Liaquat Ahamed's new book, Lords of Finance, is a history of the Great Depression that centers on the era's four most important central bankers — those in Britain, France, Germany and the United States.
Ahamed writes that these men contributed to economic disaster — or, as he proclaims in the book's subtitle, "broke the world" — because they just didn't understand how economics work.
Part of the problem was that the bankers subscribed to the theory that currencies needed to be tied to gold. But after World War I, Ahamed says, there wasn't enough gold in the world.
"Gold production collapsed during WWI, the economies expanded, prices went up, and so it was like trying to put the world into a monetary straightjacket," Ahamed tells Weekend Edition's Liane Hansen.
Added to that, says Ahamed, 60 percent of the world's gold wound up in the U.S. after the war: "It was like trying to play poker where one player has all the chips — the idea just never got off the ground."
The U.S. cut interest rates domestically, which encouraged money to flow abroad. But over the next two years, the U.S. stock market went up 300 percent — then it crashed. "That was the beginning of the Great Depression," says Ahamed.
Ahamed calls the similarities between our current economic problems and the Great Depression "eerie." He points out that both crises began with a bubble, and that both bubbles were caused, in his view, by mistakes in federal review policy. And, when both bubbles burst, they eventually led to a banking crisis.
But, he says, the leaders of today can learn from the lessons of the Great Depression: First, he says, we should not let the banking system collapse. Second, we should not go to extreme lengths to try to protect the currency. Third, we need to let the budget deficit expand.
"The problem of the Great Depression was ... a failure of intellectual will. The danger this time might be a failure of political will," says Ahamed. "To bail out the banks is going to cost a lot of money, and the American public are so angry that they are not, at the moment, willing to sign a blank check."
Ahamed says that one of the ways Roosevelt was able to persuade Americans to back his financial plan was by being completely honest and not glossing over the situation.
"It was remarkable how by actually telling the truth, [Roosevelt] inspired confidence," says Ahamed. "President Obama is trying to do that, and I hope he continues."
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