht, the future Minister of the Economy for the Nazis.  And some French guy, too.

But I found Ahamed’s thesis unpersuasive.  First, I just can’t take any positive assessment of Keynes at face value.  Ahamed paints him as a man ahead of his times, tragically enlightened, a Cassandra who saw but could not convince.  This is bunk.  Ahamed makes Keynes look good only by contrasting him with the other economists of his times; Keynes looks considerably less heroic when compared with the record his ideas have amassed over the past 70 years.  The gold standard is foolish and arbitrary, but so is fiat money.  A pure laissez-faire market is brutal and corrupt—but so is massive government regulation and spending.  Ignoring the poor and unemployed is immoral, but so is burying future generations in trillions of dollars of un-payable debt.

I’m no libertarian, I don’t believe in conspiracies about the Fed, and I’ll never vote for Ron Paul—but I am waiting to hear a persuasive case that the Keynesian economic system is worth perpetuating.  The closest Ahamed gets to acknowledging the weakness of Keynesianism is an admission, at one point, that the orchestrated inflationary effects of fiat money amounts to theft by the government of worker’s hard-earned savings.  It doesn’t take a Pulitzer to know that.

The second reason I was not persuaded is that there seemed to be a much larger evil than the gold standard looming over the world in the 1920s that contributed more to the economic chaos:  war reparations.  Ahamed finally gets around to acknowledging so in his conclusion, but it seems clear much earlier in his narrative that the war reparations demanded by the Allies from Germany were among the most ruinous and foolish things ever perpetuated by a set of policymakers on themselves, much less on other countries.  Trying to get a country you have just destroyed to fork over some five or ten percent of its GDP every year for decades is, first, unrealistic, and, second, more a product of vengeance than justice.  Crippling Germany with reparations ensured it would not contribute to the world’s postwar economic recovery and tangled the global financial system with a chain of IOUs and unpaid debts, one of the major eventual causes of the Great Depression.

More to the point, reparations have nothing to do with classical economic theory.  If reparations were a major cause of the Depression, then the Depression is less damning of classical economic theory than Ahamed makes out.  The lesson that war reparations are a destructive evil seemed so clear that the Allies did the opposite after World War II.  Instead of extracting payments from Germany, they helped rebuild it through the Marshall Plan, helping turn Germany into a prosperous, peaceful democracy.  Ahamed touches on none of this.

In the end, Ahamed makes one very solid point:  the Great Depression was the result of human error, and thus it could happen again.  Politicians are human, which means they are as stupid and evil as the rest of us.  Put a bunch of stupid, evil people in charge of trillions of dollars and massive power, and eventually you will have catastrophe.  Lords of Finance is a worthwhile book if you’re looking for a human-level story of the interwar years, but read it with a healthy suspicion for the author’s clear partisan bias in favor of Keynes.

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