Liaquat Ahamed: Europe’s Bankers Have Forgotten the Lessons of the Depression
Liaquat Ahamed is author of Lords of Finance: The Bankers Who Broke the World.
Eighty years ago central bankers were responsible for sending the global economy into the Great Depression. They failed to ease monetary policy fast enough. Indeed, because of the dictates of the gold standard, at various points they moved in the opposite direction and were forced to raise interest rates despite mass unemployment. And instead of acting as lender of last resort to the financial system, they stood by as across the world one bank after another failed.
When Lehman Brothers collapsed in 2008, it seemed as if the world’s major central bankers had taken on board the lessons of the 1930s and would do everything they could to avoid replicating their mistakes. But during the past few months, as the crisis in Europe has spiralled out of control and the global economy has started to weaken, I have begun to fear that the world might in fact be repeating some of those same errors.
Much has changed in the world of central banking since the 1930s. At that time most central banks were privately held institutions, jealously guarding their autonomy from government. They had quirky ways of conducting their affairs. The Bank of England, for example, was run by a board of 26 directors – known as the “Court” – drawn from a closed, almost hereditary circle of City of London bankers and merchants.
The result was that the men at the helm of central banks came from insular oligarchies. Few of them thought it necessary to know anything about economics. Montagu Norman, governor of the BoE from 1920 to 1944, is reputed to have once told his chief economist: “Your job is not to tell me what to do, but to tell me why I did it.” When asked before a parliamentary committee what his reasons were for a particular policy, he simply tapped the side of his nose three times and said: “Reasons, Mr Chairman? I don’t have reasons. I have instincts.”
The contrast with the men in charge of central banks today is stark...