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Lords of Finance: A Review

Bloomberg recently complained that whenever the government announces a stimulus plan, people are quick to “invoke the history of Weimar Germany and how soon we might all go around transporting dollars in wheelbarrows.” In fact, the Biden administration’s latest trillion-dollar plan has inspired its fair share of doomsday prophets, and the Fed admits that a mild inflationary period will soon be upon us. Is Weimar Germany just a scary ghost story that resurfaces again and again, or is there something to these claims? This week, as we mark 88 years off the gold standard (since FDR first unhinged it), we reviewed Lords of Finance: The Bankers Who Broke the World. Former investment banker Liaquat Ahamed’s interwar classic identifies four central bankers — Montagu Norman of the Bank of England, Benjamin Strong of the New York Federal Reserve Bank, Hjalmar Schacht of the Reichsbank, and Émile Moreau of the Banque de France — as the principal cause of financial dysfunction and collapse in the 1930s. One of the more interesting questions that underpins the entire narrative — are central banks a catalyst for war? — carries profound moral implications for monetary policy.

Too often, historical biographies devolve into some tired derivative of the Great Man Theory. George Washington alone has spawned so many hero-worshipers — each entranced by his “thunderous thighs” — that one female historian now collectively refers to them as the “Thigh Men.” Ahamed resists this portrait. If anything, each man emerges as a tragic figure hopelessly trying to elevate monetary policy from its medieval state while working against a backdrop of immense international bitterness and simmering violence.

How to Finance a World War: Debt & Inflation

Much of World War I — particularly Germany’s mobilization effort — was financed through inflation. In the buildup to the conflict, Kaiser Wilhelm II gathered a group of influential bankers and demanded to know whether German banks were capable of financing a war. When he didn’t receive a resounding ‘yes,’ he told them: “The next time I ask that question, I expect a different answer from you gentleman.” They rose to the occasion by printing more currency. “The various belligerent Governments, unable, or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance,” observed the promising young economist, John Maynard Keynes. While every European nation was guilty of inflation — the money supply in Britain doubled, in France it tripled, and in Germany, it quadrupled — no one was more cavalier with currency debasement than Germany, where the inflation rate exceeded 40 percent a year. The rationale behind this strategy assumed a quick victory, and that the vanquished would eat the bill. Unfortunately, the actual victors held the same vindictive attitude. The British approached the Treaty of Versailles with the slogan, “squeeze Germany until the pips squeak.” Lord Cunliffe, one of the most vocal supporters of punitive reparations, was appointed as the “financial brains” of the delegation. “Although he had been a successful banker and even governor of the Bank of England,” wrote Ahamed, “he retained his ignorance of the most basic rudiments of economics.” When asked how much Germany should pay, Cunliffe recommended $100 billion, a figure eight times the size of Germany’s annual GDP before the war. Interest payments alone would have consumed 40 percent of its GDP. When pressed, Cunliffe admitted that he had come up with the figure “between a Saturday and a Monday,” and that it amounted to a “little more than a shot in the dark.” If anything, Cunliffe believed he had underestimated the bill — $200 billion sounded more to his liking. The French, meanwhile, had their own cutting slogan — “The Krauts will pay” — and spent much of the negotiations debating over the merits of obtaining more cash from Germany versus seizing another swath of its industrial heartland. “France could not decide whether it wanted to make beef-stew or milk the German cow,” said one observer. The sole voice of moderation among this chorus of bitterness was Keynes, whose runaway bestseller, The Economic Consequences of the Peace, urged a more compassionate (and pragmatic) approach. “If Germany is to be milked,” warned Keynes, “she must first of all not be ruined.” His estimate for reparations? $6 billion. Go any higher, and the Allies risked causing a massive disruption to world trade which would leave no economy spared.

What Actually Caused Hyperinflation?

Ultimately, Germany was stripped of one-eighth of its territory, assigned full blame for the war, and handed an initial bill for $33 billion (this was later reduced to $12.5 billion). Annual interest and principal repayments amounted to 5 percent of its annual GDP. Even with this severely reduced obligation, Germany only made one payment on time. German politicians chose this inopportune moment to adopt a dazzling array of liberal reforms — unemployment insurance, an eight-hour day for workers, health and welfare payments, etc. — to placate its demoralized populace. This decision spawned a generation of neoliberal thinkers — Friedrich Hayek most famous among them — who disavowed the recklessness of deficit financing. The social welfare programs combined with residual expenses from the war exacerbated Germany’s fiscal situation. But despite a 50 percent increase in currency coupled with an enormous budget deficit, the mark stabilized for a brief period in 1920. Foreign speculators dove in, dumping $2 billion into the country. “Nothing like this has been known in the history of speculation,” wrote Maynard Keynes. “Bankers and servant girls have been equally involved. Everyone in Europe and America has bought mark notes. They have been hawked . . . in the streets of the capitals and handled by barbers’ assistants in the remotest townships of Spain and South America.” The relief was short-lived. A series of political assassinations — culminating in a fatal terrorist attack on Foreign Minister Walter Rathenau, one of the most respected public figures of the time — destroyed investors’ confidence. Prices climbed fortyfold during 1922 and the mark fell from 190 to 7,600 to the dollar. Complete chaos set in when Germany failed to deliver 100,000 telephone poles to France, prompting an invasion of the Ruhr Valley, Germany’s largest source of bituminous coal. “Over the next few months, Germany experienced the single greatest destruction of monetary value in human history,” wrote Ahamed. “By August 1923, a dollar was worth 620,000 marks and by early November 1923, 630 billion.”

At this stage, the fabled wheelbarrows of money finally appeared (baby carriages, laundry baskets, and hampers were also popular forms of money bags). Thirty paper mills were in constant use just to print enough money. Workers continued to be paid in cash: every morning, trucks laden with laundry baskets full of notes threw the bundles to outraged crowds below. Workers had thirty minutes to embark on a perverse treasure hunt for something of value before the money became worthless. In the time it took to sip down a cup of coffee, prices might have easily doubled. Basic necessities became measured in billions: a ride on a Berlin streetcar, which had cost 1 mark before the war, now cost 15 billion. The middle class suffered the most. The entire Berlin Philharmonic was rented out by an opportunistic Texan for a mere 100 dollars an evening. Professors were seen begging in the streets, and young ladies from respectable families joined the throng of 200,000 street walkers now roaming the streets of Berlin. A strange psychiatric disorder came over them. German physicians identified the new condition as “cipher stroke,” a disease that compelled once normal citizens to scrawl row after row of zeroes. “Perfectly sensible people would say they were ten billion years old or had forty trillion children,” wrote Ahamed. Those not afflicted abandoned any attempt at computation and turned to barter or foreign currency. Germany only escaped from the desperate cycle thanks to Hjalmar Schacht (now known as “Hitler’s Banker”) who created an entirely new currency, the Retenmark, based on a mortgage of all the properties in Germany. The Retenmark, “a bridge between chaos and hope,” as Schacht called it, bought Germany a few months to stabilize before it begged a loan from the Bank of England to restore confidence in the nation.

Tribalism Reigns

One of the more demoralizing, if entertaining, impressions of the book was the pervasive tribalism and pettiness that permeated nearly every attempt at negotiation. Montagu Norman, with his Van Dyke beard, flowing cape, and blind devotion to the gold standard, represented Britain: a fading nation still clinging to the comforting orthodoxy and former glories of the nineteenth century. Hjalmar Schacht — venting from his “stool of repentance” in the middle of the room — stands in for Germany: always the social pariah of the group, hemmed in by all sides, getting closer and closer to combustion. The Americans were supposedly the neutral party. This label was continuously undercut by Benjamin Strong’s decades-long bromance with Montagu: the two repeatedly shared their vacations, policies, and even outfits, much to the chagrin of everyone else. The French delegation, continuously prone to fits of public tears and scandal, offers the reader an enlightening explanation for their long-standing hatred of Americans. Thanks to the enormous war debt France owed to the United States aka “Uncle Shylock,” Americans living abroad enjoyed a decadent existence. By 1926, over 45,000 “destructive grasshoppers” were living in Paris, boasting about the strength of American currency while maimed French war veterans protested in the streets. No one gets a happy ending. Strong meets a premature death while Moreau retires in casual disgrace. Schacht gets thrown in with the “gangsters,” as he says, and faces vilification at the Nuremberg trials. And Norman, once the most venerated central banker in the world, is dismissed as an old crackpot. Norman, reflecting after twenty years of struggle, best captured the futility of it all: “As I look back, it now seems that, with all the thought and work and good intentions, which we provided, we achieved absolutely nothing … nothing that I did, and very little that old Ben did, internationally produced any good effect — or indeed any effect at all except that we collected money from a lot of poor devils and gave it over to the four winds.”

About Colbeck: Colbeck is a strategic lender that partners with companies during periods of transition, providing creative capital solutions to meet their evolving needs. You can reach the team at


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