Liaquat Ahamed on Financial Crises, Gold, and the Lessons of 1873

Tyler Cowen (0:04)

Conversations with Tyler is produced by the Mercatus Center at George Mason University, bridging the gap between academic ideas and real world problems. Learn more at mercatus.org. For a full transcript of every conversation enhanced with helpful links, visit conversationswithtyler.com.

Hello everyone and welcome back to Conversations with Tyler. Today I am chatting with Liaquat Ahamed, who is the author of a new and wonderful book, 1873, The Rothschilds, The First Great Depression and The Making of the Modern World, which I enjoyed very much. Many of you will know him as the author of Lords of Finance, The Bankers Who Broke the World from 2009, a book that won the Pulitzer Prize for History and numerous other awards.

Liaquat also has extensive experience in the private sector, dealing with the World Bank and the IMF, and he has headed the World Bank's investment decisions. He's also produced a movie about Iraq and done much more as well. Liaquat, welcome.

Liaquat Ahamed (1:11)

Thank you, Tyler.

Tyler Cowen (1:13)

I have a general question about how your work fits together.

So your book, Lords of Finance, it convinced me that financial crises really matter, and your new book, 1873, almost convinced me that financial crises don't really matter, because the world just keeps on growing.

So what makes for the difference for when historically speaking, crises will really matter?

Liaquat Ahamed (1:36)

Well, I think the first book, Lords of Finance, was about the financial crisis that really plunged the world into a Great Depression.

The second, 1873, is about a crisis that didn't actually plunge the world into a terrible Great Depression. But what it did was cause a sort of sequence of effects throughout the world, which sort of damaged the political economy of the world for the next 20 years. A better title would have been The First Great Deflation.

Tyler Cowen (2:14)

We're supposed to believe that deflation is bad, nominal wages are sticky. This was a pretty slow deflation. But by one measure, the major world economies are growing two and a half percent over the next 20 years from 1873 onwards. So how did we adjust so well to this?

Liaquat Ahamed (2:32)

Because prices were flexible, nominal wages went down. I think the distributional consequences and the political impact of those distributional consequences were much more damaging than the pure economic consequences.

Tyler Cowen (2:50)

So in the 1920s and a bit afterwards, of course, you could say politics goes crazy in many countries, most of all in Europe. After 1873, would you say politics went crazy or it just continued along its 19th century path?

Liaquat Ahamed (3:04)

No, I don't think it went crazy, but it wasn't a happy time politically. I think populism in the United States, protectionism, the resurgence of protectionism in Europe, the retreat from liberal ideas, the revival of imperialism by Britain when it invaded Egypt, those were not happy things that happened.

Tyler Cowen (3:30)

I wouldn't endorse any of those, but they sound a bit like business as usual for Europe in the 19th century. So England goes many places in that century, often with bad results, but Egypt hardly seems like a major outlier, right? There was protectionism throughout.

Liaquat Ahamed (3:47)

Well, it was the beginning of the scramble for Africa and gave a sort of second win to imperialism because you could argue that until then, there was actually a retreat away from the growth of imperialism.

Tyler Cowen (4:03)

And you view imperialism as a natural expression of liberalism or is something contrary to its spirit? Because the liberals themselves often favored it, right? There's a whole literature called liberal imperialism as a topic.

Liaquat Ahamed (4:17)

Right. I think it's definitely contrary to the spirit of liberalism.

Tyler Cowen (4:22)

But the liberalism of that era, surely it was a doctrine that thought England and some other countries could improve the rest of the world. They thought of that as quite a liberal idea. Malthus and Mill, of course, work for the East India Company. They don't seem so morally torn over that. I'm not saying they were correct.

But isn't that in some way a high watermark of liberalism? To think you can re-engineer the whole world along liberal lines.

Liaquat Ahamed (4:49)

Yes, you're right. They didn't think that they were damaging these societies. But I think the long-run consequences weren't happy.

Tyler Cowen (4:59)

If we look at the somewhat fragmentary data we have, I see that the estimated rate of per capita economic growth for the United States over the period you consider, it's below 2 percent. Some sources would estimate 1.7 to 1.8 percent. But this seems to be the time in American life where just everything is starting to change. It's not fully taking off until the 1920s, but fossil fuels are being mobilized. Some centerpieces of modern society are being laid.